<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1998
REGISTRATION NO. 333-53341
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
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. PAUL J. NOZICK, 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......... 4,830,000 $11.00 $53,130,000 $15,674(3)
=====================================================================================================================
</TABLE>
(1) Includes 630,000 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).
(3) $14,927 has been paid previously.
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 JUNE 29, 1998
PROSPECTUS
4,200,000 SHARES
TOWNE SERVICES, INC.
[LOGO]
COMMON STOCK
This is an initial public offering of 4,200,000 shares of common stock of
Towne Services, Inc. Towne Services is offering 4,000,000 of these shares and
one selling shareholder identified in this prospectus is offering 200,000 of
these shares. Towne Services will not receive any proceeds from the sale of
shares by the selling shareholder.
There is currently no public market for the common stock. Towne Services
has applied for listing of the common stock on the Nasdaq National Market under
the symbol "TWNE." Towne Services 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 RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9 OF THIS PROSPECTUS.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................... $ $
Underwriting Discount...................... $ $
Proceeds to Towne Services................. $ $
Proceeds to the Selling Shareholder........ $ $
</TABLE>
In addition, six other selling shareholders identified in this prospectus
have granted the underwriters an over-allotment option which allows the
underwriters to purchase 630,000 additional shares. These shares will be
purchased directly from these six selling shareholders. Towne Services will not
receive any of the proceeds from the sale of these shares.
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.
WHEAT FIRST UNION
J.C. BRADFORD&CO.
STEPHENS INC.
, 1998
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 9
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Dilution.................................................... 15
Capitalization.............................................. 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 19
Business.................................................... 27
Management.................................................. 37
Principal and Selling Shareholders.......................... 45
Certain Transactions........................................ 47
Description of Capital Stock................................ 48
Shares Eligible for Future Sale............................. 52
Underwriting................................................ 54
Legal Matters............................................... 55
Experts..................................................... 55
Additional Information...................................... 55
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 (a)
that the shares of common stock will be sold to the public for $10.00 per share,
and (b) that the underwriters will not exercise their over-allotment option to
purchase any of the 630,000 shares subject to that option.
In addition, we have adjusted the common stock share numbers presented in
this prospectus to reflect (a) a 100-for-1 split of the common stock which
occurred in January 1997 and (b) the conversion of 15,000 shares of preferred
stock into 1,217,903 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 WORK]
<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, are
recorded and processed manually and then 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
generate interest-bearing revolving credit accounts by financing the accounts
receivable of these small businesses. Through the use of Towne Services'
products, banks can monitor customers' accounts receivable and generate detailed
status reports. Towne Services' products and services allow banks to attract new
business customers who, in turn, may become customers of 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. In addition, the business'
customer pays interest and fees to the bank for amounts owed by the customer for
purchases made on in-house credit. 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,
3
<PAGE> 6
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' processing systems allow small
businesses to automate these in-house accounts and provide a convenient service
to customers who prefer to purchase items on credit. Towne Services believes
that the market for its electronic processing products and services is largely
untapped, as most electronic payment processing companies focus on larger
businesses and on credit and debit card transactions which may be less
convenient and are subject to terms established by the credit card company or
debit card issuer.
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 15 16 17 33 45 54
Bank contracts............ 29 34 41 41 58 65 74 85 97 122 130 152
Business customers........ 34 38 49 59 69 81 96 117 135 161 189 225
</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 54
persons located in 25 states. Towne Services intends to continue
aggressively hiring sales and marketing personnel nationwide to strengthen
its direct marketing efforts, increase its customer base and expand into
new markets. Towne Services recently retained a marketing firm to help
develop new marketing materials and expand its advertising efforts across
the country. Towne Services also plans to 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 Bank Relationships
Towne Services' executive officers and directors have an average of
over 15 years experience in the electronic processing and financial
services industries, and 7 members of its board of directors either run
banks or run companies that have banks as customers. Towne Services'
management leverages this experience and these contacts to develop
relationships with banks and banking organizations. These 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. In addition, Towne Services intends to
provide new products and services, such as a lease financing and processing
system currently being developed, that may allow these banks to attract new
customers for both the banks and Towne Services. Towne Services plans to
sign additional agreements with existing bank customers to offer its new
products and services and to leverage these relationships to develop new
bank customers in its current and future markets.
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<PAGE> 7
Enter New Relationships For Marketing and Product Enhancements
Towne Services has established marketing and other business
relationships that enhance its products and services and its channels of
distribution. Towne Services has agreements with several companies whose
products and services complement the TOWNE CREDIT and TOWNE FINANCE
systems, including Datamatx Inc., Wallace and de Mayo P.C. and Cash
Management Services, Inc. which provide statement processing services,
collections services and lockbox management services. Towne Services also
has agreements with entities that have banks as their customers, such as
Phoenix International Ltd., Inc. and The Bankers Bank of Kentucky, under
which these other companies and organizations encourage their bank
customers to use Towne Services' systems. Towne Services intends to enter
more relationships with companies that can expand the number of its
products and services, complement its existing and future systems and
provide access to large groups of banks and small businesses.
Maximize Electronic Link to Customers
When a business customer installs TOWNE CREDIT or TOWNE FINANCE, it
establishes an electronic link with Towne Services. Towne Services intends
to maximize 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.
Acquire Complementary Companies and Products
Towne Services intends to acquire 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 recently acquired some of the 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 acquisition, please see "Business -- Acquisitions of Complementary
Companies and Products."
5
<PAGE> 8
THIS OFFERING
Common stock offered by Towne Services...... 4,000,000 shares
Common stock offered by one selling
shareholder............................... 200,000 shares
Total shares to be sold in this offering.... 4,200,000 shares
Common stock offered by other selling
shareholders if the underwriters exercise
the over-allotment option................. 630,000 shares
Common stock to be outstanding
after this offering....................... 18,823,734 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
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SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
INCEPTION YEARS ENDED ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------ --------------------------------------
------------ PRO FORMA PRO FORMA
1995(1) 1996 1997 1997(2) 1997 1998 1998(2)
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.................. $ 6,000 $ 105,285 $ 722,364 $ 952,029 $ 96,663 $ 547,954 $ 597,237
Costs of processing,
servicing and support... 2,250 219,621 832,102 883,851 102,684 374,128 400,688
Research and
development............. 0 51,871 332,470 402,761 11,231 74,024 90,599
Sales and marketing....... 3,739 118,163 839,323 839,323 94,337 485,562 485,562
Stock compensation
expense................. 0 10,020 0 0 0 2,489,268(3) 2,489,268
General and
administrative.......... 18,410 358,606 1,118,642 1,878,787 170,416 1,347,282 1,471,821
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses................ 24,399 758,281 3,122,537 4,004,722 378,668 4,770,264 4,937,938
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating loss............ (18,399) (652,996) (2,400,173) (3,052,693) (282,005) (4,222,310) (4,340,701)
Financing costs for stock
issued to
nonemployees............ 0 0 0 0 0 133,000(4) 133,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss.................. (18,625) (662,307) (2,495,101) (3,211,458) (300,420) (4,419,599) (4,557,165)
Net loss attributable to
common shareholders(5).. (18,625) (662,307) (2,495,101) (3,211,458) (300,420) (6,527,599) (6,665,165)
Net loss per common
share(6)................ $ (0.00) $ (0.10) $ (0.26) $ (0.33) $ (0.04) $ (0.54) $ (0.55)
========== ========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding(6)... 5,000,000 6,337,356 9,600,592 9,700,592 8,006,626 12,077,352 12,177,352
========== ========== ========== ========== ========== ========== ==========
OTHER OPERATING DATA AT
END OF PERIOD:
Number of sales people.... 0 2 15 2 33
Number of bank
contracts(7)............ 0 17 74 27 122
Number of business
customers............... 0 11 96 24 161
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
------------------------------------------
ACTUAL AS ADJUSTED(8) PRO FORMA(9)
---------- -------------- ------------
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BALANCE SHEET DATA:
Working capital............................................. $3,159,039 $37,704,096 $2,233,978
Total assets................................................ 5,523,501 40,026,591 7,298,613
Long-term debt, net of discounts............................ 1,289,162 28,559 1,289,162
Shareholders' equity........................................ 2,511,101 38,627,794 3,311,101
</TABLE>
7
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- ---------------
(1) Towne Services was incorporated on October 23, 1995. The inception period is
from that date to December 31, 1995 (the "Inception Period").
(2) The pro forma statements of operations data give effect to Towne Services'
acquisition of some of the assets and liabilities of Credit Collection
Solutions, Inc. as if the purchase had occurred at the beginning of the
periods presented. The pro forma financial information does not necessarily
represent what Towne Services' results of operations would have been if this
purchase had actually occurred on these dates. See "Selected Financial Data"
and the pro forma financial information included in this prospectus.
(3) During the three months ended March 31, 1998, Towne Services sold shares of
common stock and issued options to acquire common stock to employees,
officers and directors at what management believed to be the fair market
value of the common stock at that time. Towne Services retained an
independent appraiser who subsequently valued the common stock at a higher
price. Towne Services recorded a one time non-cash compensation charge for
the difference between the two values. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) During the three months ended March 31, 1998, Towne Services sold shares of
common stock to non-employees at what management believed to be the fair
market value of the common stock at that time. Towne Services retained an
independent appraiser who subsequently valued the common stock at a higher
price. Towne Services recorded a one time financing cost for the difference
between the two values. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) Net loss attributable to common shareholders includes dividends recorded
with respect to convertible preferred stock issued on March 13, 1998 for the
difference between the estimated fair market value of the common stock on
that date and the conversion price of the preferred stock. See notes (3) and
(4) above and Note 9 of notes to Towne Services' financial statements.
(6) See Note 2 of notes to Towne Services' financial statements for a
description of the method used to determine the share calculations.
(7) 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
branches or subsidiary banks have entered into separate written agreements
with Towne Services.
(8) 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."
(9) Derived from the March 31, 1998 unaudited financial statements of Towne
Services and of Credit Collection Solutions, Inc. appearing elsewhere in
this prospectus.
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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
Towne Services released its TOWNE CREDIT product and related services in
June 1997. From its incorporation on October 23, 1995 through June 1997, Towne
Services' activities consisted of raising capital, hiring personnel and research
and development. Accordingly, Towne Services has only a limited operating
history. Towne Services has incurred significant losses since it began
operations. Towne Services had net losses of approximately $19,000 for the
period from October 23 to December 31, 1995, $660,000 in 1996 and $2.5 million
in 1997. For the three months ended March 31, 1998, Towne Services had a net
loss of approximately $4.4 million. Towne Services expects that it will continue
to incur net losses until it is able to attain sufficient revenues to support
its business and it can provide no assurances as to when, if ever, this may
occur.
You should evaluate Towne Services 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 these
products and services quickly or at all. Although Towne Services has experienced
growth in revenues in recent periods, its costs and expenses have also increased
substantially. Accordingly, there can be no assurance that it will continue to
sustain its revenue growth, control costs or become profitable. Towne Services'
ability to achieve and maintain profitability depends on a number of factors,
including gaining market acceptance for its current and future products and
services, increasing revenues while reducing costs, implementing its business
strategies and many things outside its control. There can be no assurance that
Towne Services will be successful in the future.
DEPENDENCE ON INCREASED SALES AND MARKETING FORCES AND ENTERING NEW MARKETING
RELATIONSHIPS
An integral part of Towne Services' strategy is to continue aggressively
hiring sales and marketing personnel and enter into new marketing relationships
to gain access to large groups of potential bank and business customers.
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. For example, Towne
Services has agreements with Phoenix International Ltd., Inc. and The Bankers
Bank of Kentucky for these entities to market Towne Services' processing systems
to their existing and future customer base of banks across the country. The loss
of any of these key marketing relationships or the failure to enter into new
marketing 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."
DEPENDENCE ON ABILITY TO GROW AND MANAGE GROWTH
Towne Services has grown rapidly since the release of Towne Credit in June
1997, and much of this growth has occurred in the last few months. For example,
the number of Towne Services customers and contracts has more than doubled since
January 1, 1998, and Towne Services has had to recruit and hire more personnel,
modify its processing systems and otherwise expand its operations to accommodate
its growth. Towne Services may not be successful in continuing its growth or
managing its growth. Further, Towne Services' 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 Towne Services 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."
9
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FLUCTUATIONS IN OPERATING RESULTS; FACTORS BEYOND TOWNE SERVICES' CONTROL
Towne Services' operating results have varied in the past and are likely to
vary significantly in the future, in large part because the market for its
products and services is emerging and because its processing volume differs
substantially from customer to customer. Towne Services' future success depends
on a number of factors, many of which are unpredictable and beyond its control.
These factors include: whether or not the market accepts current and future
products and services; whether new competitors emerge or existing competitors
gain market share faster than Towne Services; whether new technologies are
developed which make Towne Services' systems outdated or obsolete; whether costs
of doing business increase as a result of higher wages, sales commissions, taxes
and other operating costs; whether seasonal trends in consumer purchasing impact
the volume of transactions processed; general economic factors and the impact of
potential acquisitions to Towne Services' operations. Due to all of these
factors, historical results cannot be relied upon to indicate future results and
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. Towne Services 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 Towne
Services. 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 competitors have longer operating
histories, greater name recognition, larger customer bases and substantially
greater resources than Towne Services.
ACQUISITION RISKS
Towne Services recently acquired some of the assets and liabilities of
Credit Collection Solutions, Inc., a provider of payment collections software.
An inability to acquire and integrate additional businesses, products or
services may negatively affect the financial results of Towne Services and its
ability to grow. There can be no assurance that Towne Services 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
Towne Services. In addition, Towne Services competes with other electronic
processing companies for acquisition candidates.
RISK OF POSSIBLE SYSTEM FAILURE
Towne Services' 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 Towne Services, the occurrence of human
error, a natural disaster or other unanticipated problems could halt its
services, damage network equipment and result in substantial expense to repair
or replace damaged equipment. In addition, the failure of its telecommunications
providers to supply the necessary services could also interrupt Towne Services'
business. The inability to supply services to its customers could negatively
affect Towne Services' business and financial results and may also harm its
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.
10
<PAGE> 13
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. Towne
Services maintains key man life insurance on certain of its executive officers,
but if members of management become unable or unwilling to continue in their
present positions, Towne Services' business and financial results could be
negatively affected. See "Management."
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.
Towne Services 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, Towne Services may elect not to process or continue processing for
customers that experience financial difficulties or other problems.
TAX ISSUES
Towne Services 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 its ownership structure, Towne Services' 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 Towne Services 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 Towne Services.
At March 31, 1998, Towne Services had available NOLs of approximately $4.2
million. Once these NOLs are utilized or expire, the projected effective tax
rate will increase, which will adversely affect Towne Services' 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, Towne Services' senior officers and directors will
beneficially own approximately 43.2% 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 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
11
<PAGE> 14
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. Towne Services 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 its
technology, products and services or to otherwise obtain and use information
that Towne Services regards as proprietary, despite its efforts to protect them.
Third parties may claim that Towne Services' 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,
Towne Services 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 its 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. Four
members of Towne Services' management team have agreed to sell 403,500 shares of
common stock at the offering price if the underwriters' exercise their
over-allotment option. Investors may not be able to resell their shares at or
above the initial public offering price. The completion of the offering and the
establishment of a trading market for the common stock may also make it easier
for members of senior management to sell more shares of their common stock in
the future. See "Principal and Selling Shareholders" and "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 $7.96 per share
in their investment, while the value of shares held by current shareholders will
increase. 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 18,823,734 shares of common stock outstanding immediately
after this offering. Of these shares, the 4,200,000 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 14,623,734 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 some 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 some of its shareholders
12
<PAGE> 15
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."
ANTI-TAKEOVER PROVISIONS; EMPLOYMENT AGREEMENTS
Some 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." Some 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."
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to Towne Services from the sale of 4,000,000 shares of
common stock offered by it 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. See
"Principal and Selling Shareholders."
Towne Services intends to use a total of approximately $11.0 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; (iii) approximately $1.5 million to repay the
indebtedness outstanding under the Company's loan facility with Sirrom
Investments, Inc. (the "Sirrom Loan Facility"); and (iv) approximately $510,000
to repay the indebtedness outstanding under the Company's loan from Citizens
Bank (the "Citizens Loan"). 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. The Citizens Loan matures on September 3, 1998, bears
interest at 8.5% per year and was obtained to finance the Company's purchase of
assets and liabilities from Credit Collection Solutions, Inc. on June 11, 1998.
Towne Services intends to use the balance of the net proceeds, expected to
be approximately $25.0 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 acquisition of assets from Credit Collection
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 -- Dependence on
Acquisitions of Complementary Companies and Products."
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."
14
<PAGE> 17
DILUTION
The net tangible book value of the Company at March 31, 1998 was $2.2
million or $0.17 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 $2.04
per share. This represents an immediate increase of $1.87 in net tangible book
value per share to existing shareholders and an immediate dilution of $7.96 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.............. $0.17
Increase attributable to the sale of shares offered
hereby................................................. 1.87
Pro forma net tangible book value after this offering....... 2.04
------
Dilution in net tangible book value to new investors........ $ 7.96
======
</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........................ 14,823,734 21.2% $11,266,038 22.0% $ 0.76
New investors................................ 4,000,000 78.8 40,000,000 78.0 10.00
---------- ----- ----------- -----
Total.............................. 18,823,734 100.0% 51,266,038 100.0%
========== ===== =========== =====
</TABLE>
The sale of 200,000 shares by one selling shareholder in this offering will
reduce the number of shares of common stock held by existing investors to
14,623,734, or 77.7%, and will increase the number of shares to be held by new
investors to 4,200,000, or 22.3%, of the total number of shares to be
outstanding after this offering. If the underwriters exercise their
over-allotment option in full, sales by the other six selling shareholders in
this offering will reduce the number of shares of common stock held by existing
shareholders to 13,993,734, or 74.3%, and will increase the number of shares to
be held by new investors to 4,830,000, or 25.7%, 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 that 1,217,903 shares of common stock will be
issued upon conversion of the Series A Preferred Stock outstanding upon
completion of this offering (assuming a conversion date of August 1, 1998) and
that warrants for 308,982 shares of common stock will be exercised on or before
completion of this offering. At March 31, 1998 there were outstanding options
and warrants to purchase 3,339,361 shares of common stock at a weighted average
exercise price of $1.13 per share which are not included in the above table. See
"Management -- Stock Option Plans" and Note 6 of the notes to the Company's
financial statements.
15
<PAGE> 18
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; 13,220,849
shares issued and outstanding, actual; and 18,747,734
shares issued and outstanding, as adjusted(2).......... 10,784,733 48,648,823
Warrants outstanding...................................... 20,000 20,000
Accumulated deficit....................................... (9,801,632) (10,041,029)
---------- -----------
Total shareholders' equity........................ 2,511,101 38,627,794
---------- -----------
Total capitalization.............................. $4,195,230 $38,698,320
========== ===========
</TABLE>
- ---------------
(1) The 15,000 shares of Series A Preferred Stock outstanding immediately prior
to this offering automatically convert into 1,217,903 shares of common stock
upon completion of this offering (assuming a conversion date of August 1,
1998). 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 3,339,361 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 Note 6 of notes
to the Company's financial statements.
16
<PAGE> 19
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.
The pro forma statements of operations data for the year ended December 31,
1997 and for the three months ended March 31, 1998 and the pro forma balance
sheet data at March 31, 1998 give effect to the acquisition of certain assets of
Credit Collection Solutions, Inc. as if the purchase had occurred at the
beginning of the periods presented (for the statements of operations) and at
March 31, 1998 (for the balance sheet). The pro forma financial information does
not necessarily represent what the Company's results of operations would have
been if these transactions had in fact occurred on these dates, nor does it
indicate the future financial position or results of future operations of the
Company. The pro forma adjustments are based on currently available information
and certain assumptions that management believes to be reasonable. See the pro
forma financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
INCEPTION YEARS ENDED ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------- ---------------------------------------
------------ PRO FORMA PRO FORMA
1995(1) 1996 1997 1997(2) 1997 1998 1998(2)
------------ --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.................. $ 6,000 $ 105,285 $ 722,364 $ 952,029 $ 96,663 $ 547,954 $ 597,237
Costs of processing,
servicing and support... 2,250 219,621 832,102 883,851 102,684 374,128 400,688
Research and
development............. 0 51,871 332,470 402,761 11,231 74,024 90,599
Sales and marketing....... 3,739 118,163 839,323 839,323 94,337 485,562 485,562
Stock compensation
expense................. 0 10,020 0 0 0 2,489,268(2) 2,489,268
General and
administrative.......... 18,410 358,606 1,118,642 1,878,787 170,416 1,347,282 1,471,821
--------- --------- ----------- ----------- --------- ----------- -----------
Total costs and
expenses................ 24,399 758,281 3,122,537 4,004,722 378,668 4,770,264 4,937,938
--------- --------- ----------- ----------- --------- ----------- -----------
Operating loss............ (18,399) (652,996) (2,400,173) (3,052,693) (282,005) (4,222,310) (4,340,701)
--------- --------- ----------- ----------- --------- ----------- -----------
Interest expense (income),
net..................... (131) 5,802 95,946 159,783 19,063 64,289 83,464
Other expense (income).... 357 3,509 (1,018) (1,018) (648) 0 0
Financing costs for stock
issued to
nonemployees............ 0 0 0 0 0 133,000(3) 133,000
--------- --------- ----------- ----------- --------- ----------- -----------
Total other expenses...... 226 9,311 94,928 158,765 18,415 197,289 216,464
--------- --------- ----------- ----------- --------- ----------- -----------
Net loss.................. (18,625) (662,307) (2,495,101) (3,211,458) (300,420) (4,419,599) (4,557,165)
Net loss attributable to
common shareholders(4).. (18,625) (662,307) (2,495,101) (3,211,458) (300,420) (6,527,599) (6,665,165)
Net loss per common
share(5)................ $ (0.00) $ (0.10) $ (0.26) $ (0.33) $ (0.04) $ (0.54) $ (0.55)
========= ========= =========== =========== ========= =========== ===========
Weighted average common
shares outstanding(5)... 5,000,000 6,337,356 9,600,592 9,700,592 8,006,626 12,077,352 12,177,352
========= ========= =========== =========== ========= =========== ===========
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS
INCEPTION YEARS ENDED ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------- ---------------------------------------
------------ PRO FORMA PRO FORMA
1995(1) 1996 1997 1997(2) 1997 1998 1998(2)
------------ --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA AT
END OF PERIOD:
Number of sales people... 0 2 15 2 33
Number of bank
contracts(6)........... 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(7) PROFORMA
------- -------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $17,517 $ 1,677 $2,025,165 $3,159,039 $37,704,096 $2,233,978
Total assets................................ 28,226 366,806 3,586,432 5,523,501 40,026,591 7,298,613
Long-term debt.............................. 30,000 90,000 1,289,666 1,289,162 28,559 1,289,162
Shareholders'(deficit) equity............... (2,875) 119,092 1,261,663 2,511,101 38,627,794 3,311,101
</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 to employees,
offices and directors 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 compensation charge for the difference
between the two values. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) During the three months ended March 31, 1998, the Company sold shares of
common stock to non-employees 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 financing cost for the difference
between the two values. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(4) Net loss attributable to common shareholders includes dividends recorded
with respect to convertible preferred stock issued on March 13, 1998 for the
difference between the estimated fair market value of the common stock on
that date and the conversion price of the preferred stock. See Notes (2) and
(3) above and Note 9 of notes to the Company's financial statements.
(5) See Note 2 of notes to the Company's financial statements for a description
of the method used to determine the share calculations.
(6) 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 separate written agreements
with Towne Services.
(7) 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".
18
<PAGE> 21
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, are recorded
and processed manually and then 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 generate interest-bearing revolving credit accounts by
financing the accounts receivable of these small businesses. Through the use of
Towne Services' products, banks can monitor customers' accounts receivable and
generate detailed status 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.
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.
19
<PAGE> 22
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 $4.4 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; Factors Beyond Towne
Services' Control" and "Dependence on Ability to Grow and Manage Growth."
20
<PAGE> 23
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 2,489,268
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 4,770,264
-------- --------- ----------- --------- -----------
Operating loss................ (18,399) (652,996) (2,400,173) (282,005) (4,222,310)
-------- --------- ----------- --------- -----------
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 0 133,000
-------- --------- ----------- --------- -----------
Total other expenses.......... 226 9,311 94,928 18,415 197,289
-------- --------- ----------- --------- -----------
Net loss...................... $(18,625) $(662,307) $(2,495,101) $(300,420) $(4,419,599)
======== ========= =========== ========= ===========
Net loss attributable to
common shareholders......... $(18,625) $(662,307) $(2,495,101) $(300,420) $(6,527,599)
======== ========= =========== ========= ===========
</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 0 454
General and administrative.... 307 340 155 176 246
-------- --------- ----------- --------- -----------
Total costs and expenses...... 407 720 432 392 871
-------- --------- ----------- --------- -----------
Operating loss................ 307 620 332 292 771
-------- --------- ----------- --------- -----------
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 24
-------- --------- ----------- --------- -----------
Total other expenses.......... 4 9 13 19 36
-------- --------- ----------- --------- -----------
Net loss...................... 311% 629% 345% 311% 807%
======== ========= =========== ========= ===========
Net loss attributable to
common shareholders......... 311% 629% 345% 311% 1,191%
======== ========= =========== ========= ===========
</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
21
<PAGE> 24
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.
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.
22
<PAGE> 25
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.
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.
23
<PAGE> 26
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
----- ----- --------- -------- ----- ----- --------- -------- -------
(IN THOUSANDS)
<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 -- -- -- -- 2,489
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 4,770
---- ----- ----- ----- ----- ----- ----- ------- -------
Operating loss................. (50) (123) (113) (367) (248) (428) (613) (1,111) (4,222)
---- ----- ----- ----- ----- ----- ----- ------- -------
Interest (income) expense,
net.......................... -- 2 2 2 19 26 29 22 64
Other expense (income)......... -- -- -- 3 (1) -- -- -- --
Financing costs for stock
issued to nonemployees....... -- -- -- -- -- -- -- -- 133
---- ----- ----- ----- ----- ----- ----- ------- -------
Total other expenses........... -- 2 2 5 18 26 29 22 197
---- ----- ----- ----- ----- ----- ----- ------- -------
Net loss....................... $(50) $(125) $(115) $(372) $(266) $(454) $(642) $(1,133) $(4,420)
==== ===== ===== ===== ===== ===== ===== ======= =======
Net loss attributable to common
shareholders................. $(50) $(125) $(115) $(372) $(266) $(454) $(642) $(1,133) $(6,528)
==== ===== ===== ===== ===== ===== ===== ======= =======
</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 0 454
General and administrative..... 400 389 241 373 145 239 135 147 246
---- ----- ----- ----- ----- ----- ----- ------- -------
Total costs and expenses....... 933 747 490 820 356 586 410 427 871
---- ----- ----- ----- ----- ----- ----- ------- -------
Operating loss................. (833) (647) (390) (720) (256) (486) (310) (327) (771)
---- ----- ----- ----- ----- ----- ----- ------- -------
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 24
---- ----- ----- ----- ----- ----- ----- ------- -------
Total other expenses........... 0 11 7 10 19 30 15 6 36
---- ----- ----- ----- ----- ----- ----- ------- -------
Net loss....................... (833)% (658)% (397)% (729)% (274)% (516)% (324)% (333)% (807)%
==== ===== ===== ===== ===== ===== ===== ======= =======
Net loss attributable to common
shareholders................. (833)% (658)% (397)% (729)% (274)% (516)% (324)% (333)% (1,191)%
==== ===== ===== ===== ===== ===== ===== ======= =======
</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
24
<PAGE> 27
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 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 $4.4 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 and the
Citizens Loan are expected to total approximately $34.0 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
25
<PAGE> 28
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 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). See Note 2 of
notes to the Company's financial statements for a reconciliation of net loss
attributable to common shareholders under SFAS No. 128.
26
<PAGE> 29
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, are
recorded and processed manually and then 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
generate interest-bearing revolving credit accounts by financing the accounts
receivable of these small businesses. Through the use of Towne Services'
products, banks can monitor customers' accounts receivable and generate detailed
status reports. Towne Services' products and services allow banks to attract new
business customers who, in turn, may become customers of 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. In addition, the business'
customer pays interest and fees to the bank for amounts owed by the customer for
purchases made on in-house credit. 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' processing systems allow small
businesses to automate these in-house accounts and provide a convenient service
to customers who prefer to purchase items on credit.
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 larger businesses and
on credit and debit card transactions
27
<PAGE> 30
which may be less convenient and are subject to terms established by the credit
card company or debit card issuer. 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.
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 15 16 17 33 45 54
Bank contracts............... 29 34 41 41 58 65 74 85 97 122 130 152
Business customers........... 34 38 49 59 69 81 96 117 135 161 189 225
</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 54 persons located in 25
states. Of this total, 30 persons are dedicated to developing bank customer
relationships and 24 are focused on developing small business customers. Towne
Services intends to continue aggressively hiring sales and marketing personnel
nationwide to strengthen its direct marketing efforts, increase its customer
base and expand into new markets. Towne Services recently retained a marketing
firm to help develop new marketing materials and expand its advertising efforts
across the country. Towne Services also plans to 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 Bank Relationships
Towne Services' executive officers and directors have an average of over 15
years experience in the electronic processing and financial services industries,
and 7 members of its board of directors either run banks or run companies that
have banks as customers. Towne Services' management leverages these expertise
and contacts to develop relationships with banks and banking organizations.
These 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. In addition, Towne Services intends to provide new products
and services, such as a lease financing and processing system currently being
developed, that may allow these banks to attract new customers for both the
banks and Towne Services. Towne Services plans to sign additional agreements
with existing bank customers to offer its new products and services and to
leverage these relationships to develop new bank customers in its current and
future markets.
Enter New Relationships For Marketing and Product Enhancements
Towne Services has established marketing and other business relationships
that enhance its products and services and its channels of distribution. Towne
Services has agreements with several companies whose products and services
complement the TOWNE CREDIT and TOWNE FINANCE systems, including Datamatx,
Wallace and de Mayo and Cash Management Services, which provide statement
processing services, collection services and lockbox management services. Towne
Services also has agreements with entities that
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have banks as their customers, such as Phoenix International Ltd. and The
Bankers Bank of Kentucky, under which these other companies and organizations
encourage their bank customers to use Towne Services' systems. Towne Services
intends to enter more relationships with companies that can expand the number of
its products and services, complement its existing and future systems and
provide access to large groups of banks and small businesses.
Maximize Electronic Link to Customers
When a business customer installs TOWNE CREDIT and TOWNE FINANCE, it
establishes an electronic link with Towne Services. Towne Services intends to
maximize 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 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.
Acquire Complementary Companies and Products
Towne Services intends to acquire 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
recently acquired some of the 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 acquisition,
please see "-- Acquisitions of Complementary Companies and Products."
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.
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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.
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.
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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 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
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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.
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.
ACQUISITIONS OF COMPLEMENTARY COMPANIES AND PRODUCTS
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, on June
11, 1998 Towne Services acquired certain assets and liabilities of Credit
Collection Solutions, Inc. Credit Collection has developed computer software for
processing payments and tracking collections including Collection Works, an
operating system developed to address the debt collection needs of banks and
collection agencies. Pursuant to this acquisition, the Company agreed to assume
liabilities of approximately $510,000 and to issue up to 100,000 shares of its
common stock if certain financial results are achieved from the acquired assets
including Collection Works. Following the acquisition, Towne Services hired
Credit Collections' majority shareholder and president, who is experienced in
credit collection solutions. Towne Services' management believes this
acquisition advances its growth strategies by adding a complementary technology
solution and enhancing its customer base.
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SALES AND MARKETING
Towne Services employs a direct sales force of 54 persons located in 25
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.
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 150 agreements with community banks located
in 16 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 15 persons. As of May 31, 1998, the
sales force had increased to 54 persons located in 25 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
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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.
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
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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
220 small and medium size retail merchants and small commercial businesses
located in 16 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 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 150 contracts with banks in 16 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
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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 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 May 31, 1998, the Company had 86 full-time employees, of which 54 were
in sales and marketing, 17 were in operations and 15 were corporate and general
administrative employees. Of these employees, 41 were based in Norcross,
Georgia, and 45 were based in 24 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.
36
<PAGE> 39
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
J. Stanley Mackin...................... 65 I 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
37
<PAGE> 40
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.
J. Stanley Mackin has been a director of Towne Services since June 1998.
Mr. Mackin has been the Chairman of the Board of Directors of Regions Financial
Corporation since 1990 and served as its Chief Executive Officer from August
1990 to January 1998. Prior to joining Regions Financial as its President and
Chief Operating Officer in January 1990, Mr. Mackin had worked for Regions Bank
since 1966. He served as Chairman and Chief Executive Officer of Regions Bank
from 1986 to 1990, as President and Chief Executive Officer from 1983 to 1986,
and as head of the commercial loan division from 1971 to 1983.
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 and 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 publicly-traded 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
38
<PAGE> 41
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., Inc. since its 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
39
<PAGE> 42
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 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 $1.00 beyond the
budgeted revenue goal, provided that the corresponding margins are in line with
the budget. If the bonuses are paid, the Company's executive officers will
receive the following percentages of the total bonus pool: Mr. Edwards, 20%; Mr.
Baroco, 20%; Mr. Lowthers, 15%; and Mr. Shultz, 12%. Bonuses are payable as
follows: 12.5% of the pool is payable following the end of each quarter if the
Company meets its goals for that quarter and has met the goals for prior during
the year, and the remainder is payable following the end of the fiscal year if
the Company has met its goals for the entire year. No bonus will be paid if the
Company does not meet its goals during any quarter.
40
<PAGE> 43
OPTION GRANTS
The following table sets forth information concerning each grant of stock
options to the executive officers during the year ended December 31, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES OF
NUMBER OF OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/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 executive officers who have
been 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.
41
<PAGE> 44
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 June 15, 1998, options to acquire 2,090,000 shares had been
authorized for issuance under the 1996 Plan, and options to acquire 1,708,400
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
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<PAGE> 45
Yusefzadeh. The Audit Committee currently consists of Messrs. Baroco, Edwards,
Speight and Turner, and the Executive Committee consists of Messrs. Boggs,
Brown, Collins, Edwards, Sturm and Yusefzadeh. The Company anticipates changing
the members of these committees prior to completion of this offering.
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. On June 5, 1998, the
Company entered into a $500,000 loan with Citizens Bank to fund its acquisition
of assets and liabilities from Credit Collection Solutions. This loan matures
September 3, 1998 and accrues interest at a fixed rate of 8.5% per year. 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
43
<PAGE> 46
Company at a price of $1.00 per share in October 1997 and 50,000 shares of
common stock upon the exercise of options at an exercise price of $1.25 per
share in March 1998.
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 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.
44
<PAGE> 47
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 13.2% 100,000 1,910,490 9.9%
Henry M. Baroco............................ 1,426,133 9.0 87,000 1,339,133 6.8
Bruce F. Lowthers, Jr. .................... 279,033 1.9 279,033 1.5
Cleve B. Schultz........................... 627,935 4.1 40,000 587,935 3.1
G. Lynn Boggs.............................. 1,725,923 11.5 176,500 1,549,423 8.1
Frank W. Brown(3).......................... 1,367,903 9.2 1,367,903 7.3
John W. Collins(4)......................... 512,623 3.5 512,623 2.6
J. Stanley Mackin.......................... 50,000 * 50,000 *
Joe M. Rodgers(5).......................... 271,648 1.8 271,648 1.4
J. Daniel Speight, Jr.(6).................. 431,700 2.9 50,000 381,700 2.0
Glenn W. Sturm............................. 360,923 2.4 360,923 1.9
J. Stephen Turner.......................... 552,500 3.7 552,500 2.9
Bahram Yusefzadeh.......................... 102,500 * 102,500 *
All directors and executive officers as a
group (13 persons)....................... 9,669,311 55.8 9,224,811 43.2
OTHER PRINCIPAL AND SELLING SHAREHOLDERS
Thomas A. Bryan(7)......................... 1,671,923 11.2 176,500 1,495,423 7.9
FLAG Financial Corporation(8).............. 361,700 2.7 50,000 311,700 1.7
Sirrom Investments, Inc.(9)................ 308,942 2.1 200,000 108,942 *
Capital Appreciation Partners, L.P.(10).... 1,217,903 8.3 1,217,903 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) Other than the 200,000 shares to be sold by Sirrom Investments in this
offering, shares will be offered by selling shareholders only if and to the
extent that the underwriters exercise their over-allotment option. See
"Underwriting."
(3) Includes (i) 150,000 shares of common stock held by Brown, Burke Capital
Partners, Inc. of which Mr. Brown is a principal, and (ii) 1,217,903 shares
of common stock issuable upon conversion of the Series A Preferred Stock
held by Capital Appreciation Partners, L.P. Mr. Brown is the managing
member of Capital Appreciation Management Company, L.L.C., the managing
general partner of Capital Appreciation Partners, L.P. See note (10) below
and "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
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<PAGE> 48
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.
(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 (50,000 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) Sirrom Investments, Inc.'s address is 500 Church Street, Suite 200,
Nashville, Tennessee 37219.
(10) Represents shares issuable upon conversion of Series A Preferred Stock,
including 17,903 shares issuable as payment of estimated dividends owed
with respect to the Series A Preferred Stock through July 31, 1998. Capital
Appreciation Partners, L.P.'s address is One Buckhead Plaza, Suite 1585,
3060 Peachtree Road, Atlanta, Georgia 30305.
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<PAGE> 49
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 Sirrom Investments 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.
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<PAGE> 50
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 31, 1998, there were 13,296,849 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.
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<PAGE> 51
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 12 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
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<PAGE> 52
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
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<PAGE> 53
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
51
<PAGE> 54
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 First Union
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
18,823,734 shares of common stock and immediately exercisable options and
warrants to purchase 2,195,411 additional shares of common stock. The 4,200,000
shares sold in this offering (4,830,000 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 14,623,734 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, 115,000 of these
restricted shares will be eligible for immediate sale in the public market
without restriction pursuant to Rule 144(k) and an additional 11,372,933 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. When the lock-up
agreements between the underwriters and the directors, executive officers and
certain shareholders of the Company expire 180 days after the date of this
prospectus (or earlier with the written consent of Wheat First Securities,
Inc.), 11,596,915 of the restricted shares will be eligible for immediate sale
in the public market, subject to the provisions of Rule 144 or 701, and the
remaining 3,026,819 restricted shares which are currently outstanding will
become available for public sale, subject to the provisions of Rule 144 or 701,
at various times thereafter. 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(k) 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 3,708,400 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
52
<PAGE> 55
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
1,217,903 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.
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<PAGE> 56
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 one selling shareholder,
and the Company and one selling shareholder have 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.
Six of 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 630,000 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
54
<PAGE> 57
common stock at an exercise price equal to 110% of the initial public offering
price to the following 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 630,000 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
55
<PAGE> 58
contract or other document filed as an exhibit to the Registration Statement of
which this prospectus forms a 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.
56
<PAGE> 59
TOWNE SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TOWNE SERVICES, INC.
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............................... 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
CREDIT COLLECTION SOLUTIONS, INC.
Report of Independent Public Accountants.................... F-19
Balance Sheets as of December 31, 1997 and March 31, 1998
(unaudited)............................................... F-20
Statements of Operations for the Year Ended December 31,
1997 and for the three months ended March 31, 1997 and
1998 (unaudited).......................................... F-21
Statements of Shareholders' Deficit for the Year Ended
December 31, 1997 and for the three months ended March 31,
1998 (unaudited).......................................... F-22
Statements of Cash Flows for the Year Ended December 31,
1997 and for the three months ended March 31, 1997 and
1998 (unaudited).......................................... F-23
Notes to Financial Statements............................... F-24
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Financial Information................... F-28
Unaudited Pro Forma Balance Sheet as of March 31, 1998...... F-29
Unaudited Pro Forma Statements of Operations................ F-30
</TABLE>
F-1
<PAGE> 60
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> 61
TOWNE SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
MARCH 31, MARCH 31,
1996 1997 1998 1998
--------- ----------- ------------ -------------
(NOTE 9)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 151,082 $ 2,536,439 $ 3,500,010
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 4,529,277
PROPERTY AND EQUIPMENT, net................. 138,916 489,849 687,363
DEBT ISSUANCE COSTS, net.................... 64,124 288,815 304,361
OTHER ASSETS................................ 4,375 2,500 2,500
--------- ----------- ------------
$ 366,806 $ 3,586,432 $ 5,523,501
========= =========== ============
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 13,220,849 shares
issued and outstanding in 1996, 1997,
and 1998, respectively................. 800,024 4,417,696 10,784,733 12,645,733
Warrants outstanding...................... 0 20,000 20,000 20,000
Accumulated deficit....................... (680,932) (3,176,033) (9,801,632) (9,801,632)
--------- ----------- ------------ -----------
Total shareholders' equity........ 119,092 1,261,663 2,511,101 $ 2,864,101
--------- ----------- ------------ =============
$ 366,806 $ 3,586,432 $ 5,523,501
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 62
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 2,489,268
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 4,770,264
---------- ---------- ----------- ---------- -----------
OPERATING LOSS.................... (18,399) (652,996) (2,400,173) (282,005) (4,222,310)
---------- ---------- ----------- ---------- -----------
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 0 133,000
---------- ---------- ----------- ---------- -----------
Total other expenses.... 226 9,311 94,928 18,415 197,289
---------- ---------- ----------- ---------- -----------
NET LOSS.......................... $ (18,625) $ (662,307) $(2,495,101) $ (300,420) $(4,419,599)
========== ========== =========== ========== ===========
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS:
Basic........................... $ (18,625) $ (662,307) $(2,495,101) $ (300,420) $(6,527,599)
========== ========== =========== ========== ===========
Diluted......................... $ (18,625) $ (662,307) $(2,495,101) $ (300,420) $(6,527,599)
========== ========== =========== ========== ===========
NET LOSS PER COMMON SHARE:
Basic........................... $ (0.0) $ (0.10) $ (0.26) $ (0.04) $ (0.54)
========== ========== =========== ========== ===========
Diluted......................... $ (0.0) $ (0.10) $ (0.26) $ (0.04) $ (0.54)
========== ========== =========== ========== ===========
Weighted average common shares
outstanding.................. 5,000,000 6,337,356 9,600,592 8,006,626 12,077,352
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 63
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 0 0 0 1,500,000
Issuance of common stock.......... 0 0 1,019,083 2,915,787 0 0 2,915,787
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
Preferred stock dividend (Note
9).............................. 0 0 0 2,100,000 0 (2,100,000) 0
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 (4,419,599) (4,419,599)
------ ---------- ---------- ----------- ------- ----------- -----------
BALANCE, March 31, 1998
(unaudited)..................... 15,000 $1,508,000 13,220,849 $10,784,733 $20,000 $(9,801,632) $ 2,511,101
====== ========== ========== =========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 64
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) $(4,419,599)
-------- --------- ----------- --------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense recognized for stock
option grants................................ 0 10,020 0 0 2,489,268
Financing costs for stock issued to
nonemployees................................. 0 0 0 0 133,000
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) 2,904,392
-------- --------- ----------- --------- -----------
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 1,217,269
-------- --------- ----------- --------- -----------
Net cash provided by financing
activities............................... 45,750 770,130 5,046,012 1,023,314 2,701,872
-------- --------- ----------- --------- -----------
NET INCREASE IN CASH............................... 18,620 132,462 2,385,357 252,185 963,571
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 $ 3,500,010
======== ========= =========== ========= ===========
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> 65
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 $4,419,599. 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> 66
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> 67
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). A reconciliation of net loss attributable to
common shareholders for the three months ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net loss as reported........................................ (4,419,599)
Dividends on convertible preferred shares................... (2,108,000)
----------
Net loss attributable to common shareholders................ (6,527,599)
==========
</TABLE>
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
F-9
<PAGE> 68
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
January 1, 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 for all periods presented.
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 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.
F-10
<PAGE> 69
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 assets on the accompanying balance sheet.
The value of the debt issuance costs was determined using the minimum value
method as prescribed under SFAS 123, using an expected life of 5 years and the
risk-free interest rate at the date of grant. This amount is being amortized to
interest expense over the life of the credit
F-11
<PAGE> 70
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreement. As of December 31, 1997, none of these options had been exercised.
See Note 6 where these options are included in the stock option activity tables.
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 value of the debt issuance costs was determined
using the minimum value method as prescribed under SFAS 123, using an expected
life of 5 years and the risk-free interest rate at the date of grant. The line
of credit expired on December 11, 1997. As of December 31, 1997, none of these
options had been exercised. See Note 6 where these options are included in the
stock option activity tables.
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.
F-12
<PAGE> 71
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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. Upon the
completion of an initial public offering, the value of the warrants will be
transferred to permanent equity.
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
F-13
<PAGE> 72
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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' 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................................................... 401,000 1.25
Canceled.................................................. 0 0.00
Exercised................................................. (495,000) 0.86
---------
Options Outstanding at March 31, 1998....................... 3,264,361 0.58
=========
Exercisable at December 31, 1997.......................... 2,157,361
---------
Exercisable at March 31, 1998............................. 2,118,611
=========
</TABLE>
F-14
<PAGE> 73
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.......................... 689,500 1.10 9.66 181,250 1.18
--------- ---------
Total................................ 3,264,361 0.59 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> 74
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. To calculate the
estimated fair value of the warrants, the Company used a risk free interest rate
of 5.9% and an expected life of 5 years.
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.
F-16
<PAGE> 75
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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.
In October 1997, Rodgers Capital Group purchased 200,000 shares of common
stock from the Company 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.
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 as a preferred stock dividend 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. Dividends are to be paid in cash or with shares of common stock valued
at a price of $1.25, at the option of the holders of the preferred stock.
Pro forma shareholders' equity at March 31, 1998 assumes the conversion of
preferred stock into 1,217,903 shares of common stock upon completion of an
initial public offering (assuming an August 1, 1998 conversion date).
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 (Smerkovitz & Associates) who
F-17
<PAGE> 76
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 943,083
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 397,500 shares of common stock granted
during 1996 and 1997 to nonemployee directors from a five year vesting period to
immediate vesting. As this change in vesting period created a new measurement
date, the 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> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Credit Collection Solutions, Inc.:
We have audited the accompanying balance sheet of CREDIT COLLECTION
SOLUTIONS, INC. (a Georgia corporation) as of December 31, 1997 and the related
statements of operations, shareholders' deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Credit Collection Solutions,
Inc. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Atlanta, Georgia
June 8, 1998
F-19
<PAGE> 78
CREDIT COLLECTION SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
1997 1998
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 215 $ 144
Accounts receivable, net of allowance for doubtful
accounts of $10,000 at December 31, 1997 and March 31,
1998, respectively..................................... 74,320 59,907
--------- ---------
Total current assets.............................. 74,535 60,051
PROPERTY AND EQUIPMENT, net................................. 14,568 10,927
--------- ---------
$ 89,103 $ 70,978
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 21,392 $ 17,268
Accrued liabilities....................................... 26,891 42,241
Payroll taxes payable..................................... 39,899 46,468
Note payable.............................................. 85,000 85,000
Wages payable............................................. 1,471 44,353
Due to shareholders....................................... 153,028 163,119
Due to employees.......................................... 32,675 24,984
Due to related party...................................... 213,489 213,518
--------- ---------
Total current liabilities......................... 573,845 636,951
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' DEFICIT:
Common stock, $10 par value; 100,000 shares authorized,
10,000 shares issued and outstanding................... 100,000 100,000
Accumulated deficit....................................... (584,742) (665,973)
--------- ---------
Total shareholders' deficit....................... (484,742) (565,973)
--------- ---------
$ 89,103 $ 70,978
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-20
<PAGE> 79
CREDIT COLLECTION SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
MARCH 31
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................................... $ 229,665 $ 58,338 $ 49,283
--------- -------- --------
COSTS AND EXPENSES:
Costs of processing, servicing, and support............... 51,749 3,006 26,560
Research and development.................................. 70,291 16,695 16,575
General and administrative................................ 457,305 90,151 78,829
--------- -------- --------
Total costs and expenses.......................... 579,345 109,852 121,964
--------- -------- --------
OPERATING LOSS.............................................. (349,680) (51,514) (72,681)
INTEREST EXPENSE............................................ 21,337 1,019 8,550
--------- -------- --------
NET LOSS.................................................... $(371,017) $(52,533) $(81,231)
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 80
CREDIT COLLECTION SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996.......................... 10,000 $100,000 $(213,725) $(113,725)
Net loss.......................................... 0 0 (371,017) (371,017)
------ -------- --------- ---------
BALANCE, December 31, 1997.......................... 10,000 100,000 (584,742) (484,742)
Net loss.......................................... 0 0 (81,231) (81,231)
------ -------- --------- ---------
BALANCE, March 31, 1998 (unaudited)................. 10,000 $100,000 $(665,973) $(565,973)
====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE> 81
CREDIT COLLECTION SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(371,017) $(52,533) $(81,231)
--------- -------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 14,566 3,641 3,641
Changes in operating assets and liabilities:
Accounts receivable.................................. (36,276) (51,266) 14,413
Accounts payable..................................... 20,547 30,712 (4,124)
Payroll taxes payable................................ 39,899 5,036 6,569
Related-party payable................................ 41,465 45,493 29
Accrued liabilities.................................. 26,891 6,179 15,350
Wages payable........................................ 1,471 0 42,882
Due to employees..................................... 32,675 0 (7,691)
Due to shareholders.................................. 143,028 11,350 10,091
--------- -------- --------
Total adjustments................................. 284,266 51,145 81,160
--------- -------- --------
Net cash used in operating activities............. (86,751) (1,388) (71)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ 85,000 0 0
--------- -------- --------
NET DECREASE IN CASH........................................ (1,751) (1,388) (71)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,966 1,966 215
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 215 $ 578 $ 144
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 82
CREDIT COLLECTION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1997 AND 1998
1. ORGANIZATION AND BACKGROUND
Credit Collection Solutions, Inc. (the "Company") was formed in November
1994 to provide information, training, and support for the collection and
finance industry. The Company's product, Collection Works, is a PC-based
software package which was specifically developed to operate in the local area
network environment for the purpose of debt collection. The product focuses
primarily on collection agencies and bank users but is also adapted to serve the
large company or business that does in-house debt collecting.
The Company's products and services are sold throughout the United States
and Asia.
In June 1998, Towne Services, Inc. ("Towne Services") purchased certain
assets and assumed certain liabilities of the Company for approximately $510,000
cash and, subject to certain earn-out agreements, the issuance of up to 100,000
shares of Towne Services common stock to the shareholders of the Company. The
$510,000 cash was used to extinguish existing obligations of the Company.
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 Company's management, 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.
REVENUE RECOGNITION
The Company's revenue is generated through sales of its software program
and through providing maintenance and support services. Revenue from software
licenses and system sales is generally recognized as products are shipped,
provided that no significant postcontract support obligations remain and the
collection of the related receivable is probable. Revenue from maintenance and
support is recognized as the service is provided.
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
F-24
<PAGE> 83
CREDIT COLLECTION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
incurred. Depreciation is provided using the straight-line method for financial
reporting. The detail of property and equipment at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
USEFUL
LIVES
-----------
<S> <C> <C>
Computers and equipment..................................... $12,100 Three years
Software development costs.................................. 31,600 Three years
-------
43,700
Less accumulated depreciation............................... (29,132)
-------
$14,568
=======
</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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of salary-related personnel costs
and support services used in products necessary to deliver the Company's
product. 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 capitalized
$31,600 of software development costs at December 31, 1997.
INCOME TAXES
The Company is a C corporation for income tax reporting purposes and
accounts for income taxes under the provisions of Statement of Financial
Accounting Standards ("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.
CONCENTRATION OF CUSTOMERS
For the year ended December 31, 1997, the Company had two customers which
accounted for approximately 18% and 13% of the Company's revenues. The loss of
one or both of these customers could have an adverse effect on the Company's
performance and operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board 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
F-25
<PAGE> 84
CREDIT COLLECTION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
beginning after December 15, 1997. The Company adopted SFAS No. 130, January 1,
1998. The adoption of SFAS No. 130 did not have a material impact on the
Company's financial statements, as comprehensive income did not differ from the
reported net loss for all periods presented.
3. NOTE PAYABLE
In April 1997, the Company signed a note payable to a third party for
$85,000. This note bears interest at 16% and is due in 36 monthly installments
of approximately $3,000, including interest, beginning May 1997. As of December
31, 1997, the Company has not made any payments on this note payable. Per the
provisions of the note payable, the note is due on demand upon any default.
Accordingly, the note payable has been recorded as a current liability. Accrued
interest of $10,200 on the note is included in accrued liabilities.
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 year ended December 31,
1997:
<TABLE>
<S> <C>
Income tax benefit computed at the federal statutory rate... $126,146
State income tax benefit, net of federal income tax
benefit................................................... 14,840
Other, net.................................................. 6,500
Change in valuation allowance............................... (147,486)
--------
$ 0
========
</TABLE>
Deferred income tax assets and liabilities for 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, 1997 are
as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable reserves.............................. $ 3,800
Payroll taxes payable..................................... 15,162
Net operating loss carryforwards.......................... 175,411
---------
Deferred tax assets............................... 194,373
Valuation allowance......................................... (194,373)
---------
Net deferred tax asset............................ $ 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
$460,000 which will expire if not utilized by 2011 and 2012.
5. RELATED-PARTY TRANSACTIONS
The Company has $213,489 payable to Southern Computer Works, Inc., a
company related through common ownership, for services and payments made on the
Company's behalf. In 1998, the Company used computer equipment which was leased
from an outside party to Southern Computer Works. The lease payments of $1,872
were paid by Southern Computer Works and reimbursed by the Company and have been
included as rent expense in the accompanying statement of operations. The
Company is not obligated to continue to use this equipment in the future.
F-26
<PAGE> 85
CREDIT COLLECTION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has received $185,703 of advances from shareholders and
employees of the Company for operating expenses. These advances consist of
personal credit cards and other notes with varying rates of interest from 16% to
23.9%. Of these advances, $10,000 do not bear any interest. All amounts are due
on demand.
The Company utilizes office space owned by one of its shareholders at no
charge. This shareholder does not make any mortgage payments on the building on
the Company's behalf. Payments for utilities are made by Southern Computer Works
and are included in due to related party.
6. COMMITMENTS AND CONTINGENCIES
The Company does not maintain insurance coverage for risk areas such as
workers' compensation, property/casualty, and general liability. Management is
not aware of any incurred or outstanding claims as of December 31, 1997 or March
31, 1998 which would impact the operations of the Company.
F-27
<PAGE> 86
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma balance sheet as of March 31, 1998,
gives effect to the acquisition of certain assets of Credit Collection
Solutions, Inc. as if the purchase had occurred on that date. The accompanying
unaudited pro forma statements of operations for the year ended December 31,
1997 and the three months ended March 31, 1998 have been prepared to reflect
adjustments to Towne Services' historical results of operations to give effect
to the purchase as if it had occurred at the beginning of the respective
periods. The pro forma adjustments are based upon available information and
certain assumptions that management believes to be reasonable. Final purchase
adjustments may differ from the pro forma adjustments herein.
The accompanying pro forma statements are not necessarily indicative of the
results of operations which would have been attained had the purchase been
consummated on the dates indicated or which may be attained in the future. These
pro forma statements should be read in conjunction with the historical financial
statements of Towne Services and related notes thereto, which are included
elsewhere in this prospectus.
F-28
<PAGE> 87
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL CREDIT PRO
TOWNE COLLECTION FORMA
SERVICES(A) SOLUTIONS(A) ADJUSTMENTS PRO FORMA
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 3,500,010 $ 144 $ (10,000)(e) $ 3,490,154
Accounts receivable, net of allowance for
uncollectible accounts........................... 359,007 59,907 0 418,914
Note receivable.................................... 78,990 0 78,990
Stock subscriptions receivable..................... 427,500 0 427,500
Other.............................................. 163,770 0 163,770
----------- --------- ---------- -----------
Total current assets........................ 4,529,277 60,051 (10,000) 4,579,328
PROPERTY AND EQUIPMENT, net.......................... 687,363 10,927 0 698,290
DEBT ISSUANCE COSTS, net............................. 304,361 0 0 304,361
INTANGIBLES, NET..................................... 0 0 1,714,134(b) 1,714,134
OTHER ASSETS......................................... 2,500 0 0 2,500
----------- --------- ---------- -----------
$ 5,523,501 $ 70,978 $1,704,134 $ 7,298,613
=========== ========= ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 125,505 $ 17,268 $ 142,773
Accrued liabilities................................ 296,469 42,241 338,710
Accrued compensation............................... 906,297 44,353 950,650
Current portion of long-term debt.................. 41,967 85,000 500,000(e) 626,967
Payroll taxes payable.............................. 0 46,468 46,468
Due to shareholders................................ 0 163,119 163,119
Due to employees................................... 0 24,984 24,984
Due to related party............................... 0 213,518 (161,839)(b) 51,679
Deferred revenue................................... 0 0 0
----------- --------- ---------- -----------
Total current liabilities................... 1,370,238 636,951 338,161 2,345,350
----------- --------- ---------- -----------
LONG-TERM DEBT, net of discount...................... 1,289,162 0 1,289,162
----------- --------- ---------- -----------
WARRANTS WITH REDEMPTION FEATURE .................... 353,000 0 353,000
----------- --------- ---------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock.................................... 1,508,000 0 1,508,000
Common stock....................................... 10,784,733 100,000 (100,000)(c) 11,584,733
800,000(d)
Warrants outstanding............................... 20,000 0 20,000
Accumulated deficit................................ (9,801,632) (665,973) 665,973(c) (9,801,632)
----------- --------- ---------- -----------
Total shareholders' equity (deficit)........ 2,511,101 (565,973) 1,365,973 3,311,101
----------- --------- ---------- -----------
$ 5,523,501 $ 70,978 $1,704,134 $ 7,298,613
=========== ========= ========== ===========
</TABLE>
- ---------------
(a) Derived from the March 31, 1998 unaudited financial statements of Towne
Services and of Credit Collection Solutions, Inc. appearing elsewhere in
this prospectus.
(b) Reflects the allocation of the purchase price to tangible and intangible
assets based on the estimated fair value of such assets and to identifiable
liabilities assumed. Towne Services is currently in the process of obtaining
a purchase price valuation. Based on this valuation, a portion of the
goodwill may be expensed as in-process research & development costs;
however, this amount has not yet been determined.
(c) Reflects elimination of Credit Collection Solutions, Inc. equity accounts.
(d) Reflects issuance of 100,000 shares of common stock with an estimated fair
value of $800,000 as of the acquisition date, adjusted to reflect a discount
from market to account for restrictions common to large holdings of
unregistered securities.
(e) Reflects financing of acquisition with $10,000 cash and a $500,000 90-day
note payable to a bank at the prime rate. It is the intent of Towne Services
to repay this note and accrued interest with the proceeds from the offering.
F-29
<PAGE> 88
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
HISTORICAL
CREDIT
HISTORICAL COLLECTION PRO FORMA
TOWNE SERVICES(A) SOLUTIONS(A) ADJUSTMENTS PRO FORMA
----------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues.................................... $ 722,364 $ 229,665 $ $ 952,029
Costs and expenses
Costs of processing, servicing, and
support.............................. 832,102 51,749 883,851
Research and development................ 332,470 70,291 402,761
Sales and marketing..................... 839,323 0 839,323
General and administrative.............. 1,118,642 457,305 342,840(c) 1,878,787
(40,000)(d)
----------- --------- ----------- ------------
Total costs and expenses.................... 3,122,537 579,345 302,840 4,004,722
----------- --------- ----------- ------------
Operating loss.............................. (2,400,173) (349,680) (302,840) (3,052,693)
Interest expense............................ 95,946 21,337 42,500(b) 159,783
Other income................................ (1,018) 0 0 (1,018)
----------- --------- ----------- ------------
Net loss.................................... $(2,495,101) $(371,017) (345,340) (3,211,458)
=========== ========= =========== ============
Pro forma net loss attributable to
common shareholders.................. (2,495,101) (3,211,458)
=========== ============
Pro forma net loss per common share..... (0.26) (0.33)
=========== ============
Weighted average common shares
outstanding.......................... 9,600,592 9,700,592(e)
=========== ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31, 1998
--------------------------------------------------------------
HISTORICAL
CREDIT
HISTORICAL COLLECTION PRO FORMA
TOWNE SERVICES SOLUTIONS(A) ADJUSTMENTS PRO FORMA
----------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues.................................... $ 547,954 $ 49,283 $ $ 597,237
Costs and expenses
Costs of processing, servicing, and
support.............................. 374,128 26,560 400,688
Research and development................ 74,024 16,575 90,599
Sales and marketing..................... 485,562 0 485,562
Stock compensation expense.............. 2,489,268 0 2,489,268
General and administrative.............. 1,347,282 78,829 85,710 1,471,821
(40,000)(d)
----------- --------- ----------- ------------
Total costs and expenses.................... 4,770,264 121,964 45,710 4,937,938
----------- --------- ----------- ------------
Operating loss.............................. (4,222,310) (72,681) (45,710) (4,340,701)
Interest expense............................ 64,289 8,550 10,625(b) 83,464
----------- --------- ----------- ------------
Financing costs for stock issued to
nonemployees.............................. 133,000 0 0 133,000
----------- --------- ----------- ------------
Net loss.................................... $(4,419,599) $ (81,231) $ (56,335) $ (4,557,165)
=========== ========= =========== ============
Pro forma net loss attributable to
common shareholders.................. (6,527,599) (6,665,165)
=========== ============
Pro forma net loss per common share..... $ (0.54) $ (0.55)
=========== ============
Weighted average common shares
outstanding.......................... 12,077,352 12,177,352(f)
=========== ============
</TABLE>
- ---------------
(a) Derived from the financial statements of Towne Services and of Credit
Collection Solutions, Inc. appearing elsewhere in this prospectus.
(b) Reflects interest expense on note payable to bank.
(c) Reflects amortization of intangibles over five years.
(d) Reflects reduction in duplicate general and administrative expenses for
utilities and equipment rentals as Credit Collection Solutions, Inc. vacated
existing office space.
(e) Weighted average common shares outstanding assumes the 100,000 shares were
issued January 1, 1997.
(f) Weighted average common shares outstanding assumes the 100,000 shares were
issued January 1, 1998.
F-30
<PAGE> 89
======================================================
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.......................... 9
Use of Proceeds....................... 14
Dividend Policy....................... 14
Dilution.............................. 15
Capitalization........................ 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 37
Principal and Selling Shareholders.... 45
Certain Transactions.................. 47
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 52
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 55
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
4,200,000 SHARES
TOWNE SERVICES, INC.
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
WHEAT FIRST UNION
J.C. BRADFORD&CO.
STEPHENS INC.
======================================================
<PAGE> 90
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........................................ $ 15,674
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...................................... 160,766
----------
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 expert witness
fees), and against 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 board of directors of the Company also has the
authority to extend to officers, employees and
II-1
<PAGE> 91
agents the same indemnification rights held by directors, subject to all the
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> 92
(vii) Between January and March 1998, the Company issued 1,019,083
shares of common stock and options to acquire 401,000 shares of common
stock to officers, directors, employees, customers, advisors and
consultants at a purchase or exercise price of either $1.19 per share or
$1.25 per share (employees received a 5% discount off the estimated fair
market value of the securities).
(viii) On March 13, 1998, the Company sold 15,000 shares of its Series
A Convertible Preferred Stock for $1,500,000 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.
(ix) In May 1998, the Company granted options to acquire 595,000
shares of common stock to a new director and four senior officers at an
exercise price of $7.20 per share. In June 1998, the Company granted
options to acquire 50,000 shares of common stock to a new director.
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*
2.1 -- Asset Purchase Agreement by and between Towne Services,
Inc., and Credit Collection Solutions, Inc., and Burton W.
Crapps and Robert M. Ragsdale dated as of June 11, 1998.**
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+
</TABLE>
II-3
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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+
10.17 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco
10.18 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.
10.19 -- Form of General Marketing Agent Agreement
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 December 31, 1997
(for SEC use only)
27.2 -- 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.
+ Previously filed.
(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
II-4
<PAGE> 94
(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-5
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on June 26, 1998.
TOWNE SERVICES, INC.
By: /s/ DREW W. EDWARDS
------------------------------------
Drew W. Edwards
Chief Executive Officer
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 June 26, 1998
- ----------------------------------------------------- Chairman of the board of
Drew W. Edwards directors (Principal Executive
Officer)
* President, Chief Operating June 26, 1998
- ----------------------------------------------------- Officer and Director
Henry M. Baroco
/s/ BRUCE F. LOWTHERS, JR. Chief Financial Officer June 26, 1998
- ----------------------------------------------------- (Principal Financial and
Bruce F. Lowthers, Jr. Accounting Officer)
* Director June 26, 1998
- -----------------------------------------------------
G. Lynn Boggs
* Director June 26, 1998
- -----------------------------------------------------
Frank W. Brown
* Director June 26, 1998
- -----------------------------------------------------
John W. Collins
* Director June 26, 1998
- -----------------------------------------------------
Joe M. Rodgers
* Director June 26, 1998
- -----------------------------------------------------
J. Daniel Speight, Jr.
</TABLE>
II-6
<PAGE> 96
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director June 26, 1998
- -----------------------------------------------------
Glenn W. Sturm
* Director June 26, 1998
- -----------------------------------------------------
J. Stephen Turner
* Director June 26, 1998
- -----------------------------------------------------
Bahram Yusefzadeh
*By: /s/ DREW W. EDWARDS
- -----------------------------------------------------
Attorney-in-Fact pursuant to power of attorney
granted in Registration Statement filed on May
21, 1998.
</TABLE>
II-7
<PAGE> 97
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. STANLEY MACKIN Director June 26, 1998
- -----------------------------------------------------
J. Stanley Mackin
</TABLE>
II-8
<PAGE> 98
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> 99
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> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement*
2.1 -- Asset Purchase Agreement by and between Towne Services,
Inc., and Credit Collection Solutions, Inc., and Burton W.
Crapps and Robert M. Ragsdale dated as of June 11, 1998.**
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+
10.17 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco
10.18 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.
10.19 -- Form of General Marketing Agent Agreement
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 December 31, 1997
(for SEC use only)
27.2 -- 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.
+ Previously filed.
<PAGE> 1
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement"), is made and entered
into this 11th day of June, 1998, by and between TOWNE SERVICES, INC., a Georgia
corporation (the "Purchaser"), and CREDIT COLLECTION SOLUTIONS, INC., a Georgia
corporation (the "Seller"); and BURTON W. CRAPPS and ROBERT M. RAGSDALE,
individual residents of the State of Georgia (the "Shareholders").
RECITALS
The Seller is engaged in the business of designing, developing and
selling certain credit collection financial software for use by banks and small
to medium-sized businesses (collectively, the "Business").
The Purchaser desires to purchase certain assets of Seller associated
with the Business.
The Shareholders agree that it is in the best interests of the Seller
to transfer certain of its assets, including the Collection Works software, to
the Purchaser.
NOW, THEREFORE, in consideration of the recitals and of the mutual
agreements of the parties herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE 1
SALE AND PURCHASE
Upon the terms and subject to the conditions of this Agreement, Seller
hereby agrees to grant, sell, convey, assign, transfer and deliver to Purchaser,
and Purchaser agrees to purchase, accept and acquire, all right, title and
interest of Seller in and to all of the assets hereinafter described (the
"Assets"), for the purchase price and other consideration as hereinafter set,
free and clear of all mortgages, liens, pledges, security interests, charges,
claims, restrictions and encumbrances of any nature whatsoever.
ARTICLE 2
ASSETS TO BE PURCHASED AND SOLD
(a) Included Assets. The Assets shall include without limitation the
following assets, properties and rights of Seller used directly or indirectly in
the conduct of, or generated by or constituting, the Business, except as
otherwise expressly set forth in Section 2(b) hereof:
(i) All of the Seller's sales contracts and accounts
receivable listed on Schedule 2(a);
(ii) Customer lists; technical bulletins; product literature;
regulatory records; quality control test methods; all records relating to
products and customers since inception; all files relating to contact with
customers; all records related to or used in connection with the
<PAGE> 2
operation or ownership of the Assets by Seller including, without limitation,
copies of records and data maintained on Seller's computer system; all rights or
choices in action related to the Assets and arising out of occurrences before or
after the date hereof, including without limitation all rights under express or
implied warranties relating to the Assets; all other transferable rights of
Seller in and to intangible assets used or held for use in the Business,
including goodwill; and all information, files, records, data, plans, contracts
and recorded knowledge related to the foregoing.
(iii) All equipment identified on Schedule 2(a) hereto; and
(iv) All rights under any patent, trademark, service mark,
trade name or copyright, whether registered or unregistered, and any
applications therefor; all technologies, methods, formulations, data bases,
trade secrets, know-how, inventions and other intellectual property used in the
Business or under development; all computer software (including documentation
and related object and source codes), including but not limited to the
Collection Works software as copyrighted by Seller.
(b) Excluded Assets. Notwithstanding the foregoing, the Assets shall
not include any of the following: the corporate seals, certificates of
incorporation, minute books, stock books, tax returns, books of account or other
records having to do with corporate organization of Seller; the rights which
accrue or will accrue to Seller under this Agreement; the rights to any of
Seller's claims for any federal, state, local, or foreign tax refunds; or the
assets, properties or rights set forth on Schedule 2(b).
ARTICLE 3
SELLER'S TRADE NAME
In addition to the Assets, it is the intention of the parties
that the Purchaser shall have the sole and absolute right to the trade name
"Collection Works"; and in that regard, the Seller shall and does hereby
transfer and assign to the Purchaser all of its right, title and interest in and
to said name, and hereby agrees to execute and deliver instruments or documents
that shall reasonably be necessary to accomplish same, in form to be approved by
Purchaser's legal counsel.
ARTICLE 4
TITLE TO AND TRANSFER OF ASSETS
The Seller agrees to convey to the Purchaser fee simple, marketable and
unencumbered lien free title to all of the Assets by appropriate documents of
transfer and sale, including such bills of sale, endorsements and assignments,
and other good and sufficient instruments of bargain and sale, in such form as
shall be approved and deemed appropriate by legal counsel for the Purchaser, and
which documents shall contain covenants of warranty as to title, and which
documents shall, in the opinion of the Purchaser's counsel, be sufficient to
vest in Purchaser good and marketable title to the Assets.
<PAGE> 3
ARTICLE 5
LIABILITIES TO BE ASSUMED BY THE PURCHASER
The Purchaser hereby assumes and agrees to be responsible for only the
specific obligations and liabilities of the Seller (the "Liabilities") listed on
Schedule 5 hereto. Purchaser shall not assume or be subject to any other debts
or liabilities of the Seller or the Shareholders. Without limiting the
generality of the foregoing, in no event shall Purchaser assume or incur any
liability or obligation in respect of any of the following:
(a) any product liability or similar claim for injury to person or
property, regardless of when made or asserted, which arises out of or is based
upon any express or implied representation, warranty, agreement or guarantee
made by Seller, or alleged to have been made by Seller, or which is imposed or
asserted to be imposed by operation of law, in connection with any service
performed or product sold or leased by or on behalf of Seller on or prior to the
Closing, including without limitation any claim relating to any product
delivered in connection with the performance of such service and any claim
seeking recovery for consequential damage, lost revenue or income;
(b) except as provided on Schedule 5, any federal, state or local
income or other tax (i) payable with respect to the business, assets, properties
or operations of Seller or any member of any affiliated group of which Seller is
a member for any period prior to date hereof, or (ii) incident to or arising as
a consequence of the negotiation or consummation by Seller or any member of any
affiliated group of which Seller is a member of this Agreement and the
transactions contemplated hereby;
(c) any liability or obligation under or in connection with the assets
excluded from the Assets under Section 2(b);
(d) any liability or obligation arising prior to or as a result of the
transactions contemplated by this Agreement to any employees, agents or
independent contractors of Seller, whether or not employed by Purchaser after
the date hereof, or under any benefit arrangement with respect thereto;
(e) any liability or obligation arising out of any breach by Seller of
any provision of any agreement, contract, commitment or lease referred to in
this Agreement, including but not limited to liabilities or obligations arising
out of Seller's failure to perform any agreement, contract, commitment or lease
in accordance with its terms prior to the date hereof, but excluding however any
liability arising out of the assignment to Purchaser of such agreements,
contracts, commitments or leases in violation of the terms thereof; or
(f) any liability or obligation of Seller arising or incurred in
connection with the negotiation, preparation and execution of this Agreement and
the transactions contemplated hereby and fees and expenses of counsel,
accountants and other experts.
<PAGE> 4
ARTICLE 6
PURCHASE PRICE AND PAYMENT
The assumption of liabilities pursuant to Article 5 shall constitute
the total purchase price for all of the Assets, subject to adjustments as
hereinafter set forth and further subject to the contingent payment of up to
100,000 shares of Purchaser's common stock, as described on Schedule 6(a)
hereto. The parties agree that the purchase price of $510,111.54 (including any
required adjustments) represents the fair market value of the Assets. The
purchase price shall be allocated among the Assets acquired hereunder as
described on Schedule 6(b) hereof. Seller and Purchaser each hereby covenant and
agree that it will not take a position on any income tax return, before any
governmental agency charged with the collection of any income tax, or in any
judicial proceeding that is in any way inconsistent with the terms of this
Article 6.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller and/or the Shareholders, as applicable, hereby represents
and warrants to Purchaser that, except as set forth on the Disclosure Schedule
attached hereto, each of which exceptions shall specifically identify the
relevant subsection hereof to which it relates and shall be deemed to be
representations and warranties as if made hereunder:
(a) Corporate Existence. Seller is a corporation duly organized,
validly existing and in good standing under the laws of Georgia. Seller is not
required to qualify to do business as a foreign corporation in any jurisdiction.
(b) Corporate Power; Authorization; Enforceable Obligations. The Seller
and the Shareholders have the power (in the case of Seller, the corporate
power), authority and legal right to execute, deliver and perform this
Agreement. The execution, delivery and performance of this Agreement by Seller
have been duly authorized by all necessary corporate and shareholder action.
This Agreement has been, and the other agreements, documents and instruments
required to be delivered by Seller or the Shareholders in accordance with the
provisions hereof (the "Seller's Documents") will be, duly executed and
delivered on behalf of Seller or the Shareholders by a duly authorized officer
of Seller, and this Agreement constitutes, and the Seller's Documents when
executed and delivered will constitute, the legal, valid and binding obligations
of Seller and/or the Shareholders, as applicable, enforceable against it in
accordance with their respective terms.
(c) No Interest in Other Entities. No shares of any corporation or any
ownership or other investment interest, either of record, beneficially or
equitably, in any association, partnership, joint venture or other legal entity
are included in the Assets. Except as described in the Disclosure Schedule in
response to this Section, the Seller's interest in the Assets is held directly
by the Seller and not through any association, partnership, joint venture or
other legal entity.
<PAGE> 5
(d) Validity of Contemplated Transactions, etc. The execution, delivery
and performance of this Agreement by the Seller and the Shareholders does not
and will not violate, conflict with or result in the breach of any term,
condition or provision of, or require the consent of any other person under, (a)
any existing law, ordinance, or governmental rule or regulation to which the
Seller or the Shareholders is subject, (b) any judgment, order, writ,
injunction, decree or award of any court, arbitrator or governmental or
regulatory official, body or authority which is applicable to the Seller or the
Shareholders, (c) the charter documents of the Seller or any securities issued
by the Seller, or (d) any mortgage, indenture, agreement, contract, commitment,
lease, plan, authorization, or other instrument, document or understanding, oral
or written, to which the Seller or the Shareholders is a party, by which the
Seller or the Shareholders may have rights or by which any of the Assets may be
bound or affected, or give any party with rights thereunder the right to
terminate, modify, accelerate or otherwise change the existing rights or
obligations of the Seller thereunder. Except as aforesaid, no authorization,
approval or consent of, and no registration or filing with, any governmental or
regulatory official, body or authority is required in connection with the
execution, delivery or performance of this Agreement by the Seller or the
Shareholders.
(e) No Third Party Options. There are no existing agreements, options,
commitments or rights with, of or to any person to acquire any of Seller's
assets, properties or rights included in the Assets or any interest therein,
except for those contracts entered into in the normal course of business
consistent with past practice for the sale of inventory of Seller.
(f) Capitalization. The authorized and issued capital stock of the
Seller is, and the owners of such capital stock are, as set forth in Schedule
7(f). The Seller has not issued any other shares of its capital stock and there
are no outstanding rights to purchase or acquire any of such shares, nor any
outstanding securities convertible into such shares. There are no agreements to
which the Seller is a party or has knowledge regarding the issuance,
registration, voting or transfer of its outstanding shares of capital stock of
the Seller.
(g) Financial Statements. Seller has delivered to Purchaser true and
complete copies of the unaudited balance sheets of Seller at January 31, 1997
and March 31, 1998. Such balance sheets, including the related notes, fairly
present the financial position, assets and liabilities (whether accrued,
absolute, contingent or otherwise) of Seller at the dates indicated and such
statements of income, cash flow and changes in shareholders equity fairly
present the results of operations, cash flow and changes in shareholders equity
of Seller for the periods indicated.
(h) Absence of Certain Developments. Except as disclosed in Schedule
7(h), since March 31, 1998, (a) there has been no material adverse change in the
financial condition of the Seller, (b) the Seller has not incurred any material
liabilities or material contingent liabilities, (c) the Seller has not declared
any dividends or purchased any of its capital stock, and (d) the Seller has not
entered into any material transactions outside the ordinary course of business
other than transactions disclosed in writing to the Purchaser prior to the date
of Closing.
<PAGE> 6
(i) Tax Matters. Except as provided on Schedule 7(i), all required tax
returns of the Seller have been accurately prepared in all material respects and
timely filed, and all taxes required to be paid with respect to the periods or
transactions covered by such returns have been timely paid. Except as provided
on Schedule 7(i), the Seller is not delinquent in the payment of any tax,
assessment or governmental charge, has not had any tax deficiency proposed in
writing or assessed against it, and has not executed any waiver still in effect
of any statute of limitations on the assessment or collection of any tax. None
of the federal or state income tax returns or state franchise tax returns of the
Seller has ever been audited by governmental authorities. The amounts accrued on
the Seller's balance sheet are sufficient with respect to all unpaid taxes due
for the period ending on such date.
(j) Books of Account. The books, records and accounts of Seller
maintained with respect to the Business accurately and fairly reflect, in
reasonable detail, the transactions and the assets and liabilities of Seller
with respect to the Business. Seller has not engaged in any transaction with
respect to the Business, maintained any bank account for the business or used
any of the funds of Seller in the conduct of the Business except for
transactions, bank accounts and funds which have been and are reflected in the
normally maintained books and records of the business.
(k) Absence of Undisclosed Liabilities. Seller has no liabilities or
obligations with respect to the Business, either direct or indirect, matured or
unmatured or absolute, contingent or otherwise, except:
(i) those liabilities or obligations set forth on the
March 31, 1998 balance sheet and not heretofore paid or discharged;
(ii) liabilities arising in the ordinary course of business
under any agreement, contract, commitment, lease or plan specifically disclosed
in this Agreement or not required to be disclosed because of the term or amount
involved; and
(iii) those liabilities or obligations incurred, consistently
with past business practice, in or as a result of the normal and ordinary course
of business since March 31, 1998.
For purposes of this Agreement, the term "liabilities" shall include,
without limitation, any direct or indirect indebtedness, guaranty, endorsement,
claim, loss, damage, deficiency, cost, expense, obligation or responsibility,
fixed or unfixed, known or unknown, asserted or unasserted, choate or inchoate,
liquidated or unliquidated, secured or unsecured.
(l) Title to Properties. Seller has good, valid and marketable title to
all of its properties and assets, including without limitation all properties
and assets reflected in the March 31, 1998 balance sheet, free and clear of all
mortgages, liens, pledges, security interests, charges, claims, restrictions and
other encumbrances and defects of title of any nature whatsoever, except for (i)
liens for current personal property taxes not yet due and payable, and (ii)
liens that are immaterial in character, amount, and extent, and which do not
<PAGE> 7
detract from the value or interfere with the present or proposed use of the
properties they affect.
(m) Condition of Purchased Equipment. All items of Purchased Equipment
which are included in the Assets are in good operating condition and repair,
subject to normal wear and maintenance, are usable in the regular and ordinary
course of business and conform to all applicable laws, ordinances, codes, rules
and regulations or Authorizations relating to their construction, use and
operation.
(n) Compliance with Law; Authorizations. Seller has complied with each,
and is not in violation of any, law, ordinance, or governmental or regulatory
rule or regulation, whether federal, state, local or foreign, to which Seller's
business, operations, assets or properties is subject ("Regulations"). Seller
owns, holds, possesses or lawfully uses in the operation of its business all
franchises, licenses, permits, easements, rights, applications, filings,
registrations and other authorizations ("Authorizations") which are in any
manner necessary for it to conduct its business as now or previously conducted
or for the ownership and use of the Assets, free and clear of all liens,
charges, restrictions and encumbrances and in compliance with all Regulations.
Seller is not in default, nor has it received any notice of any claim of
default, with respect to any such Authorization.
(o) Transactions with Affiliates. Other than with respect to Burton
Crapps and Southern Computer Works, no shareholder, director, officer or
employee of Seller, or any member of its, his or her immediate family or any
other of its, his or her affiliates, owns or has a 5% or more ownership interest
in any corporation or other entity that is or was during the last three years a
party to, or in any property which is or was during the last three years the
subject of, any material contract, agreement or understanding, business
arrangement or relationship with Seller.
(p) Litigation. No litigation, including any arbitration, investigation
or other proceeding of or before any court, arbitrator or governmental or
regulatory official, body or authority is pending or, to the best knowledge of
Seller after due inquiry, threatened against Seller or which relates to the
assets of Seller or the transactions contemplated by this Agreement, nor does
Seller know of any reasonably likely basis for any such litigation, arbitration,
investigation or proceeding, the result of which could adversely affect Seller,
its assets or the transactions contemplated hereby. Seller is not a party to or
subject to the provisions of any judgment, order, writ, injunction, decree or
award of any court, arbitrator or governmental or regulatory official, body or
authority which may adversely affect Seller, its assets or the transactions
contemplated hereby.
(q) Insurance. The assets, properties and operations of Seller are
insured under various policies of general liability and other forms of
insurance, which policies are in amounts which are adequate in relation to the
business and assets of Seller and all premiums to date have been paid in full.
Seller has not been refused any insurance, nor has its coverage been limited, by
any insurance carrier to which it has applied for insurance or with which it has
carried insurance during the last three fiscal years.
<PAGE> 8
(r) Contracts and Commitments. Except as set forth on Schedule 7(r),
Seller is not a party to any written or oral:
(i) agreement, contract or commitment with any present or
former employee or consultant or for the employment of any person, including any
consultant, who is engaged in the conduct of the Business;
(ii) agreement, contract or commitment for the future purchase
of, or payment for, supplies or products, or for the performance of services by
a third party involving in any one case $10,000.00 or more;
(iii) agreement, contract or commitment to perform services or
to sell or supply products in connection with the Business involving in any one
case $10,000.00 or more;
(iv) agreement, contract or commitment limiting or restraining
Seller, the Business or any successor thereto from engaging or competing in any
manner or in any business, nor, to Seller's knowledge, is any employee of Seller
engaged in the conduct of the Business subject to any such agreement, contract
or commitment;
(v) license, franchise, distributorship or other agreement
which relates in whole or in part to any software, patent, trademark, trade
name, service mark or copyright or to any ideas, technical assistance or other
know-how of or used by Seller in the conduct of the Business; or
(vi) material agreement, contract or commitment relating to
the Business not made in the ordinary course of business.
(s) Intellectual Property Matters. The Seller in the conduct of the
Business did not and does not utilize any patent, trademark, tradename, service
mark, copyright, software, trade secret or know-how except for those listed on
Schedule 7(s) (the "Intellectual Property"), all of which are owned by the
Seller free and clear of any liens, claims, charges or encumbrances. The Seller
does not infringe upon or unlawfully or wrongfully use any patent, trademark,
tradename, service mark, copyright or trade secret owned or claimed by another.
The Seller is not in default under, and has not received any notice of any claim
of infringement or any other claim or proceeding relating to any such patent,
trademark, tradename, service mark, copyright or trade secret. No present or
former employee of the Seller and no other person owns or has any proprietary,
financial or other interest, direct or indirect, in whole or in part, in any
patent, trademark, tradename, service mark or copyright, or in any application
therefor, or in any trade secret, which the Seller owns, possesses or uses in
its operations as now or heretofore conducted. There are no confidentiality or
nondisclosure agreements to which the Seller or any of Seller's employees
engaged in the Business is a party which relates to the Assets.
<PAGE> 9
(t) Environmental Matters. Seller has obtained all permits, licenses
and other authorizations which are required in connection with the conduct of
the Business under Regulations relating to pollution or protection of the
environment, including Regulations relating to emissions, discharges, releases
or threatened releases of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes into the environment (including without
limitation ambient air, surface water, groundwater, or land), or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes.
Seller is in full compliance in the conduct of the Business
with all the terms and conditions of the required permits, licenses and
authorizations, and is also in full compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in those laws or contained in any regulation,
code, plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder.
Seller is not aware of, nor has Seller nor any of its
subsidiaries received notice of, any past, present or future events, conditions,
circumstances, activities, practices, incidents, actions or plans which may
interfere with or prevent compliance or continued compliance with those laws or
any regulations, code, plan, order, decree, judgment, injunction, notice or
demand letter issued, entered, promulgated or approved thereunder, or which may
give rise to any common law or legal liability, or otherwise form the basis of
any claim, action, demand, suit, proceeding, hearing, study or investigation,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any pollutant,
contaminant, chemical, or industrial, toxic or hazardous substance or waste.
There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice or demand letter, notice of violation,
investigation, or proceeding pending or threatened against Seller in connection
with the conduct of the Business relating in any way to the laws referred to in
this Section or any regulation, code, plan, order, decree, judgment, injunction,
notice or demand letter issued, entered, promulgated or approved under such
laws.
Seller agrees to cooperate with Purchaser in connection with
Purchaser's application for the transfer, renewal or issuance of any permits,
licenses, approvals or other authorizations or to satisfy any regulatory
requirements involving the Assets.
(u) Availability of Documents. Seller has made available to Purchaser
copies of all documents, including without limitation all agreements, contracts,
commitments, insurance policies, leases, plans, instruments, undertakings
authorizations, permits, licenses, patents, trademarks, tradenames, service
marks, copyrights and applications therefor listed in the Disclosure SchedulE
hereto or referred to herein. Such copies are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder.
<PAGE> 10
(v) Restrictions. Seller is not a party to any indenture, agreement,
contract, commitment, lease, plan, license, permit, authorization or other
instrument, document or understanding, oral or written, or subject to any
charter or other corporate restriction or any judgment, order, writ, injunction,
decree or award which materially adversely affects or materially restricts or,
so far as Seller can now reasonably foresee, may in the future materially
adversely affect or materially restrict, Purchaser's use of the Assets after
consummation of the transactions contemplated hereby.
(w) Completeness of Disclosure. No representation or warranty by Seller
in this Agreement nor any certificate, schedule, statement, document or
instrument furnished or to be furnished to Purchaser pursuant hereto, or in
connection with the negotiation, execution or performance of this Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact required to be stated herein or therein or
necessary to make any statement herein or therein not misleading.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser, as applicable, hereby represents and warrants to the
Seller as follows::
(a) Corporate Existence. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Georgia.
(b) Corporate Power and Authorization. Purchaser has the corporate
power, authority and legal right to execute, deliver and perform this Agreement.
The execution, delivery and performance of this Agreement by Purchaser have been
duly authorized by all necessary corporate action. This Agreement has been duly
executed and delivered by Purchaser and constitutes the legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms.
(c) Validity of Contemplated Transactions, etc. The execution, delivery
and performance of this Agreement by Purchaser does not and will not violate,
conflict with or result in the breach of any term, condition or provision of, or
require the consent of any other party to, (a) any existing law, ordinance, or
governmental rule or regulation to which Purchaser is subject, (b) any judgment,
order, writ, injunction, decree or award of any court, arbitrator or
governmental or regulatory official, body or authority which is applicable to
Purchaser, (c) the charter documents or By-Laws of, or any securities issued by,
Purchaser, or (d) any mortgage, indenture, agreement, contract, commitment,
lease, plan or other instrument, document or understanding, oral or written, to
which Purchaser is a party or by which Purchaser is otherwise bound. Except as
aforesaid, no authorization, approval or consent of, and no registration or
filing with, any governmental or regulatory official, body or authority is
required in connection with the execution, delivery and performance of this
Agreement by Purchaser.
<PAGE> 11
ARTICLE 9
CLOSING DATE, PLACE AND TIME
(a) The closing (the "Closing") of the sale and purchase of the Assets
shall take place on June 11, 1998 in Atlanta, Georgia, at the offices of Nelson
Mullins Riley & Scarborough, L.L.P. or on such other date as may be mutually
agreed upon in writing by Purchaser and Seller. The date of the Closing is
sometimes herein referred to as the "Closing Date."
(b) Items to be Delivered at Closing.
(i) Seller's Deliveries. At the Closing and subject to the
terms and conditions herein contained, Seller shall deliver to Purchaser such
bills of sale, assignments, endorsements, and other good and sufficient
instruments and documents of conveyance and transfer, in form reasonably
satisfactory to Purchaser and its counsel, as shall be necessary and effective
to transfer and assign to, and vest in, Purchaser all of Seller's right, title
and interest in and to the Assets owned by Seller, the Assets leased by Seller
as lessee, and all of Seller's rights under all agreements, contracts,
commitments, leases, plans, bids, quotations, proposals, instruments and other
documents included in the Assets to which Seller is a party or by which it has
rights on the Closing Date, including the following:
(A) A blanket transfer, assignment and bill of
Sale with respect to the intangible personal property of Seller included in the
Assets;
(B) Copies of all consents obtained;
(C) A bill of sale with respect to the purchased
Equipment
(ii) Simultaneously with such deliveries, Seller shall also
deliver original counterparts of all of the agreements, contracts, commitments,
leases, plans, bids, quotations, proposals, instruments, computer programs and
software, data bases whether in the form of diskettes, computer tapes or
otherwise, related object and source codes, manuals and guidebooks, price books
and price lists, customer and subscriber lists, supplier lists, sales records,
files, correspondence, legal opinions, rulings issued by governmental entities,
and other documents, books, records, papers, files, office supplies and data
belonging to Seller which are part of the Assets, and all such steps will be
taken as may be required to put Purchaser in actual possession and operating
control of the Assets.
(c) Third Party Consents. To the extent that Seller's rights under any
agreement, contract, commitment, lease, authorization or other Asset to be
assigned to Purchaser hereunder may not be assigned without the consent of
another person which has not been obtained, this Agreement shall not constitute
an agreement to assign the same if an attempted assignment would constitute a
breach thereof or be unlawful, and Seller, at its expense, shall use its best
efforts to obtain any such required consent(s) as promptly as possible. If any
such consent shall not be obtained or if any attempted assignment would be
ineffective or would impair Purchaser's rights under the Asset in question so
that Purchaser would not in effect
<PAGE> 12
acquire the benefit of all such rights, Seller, to the maximum extent permitted
by law and the Asset, shall act after the Closing as Purchaser's agent in order
to obtain for it the benefits thereunder and shall cooperate, to the maximum
extent permitted by law and the Asset, with Purchaser in any other reasonable
arrangement designed to provide such benefits to Purchaser.
(d) Further Assurances. Seller from time to time after the Closing, at
Purchaser's request, will execute, acknowledge and deliver to Purchaser such
other instruments of conveyance and transfer and will take such other actions
and execute and deliver such other documents, certifications and further
assurances as Purchaser any reasonably require in order to vest more effectively
in Purchaser, or to put Purchaser more fully in possession of, any of the
Assets. Each of the parties hereto will cooperate with the other and execute and
deliver to the other parties hereto such other instruments and documents and
take such other actions as may be reasonably requested from time to time by any
other party hereto as necessary to carry out, evidence and confirm the intended
purposes of this Agreement.
ARTICLE 10
BULK SALES/TRANSFER LAWS
Purchaser and Seller hereby waive compliance by Purchaser and Seller
with the bulk sales law and any other similar laws in any applicable
jurisdiction in respect of the transactions contemplated by this Agreement.
Seller shall indemnify Purchaser from, and hold it harmless against, any
liabilities, damages, costs and expenses resulting from or arising out of (i)
the parties' failure to comply with any of such laws in respect of the
transactions contemplated by this Agreement, or (ii) any action brought or levy
made as a result thereof.
ARTICLE 11
SURVIVAL OF UNDERTAKINGS
All of the warranties, representations and undertakings of the parties
hereto as set forth under the terms of this Agreement shall survive the Closing,
and each of the parties does hereby agree to indemnify and hold harmless the
other for any breach or failure of any of said warranties, representations or
undertakings, whenever the same may occur, either before or after Closing.
ARTICLE 12
INDEMNIFICATIONS OF PURCHASER BY SELLER
From and after the Closing, Seller and each Shareholder, jointly and
severally, will reimburse, indemnify and hold harmless Purchaser and its
successors and assigns (an "Indemnified Purchaser Party") against and in respect
of:
(a) any and all damages, losses, deficiencies, liabilities,
costs and expenses incurred or suffered by any Indemnified Purchaser Party that
result from, relate to or arise out of:
<PAGE> 13
(b) any and all liabilities and obligations of Seller of any
nature whatsoever, except for those liabilities and obligations of Seller which
Purchaser specifically assumes pursuant to this Agreement;
(c) any and all actions, suits, claims, or legal,
administrative, arbitration, governmental or other proceedings or investigations
against any Indemnified Purchaser Party that relate to Seller or the Business in
which the principal event giving rise thereto occurred prior to the Closing Date
or which result from or arise out of any action or inaction prior to the Closing
Date of Seller or any director, officer, employee, agent, representative or
subcontractor of Seller, except for those which Purchaser specifically assumes
pursuant to this Agreement; or
(d) any misrepresentation, breach of warranty or
nonfulfillment of any agreement or covenant on the part of Seller or any
Shareholder under this Agreement, or from any misrepresentation in or omission
from any certificate, schedule, statement, document or instrument furnished to
Purchaser pursuant hereto or in connection with the negotiation, execution or
performance of this Agreement; and
(e) any and all actions, suits, claims, proceeding,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses (including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section.
ARTICLE 13
INDEMNIFICATIONS OF SELLER BY PURCHASER
From and after the Closing, Purchaser will reimburse, indemnify and
hold harmless Seller and its successors or assigns (an "Indemnified Seller
Party") against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities,
costs and expenses incurred or suffered by any Indemnified Seller Party that
result from, relate to or arise out of:
(i) any and all liabilities and obligations of
Seller which have been specifically assumed by Purchaser to this Agreement;
(ii) any misrepresentation, breach of warranty or
non-fulfillment of any agreement or covenant on the part of Purchaser under this
Agreement, or from any misrepresentation in or omission from any certificate,
schedule, statement, document or instrument furnished to Seller pursuant hereto
or in connection with the negotiation, execution or performance of this
Agreement; and
(b) any and all actions, suits, claims, proceeding,
investigations, demands, assessments, audits, fines, judgments, costs and other
expenses (including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section.
<PAGE> 14
ARTICLE 14
POST CLOSING MATTERS
(a) Employee Benefits. Seller shall pay directly to each employee of
the Business that portion of all benefits which has been accrued on behalf of
that employee (or is attributable to expenses properly incurred by that
employee) as of the Closing Date, and Purchaser shall assume no liability
therefor. No portion of the assets of any plan, fund, program or arrangement,
written or unwritten, heretofore sponsored or maintained by Seller (and no
amount attributable to any such plan, fund, program or arrangement) shall be
transferred to Purchaser, and Purchaser shall not be required to continue any
such plan, fund, program or arrangement after the Closing Date. The amounts
payable on account of all benefit arrangements (other than as specified in the
following subsections) shall be determined with reference to the date of the
event by reason of which such amounts become payable, without regard to
conditions subsequent, and Purchaser shall not be liable for any claim for
insurance, reimbursement or other benefits payable by reason of any event which
occurs prior to the Closing Date. All amounts payable directly to employees, or
to any fund, program, arrangement or plan maintained by Seller therefor shall be
paid by Seller within 30 days after the Closing Date to the extent that such
payment is not inconsistent with the terms of such fund, program, arrangement or
plan.
(b) Discharge of Business Obligations. From and after the Closing Date
Seller shall pay and discharge, in accordance with past practice but not less
than on a timely basis, all obligations and liabilities incurred prior to the
Closing Date in respect of the Business, its operations or the assets and
properties used therein (except for those expressly assumed by Purchaser
hereunder), including without limitation any liabilities or obligations to
employees, trade creditors and clients of the Business.
(c) Maintenance of Books and Records. Each of Seller and Purchaser
shall preserve until the fifth anniversary of the Closing Date all records
possessed or to be possessed by such party relating to any of the assets,
liabilities or business of the Business prior to the Closing Date. After the
Closing Date, where there is a legitimate purpose, such party shall provide the
other parties with access, upon prior reasonable written request specifying the
need therefor, during regular business hours, to (i) the officers and employees
of such party, and (ii) the books of account and records of such party, but, in
each case, only to the extent relating to the assets, liabilities or business of
the Business prior to the Closing Date, and the other parties and their
representatives shall have the right to make copies of such books and records;
provided, however, that the foregoing right of access shall not be exercisable
in such a manner as to interfere unreasonably with the normal operations and
business of such party; and further, provided, that, as to so much of such
information as constitutes trade secrets or confidential business information of
such party, the requesting party and its officers, directors and representatives
will use due care to not disclose such information except (i) as required by
law, (ii) with the prior written consent of such party, which consent shall not
be unreasonably withheld, or (iii) where such information becomes available to
the public generally, or becomes generally known to competitors of such party,
through sources other than the
<PAGE> 15
requesting party, its affiliates or its officers, directors or representatives.
Such records may nevertheless be destroyed by a party if such party sends to the
other parties written notice of its intent to destroy records, specifying with
particularity the contents of the records to be destroyed. Such records may then
be destroyed after the 30th day after such notice is given unless another party
objects to the destruction in which case the party seeking to destroy the
records shall deliver such records to the objecting party.
(d) Use of Name. From and after the Closing Date, Seller will sign such
consents and take such other action as Purchaser shall reasonably request in
order to permit Purchaser to use the tradename "Collection Works" and variants
thereof.
(e) UCC Matters. From and after the Closing Date, Seller will promptly
refer all inquiries with respect to ownership of the Assets or the Business to
Purchaser. In addition, Seller will execute such documents and financing
statements as Purchaser may request from time to time to evidence transfer of
the Assets to Purchaser, including any necessary assignments of financing
statements.
(f) Covenant Not to Compete. Seller and Shareholders and each of their
controlled affiliates agrees that for a period of five years after that the
Closing Date, neither it nor any of its affiliates will, directly or indirectly,
own, manage, operate, join, control or participate in the ownership, management,
operation or control of, any business whether in corporate, proprietorship or
partnership form or otherwise as more than a five percent owner in such business
where such business is competitive with the Business. The parties hereto
specifically acknowledge and agree that any business conducted outside the
continental United States is not competitive with the Business. The parties
further specifically acknowledge and agree that the remedy at law for any breach
of the foregoing will be inadequate and that the Purchaser, in addition to any
other relief available to it, shall be entitled to temporary and permanent
injunctive relief without the necessity of proving actual damage. In the event
that the provisions of this Section 7.9 should ever be deemed to exceed the
limitation provided by applicable law, then the parties hereto agree that such
provisions shall be reformed to set forth the maximum limitations permitted.
(g) Seller covenants that it will continue to exist and shall keep and
maintain its present corporate status in good standing for a minimum of thirteen
(13) months following the date of Closing.
ARTICLE 15
RELEASE AND COVENANT NOT TO SUE
The Shareholders hereby acknowledge and agree that the transactions
contemplated by this Agreement are in the best interest of the Seller and in
their own best interests as shareholders of the Seller. As part of the
agreements set forth herein and in consideration of Purchaser's agreements
hereunder, to the fullest extent permitted by law, the Shareholders hereby fully
and forever release, remise, acquit and discharge the Purchaser and its past,
<PAGE> 16
present and future subsidiaries, officers, directors, employees, shareholders,
attorneys, agents, successors, assigns, representatives and other affiliates
(collectively, the "Company Releases") of and from all claims (as defined by
Section 101 of the United States Bankruptcy Code, as amended), debts, demands,
actions, causes of action, suits, accounts, damages and liabilities of every
name and nature, both at law and in equity, whether known or unknown, that any
of such Shareholders now has, ever had or may, at any time, claim to have had
against any of the Company Releases.
ARTICLE 16
MISCELLANEOUS
(a) Brokers' and Finders' Fees. Seller represents and warrants to
Purchaser that all negotiations relative to this Agreement have been carried on
by it directly without the intervention of any person who may be entitled to any
brokerage or finder's fee or other commission in respect of this Agreement or
the consummation of the transactions contemplated hereby, and Seller agrees to
indemnify and hold harmless Purchaser against any and all claims, losses,
liabilities and expenses which may be asserted against or incurred by it as a
result of Seller's dealings, arrangements or agreements with any such person.
Purchaser represents and warrants that all negotiations relative to this
Agreement have been carried on by it directly without the intervention of any
person who may be entitled to any brokerage or finder's fee or other commission
in respect of this agreement or the consummation of the transactions
contemplated hereby, and Purchaser agrees to indemnify and hold harmless Seller
against any and all claims, losses, liabilities and expenses which may be
asserted against or incurred by it as a result of Purchaser's dealings,
arrangements or agreements with or any such person.
(b) Sales, Transfer and Documentary Taxes, etc. Seller shall pay all
federal, state and local sales, documentary and other transfer taxes, if any,
due as a result of the purchase, sale or transfer of the Assets in accordance
herewith whether imposed by law on Seller or Purchaser and Seller shall
indemnify, reimburse and hold harmless Purchaser in respect of the liability for
payment of or failure to pay any such taxes or the filing of or failure to file
any reports required in connection therewith.
(c) Expenses. Except as otherwise provided in this Agreement, each
party hereto shall pay its own expenses incidental to the preparation of this
Agreement, the carrying out of the provisions of this Agreement and the
consummation of the transactions contemplated hereby.
(d) Contents of Agreement; Parties in Interest; etc. This Agreement
sets forth the entire understanding of the parties hereto with respect to the
transactions contemplated hereby. It shall not be amended or modified except by
written instrument duly executed by each of the parties hereto. Any and all
previous agreements and understandings between or among the parties regarding
the subject matter hereof, whether written or oral, are superseded by this
Agreement.
<PAGE> 17
(e) Waiver. Any term or provision of this Agreement may be waived at
any time by the party entitled to the benefit thereof by a written instrument
duly executed by such party.
(f) Notices. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered personally or sent by telegram or by
registered or certified mail, postage prepaid, as follows:
If to Purchaser, to:
Towne Services, Inc.
3295 River Exchange Drive
Suite 350
Norcross, GA 30092
Attention: Mr. Drew W. Edwards
With a copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, GA 30309
Attention: Susan L. Spencer, Esq.
If to Seller or Shareholders, to:
Credit Collection Solutions, Inc.
108 NE Park Avenue
P.O. Box 363
Baxley, GA 31513
Attention: Mr. Burton W. Crapps
With a copy to:
Arden J. Hadwin, Esq.
Morris and Morris
15 East Montgomery Crossroad
Savannah, GA 31416
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other
<PAGE> 18
communication will be deemed to have been given as of the date so delivered,
telegraphed or mailed.
(g) Georgia Law to Govern. This Agreement shall be governed by and
interpreted and enforced in accordance with the laws of the State of Georgia.
(h) No Benefit to Others. The representations, warranties, covenants
and agreements contained in this Agreement are for the sole benefit of the
parties hereto and the other Indemnified Parties, and their heirs, executors,
administrators, legal representatives, successors and assigns, and they shall
not be construed as conferring any rights on any other persons.
(i) Headings, Gender and "Person". All section headings contained in
this Agreement are for convenience of reference only, do not form a part of this
Agreement and shall not affect in any way the meaning or interpretation of this
Agreement. Words used herein, regardless of the number and gender specifically
used, shall be deemed and construed to include any other number, singular or
plural, and any other gender, masculine, feminine, or neuter, as the context
requires. Any reference to a "person" herein shall include an individual, firm,
corporation, partnership, trust, governmental authority or body, association,
unincorporated organization or any other entity.
(j) Schedules and Exhibits. All Exhibits and Schedules referred to
herein are intended to be and hereby are specifically made a part of this
Agreement.
(k) Severability. The invalidity or unenforceability of any provision
of this Agreement in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
(l) Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered by the parties. It shall
not be necessary in making proof of this Agreement or any counterpart hereof to
produce or account for any of the other counterparts.
(m) Guarantees. Each Shareholder hereby unconditionally guarantees to
Purchaser and its affiliates the full and timely performance of all of the
obligations and agreements of Seller. The foregoing guarantee shall include the
guarantee of the payment of all damages, costs and expenses which might become
recoverable as a result of the nonperformance of any of the obligations or
agreements so guaranteed or as a result of the nonperformance of this guarantee.
Each Shareholder further agrees that its guarantee shall be an irrevocable
guarantee and shall continue in effect notwithstanding any extension or
modification of any guaranteed obligation, any assumption of any such guaranteed
obligation by any other party, or any other
<PAGE> 19
act or thing which might otherwise operate as a legal or equitable discharge of
a guarantor, and such Shareholder hereby waives all special suretyship defenses
and notice requirements.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first written above
"Purchaser"
ATTEST: TOWNE SERVICES, INC.
By /s/ Henry Baroco By /s/ Drew W. Edwards
-------------------------------- -----------------------------------
As its President As its Chairman/CEO
"Seller"
ATTEST: CREDIT COLLECTION SOLUTIONS,
INC.
By By /s/ Burton W. Crapps
-------------------------------- ----------------------------------
As its As its President
"Shareholders"
BURTON W. CRAPPS
/s/ Burton W. Crapps
-------------------------------------
ROBERT M. RAGSDALE
/s/ Robert M. Ragsdale
-------------------------------------
<PAGE> 1
EXHIBIT 10.4
COMMERCIAL LEASE
FOR
RIVER EXCHANGE OFFICE BUILDING
3295 River Exchange Drive, Suite 350
Norcross, Georgia 30092
Prepared For:
TOWNE SERVICES, INC.
By:
RIVER EXCHANGE ASSOCIATES LIMITED PARTNERSHIP
Dated: As of January 12, 1998
Space: 9,957Rentable Square Feet
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. PREMISES.................................................................................................3
2. TERM.....................................................................................................3
3. RENT.....................................................................................................3
4. ADJUSTMENT TO BASE RENT..................................................................................3
5. LATE CHARGES.............................................................................................4
6. SECURITY DEPOSIT.........................................................................................4
7. RULES AND REGULATIONS....................................................................................4
8. USE OF PREMISES..........................................................................................5
9. OPERATING EXPENSES.......................................................................................5
10. INDEMNITY; INSURANCE.....................................................................................7
11. REPAIRS BY LANDLORD......................................................................................8
12. REPAIRS BY TENANT; SURRENDER.............................................................................8
13. ALTERATIONS..............................................................................................9
14. REMOVAL OF TRADE FIXTURES................................................................................9
15. SERVICES.................................................................................................9
16. DESTRUCTION OF OR DAMAGE TO PREMISES....................................................................10
17. GOVERNMENTAL ORDERS.....................................................................................11
18. CONDEMNATION............................................................................................11
19. ASSIGNMENT AND SUBLETTING...............................................................................11
20. EVENTS OF DEFAULT.......................................................................................12
21. LANDLORD'S REMEDIES UPON DEFAULT........................................................................12
22. SIGNS...................................................................................................13
23. LANDLORD'S ENTRY OF PREMISES............................................................................14
24. EFFECT OF TERMINATION OF LEASE..........................................................................14
25. MORTGAGEE'S RIGHTS......................................................................................14
26. NO ESTATE IN LAND.......................................................................................15
27. HOLDING OVER............................................................................................15
28. ATTORNEY'S FEES.........................................................................................15
29. RIGHTS CUMULATIVE.......................................................................................15
</TABLE>
Tenant's Initials:___________
<PAGE> 3
<TABLE>
<S> <C> <C>
30. WAIVER OF RIGHTS........................................................................................15
31. AGENCY DISCLOSURE.......................................................................................15
32. AGENT'S COMMISSION......................................................................................15
33. LIMITATION OF AGENT'S SERVICES..........................................................................15
34. ENVIRONMENTAL LAWS......................................................................................16
35. TIME OF ESSENCE; GOVERNING LAW..........................................................................16
36. DEFINITIONS.............................................................................................16
37. NOTICES.................................................................................................17
38. WAIVER..................................................................................................17
39. COVENANT OF QUIET ENJOYMENT.............................................................................17
40. LANDLORD'S LIABILITY....................................................................................17
41. ASSIGNMENT OF RENTS AND TRANSFER OF TITLE...............................................................18
42. ESTOPPEL CERTIFICATE....................................................................................18
43. ENTIRE AGREEMENT........................................................................................18
44. SPECIAL STIPULATIONS....................................................................................19
</TABLE>
Tenant's Initials:_______
<PAGE> 4
SUMMARY OF PRIMARY BUSINESS TERMS
<TABLE>
<S> <C>
LANDLORD: River Exchange Associates Limited Partnership, a Georgia limited
partnership, having River Management, Inc. as its sole general partner
LANDLORD'S NOTICE ADDRESS: River Exchange Associates Limited Partnership
c/o River Management, Inc.
Penthouse Suite, 25 New Chardon Street
Boston, MA 02114-4771
Attention: Robert A. Schlager, Treasurer
Phone: 617/523-3775; Fax: 617/523-3387
TENANT: Towne Services, Inc., a Georgia corporation.
TENANT'S NOTICE ADDRESS: Prior to Commencement Date:
6621 Bay Circle, Suite 170
Norcross, Georgia 30071
Attention: Henry Baroco
Phone: 770-582-8351; Fax: 770-734-1682
After Commencement Date:
Suite 350
3295 River Exchange Drive
Norcross, Georgia 30092
Attention: Henry Baroco
Phone: ________________; Fax: ________________
PROPERTY: 3295 River Exchange Drive,
Norcross, Georgia 30092;
together with the office
building located thereon,
containing in the aggregate
110,512 total rentable
square feet (the
"Building"), and being more
particularly described on
Exhibit A hereto.
PREMISES: Suite 350 containing an agreed upon 9,957 rentable square feet on the
third floor of the Building, and depicted on Exhibit C attached hereto.
COMMENCEMENT DATE: The earlier of February 1, 1998, or the date on which Tenant takes occupancy
of the Premises, unless the Commencement Date is postponed
pursuant to Section 2 hereof.
EXPIRATION DATE: January 31, 2003, as the same may be adjusted pursuant to Section 2
hereof.
INITIAL BASE RENT: $184,204.50 per year ($18.50 per rentable square foot)
FUNDS DUE ON EXECUTION: First Month's Rent: $15,350.38
Security Deposit: $15,350.38
TOTAL $30,700.76
TENANT'S SHARE: Agreed to be 9.01%
SECURITY DEPOSIT: $15,350.38
OPTIONS TO EXTEND: See Exhibit G attached hereto.
AGENT: The Bulfinch Companies, Inc.
AGENT'S NOTICE ADDRESS: 3295 River Exchange Drive
Suite 150
Norcross, GA 30092
Attention: J. Michael Veazey
</TABLE>
Tenant's Initials:_______
Page 1 of 20
<PAGE> 5
<TABLE>
<S> <C>
Phone: 770/368-4105; Fax: 770/368-4107
SUB-AGENT: Grubb & Ellis Company
SUB-AGENT'S NOTICE ADDRESS: Suite 1200
400 Northridge Road
Atlanta, Georgia 30350
Attention: David Milstead
Phone: 770-552-2400; Fax: 770-552-2401
</TABLE>
Tenant's Initials:_______
Page 2 of 20
<PAGE> 6
THIS LEASE, made as of the 12th day of January, 1998, by and among
RIVER EXCHANGE ASSOCIATES LIMITED PARTNERSHIP, a Georgia limited partnership
(hereinafter called "Landlord"); and TOWNE SERVICES, INC., a Georgia corporation
(hereinafter called "Tenant");
WITNESSETH:
1. PREMISES
Landlord, for and in consideration of the rents, covenants, agreements,
and stipulations hereinafter set forth to be paid, kept and performed by Tenant,
leases and rents unto Tenant, and Tenant hereby leases and takes upon the terms
and conditions which hereinafter appear, the Premises. No easement for light or
air is included in the Premises. In addition to the Premises, Tenant shall also
have the following non-exclusive rights as appurtenances to the Premises: (i)
the right of reasonable access to and from the Building and the Premises, and to
and from any parking facilities located on the Property; and (ii) the right of
reasonable access to and from, and the right to use, designated common areas of
the Building and the Property as is reasonably afforded to all tenants of the
Building. Landlord shall have the right, in its sole and absolute discretion, to
enlarge, alter or otherwise deal with the common areas of the Building and the
Property, including without limitation the parking areas and access roadways;
provided, however, Tenant's appurtenant rights of access, parking and use set
forth above will not be materially affected thereby.
2. TERM
Tenant shall have and hold the Premises for a term (the "Term")
commencing on the Commencement Date, and terminating at midnight on the
Expiration Date, unless sooner terminated or extended as hereinafter provided.
Promptly following the Commencement Date, Landlord and Tenant shall enter into a
letter agreement in the form attached hereto as Exhibit B, specifying the
Commencement Date, and the Expiration Date. In the event Landlord is unable to
deliver the Premises to Tenant on the anticipated Commencement Date set forth
above due to the fact that the prior tenant does not timely vacate the Premises,
or due to circumstances or conditions beyond the control of Landlord, then
Landlord shall have no liability to Tenant for such delay, and the Commencement
Date and the Expiration Date shall be postponed until such time as Landlord is
able to deliver possession of the Premises to Tenant. Notwithstanding the
foregoing, during the period of any postponement of the Commencement Date, and
provided Tenant is not in possession of the Premises, Base Rent shall not accrue
or become due and payable. If the Commencement Date is delayed beyond March 1,
1998, Tenant may, on or before March 10, 1998, terminate this Lease by written
notice to Landlord.
3. RENT
Tenant agrees to pay to Landlord at Landlord's Notice Address, without
demand, deduction or set-off, annual rent equal to the Base Rent, as adjusted
from time to time pursuant to the terms hereof, payable in equal monthly
installments in advance on the first day of each calendar month during the term
hereof. The Base Rent initially payable hereunder shall be the "Initial Base
Rent" set forth in the Summary of Primary Business Terms hereinabove. The Base
Rent shall be adjusted from time to time as set forth in Section 4 below. Upon
execution of this Lease, Tenant shall pay to Landlord the monthly Base Rent for
the first full calendar month of the Lease Term. Base Rent and Additional Rent
for any partial month during the Lease Term shall be pro-rated based on the
number of days in such month, and Base Rent for any such partial month at the
beginning of the Lease Term shall be paid on the Commencement Date. Landlord
does not mail or otherwise distribute statements or bills for rent or other
amounts due hereunder, except as may be expressly otherwise provided herein. It
is Tenant's sole responsibility to ensure that payments are made and received
when due. If any check received by Landlord from Tenant shall be dishonored,
refused or returned, then in addition to Landlord's other remedies and rights,
Tenant shall pay a $100.00 administrative charge, in addition to any late
charges and the payment in respect of which the check was given. Tenant and
Landlord agree that all amounts due hereunder, whether labeled Base Rent,
Additional Rent or otherwise, shall be considered as rental reserved under this
Lease for all purposes, including without limitation regulations pursuant to the
United States Bankruptcy Code, as may be amended from time to time, including
further without limitation Section 502(b)(6) thereof.
4. ADJUSTMENT TO BASE RENT
Landlord and Tenant agree that the Base Rent set forth in Section 3
above shall be increased annually on each anniversary date of the Commencement
Date. The new Base Rent as of each such anniversary shall be the lesser of (a)
or (b), as follows: (a) multiply the Base Rent for the Lease Year which has just
expired by a fraction,
Tenant's Initials:_______
Page 3 of 20
<PAGE> 7
the numerator of which is the Consumer Price Index for All Urban Consumers,
United States City Average, All Items (1982-1984 = 100), issued by the Bureau of
Labor Statistics of the United States Department of Labor (the "CPI Index") for
the month of February of the year in which such anniversary date occurs and the
denominator of which is the CPI Index for the month of February of the previous
calendar year, or (b) multiply the Base Rent for the Lease Year which has just
expired by 1.04. The term "Lease Year" as used herein, shall mean each and every
consecutive twelve (12) month period during the Term of this Lease, and any
renewal or extension thereof, with the first Lease Year commencing on the
Commencement Date (or on the first day of the next calendar month if the
Commencement Date does not fall on the first day of a calendar month) and each
Lease Year thereafter commencing immediately upon the expiration of the previous
Lease Year. If the Bureau of Labor Statistics should discontinue the publication
of the CPI Index, or publish the same less frequently, or alter the same in some
manner, then Landlord shall adopt a substitute index or substitute procedure
which reasonably reflects and monitors consumer prices. In no event shall the
Base Rent for any Lease Year be less than the Base Rent for the prior Lease
Year. Landlord shall use reasonable efforts to notify Tenant in writing of the
adjusted Base Rent for each Lease Year at least ten (10) days prior to the date
on which the first installment of such adjusted Base Rent is due and payable, or
as soon thereafter as is practicable. Failure by Landlord to notify Tenant of
the adjusted Base Rent shall not prejudice Landlord's right to collect such
adjusted Base Rent, nor shall Landlord be deemed to have forfeited or
surrendered its right to collect such adjusted Base Rent.
5. LATE CHARGES
If Landlord fails to receive any payment when it becomes due, Tenant
shall pay to Landlord, as Additional Rent, a late charge equal to $250.00 The
parties agree that such late charge represents a fair and reasonable estimate of
the costs Landlord will incur by reason of such late payment. In addition,
interest at a rate equal to ten percent (10%) per annum from the date on which
such payment was due until such payment is received by Landlord, shall be due
and payable as Additional Rent in addition to such amounts owed under this
Lease.
6. SECURITY DEPOSIT
Tenant shall pay to Landlord the Security Deposit, upon execution of
this Lease, which shall be held by Landlord as security for the full and
faithful performance by Tenant of each and every term, covenant and condition of
this Lease of Tenant. If any of the rents or other charges or sums payable by
Tenant to Landlord shall be overdue and unpaid or should Landlord make payments
on behalf of Tenant, or should Tenant fail to perform any of the terms of this
Lease, then Landlord may, at its option, appropriate and apply the security
deposit, or so much thereof as may be necessary to compensate Landlord toward
the payment of the rents, charges or other sums due from Tenant, or towards any
loss, damage or expense sustained by Landlord resulting from such default on the
part of Tenant; and in such event Tenant shall upon demand restore the security
deposit to the original sum deposited. While Landlord holds such deposit,
Landlord shall have no obligation to pay interest on the same and shall have the
right to commingle the same with Landlord's other funds. If Landlord conveys
Landlord's interest under this Lease, the deposit, or any part thereof not
previously applied, may be turned over by Landlord to Landlord's grantee, and,
if so turned over, Tenant agrees to look solely to such grantee for proper
application of the deposit in accordance with the terms of this section, and the
return thereof in accordance herewith. The holder of a mortgage shall not be
responsible to Tenant for the return or application of any such deposit, whether
or not it succeeds to the position of Landlord hereunder, unless such deposit
shall have been received in hand by such holder. Subject to the inspection
provisions of the next sentence, the security deposit shall be refunded by
Landlord at the expiration or sooner termination of this Lease, provided that
all of Tenant's obligations under this Lease have been duly performed. Landlord
shall inspect the Premises within five (5) days after Tenant vacates the
Premises, and Landlord shall thereafter deliver to Tenant a statement of any
damage to the Premises and the estimated reasonable cost to repair the same, and
Landlord shall be entitled to retain from such security deposit an amount equal
to such estimate, and any remainder shall be returned to Tenant, assuming that
all Base Rent, Additional Rent and other charges payable by Tenant hereunder
shall have been paid. The foregoing provisions shall in no way be construed to
limit Tenant's liability for damage to the Premises or the Property.
7. RULES AND REGULATIONS
The Rules and Regulations attached hereto as Exhibit H are made a part
of this Lease. Tenant agrees to perform and abide by those rules and Regulations
and such other Rules and Regulations as may be made from time to time by
Landlord in the exercise of its sole discretion provided such rules and
regulations apply and are enforced uniformly against all tenants of the
Building.
Tenant's Initials:_______
Page 4 of 20
<PAGE> 8
8. USE OF PREMISES
The Premises shall be used only for general office purposes. The
Premises shall not be used for any illegal purposes, nor in any manner to create
any nuisance or trespass, nor in any manner to vitiate the insurance or increase
the rate of insurance on the Premises. Tenant shall, in its use and maintenance
of the Premises, comply with all laws, ordinances, codes, covenants and
restrictions applicable to the Property, and shall not perform any act or carry
on any practice which may injure the Premises, or any other part of the
Building, or cause any offensive odors or loud noise or constitute a nuisance or
a menace to any other tenant or tenants or other persons in the Building or on
the Property. Except for latent defects and matters covered by Landlord's one
year construction warranty, and except to the extent that Landlord has agreed to
perform any "Landlord's Work," as shown on Exhibit D, TENANT IS LEASING THE
PREMISES FROM LANDLORD IN THEIR CURRENT "AS IS" CONDITION, WITHOUT
REPRESENTATION OR WARRANTY BY LANDLORD, INCLUDING WITHOUT LIMITATION ANY
REPRESENTATION AS TO THE SUITABILITY OR UTILITY OF THE PREMISES FOR TENANT'S
INTENDED USES. TENANT REPRESENTS THAT IT HAS INSPECTED THE PREMISES AND THE
COMMON AREAS OF THE PROPERTY, AND HAS FOUND THE SAME ACCEPTABLE FOR THE INTENDED
USES. Landlord shall promptly undertake at its expense Landlord's Work. All
construction performed by Landlord shall use new, first quality materials and
shall be performed in a good and workmanlike manner. Landlord warrants
Landlord's Work for a period of one year from the Commencement Date. Tenant
shall promptly undertake at its expense the work described on Exhibit E hereto.
9. OPERATING EXPENSES
(a) Tenant agrees to reimburse Landlord, as Additional Rent hereunder,
and under any extensions or renewals of this Lease, for Tenant's pro rata share
of the annual Operating Expenses (as defined in subsection (b) below) of the
Building and related common areas, including the parking areas, in excess of the
amount of the per rentable square foot cost of the actual operating expenses for
calendar year 1998 (hereinafter called the "Base Year Rate"). The Operating
Expenses per rentable square foot of the Building shall be determined by
dividing the total Operating Expenses incurred for the calendar year in question
by the total number of rentable square feet in the Building; provided, however,
that in any year during which the Building is less than ninety-five (95%)
occupied (on an average basis) the annual Operating Expenses used to determine
Tenant's share shall be adjusted to the amount which would have been incurred if
the Building had been ninety-five percent (95%) occupied for the entire year,
but in no event shall Landlord be reimbursed for more than the total Operating
Expenses actually incurred during the year in question. Tenant's pro rata share
of the excess Operating Expenses shall be determined by multiplying such excess
amount by the number of rentable square feet contained within the Premises
(hereinafter called "Tenant's Share"). Landlord and Tenant hereby agree that,
for purposes of this Section 9, the rentable square footages of the Premises and
the Building are set forth in the Summary of Primary Business Terms at the
beginning of this document, and Tenant's Share shall be determined based on such
amounts. If the size of the Building or the Premises is changed, the parties
hereby agree to recalculate Tenant's Share following such change.
(b) Operating Expenses shall be all those expenses of operating,
servicing, managing and maintaining the Building and the Property in a
first-class manner deemed by Landlord reasonable and appropriate and in the best
interest of the tenants of the Building. Operating Expenses shall include,
without limitation, the following:
(1) All taxes and assessments applicable to the Property and
the Building, which shall include real and personal property ad valorem taxes,
and any and all costs and expenses (including consultant's fees) incurred by
Landlord in seeking a reduction of any such taxes and assessments. However,
Tenant shall not be obligated for taxes on the net income from the operation of
the Building, unless there is imposed in the future a tax on rental income on
the Building in lieu of the real property ad valorem taxes, in which event such
tax shall be deemed to be included in the Operating Expenses of the Building.
(2) Insurance, including, without limitation, liability,
casualty, workers' compensations, comprehensive and any other coverage which
Landlord deems appropriate for the Property and the Building.
(3) Utility charges for the operation of the Property and the
Building including, without limitation, water, electricity, gas, heating,
lighting, ventilation, sanitary sewer and air conditioning of the Building, but
not including those utility charges separately metered and actually paid
directly by any tenant.
(4) Janitorial and maintenance expenses, including:
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(i) The wages and salaries of all employees
engaged in the operation and maintenance of the Building including the
employer's social security taxes and any other taxes which may be levied on such
wages and salaries, and including customary fringe benefits.
(ii) Janitorial services and janitorial supplies and
other materials used in the operation and
maintenance of the Building.
(iii) The cost of maintenance and service agreements
on equipment, window cleaning, landscaping,
grounds maintenance, pest control, security, trash and snow removal, and other
similar services or agreements.
(5) Management expense, including, without limitation,
management fees and expenses whether paid to Landlord, if Landlord manages the
Building, or to a third party management company.
(6) The costs, including interest, amortized over its useful
life, of any capital improvement made to the Building by or on behalf of
Landlord after the date of this Lease which is required under any governmental
law or regulation that was not applicable to the Building at the time of its
construction, and of the acquisition and installation of any device or equipment
designed to improve the operating efficiency of any system within the Building
and capital improvements designed to protect the health and safety of Tenants in
the Building.
(7) All services, supplies, repairs, replacements or other
expenses directly and reasonably associated with servicing, maintaining,
managing and operating the Property and the Building, including, but not limited
to lobby and other common use areas and vehicular and pedestrian traffic areas,
the parking areas, landscaped areas and all access ways to the Building.
(c) As soon as practicable after December 31 of each year during the
Term of this Lease, Landlord shall furnish to Tenant an itemized statement
(including a statement of how such Operating Expenses were increased if the
Building was less than 95% occupied during that calendar year) of such Operating
Expenses per rentable square foot within the Building for the calendar year then
ended. Tenant may have access to Landlord's records, during normal business
hours and at the place where Landlord keeps such records, in order to audit or
otherwise verify such expenses. If an audit discloses that Tenant has been
overcharged by ten percent (10%) or more, then Landlord shall reimburse Tenant
for the reasonable cost of such audit.
(1) On or before January 1 of each calendar year thereafter,
Landlord shall provide Tenant a written estimate of Tenant's Share of annual
excess Operating Expenses for the upcoming calendar year. Beginning with the
first month of such calendar year, Tenant shall pay to Landlord, together with
its monthly payment of Base Rent as provided in Section 3 hereinabove, as
Additional Rent hereunder, an amount equal to one-twelfth (1/12th) of the
estimated Tenant's Share (as shown in Landlord's statement) of any excess
Operating Expenses. In the event that at the end of any calendar year, Tenant
has paid to Landlord an amount in excess of Tenant's Share of any actual excess
Operating Expenses for such calendar year, Landlord shall apply any such excess
amount to any amount then owing to Landlord hereunder, and if none, Landlord
shall promptly refund such excess amount to Tenant; and in the event at the end
of any calendar year Tenant has paid to Landlord less than Tenant's Share of any
actual excess Operating Expenses for such calendar year, Tenant shall pay to
Landlord any such deficiency within thirty (30) days after Tenant receives the
annual statement referred to above.
(2) For the calendar year in which this Lease terminates, and
is not extended or renewed, the provisions of this section shall apply, but
Tenant's Share for such year shall be subject to a pro rata adjustment based
upon the number of full and partial calendar months of said calendar year prior
to the expiration of the Term of this Lease and shall be computed by December 31
immediately preceding the expiration of the Term of this Lease as the Operating
Expenses for such last calendar year. Tenant's Share for the final calendar
year, if not fully paid with Tenant's monthly payments of Base Rent as provided
herein, shall be paid to Landlord thirty (30) days after receipt of the
applicable Operating Expense statement.
(d) Notwithstanding the foregoing, Landlord agrees that if the
aggregate cost of the expenses set forth in Subsections 9(b)(4), 9(b)(5),
9(b)(6) and 9(b)(7) above increase by more than five percent (5%) over the cost
thereof for the prior year, Tenant shall be liable for Tenant's Share of only
the first five percent (5%) of such increase.
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10. INDEMNITY; INSURANCE
(a) To the maximum extent this agreement may be made effective
according to law, Tenant agrees to indemnify and save harmless Landlord from and
against all claims, loss, cost, damage or expense of whatever nature arising:
(i) from any accident, injury or damage whatsoever to any person, or to the
property of any person, occurring in or about the Premises, except to the extent
that any such claim arises from the gross negligence or wilful misconduct of
Landlord; (ii) from any accident, injury or damage occurring outside of the
Premises where such accident, damage or injury results or is claimed to have
resulted from an act or omission on the part of Tenant or Tenant's agents or
employees or independent contractors; or (iii) in connection with the conduct or
management of the Premises or of any business therein, or any thing or work
whatsoever done, or any condition created (other than by Landlord) in or about
the Premises; and, in any case, occurring after the date of this Lease until the
end of the Term of this Lease and thereafter so long as Tenant is in occupancy
of any part of the Premises. This indemnity and hold harmless agreement shall
include indemnity against all losses, costs, damages, expenses and liabilities
incurred in or in connection with any such claim or proceeding brought thereon,
and the defense thereof, including, without limitation, reasonable attorneys'
fees and costs at both the trial and appellate levels.
(b) To the maximum extent this agreement may be made effective
according to law, and provided Tenant has maintained the insurance required in
subparagraph (c) below, Landlord agrees to indemnify and save harmless Tenant
from and against all claims, loss, cost, damage or expense of whatever nature
arising from (i) any breach or default by Landlord under the terms of this
Lease, or (ii) any accident, injury or damage occurring within the Premises or
on the Property to the extent arising from a grossly negligent or otherwise
tortious act or omission on the part of Landlord or Landlord's agents or
employees or independent contractors, occurring after the date of this Lease
until the end of the Term of this Lease and thereafter so long as Tenant is in
occupancy of any part of the Premises. This indemnity and hold harmless
agreement shall include indemnity against all losses, costs, damages, expenses
and liabilities incurred in or in connection with any such claim or proceeding
brought thereon, and the defense thereof, including, without limitation,
reasonable attorneys' fees and costs at both the trial and appellate levels.
(c) Tenant agrees to maintain in full force from the date upon which
Tenant first enters the Premises for any reason, throughout the Term of this
Lease, and thereafter so long as Tenant is in occupancy of any part of the
Premises, a policy of commercial general liability and property damage insurance
(including broad form contractual liability, independent contractor's hazard and
completed operations coverage) under which Tenant is named as an insured and
Landlord (and such other persons as are in privity of estate with Landlord as
may be set out in a notice from time to time) are named as additional insureds,
and under which the insurer agrees to indemnify and hold Landlord, Agent and
those in privity of estate with Landlord, harmless from and against all cost,
expense and/or liability arising out of or based upon any and all claims,
accidents, injuries and damages set forth in section (a). Each such policy shall
be non-cancelable and non-amendable with respect to Landlord and Landlord's said
designees without thirty (30) days' prior notice and shall be in at least the
amount of $2,000,000, combined single limit, for bodily injury, death and damage
to property, and a duplicate original or certificate thereof is annexed hereto
as Exhibit F, and future certificates shall be delivered to Landlord from time
to time.
(d) Tenant agrees to use and occupy the Premises and to use such other
portions of the Property as Tenant is herein given the right to use at Tenant's
own risk. To the maximum extent this agreement may be made effective according
to law, Landlord shall have no responsibility or liability for any loss of or
damage to Tenant's property. Tenant shall carry "all-risk" property insurance on
a "replacement cost" basis, insuring Tenant's property and any alterations,
additions or improvements installed by Tenant pursuant to this Lease, to the
extent that the same have not become the property of Landlord, and other
so-called improvements and betterments, and a policy of business interruption
insurance in an amount equal to six (6) months of insurable operating expenses.
Landlord, Agent and such other persons as are described above shall be named as
additional insureds on each such policy. Landlord shall insure the Building, all
leasehold improvements in the Premises (but excluding equipment, trade fixtures,
personal property and any other items required to be insured by Tenant), all
personal property of Landlord, and all fixtures not constituting trade fixtures
on a "replacement cost" basis pursuant to industry standard insurance policies
insuring such risks as are customary for landlord's similar to Landlord, and in
any event meeting the requirements of any "Holder", as hereinafter defined,
which insurance shall include loss of rents insurance equivalent to twelve
months' rent, and shall carry liability insurance comparable to that required to
be provided by Tenant and providing for such additional coverages, deductibles,
co-insurance limits and other endorsements as Landlord may from tine to time
deem appropriate. Tenant may, from time to time during the Term request that
Landlord provide evidence of such insurance coverage, which shall consist of a
reasonably satisfactory certificate of insurance.
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(e) Landlord and Tenant hereby agree, on behalf of themselves, their
successors, assigns and subrogees, each to waive all liability against the other
for any claims, losses or any damages relating to property and caused by fire or
other insurable property peril that may have been caused by the fault or neglect
of the other party or anyone for whom the other party may be legally
responsible, to the extent insured or required by this Lease to be insured by
the party waiving liability hereunder, less the first $25,000.00 of any
deductible, and accordingly do hereby release each other from any and all
liabilities and responsibilities and all rights of action against the other or
owing to the other or anyone else claiming through or under or by way of
subrogation or otherwise, for any loss or damage to property caused by fire or
other insurable peril that may have been caused by the fault or neglect of the
other party or anyone for whom such party may be legally responsible, but only
to the extent insured or required by this Lease to be insured by the party
waiving liability hereunder, less the first $25,000.00 of any deductible.
Landlord and Tenant agree, further, that, to the extent available, the casualty
policies, business interruption and other insurance covering of the Premises or
the contents, fixtures and improvements therein shall contain a clause or
endorsement providing in substance that the insurance shall not be prejudiced if
the assureds have waived right of recovery from any person or persons prior to
the date and time of loss or damage, if any. Any additional premium shall be
paid by the party benefitted thereby.
(f) To the maximum extent this agreement may be made effective
according to law, Tenant agrees that Landlord shall not be responsible or liable
to Tenant, or to those claiming by, through or under Tenant, for any loss or
damage that may be occasioned by or through the acts or omissions of persons
occupying adjoining premises or any part of the premises adjacent to or
connecting with the Premises or any part of the Property or otherwise.
(g) Insofar as, and to the extent that, the provisions hereof shall not
make it impossible to secure insurance coverage obtainable from responsible
insurance companies doing business in the State of Georgia (even though extra
premium may result therefrom), Landlord and Tenant mutually agree that any
property damage insurance carried by either shall provide for the waiver by the
insurance carrier of all right of subrogation, and all rights based on
assignment from its insured, against the other, or against the officers,
directors, constituent partners or venturers, employees, invitees, licensees and
concessionaires of the other (and, in the case of Tenant, against its
subtenants) in connection with any loss or damage caused by any risk covered by
such insurance.
11. REPAIRS BY LANDLORD
Landlord agrees to keep in good repair the Building's roof,
foundations, exterior walls, common areas, structural portions and the
Building's electrical, mechanical and plumbing systems, all to the extent that
the same affects the Premises. Landlord shall in no event be responsible for
repairs rendered necessary by the negligence or intentional wrongful acts of
Tenant, its agents, employees or invitees. Landlord shall maintain the common
areas surrounding the Building, including paving, the mowing of grass, care of
shrubs and general landscaping. Tenant shall promptly report in writing to
Landlord any defective condition in the Premises known to it which Landlord is
required to repair. If Tenant fails to so report such condition, and the delay
occasioned thereby increases Landlord's costs in making any repairs, then Tenant
shall be responsible for those additional costs. Landlord shall not be
responsible to make any improvements or repairs to the Building other than as
expressly provided in this Lease. Landlord shall not be liable for any failure
to make repairs which, under the provisions of this section Landlord has
undertaken to make unless Tenant has given notice to Landlord of the need to
make such repairs, and Landlord has failed to commence to make such repairs
within a reasonable time after receipt of such notice, or fails to proceed with
reasonable diligence to complete such repairs.
12. REPAIRS BY TENANT; SURRENDER
(a) Tenant shall, through out the initial term of this Lease, and any
extension or renewal thereof, at its expense, maintain the Premises, and all
leasehold improvements and equipment therein, except those repairs expressly
required to be made by Landlord hereunder. Tenant shall further, at its own cost
and expense, repair or restore any damage or injury to all or any part of the
Premises or the Building caused by the carelessness or neglect of Tenant or
Tenant's agents, employees, invitees, licensees, visitors or contractors,
including but not limited to, any repairs or replacements necessitated by (i)
the construction or installation of improvements to the Premises by or on behalf
of the Tenant, or (ii) the moving of any property into or out of the Premises;
provided, however, if Tenant fails to make such repairs or replacements promptly
after notice to do so, Landlord may, at its option, make the repairs and
replacements and the reasonable cost of such repair or replacements shall be
charged to Tenant as Additional Rent and shall become due and payable by Tenant
with the monthly installment of Base Rent next due hereunder. Landlord expressly
disclaims any and all responsibility and/or liability for the physical safety of
the Premises or Tenant's property, and for that of Tenant's employees, agents,
contractors and
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invitees. In the event that Tenant shall fail to perform any obligation or make
any payment hereunder in a timely manner, without limitation of any other right
Landlord may have under this Lease, Landlord may make such payment or cause such
obligation to be performed, and Tenant shall pay the cost thereof as Additional
Rent immediately upon demand.
(b) Upon the expiration or earlier termination of the Term of this
Lease, Tenant shall peaceably quit and surrender to Landlord the Premises in
neat and broom-clean condition and in good order, condition and repair,
excepting only damage by fire or other casualty, condemnation, or Landlord's
negligent or wilful misconduct for which, under other provisions of this Lease,
Tenant has no responsibility of repair or restoration. Tenant shall remove all
of Tenant's equipment and property and shall repair any damages to the Premises
or the Building caused by such removal. Any property of Tenant which shall
remain in the Building or on the Premises after the expiration or termination of
the term of this Lease shall be deemed conclusively to have been abandoned, and
either may be retained by Landlord as its property or may be disposed of in such
manner as Landlord may see fit, without liability and at Tenant's sole cost and
expense.
13. ALTERATIONS
Tenant shall not make any alterations, additions, or improvements to
the Premises without Landlord's prior written consent, which consent shall not,
subject to the following, be unreasonably withheld or delayed. Landlord's
consent may be conditioned upon Tenant's agreement to remove such alterations,
additions or improvements, and to restore the Premises to its prior condition,
prior to the expiration of the Lease. Landlord's consent shall not be required
for any alterations costing less than $25,000.00, provided that such alterations
do not affect the structural integrity of the Building, and are otherwise made
in compliance with this section. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Section 13 upon
Landlord's written request. All alterations, additions, and improvements will be
accomplished in a good and workmanlike manner, in conformity with all applicable
laws and regulations, and by a contractor reasonably approved by Landlord, free
of any liens or encumbrances. Tenant shall remove any or all alterations,
additions or improvements, the consent for which was conditioned upon removal,
or which were constructed without Landlord's consent (whether such consent was
required herein or not), at the termination of this Lease and shall restore the
Premises to its prior condition, all at Tenant's expense. All alterations,
additions or improvements which Landlord has not required Tenant to remove shall
become Landlord's property and shall be surrendered to Landlord upon the
termination of this Lease, except that Tenant may remove any of Tenant's
furniture or equipment. Tenant shall repair, at Tenant's expense, any damage to
the Premises caused by the removal of any such alterations, additions or
improvements, furniture or equipment. Tenant will not permit or suffer any
mechanics, materialmen's or other liens or claims to attach to the Property or
to the leasehold interest created hereby, and without limiting any other rights
Landlord may have, Tenant shall, immediately upon the filing of any such claim
or lien, pay such amounts as may be necessary to remove the same, or provide
such bonds or other security as may be required to remove the same.
14. REMOVAL OF TRADE FIXTURES
Tenant may prior to the expiration of this Lease, or any extension or
renewal thereof, remove all trade fixtures and equipment which it has placed in
the Premises, provided Tenant repairs all damage to the Premises caused by such
removal.
15. SERVICES
(a) The normal business hours of the Building shall be from 8:00 A.M.
to 6:00 P.M. on Monday through Friday, and 8:00 A.M. to 12:00 P.M. (Noon) on
Saturday, except New Year's Day, Memorial Day, July 4, Labor Day, Thanksgiving
Day, Christmas Day and such other holidays designated by Landlord which shall be
in keeping with the holidays customarily designated by landlords of first-class
office buildings in metropolitan Atlanta, Georgia. Landlord shall furnish the
following services during the normal hours of operation of the Building except
as noted:
(i) Elevator service for passenger and delivery needs.
(ii) Heat and air conditioning at a temperature of approximately
75 degrees Fahrenheit during summer operations and at a
temperature of approximately 70 degrees Fahrenheit during
winter operations, subject to governmental regulations.
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(iii) Hot and cold running water for all Building standard
restrooms and lavatories.
(iv) Soap, paper towels, and toilet tissue for public restrooms.
(v) Janitorial service, which includes sanitizing, dusting,
cleaning, mopping, vacuuming and removal of trash not
requiring special handling, Monday through Friday.
(vi) Electrical and mechanical maintenance services are provided
Monday through Friday.
(vii) Electric power, for small desk top types of machines, or
hand held devices, such as personal computers, fax
machines, copiers, typewriters, adding machines and
recording machines, in each case using no more than 110
volts, 20 amp circuits.
(viii) Electric lighting, at a level of at least 80 foot candles
at desk height except in corridors or storage areas, and
including the replacement of lamps and ballasts as needed.
(ix) Repairs and maintenance, for maintaining in good order at
all times, the exterior walls, windows, doors and roof of
the Building; public corridors, stairs, elevators, storage
rooms and restrooms; the air conditioning, electrical and
plumbing systems of the Building; and the walks, paving and
landscaping surrounding the Building.
(x) General management, including supervision, inspections,
record keeping, accounting, leasing and related management
functions.
(b) The services provided in subsection (a) herein, and the amount of
Rent prescribed herein, are predicated on and are in anticipation of certain
usage of the Premises by Landlord as follows:
(i) Air conditioning design is based on sustained outside
temperatures being no higher than 92 degrees Fahrenheit and
no lower than 22 degrees Fahrenheit with sustained
occupancy of the Premises by no more than one person per 75
square feet of floor area and heat generated by electrical
lighting and fixtures not to exceed 4.0 watts per square
foot.
(ii) Electrical power usage and consumption is based on lighting
of the Premises during normal business hours at a level of
at least 80 foot candles at desk height, and power for the
types of equipment permitted in subsection 15(a)(vii)
above. Such heavier use items as electric heaters,
bookkeeping machine, mainframe computers, data processing
and duplicating equipment, stoves, refrigerators and the
like shall not be used or installed except with the prior
written consent of Landlord, which consent may be withheld
in Landlord's reasonable discretion, and if Landlord
consents to the use of such heavier use items, Landlord
shall have the right to install measuring devices and to
charge Tenant the cost of the installation thereof and for
any excess electrical usage as specified in subsection
(iii) below.
(iii) If Tenant uses services in an amount or for a period in
excess of that provided for herein, then Landlord reserves
the right to install, at Tenant's cost, any devices
necessary to measure such excess usage, and to charge
Tenant as Additional Rent hereunder for the direct cost of
such added services. In the event of disagreement as to the
reasonableness of such charge, the opinion of the
appropriate local utility company or an independent
professional engineering firm shall prevail.
(c) Landlord shall not be liable for any damages directly or indirectly
resulting from the interruption of the services referred to herein, regardless
of the cause of such interruption, but Landlord shall exercise due care in
furnishing adequate and uninterrupted services. Notwithstanding any contrary
provisions set forth in this Lease, if any of the services provided by Landlord
under this Lease are interrupted or discontinued due to the gross negligence or
wilful misconduct of Landlord, and such interruption continues for a period of
five (5) business days after written notice from Tenant of such interruption,
then the Rent payable under this Lease shall abate to the extent
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the Premises are thereby rendered untenantable. If such interruption continues
for sixty (60) days or more, Lessee shall have the right and option of
terminating the Lease at any time prior to restoration of the aforesaid
services.
16. DESTRUCTION OF OR DAMAGE TO PREMISES
If the Premises are substantially destroyed by storm, fire, lightning,
earthquake or other casualty, then at Landlord's option, which may be exercised
within 30 days after such destruction, this Lease shall terminate as of the date
of such destruction, and rental shall be accounted for as between Landlord and
Tenant as of that date. If either the Premises are damaged, but not
substantially, or Landlord shall not elect to terminate this Lease, rent shall
abate in such proportion as use of the Premises has been destroyed and Landlord
shall restore the Premises to substantially the same condition as they were in
before such destruction (excluding alterations, additions and improvements made
by Tenant) as speedily as is reasonably practicable, whereupon full rental shall
recommence. Notwithstanding the foregoing, but subject to any waivers of
subrogation provided by Landlord's insurer, Tenant shall be responsible for the
cost of repairs which may be made necessary by reason of damage to the Building
caused by any act or neglect of Tenant, or its contractors or invitees
(including any damage by fire or other casualty arising therefrom). As used in
this Paragraph 16, the term "substantially destroyed" shall mean damage to the
Premises which renders the Premises untenantable and which, using due diligence
in the making of repairs, will nevertheless require more than one hundred twenty
(120) days from the date of the casualty to complete repairs exclusive of any
delays caused by force majeure or delays caused by Tenant, its employees, agents
or independent contractors. In the event that the Premises is substantially
destroyed, as so defined, Tenant shall also have the right and option, which may
be exercised within thirty (30) days after such destruction, to terminate this
Lease as of the date of such destruction.
17. GOVERNMENTAL ORDERS
Tenant agrees, at its own expense, to comply promptly with all
requirements of any legally constituted public authority, other than those that
are generally applicable to buildings similar to the Building and are not made
necessary by reason of Tenant's manner of use of the Premises. Landlord agrees
to comply with any such requirements to the extent that the same are generally
applicable to buildings similar to the Building. It is mutually agreed, however,
between Landlord and Tenant, that if, in order to comply with any such
requirements which first become applicable or are promulgated or enacted after
the date of this Lease, the cost to Landlord or Tenant, as the case may be,
shall exceed a sum equal to one year's rent, then the party who is obligated to
comply with such requirements may terminate this Lease by giving written notice
of termination to the other party, which termination shall become effective
sixty (60) days after receipt of such notice and which notice shall eliminate
the necessity of compliance with such requirements by giving such notice, unless
the party receiving such notice of termination shall, before termination becomes
effective, pay to the party giving notice all cost of compliance in excess of
one year's rent, or secure payment of said sum in manner reasonably satisfactory
to the party giving notice.
18. CONDEMNATION
If the whole of the Premises, or such portion thereof as will make the
Premises unusable for the purposes herein leased, are condemned by any legally
constituted authority for any public use or purpose, then in either of said
events the term hereby granted shall cease from the date when possession thereof
is taken by public authorities, and rental shall be accounted for as between
Landlord and Tenant as of said date. Such termination, however, shall be without
prejudice to the rights of either Landlord or Tenant to recover compensation and
damage caused by condemnation from the condemnor. Landlord shall have and hereby
reserves and excepts, and Tenant hereby grants and assigns to Landlord, all
rights to recover for damages to the Premises (including all leasehold
improvements paid for by Landlord) and the leasehold interest hereby created,
and to compensation accrued or hereafter to accrue by reason of such taking,
damage or destruction, and by way of confirming the foregoing, Tenant hereby
grants and assigns, and covenants with Landlord to grant and assign to Landlord,
all rights to such damages or compensation. Nothing contained herein shall be
construed to prevent Tenant from prosecuting in any condemnation proceedings a
claim for the value of any of Tenant's property installed in the Premises by
Tenant at Tenant's expense, or for relocation expenses, provided that such
action shall not affect the amount of compensation otherwise recoverable by
Landlord from the taking authority.
19. ASSIGNMENT AND SUBLETTING
Tenant shall not, whether voluntarily, involuntarily, by operation of
law or otherwise, (i) assign this Lease or any interest hereunder, (ii) sublet
(which term, without limitation, shall include granting of concessions,
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licenses and the like) the Premises or any part thereof, or (iii) permit the use
of the Premises by any party other than the Tenant, without having first
obtained the written consent of Landlord, which consent shall not be
unreasonably withheld or delayed, and which consent shall nevertheless not be
required in connection with a merger, consolidation, share exchange,
reorganization or sale of all or substantially all of Tenant's assets, or
similar transactions or an assignment or subletting by Tenant to a parent,
subsidiary, affiliation or party related to or under common ownership or control
by, of, or with Tenant; provided, however, that Tenant shall remain liable
following any assignment or subletting authorized under this Paragraph 19. If
Tenant is a partnership, a withdrawal or change (voluntary, involuntary or by
operation of law) of any partner owning 51% or more of the partnership, or the
dissolution or liquidation of the partnership, shall be deemed an assignment of
this Lease. If Tenant is a corporation, a dissolution, merger, consolidation, or
other reorganization of Tenant, or the sale or other transfer of the controlling
percentage of the capital stock of Tenant or the sale of fifty-one percent (51%)
of the value of the assets of Tenant, shall be deemed an assignment of this
Lease. The phrase "controlling percentage" means the ownership of, and the right
to vote, stock possessing at least fifty-one percent (51%) of the total combined
voting power of all classes of tenant's capital stock issued, outstanding, and
entitled to vote for the election of directors. The foregoing provision shall
not apply to corporations, the stock of which is regularly traded through an
exchange or over the counter. Landlord shall not be required to consider any
request for consent unless and until Tenant shall have furnished to Landlord (x)
the current financial statements of the proposed assignee or sublessee, and (y)
a reasonably detailed description of the business of the proposed assignee or
sublessee, both of which shall be reasonably acceptable to Landlord using
Landlord's then current underwriting guidelines. If this Lease be assigned, or
if the Premises or any part thereof be sublet or occupied by anyone other than
Tenant, Landlord may, at any time and from time to time, collect rent and other
charges from the assignee, subtenant or occupant, and apply the net amount
collected to the rent and other charges herein reserved, but no such assignment,
subletting, occupancy, collection or modification of any provisions of this
Lease shall be deemed a waiver of this covenant, or the acceptance of the
assignee, subtenant or occupant as a tenant or a release of Tenant from the
further performance of covenants on the part of Tenant to be performed
hereunder. Any consent by Landlord to a particular subletting or occupancy shall
not in any way diminish the prohibition stated in this section or the continuing
liability of the original named Tenant. No assignment or subletting hereunder
shall relieve Tenant from its obligations hereunder and Tenant shall remain
fully and primarily liable therefor. No such assignment, subletting, or
occupancy shall affect or be contrary to the uses permitted in section 8. In the
event of any sublease or assignment to which Landlord consents, Tenant shall pay
to Landlord fifty percent (50%) of all net consideration (after deducting
leasing commissions and tenant improvements) in excess of the rental due
hereunder which Tenant receives from such assignee or sublessee.
20. EVENTS OF DEFAULT
The happening of any one or more of the following events (hereinafter
any one of which may be referred to as an "Event of Default") during the term of
this Lease, or any renewal or extension thereof, shall constitute a breach of
this Lease on the part of the Tenant: (1) Tenant fails to pay the rental as
provided for herein, and such failure continues for five (5) days; (2) Tenant
fails to comply with or abide by and perform any other obligation imposed upon
Tenant under this Lease, and Tenant shall fail to remedy the same as soon as
practicable and in any event within thirty (30) days after notice to Tenant
specifying such neglect or failure (or if such failure is of such a nature that
Tenant cannot reasonably remedy the same within such thirty (30) day period,
Tenant shall fail to commence promptly (and in any event within such thirty (30)
day period) to remedy the same and to prosecute such remedy to completion with
diligence and continuity); (3) Tenant is adjudicated bankrupt; (4) a permanent
receiver is appointed for Tenant's property and such receiver is not removed
within sixty (60) days after such appointment; (5) Tenant, either voluntarily or
involuntarily, takes advantage of any debt or relief proceedings under any
present or future law, whereby the rent or any part thereof is, or is proposed
to be, reduced or payment thereof deferred; (6) Tenant makes an assignment for
benefit of creditors or admits in writing its inability to pay its debts
generally as they come due; or (7) Tenant's effects are levied upon or attached
under process against Tenant, which is not satisfied or dissolved within thirty
(30) days. If Tenant shall fail to perform any payment obligation with respect
to which this section requires Landlord to give Tenant notice as a precondition
to the existence of an Event of Default, and Landlord shall give such notice,
Landlord shall not be required to give notice with respect to any similar
failure occurring within the subsequent twelve month period as a precondition to
the existence of an Event of Default.
21. LANDLORD'S REMEDIES UPON DEFAULT'S
(a) Upon the occurrence of an Event of Default, Landlord may pursue any
one or more of the following remedies separately or concurrently, without notice
or demand (except as may be required by applicable law), without prejudice to
any other remedy herein provided or provided by law: (i) terminate this Lease by
giving written notice to Tenant and, upon such termination, Tenant shall
immediately surrender the Premises to Landlord
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as herein provided, failing which Landlord may enter upon and take possession of
the Premises and expel or remove Tenant and any other person who may be
occupying the Premises or any part thereof, by force if necessary, without being
liable for prosecution or any claim of damages therefor, Tenant agreeing to pay
to Landlord on demand the reasonable amount of all loss and damage which
Landlord may suffer by reason of such termination, whether through inability to
re-let the Premises on satisfactory terms or otherwise; or (ii) terminate
Tenant's right of possession of the Premises (but not this Lease) and enter upon
and take possession of the Premises and expel or remove Tenant and any other
person who may be occupying the Premises or any part thereof, by entry
(including the use of such force as may be permitted by law, if necessary),
dispossessory suit or otherwise, without thereby releasing Tenant from liability
hereunder, without terminating this Lease, and without being liable for
prosecution or any claim of damages therefor; or (iii) enter upon the Premises,
by such force as may be permitted by law, if necessary, without being liable for
prosecution or any claim of damages therefor, and do whatever Tenant is
obligated to do under the terms of this Lease. In the event of termination of
this Lease, Landlord shall be entitled to recover from Tenant current damages in
an amount equal to all rental and other sums payable hereunder up to the time of
such termination, and thereafter Tenant, until the end of what would have been
the term of this Lease in the absence of such termination, and whether or not
the Premises shall have been relet, shall be liable to Landlord for, and shall
pay to Landlord, as liquidated current damages the rent and other sums that
would be payable hereunder if such termination had not occurred, less the net
proceeds, if any, of any reletting of the Premises, after deducting all
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, advertising, expenses of employees, alteration costs and
expenses of preparation for such reletting. Landlord shall not be considered to
be under any duty by reason of this provision to take any action to mitigate
damages by reason of Tenant's Event of Default.
(b) At any time after such termination, whether or not Landlord shall
have collected any such current damages, as liquidated final damages and in lieu
of all such current damages beyond the date of such demand, at Landlord's
election Tenant shall pay to Landlord an amount equal to the excess, if any, of
the rent and other sums as hereinbefore provided which would be payable
hereunder from the date of such demand (assuming that, for the purposes of this
section, annual payments by Tenant on account of Operating Expenses would be the
same as the payments required for the immediately preceding year) for what would
be the then unexpired term of this Lease if the same remained in effect,
discounted to then present value using an interest rate equal to the then
predominant "Prime Rate," as established by the Wall Street Journal, over the
then fair gross rental value of the Premises for the same period, also
discounted to then present value using the same interest rate. Tenant
acknowledges (i) that the actual damages that Landlord may suffer as a result of
an Event of Default are impossible to ascertain, and that the foregoing
liquidated damage calculations are not a penalty or forfeiture, but are a
reasonable approximation of such damages, and (ii) that the Premises are to be
used for commercial purposes, and Tenant expressly waives the protections and
rights set forth in Official Code of Georgia Annotated Section 44-7-32, as well
as any other rights of redemption granted by or under any present or future laws
in the event of Tenant being evicted or dispossessed, or in the event of
Landlord obtaining possession of the Premises, by reason of the violation by
Tenant of any of the covenants and conditions of this Lease.
(c) In case of any Event of Default, and re-entry, termination of this
Lease, termination of possessory rights (but not this Lease), expiration,
dispossession by dispossessory proceedings or otherwise, Landlord may, as
Tenant's agent (i) re-let the Premises or any part or parts thereof, either in
the name of Landlord or otherwise, for a term or terms which may at Landlord's
option be equal to or less than or exceed the period which would otherwise have
constituted the balance of the term of this Lease and may grant concessions or
free rent to the extent that Landlord considers advisable and necessary to
re-let the same and (ii) may make such reasonable alterations, repairs and
decorations in the Premises as Landlord in its reasonable judgment considers
advisable and necessary for the purpose of preserving or reletting the Premises;
and the making of such alterations, repairs and decorations shall not operate or
be construed to release Tenant from liability hereunder as aforesaid. If
Landlord shall so re-enter the Premises, with or without termination of this
Lease, Landlord may remove any or all of Tenant's property and equipment and
store the same, without liability for damage thereto, at Tenant's sole cost and
expense, all without being deemed guilty of any trespass. Landlord shall in no
event be liable in any way whatsoever for failure to re-let the Premises, or, in
the event that the Premises are re-let, for failure to collect the rent under
such re-letting. The specified remedies to which Landlord may resort hereunder
are not intended to be exclusive of any remedies or means of redress to which
Landlord may at any time be entitled lawfully, and Landlord may invoke any
remedy (including the remedy of specific performance) allowed at law or in
equity as if specific remedies were not herein provided for. Tenant shall pay to
Landlord all costs and expenses incurred by Landlord in the enforcement of this
Lease, including without limitation the fees and costs of Landlord's attorneys,
experts, agents, architects and contractors.
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(d) Landlord shall in no event be in default in the performance of any
of Landlord's obligations hereunder unless and until Landlord shall have failed
to perform such obligations within thirty (30) days, or such additional time as
is reasonably required to correct any such default, after notice by Tenant to
Landlord specifying wherein Landlord has failed to perform any such obligations.
22. SIGNS
Tenant shall not paint or place signs, placards or other advertisements
of any kind or character upon the windows or outside walls of the Premises, or
within the common areas or on the roof of the Building, and shall place no such
item within the Premises which would be visible from the exterior of the
Premises, except with the consent of Landlord, which consent may be withheld in
Landlord's sole, absolute and unfettered discretion. Landlord, at Tenant's sole
cost, will place a sign identifying Tenant's business at the entrance to the
Premises, and an entry in the Building directory, in each case in Building
standard form.
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23. LANDLORD'S ENTRY OF PREMISES'S
Landlord shall retain duplicate keys to all doors of the Premises and
Landlord and its agents, employees and independent contractors shall have the
right to enter the Premises at reasonable hours to inspect and examine same, to
make repairs, additions, alterations and improvements, to exhibit the Premises
to mortgagees and prospective mortgagees, purchasers or tenants, and to inspect
the Premises to ascertain that Tenant is complying with all of its covenants and
obligations hereunder, all without being liable to Tenant in any manner
whatsoever for any damages arising therefrom; provided, however, that Landlord
shall, except in case of emergency, afford Tenant such prior notification of an
entry into the Premises as shall be reasonably practicable under the
circumstances. Landlord shall be allowed to take into and through the Premises
any and all materials that may be required to make such repairs, additions,
alterations or improvements. During such time as such work is being carried on,
in or about the Premises, the Rent provided herein shall not abate, and Tenant
waives any claim or cause of action against Landlord for damages by reason of
interruption of Tenant's business or loss of profits therefrom because of the
prosecution of any such work or any part thereof. In exercising its rights under
this section, and except in case of emergency, Landlord shall endeavor to
minimize interference with Tenant's business operations in the Premises.
24. EFFECT OF TERMINATION OF LEASE
No termination of this Lease prior to the normal ending thereof, by
lapse of time or otherwise, shall affect Landlord's right to collect rent or
other sums due hereunder for the period prior to termination thereof.
25. MORTGAGEE'S RIGHTS'S
(a) Tenant agrees that this Lease and all rights of Tenant hereunder
are and shall be subject and subordinate to any security deed now or hereafter
encumbering the Property or any component thereof, to all advances made or
hereafter to be made upon the indebtedness secured thereby, to all amendments,
renewals, extensions and restatements of such security deed, and to any
replacements and substitutions for such security deed; provided, however, as to
any security deed encumbering the Property and granted by Landlord after the
date hereof, the foregoing agreement by Tenant is conditioned upon receipt by
Tenant of a non-disturbance agreement. Except when a non-disturbance agreement
is required pursuant to the foregoing sentence, the terms of this provision
shall be self-operative and no further instrument of subordination shall be
required. Tenant, however, upon request of any party in interest, shall execute
promptly such instrument or certificates as may be reasonably required to carry
out the intent hereof, whether said requirement is that of Landlord or any other
party in interest, including, without limitation, any Holder. The term "Holder",
as used in this Lease, refers to the holder(s) of the indebtedness secured by a
security deed. Upon occupancy of the Premises by Tenant and payment of all sums
required of Tenant upon execution of this Lease, Landlord shall endeavor to
obtain from the current Holder a non-disturbance agreement for the benefit of
Tenant; provided, however, the failure of Landlord to obtain such agreement
shall not be a default by Landlord hereunder.
(b) If any Holder elects to have this Lease superior to its security
deed and signifies its election in the instrument creating its lien or by
separate recorded instrument, then this Lease shall be superior to such security
deed.
(c) In the event any proceedings are brought for the foreclosure of, or
in the event of exercise of the power of sale under, any security deed covering
the Property, or in the event the interests of Landlord under this Lease shall
be transferred by reason of deed in lieu of foreclosure or other legal
proceedings, Tenant shall, at the option of the transferee or purchaser at
foreclosure or under power of sale, as the case may be (sometimes hereinafter
called "such person"), attorn to such person and shall recognize and be bound
and obligated hereunder to such person as the Landlord under this Lease;
provided, however, that no such person shall be (i) bound by any payment of Rent
for more than one (1) month in advance, except prepayments in the nature of
security for the performance by Tenant of its obligations under this Lease (and
then only if such prepayments have been deposited with and are under the control
of such person); (ii) bound by any amendment or modification of this Lease made
without the express written consent of the holder of the security deed or lessor
of the Landlord, as the case may be; (iii) obligated to cure any defaults under
this Lease of any prior landlord (including Landlord); (iv) liable for any act
or omission of any prior landlord (including Landlord); (v) subject to any
offsets or defenses which Tenant might have against any prior landlord
(including Landlord); or (vi) bound by any warranty or representation of any
prior landlord (including Landlord) relating to work performed by any prior
landlord (including Landlord) under this Lease. Tenant agrees to execute any
attornment agreement not in conflict herewith requested by Landlord, the Holder
or such person. Tenant's obligation to attorn to such person shall
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survive the exercise of any such power of sale, foreclosure or other proceeding.
Tenant agrees that the institution of any suit, action or other proceeding by
any Holder to realize on Landlord's interest in the Property pursuant to the
powers granted to a Holder under its security deed, shall not, by operation of
law or otherwise, result in the cancellation or termination of the obligations
of Tenant hereunder. Landlord and Tenant agree that notwithstanding that this
Lease is expressly subject and subordinate to any security deeds, any Holder its
successors and assigns, may sell the Property in the manner provided in the
security deed and may, at the option of such Holder, its successors and assigns,
make such sale of the Property subject to this Lease.
26. NO ESTATE IN LAND
This Lease shall create the relationship of Landlord and Tenant between
the parties hereto. No estate shall pass out of Landlord. Tenant has only a
usufruct not subject to levy and sale, and not assignable by Tenant except as
provided herein.
27. HOLDING OVER
If Tenant remains in possession of the Premises after expiration of the
term hereof, with Landlord's acquiescence and without any express agreement of
the parties, Tenant shall be a tenant at will at a rental rate equal to 150% of
the rental rate which is in effect at the end of this Lease and there shall be
no renewal of this Lease by operation of law.
28. ATTORNEY'S FEES'S
In the event that any action or proceeding is brought to enforce any
term, covenant or condition of this Lease on the part of Landlord or Tenant, the
prevailing party in such litigation shall be entitled to recover reasonable
attorneys' fees to be fixed by the court in such action or proceeding.
Furthermore, Landlord and Tenant agree to pay the attorney's fees and expenses
of the other party to this Lease (either Landlord or Tenant) if it is made a
party to litigation because of its being a party to this Lease and when it has
not engaged in any wrongful conduct itself.
29. RIGHTS CUMULATIVE
All rights, powers and privileges conferred hereunder upon parties
hereto shall be cumulative and not restrictive of those given by law.
30. WAIVER OF RIGHTS
No failure of Landlord to exercise any power given Landlord hereunder
or to insist upon strict compliance by Tenant of its obligations hereunder and
no custom or practice of the parties at variance with the terms hereof shall
constitute a waiver of Landlord's right to demand exact compliance with the
terms hereof.
31. AGENCY DISCLOSURE
Landlord and Tenant hereby acknowledge that Agent has acted as an agent
for Landlord in this transaction, and that Sub-Agent has acted as an agent for
Tenant in this transaction, and that each will be paid a real estate commission
by Landlord.
32. AGENT'S COMMISSION'S
Agent and Sub-Agent have rendered Landlord and Tenant a valuable
service by assisting in the creation of the landlord-tenant relationship
hereunder. The commissions to be paid in conjunction with the creation of the
relationship by this Lease has been negotiated between Landlord, Agent and
Sub-Agent, and Landlord hereby agrees to pay as compensation for their services
in procuring this Lease and creating the aforesaid landlord-tenant relationship
pursuant to a separate commission agreement. Tenant shall indemnify and hold
Landlord harmless from and against any loss, cost, damage or expense suffered by
Landlord as a result of any claim by any person other than Agent and Sub-Agent
claiming that it is due a commission or fee on account of the Lease arising out
of dealings or alleged dealings with Tenant or any of its agents, employees or
contractors. The foregoing indemnity shall include without limitation all
reasonable attorneys' fees and costs incurred by Landlord in the defense of such
claim.
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33. LIMITATION OF AGENT'S SERVICES
Tenant must look solely to Landlord as regards to all covenants,
agreements and warranties herein contained, and Agent shall never be liable to
Tenant in regard to any matter which may arise by virtue of this Lease. It is
understood and agreed that the commissions payable to Agent under Section 32
above are compensation solely for Agent's services in assisting in the creation
of the landlord-tenant relationship hereunder; accordingly, Agent is not
obligated hereunder on account of payment of such commissions to furnish any
management services for the Premises.
34. ENVIRONMENTAL LAWS
(a) Landlord represents to the best of its actual knowledge and belief,
without having made any independent investigation, that the Premises are not in
violation of any applicable Environmental Laws (as hereafter defined). Tenant
represents, warrants and covenants that: (x) Tenant will under no circumstances
maintain, allow, place, deposit, leave, release or store in, on or about the
Premises, the Building or the Property any Hazardous Material, as hereinafter
defined; and (y) Tenant is not in violation of any applicable Environmental
Laws, as hereinafter defined, relating to or affecting its operations in the
Premises. Tenant hereby indemnifies and agrees to defend and hold the Landlord
harmless from and against any and all liens, damages, losses, liabilities,
obligations, penalties, claims, litigation, demands, judgments, suits,
proceedings, costs, disbursements or expenses of any kind or nature whatsoever
(including, without limitation, attorneys' and experts' fees and expenses) which
may at any time (whether or not prior to or after expiration of the term of this
Lease) be imposed upon, incurred by or asserted or awarded against the Landlord,
the Premises, the Building or the Property arising from or out of (i) the
release by Tenant of any Hazardous Materials at any time during the Term of this
Lease on, in, under or affecting all or any portion of the Property, and (ii)
the violation or alleged violation by Tenant during the term of this Lease of
any Environmental Law with respect to the Property or any portion thereof. The
foregoing indemnification shall include, without limitation (x) the cost of
removal of any and all Hazardous Materials released by Tenant from all or any
portion of the Property or any surrounding areas, (y) additional costs required
as a result of such release or violation by Tenant to take necessary precautions
to protect against the discharge, spillage, emission, leakage, seepage or
release of Hazardous Materials on, in, under or affecting the Premises, the
Building or the Property or into the air, water or soil, and (z) costs incurred
as a result of such release or violation by Tenant to comply with Environmental
Laws in connection with all or any portion of the Premises or any surrounding
areas. In determining whether the Tenant is liable under this subsection (a),
the term "Tenant" shall include Tenant and its agents, employees and independent
contractors.
(b) Notwithstanding any of the foregoing to the contrary, Tenant shall
not be required to indemnify or hold the Landlord harmless from or against any
such liens, damages, liabilities or the like to the extent that the same arise
solely from acts or omissions of Landlord or any third parties for whose conduct
Tenant is not responsible, occurring during any period in which Landlord or such
third party was in possession of the Premises.
(c) For purposes of this Lease, "Hazardous Material" or "Hazardous
Materials" means and includes petroleum products, flammable explosives,
radioactive materials, asbestos or any material containing asbestos,
polychlorinated biphenyls, and/or any hazardous, toxic or dangerous waste,
substance or material now or hereafter defined as such, or as a hazardous
substance, or any similar term, by or in the Environmental Laws. For purposes of
this Lease, "Environmental Law" or "Environmental Laws" shall mean: (x) any
"Super Fund" or "Super Lien" law, or any other federal, state or local statute,
law ordinance, code, rule, regulation, order or decree, regulating, relating to
or imposing liability or standards of conduct concerning, any Hazardous
Materials as may now or at any time hereafter be in effect, including without
limitation, the following as the same may be amended or replaced from time to
time, and all regulations promulgated thereunder or in connection therewith: the
Super Fund Amendments and Reauthorization Act of 1986, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the
Massachusetts Oil and Hazardous Material Release Prevention and Response Act of
1983, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act,
the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act, the Hazardous Waste Management System, and the Occupational Safety
and Health Act of 1970; and (y) any law, ordinance or regulation the primary
purpose of which is to protect the quality of the environment.
35. TIME OF ESSENCE; GOVERNING LAW
Time is of the essence of this Lease. This Lease shall be governed by
the laws of the State of Georgia.
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36. DEFINITIONS
"Landlord" as used in this Lease shall include the undersigned, its
heirs, representatives, assigns and successors in title to the Premises.
"Tenant" shall include the undersigned and its heirs, representatives, assigns
and successors, and if this Lease shall be validly assigned or sublet, shall
include also Tenant's assignees or sublessees as to the Premises covered by such
assignment or sublease. "Agent" shall include the undersigned, its successors,
assigns, heirs and representatives, "Landlord", "Tenant" and "Agent" include
male and female, singular and plural, corporation, a partnership or individual,
as may fit the particular parties.
37. NOTICES
All notices required or permitted under this Lease shall be in writing
and shall be personally delivered or sent by U.S. Certified, Registered or
Express Mail, return receipt requested, postage prepaid. Notice to Tenant shall
be delivered or sent to the Premises or to Tenant's Notice Address. Notices to
Landlord, Agent and Sub-Agent shall be sent to their respective Notice Address,
with copies in the case of notices to Landlord to James J. Williams, Esq., Marks
& Williams, LLC, 7380 McGinnis Ferry Road, Suite 100, Suwanee, Georgia 30174.
All such notices shall be effective when deposited in the United States Mail or
with such courier or delivery service within the continental United States. Any
party may change its notice address by giving all other parties a notice of the
new address, which notice shall meet the requirements hereof.
38. WAIVER
Failure on the part of Landlord or Tenant to complain of any action or
non-action on the part of the other, no matter how long the same may continue,
shall never be a waiver by Tenant or Landlord, respectively, of any of the
other's rights hereunder. Further, no waiver at any time of any of the
provisions hereof by Landlord or Tenant shall be construed as a waiver of any of
the other provisions hereof, and a waiver at any time of any of the provisions
hereof shall not be construed as a waiver at any subsequent time of the same
provisions. The consent or approval of Landlord or Tenant to or of any action by
the other requiring such consent or approval shall not be construed to waive or
render unnecessary Landlord's or Tenant's consent or approval to or of any
subsequent similar act by the other. No payment by Tenant, or acceptance by
Landlord, of a lesser amount than shall be due from Tenant to Landlord shall be
treated otherwise than as a payment on account of the earliest installment of
any payment due from Tenant under the provisions hereof. The acceptance by
Landlord of a check for a lesser amount with an endorsement or statement
thereon, or upon any letter accompanying such check, that such lesser amount is
payment in full, shall be given no effect, and Landlord may accept such check
without prejudice to any other rights or remedies which Landlord may have
against Tenant.
39. COVENANT OF QUIET ENJOYMENT
Tenant, subject to the terms and provisions of this Lease, on payment
of the rent and additional charges and observing, keeping and performing all of
the other terms and provisions of this Lease on Tenant's part to be observed,
kept and performed, shall lawfully, peaceably and quietly have, hold, occupy and
enjoy the Premises during the term hereof, without hindrance or ejection by any
persons lawfully claiming under Landlord to have title to the Premises superior
to Tenant; the foregoing covenant of quiet enjoyment is in lieu of any other
covenant, express or implied.
40. LANDLORD'S LIABILITY'S
(a) Tenant specifically agrees to look solely to Landlord's then equity
interest in the Property at the time owned, for recovery of any judgment from
Landlord, it being specifically agreed that neither Landlord (original or
successor) nor any partner of Landlord (nor any principal of any such partner)
shall ever be personally liable for any such judgment, or for the payment of any
monetary obligation to Tenant. The provision contained in the foregoing sentence
is not intended to, and shall not, limit any right that Tenant might otherwise
have to obtain injunctive relief against Landlord or Landlord's successors in
interest, or to take any action not involving the personal liability of Landlord
(original or successor).
(b) With respect to any services or utilities to be furnished by
Landlord to Tenant, Landlord shall in no event be liable for failure to furnish
the same when prevented from doing so by strike, lockout, breakdown, accident,
order or regulation of or by any governmental authority, or failure of supply,
or inability by the exercise of reasonable diligence to obtain supplies, parts
or employees necessary to furnish such services, or because of war or other
emergency, or for any other cause beyond Landlord's reasonable control, or for
any cause due to
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any act or neglect of Tenant or Tenant's servants, agents, employees, licensees
or any person claiming by, through or under Tenant.
(c) In no event shall Landlord ever be liable to Tenant for any loss of
business or any other indirect or consequential damages suffered by Tenant from
whatever cause. Where provision is made in this Lease for Landlord's consent
(with no requirement that Landlord not unreasonably withhold its consent) and
Tenant shall request such consent and Landlord shall fail or refuse to give such
consent, then Tenant shall not be entitled to any damages for any withholding by
Landlord of its consent. Furthermore, whenever Tenant requests Landlord's
consent or approval (whether or not provided for herein), Tenant shall pay to
Landlord, on demand, as an additional charge, any reasonable expenses incurred
by Landlord (including without limitation legal fees and costs, if any) in
connection therewith without limitation.
(d) With respect to any repairs or restoration which are required or
permitted to be made by Landlord, the same may be made during normal business
hours and Landlord shall have no liability for damages to Tenant for
inconvenience, annoyance or interruption of business arising therefrom. In
exercising its rights under this section, and except in case of emergency,
Landlord shall endeavor to minimize interference with Tenant's business
operations in the Premises.
41. ASSIGNMENT OF RENTS AND TRANSFER OF TITLE
(a) With reference to any assignment by Landlord of Landlord's interest
in this Lease, or the rents payable hereunder, conditional in nature or
otherwise, which assignment is made to the holder of a mortgage on property
which includes the Premises, Tenant agrees that the execution thereof by
Landlord, and the acceptance thereof by the holder of such mortgage shall never
be treated as an assumption by such holder of any of the obligations of Landlord
hereunder unless such holder shall, by notice sent to Tenant, specifically
otherwise elect and that, except as aforesaid, such holder shall be treated as
having assumed Landlord's obligations hereunder only upon foreclosure of such
holder's mortgage and the taking of possession of the Premises.
(b) In no event shall the acquisition of Landlord's interest in the
Property by a purchaser which, simultaneously therewith, leases Landlord's
entire interest in the Property back to the seller thereof be treated as an
assumption by operation of law or otherwise, of Landlord's obligations
hereunder, but Tenant shall look solely to such seller-lessee, and its
successors from time to time in title, for performance of Landlord's obligations
hereunder. In any such event, this Lease shall be subject and subordinate to the
lease to such seller-lessee. For all purposes, such seller-lessee, and its
successors in title, shall be the Landlord hereunder unless and until Landlord's
position shall have been assumed by such purchaser-lessor.
(c) Except as provided in subsection (b) of this Section, in the event
of any transfer of title to the Property by Landlord, Landlord shall thereafter
be entirely freed and relieved from the performance and observance of all
covenants and obligations hereunder provided such transferee shall have assumed
all of Landlord's obligations under this Lease.
42. ESTOPPEL CERTIFICATE
Tenant, within ten (10) days from receipt of Landlord's written
request, shall execute, acknowledge and deliver to Landlord a written statement
certifying to Landlord, Landlord's lender and/or any proposed purchaser of the
Premises, as requested, (a) that this Lease is in full force and effect, without
modification (or, if there have been modifications, that the same is in full
force and effect as modified and stating the modifications); (b) that there are
no uncured defaults in Landlord's performance and that Tenant has no right of
offset, counterclaim or deduction against the Base Rent and Additional Rental
(or if there are defaults, offsets counterclaims or deductions, describing the
nature and amount of same); (c) the then current amount of Base Rent and
Additional Rent and the dates to which the Base Rent and Additional Rental have
been paid; (d) the commencement and expiration dates of the Lease; (e) whether
Tenant has any options or other rights to extend the Lease, expand the Premises,
or purchase the Premises; and (f) the amount of any security deposit; and (g)
any other matters reasonably requested by Landlord.
43. ENTIRE AGREEMENT
The Summary of Primary Business Terms attached to the beginning of this
document contain terms material to the landlord-tenant relationship created
hereby and is a part of this Lease. This Lease contains the entire agreement of
the parties hereto, and no representations, inducements, promises or agreements,
oral or otherwise, between the parties, not embodied herein, shall be of any
force or effect. The submission of this
Tenant's Initials:_______
Page 19 of 20
<PAGE> 23
document for examination or negotiation does not constitute an offer to lease or
a reservation of, or option for the Premises, and this Lease shall become
effective only upon the complete execution and delivery thereof by Landlord and
Tenant, and upon the delivery by Tenant or all payments (and the collection and
availability of such funds) and the delivery of such insurance policies,
evidences of corporate authority or other matters as Landlord may reasonably
require in connection herewith (such requirements being for the sole benefit of
Landlord, and may be waived, in whole or in part, by Landlord in its sole and
absolute discretion). Tenant represents that the signatory hereto on behalf of
Tenant is fully authorized to bind Tenant, and that the certificate annexed
hereto as Exhibit I is true and correct, and has not been modified as of the
date hereof. This Lease may be executed in one or more counterparts, each of
which shall for all purposes be deemed an original. Neither this Lease nor any
memorandum hereof shall be offered or filed as a matter of public record.
44. SPECIAL STIPULATIONS
Any special stipulations are set forth in the attached Exhibit G.
Insofar as said Special Stipulations conflict with any of the foregoing
provisions, said Special Stipulations shall control.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals, in triplicate, the date and year first above written.
Signed, sealed and delivered as LANDLORD: RIVER EXCHANGE ASSOCIATES
to Landlord, in the presence of: LIMITED PARTNERSHIP
By: River Management, Inc., its sole
general partner
/s/ Kellie N. Speed
- ------------------------------------
Witness By: /s Robert A. Schlager
----------------------------
Robert A. Schlager, Treasurer
Hereunto Duly Authorized
TENANT: TOWNE SERVICES, INC.
Signed, sealed and delivered as to Tenant in the presence of:
By: /s/ Henry Baroco
---------------------------
Name: Henry Baroco
Title: President
Hereunto Duly Authorized
/s/ Michael Veasey (CORPORATE SEAL)
- --------------------------------------
Witness
/s/ Debbie A. Polcari
Debbie A. Polcari
Notary Public
Tenant's Initials:_______
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<PAGE> 24
EXHIBIT A
[LEGAL DESCRIPTION OF PROPERTY]
ALL THAT TRACT OR PARCEL OF LAND lying and being in Land Lot 313 of the
6th District of Fulton County, Georgia, said tract or parcel being more
particularly described as follows:
To find the TRUE POINT OF BEGINNING, commence at the point of
intersection of the northerly line of the right-of-way of Spalding Drive and the
southwesterly line of the right-of-way of Holcomb Bridge Road if said lines were
extended to form an angle instead of a curve, and running thence along the
right-of-way line of Holcomb Bridge Road the following courses and distances:
North 43(Degree) 53' 59" West a distance of 464.12 feet to an iron pin; South
50(Degree) 25' 09" West a distance of 12.92 feet to an iron pin; North
43(Degree) 26' 19" West a distance of 120.21 feet to a point; and South
66(Degree) 54' 41" West a distance of 10.55 feet to an iron pin and the TRUE
POINT OF BEGINNING; from said TRUE POINT OF BEGINNING leaving the right-of-way
line of Holcomb Bridge Road and running thence South 66(Degree) 54' 41" West a
distance of 782.78 feet to an iron pin; running thence North 66(Degree) 57' 06"
West a distance of 406.37 feet to an iron pin located on the southeasterly line
of the right-of-way of River Exchange Drive; running thence along the
southeasterly line of the right-of-way of River Exchange Drive the following
courses and distances: along the arc of a curve to the right, said arc having a
radius of 311.18 feet and being subtended by a chord having a bearing of North
33(Degree) 46' 12" East and a length of 376.86 feet, an arc distance of 404.81
feet to an iron pin; North 71(Degree) 02' 16" East a distance of 202.23 feet to
an iron pin; along the arc of a curve to the left, said arc having a radius of
1200.00 feet and being subtended by a chord having a bearing of North 63(Degree)
42' 47" East and a length of 305.99 feet, an arc distance of 306.82 to an iron
pin; South 33(Degree) 36' 43" East a distance of 10.00 feet to an iron pin; and
North 56(Degree) 23' 17" East a distance of 47.00 feet to an iron pin located at
the intersection of the southeasterly line of the right-of-way of River Exchange
Drive with the southwesterly line of the right-of-way of Holcomb Bridge Road;
running thence along the mitered corner of said intersection South 75(Degree)
43' 33" East a distance of 74.00 feet to an iron pin; running thence along said
Holcomb Bridge Road right-of-way line and along the arc of a curve to the left,
said arc having a radius of 6,258.946 feet and being subtended by a chord having
a bearing of South 39(Degree) 34' 16" East and a length of 474.90 feet, an arc
distance of 475.01 feet to an iron pin and the TRUE POINT OF BEGINNING.
Said tract containing 9.8490 acres and being shown on that certain
Above Ground "As Built" Survey, prepared for River Exchange Associates Limited
Partnership, USG Annuity & Life Company and Chicago Title Insurance Company,
dated July 27, 1987, last revised October ___, 1997, prepared by Travis N.
Pruitt & Associates, P.C., bearing the certification of Travis N. Pruitt, Sr.,
Georgia R.L.S. No. 1729.
Tenant's Initials:_______
<PAGE> 25
EXHIBIT B
[COMMENCEMENT DATE AGREEMENT]
The undersigned Landlord and Tenant do hereby each agree and certify to
the other that the term of that certain Lease between Landlord and Tenant dated
January 12, 1998 (the "Lease") commenced on the ___ day of _______________, 1998
(the "Commencement Date") and shall expire at 11:59 pm on the 31st day of
January, 2003, unless extended or sooner terminated as specifically provided by
the terms, conditions and provisions of the Lease.
Tenant acknowledges that, from and after the Commencement Date,
Tenant's Notice Address is:
Suite 350
3295 River Exchange Drive
Norcross, Georgia 30092
Attention: Henry Baroco
Phone: ________________; Fax: ________________
IN WITNESS WHEREOF, Landlord and Tenant have executed this Commencement
Date Agreement under seal, this the ___ day of January, 1998.
Signed, sealed and delivered LANDLORD: RIVER EXCHANGE ASSOCIATES
as to Landlord in the presence of: LIMITED PARTNERSHIP
By: River Management, Inc., its sole
general partner
- -------------------------------
Witness
By:__________________________________
Robert A. Schlager, Treasurer
Hereunto Duly Authorized
TENANT: TOWNE SERVICES, INC.
Signed, sealed and delivered as to Tenant in the presence of:
By:_________________________________
Name: Henry Baroco
- -------------------------------- Title: President
Witness Hereunto Duly Authorized
(CORPORATE SEAL)
Tenant's Initials:_______
<PAGE> 26
EXHIBIT C
[FLOOR PLAN]
Tenant's Initials:_______
<PAGE> 27
EXHIBIT D
[LANDLORD'S WORK]
Subject to delays caused by "force majeure" and matters beyond the
reasonable control of Landlord, and subject to any delays caused by Tenant,
Landlord will use reasonable efforts to perform the work shown and described on
the following plans and specifications, and to substantially complete the same
on or before the Commencement Date, but Landlord shall have no liability for
failure to so complete such Work on or before the anticipated Commencement Date.
Tenant shall cooperate with Landlord and, in its use of the remaining portions
of the Premises, shall not interfere with Landlord, in the performance of
Landlord's Work:
Those plans and specifications prepared for Tenant and the Premises by
Crowley & Luckett Architects, Inc., dated November 23, 1997, last
revised January 7, 1998 (the "Plans"), a copy of which is attached
hereto as Exhibit "D-1", and additionally revised by hand on a full
scale original and dated 1-14-98.
Tenant's Initials:_______
<PAGE> 28
EXHIBIT E
[TENANT'S WORK]
All work shown on any revisions to the Plans, and all other work
necessary to configure the Premises for Tenant's intended uses.
Tenant's Initials:_______
<PAGE> 29
EXHIBIT F
[INSURANCE CERTIFICATE]
Tenant's Initials:_______
<PAGE> 30
EXHIBIT G
[SPECIAL STIPULATIONS]
1. RENEWAL OPTION. (a) Tenant shall have the option to extend the Lease
Term for a period of five (5) additional years ("Extension Term"), to
commence at the expiration of the initial Lease Term. This option may
be exercised only by written notice to Landlord at least one hundred
eighty (180) days prior to the end of the initial Lease Term.
(b) If Tenant has exercised its option in subsection
(a) above, Tenant shall have the option to extend the Lease Term for a
period of five (5) additional years ("Second Extension Term"), to
commence at the expiration of the Extension Term. This option may be
exercised only by written notice to Landlord at least one hundred
eighty (180) days prior to the end of the Extension Term.
(c) The terms and conditions of this Lease shall
govern the Extension Term and the Second Extension Term, as the case
may be, except (i) Base Rent shall be increased as set forth in
subparagraph (d) hereinbelow, (ii) Tenant shall have no option to renew
this Lease beyond the expiration of the Second Extension Term, (iii)
the leasehold improvements will be provided in their then-existing
condition (on an "as-is" basis) at the commencement of the Extension
Term or the Second Extension Term, as the case may be. Provided,
however, Tenant may exercise the foregoing options to renew only if (1)
the financial condition of Tenant is the same or better than it is on
the date of this Lease, as evidenced by Tenant's financial statement
not more than one year old, and (2) on both the date Tenant exercises
this option and upon the expiration of the prior term of this Lease,
(a) this Lease is in full force and effect and (b) Tenant is not in
default under this Lease beyond any applicable grace or cure period. If
Tenant shall fail to exercise this option to extend or conditions (1)
and (2) are not entirely satisfied, this Lease shall expire at the
expiration of the prior terms of this Lease and Tenant shall have no
further right to extend this Lease.
(d) Within thirty (30) days after Tenant has
exercised an option to extend the Lease, Landlord shall notify Tenant
of the then current market rate for a lease of similar length and at
similar premises to the Premises, and the rental rate for the Extension
Term or the Second Extension Term, as the case may be, shall based on
such market rate. At least ninety (90) days prior to the end of the
prior term of the Lease, Landlord and Tenant shall have agreed, in
writing, on the rental rate for the applicable extension, and if no
such agreement is reached, then Tenant's exercise of this extension
option shall be void and the Lease term shall end upon the expiration
of the then current term of this Lease.
2. PARKING. The parking areas appurtenant to the Building shall permit
free parking by Tenant's employees, customers and invitees.
3. EXPANSION OF PREMISES. Suite 320 of the Building, containing 1,880
rentable square feet in the location shown on EXHIBIT "G-1" attached
hereto (the "Expansion Space"), is currently occupied by Accelerated
Solutions Incorporated under a lease which terminates on May 31, 1998.
The Expansion Space will be added to, and shall by deemed a part of,
the Premises for the remainder of the Lease Term, on the earlier of (i)
the day Tenant commences its occupancy of the Expansion Space, or (ii)
thirty (30) days after the day on which Accelerated Solutions
Incorporated vacates the Expansion Space (such earlier date being
hereinafter referred to as the "Expansion Space Commencement Date").
From and after the Expansion Space Commencement Date, the Premises
shall be deemed to contain 11,837 rentable square feet, the Initial
Base Rent shall increase to 18,248.71 per month ($18.50) per rentable
square foot), and Tenant's Share shall be increased to 10.71%. Base
Rent for the Expansion Space shall be adjusted pursuant to Section 4 of
the Lease on the same dates, and using the same CPI Index, as will be
used to adjust Base Rent for the initial Premises. Landlord shall
contribute $9,400.00 towards those tenant improvement costs actually
incurred by Tenant with respect to the Expansion Space; all additional
costs and expenses incurred by Tenant, or by Landlord at Tenant's
request, for tenant improvements in the Expansion Space shall be the
responsibility of Tenant. All tenant improvement work performed by or
on behalf of Tenant in the Expansion Space shall performed in
accordance with Sections 8 and 13 of the Lease. Landlord will make the
Expansion Space available for tenant improvement work on the day after
Accelerated Solutions Incorporated vacates the Expansion Space.
Tenant's Initials:_______
<PAGE> 31
4. RIGHT OF FIRST REFUSAL. Landlord and Tenant acknowledge that Suite 360
on the 3rd floor of the Building contains 2,376 rentable square feet of
space in the location shown on EXHIBIT "G-1" attached hereto
(hereinafter the "Opportunity Space"). The Opportunity Space is
currently under lease to Telecommunications Technology Corp. ("TTC").
Landlord grants to Tenant a right of first refusal to lease the
Opportunity Space in accordance with, and subject to, the following
terms and conditions:
(a) In the event Landlord obtains a written offer from a
prospective tenant (including TTC) to lease all or any portion of the
Opportunity Space after the termination of the TTC lease, and in the
event Landlord desires to accept such offer, then Landlord shall submit
to Tenant in writing all of the material terms and conditions of such
proposed offer to lease (hereinafter referred to as the "Offer") and
Tenant shall have the right and option to lease the Opportunity Space
covered by the Offer upon the same monetary terms and conditions,
including any offer of free rent and leasehold improvement allowances,
as embodied in the copy of such Offer submitted to Tenant by Landlord,
but upon the same terms and conditions as this Lease and for a term
expiring as of the Expiration Date. In the event the remaining months
in the Lease Term or any extension thereof are less than the number of
months in the term embodied in the Offer, then such free rent and
leasehold improvement allowances shall be reduced to the amounts that
bear the same ratio to the free rent and leasehold improvement
allowances embodied in the Offer as the remaining months in the Lease
Term bear to the number of months of the term embodied in the Offer.
(b) If Tenant shall elect to exercise its right to lease the
Opportunity Space covered by the Offer, written notice of such election
shall be given to Landlord within three (3) days from the time that
Tenant first received a copy of the Offer from Landlord (hereinafter
referred to as the "Offer Period"), which notice by Tenant shall
specify a date that Tenant shall lease the space covered by the Offer,
which date shall be not less than fifteen (15) nor more than forty-five
(45) days after the giving of notice thereof.
(c) Upon the exercise of its right to lease the Opportunity
Space covered by the Offer, Landlord and Tenant shall enter into a
written agreement modifying and supplementing this Lease and specifying
that the Opportunity Space is a part of the Premises under this Lease
and containing other appropriate terms and provisions relating to the
addition of such area to this Lease, including, without limitation,
increasing, adjusting or augmenting Rent as a result of the addition of
such space. The right of first refusal contained in this paragraph 4 of
these Special Stipulations to the Lease shall then terminate as to the
balance of the Opportunity Space not leased by Tenant, if any.
(d) If a right to lease pursuant to this Section shall not be
exercised within the Offer Period or shall be waived (no notice is
deemed to be a waiver of such right), then Landlord shall have the
right to offer such space to the prospective tenant, and if such
transaction is consummated, Tenant's rights under this Section shall
automatically terminate and be of no further force or effect. If a
right to lease pursuant to this Section shall not be exercised within
the Offer Period or shall be waived (no notice is deemed to be a waiver
of such right), and Landlord fails to lease the space covered by the
Offer within six (6) months after Landlord's submission of a copy of
the Offer to Tenant, then this Section shall be applicable to any
subsequent offer to lease the Opportunity Space or any portion thereof.
(e) The foregoing right of first refusal is conditioned upon
this Lease being in full force and effect and there being no default
under this Lease. If Tenant fails to exercise the foregoing right of
first refusal as provided in and in strict accordance with the terms of
this paragraph, or if the condition set forth in the first sentence of
this subsection (e) is not entirely satisfied, the foregoing right of
first refusal shall automatically terminate and be of no further force
or effect, or if exercised, shall be null and void.
(f) Tenant shall not have the right to assign its right of
first refusal to any sublessee of the Demised Premises or any portion
thereof or to any assignee of this Lease, nor may any such sublessee or
assignee exercise or enjoy the benefit of such right of first refusal.
Tenant's Initials:_______
<PAGE> 32
EXHIBIT H
BUILDING RULES AND AGREED REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways and other similar
areas of the Building shall not be obstructed by tenants or used by any
tenant for any purpose other than ingress or egress to and from their
premises and for going from one to another part of the building.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which designed, and no sweepings, rubbish, rags or other unsuitable
material shall be thrown or placed therein. Damage resulting to any
such fixtures or appliances from misuse by a tenant shall be paid by
such tenant, and Landlord shall not in any case be responsible
therefor.
3. No sign, advertisements or notices shall be painted or affixed on or to
any windows or doors or other parts of the building except of such
color, size and style and in such places as shall be first approved in
writing by Landlord. No nails, hooks or screws shall be driven or
inserted in any part of the Building, nor shall any part of the
Building be defaced by tenants or their agents, servants, employees or
invitees.
4. Landlord will provide and maintain in the first floor (main lobby) of
the building an alphabetical directory board for all tenants and no
other directory shall be permitted unless previously consented to by
Landlord in writing.
5. All tenants will refer all contractors, contractors' representatives
and installation technicians rendering any service to them to Landlord
for Landlord's supervision, approval and control before the performance
of any contractual services. This provision shall apply to all work
performed in the building, including, but not limited to, installations
of telephones, electrical devices and attachments, and any and all
installations of every nature affecting floor, walls, woodwork, trim,
windows, ceilings, equipment and any other physical portion of the
building.
6. Movements in or out of the building of furniture or office equipment,
or dispatch or receipt of any bulky material or merchandise which
requires use of elevators or stairways, or movement through the
building entrances or lobby shall be restricted to such hours as
Landlord shall designate. All such movement shall be under the
supervision of Landlord and in the manner agreed between the tenant and
Landlord by prearrangement before performance. Such prearrangement
initiated by tenant will include determination by Landlord, and subject
to its decision and control, as to the time, method, and routing of
movement and as to limitations for safety or other concern which may
prohibit any article, equipment or any other item from being brought
into the building. The tenants are to assume all risks as to the damage
to articles moved and injury to persons or public engaged or not
engaged in such movement, including equipment, property and personnel
of Landlord if damaged or injured as a result of acts in connection
with carrying out this service for any tenant, from time of entering
upon the land to completion of work; and Landlord shall not be liable
for acts of any person engaged in, or any damage or loss to any of said
property or persons resulting from, any act in connection with such
service performed for a tenant.
7. Tenants shall notify the building manager when safes or other heavy
equipment are to be taken in or out of the building, and the moving
shall be done under the supervision of the building manager, after
written permission from the Landlord. Persons employed to move such
property must be acceptable to Landlord.
8. Corridor doors, when not in use, shall be kept closed.
9. Each tenant shall cooperate with Landlord's employees in keeping its
premises neat and clean. Landlord shall be in no way responsible to the
tenants, their agents, employees, or invitees for any damages to any
property in the tenants' premises or otherwise to the building from any
cause whatsoever.
10. To insure orderly operation of the building, no ice, mineral or other
water, towels, newspapers, etc., shall be delivered to any premises
except by persons appointed or approved by Landlord in writing.
11. Should any tenant require Muzak or other communication or entertainment
service, Landlord will direct the electrician where and how wires are
to be introduced and placed and none shall be introduced or placed
except as Landlord shall direct. Electric current shall not be used for
heating without Landlord's prior written permission.
Tenant's Initials:_______
<PAGE> 33
12. Without Landlord's prior approval, no tenant shall install any radio or
television antenna, loudspeaker, music system or other device on the
roof or exterior walls of the building or on common walls with adjacent
tenants.
13. No Tenants shall make or permit any improper noises in the building or
otherwise interfere in any way with other tenants or persons having
business with them.
14. Nothing (including, without limitation, boxes, crates or excess trash)
shall be swept into, disposed or deposited in the corridors, halls,
elevator shafts or stairways. No birds or animals shall be brought into
or kept in, or about any tenant's premises. The garage and parking
areas in and around the building shall be used solely for the
temporary, transient parking of automobiles used by tenants.
15. No tenant shall place, install or operate on its premises or in any
part of building, any engine, stove, or machinery, including, without
limitations fans or refrigerating, heating or air conditioning
equipment, or conduct mechanical operations or cook thereon or therein,
or place or use in or about premises any explosives, or hazardous
material without written consent of Landlord.
16. No portion of any tenant's premises shall at any time be used or
occupied as sleeping or lodging quarters.
17. Landlord will not be responsible for lost or stolen personal property,
money or jewelry from any tenant's premises or public areas (including,
without limitation, garage areas) regardless of whether or not such
loss occurs when such area is locked against entry.
18. Landlord reserves the right to close the building at 7:00 P.M. on
weekdays and at 12:00 P.M. (Noon) on Saturdays, subject, however, to
tenant's right to admittance under regulations prescribed by Landlord;
and to require all persons entering the building after 6:00 P.M.
weekdays and 12:00 P.M. (Noon) Saturdays to identify themselves to a
watchman other representative of Landlord and establish their right to
enter or leave the building. Landlord reserves the right to install an
electronic entry system in the building. In the event Landlord so
causes such electronic entry system to be installed in the building,
Landlord will supply initial entry devices to tenants and may impose
restrictions on the use thereof and additional rules and regulations
relating thereto.
19. Each tenant shall, before leaving tenant's premises unattended, close
and lock all outside doors and shut off all utilities; damages
resulting from failure to do so shall be paid by the tenant.
20. Each tenant shall give Landlord prompt notice of all accidents to or
defects in air conditioning equipment, plumbing, electric facilities or
any part or appurtenance of tenant's premises.
21. Canvassing, soliciting, and peddling in the building or garage
facilities are prohibited.
22. There shall not be used in any space or in the public halls of the
building, either by any tenant or by jobbers or others in the delivery
or receipt of merchandise, any hand trucks except those equipped with
rubber tires.
23. No tenant shall permit any portion of its premises to be used as an
office for a public secretarial service, for the sale of food, drink,
liquor, tobacco or pornographic materials, for a barber or manicure
shop, for retail sales to the general public, for an employment bureau
or travel agency, for auctions or sale of personal property, nor shall
any machine or device operated by insertion of a coin, token, or
similar object for the purpose of amusement or skill be permitted
inside or outside the premises unless such use is specifically
described as a part of the sole permitted use.
24. Each tenant shall, unless otherwise expressly stipulated herein, be
required to make all repairs of any kind and character on the tenant's
premises during the term of such tenant's lease, except such repairs as
may be required and executed by normal janitorial and maintenance
operations.
25. Each tenant will be responsible for any damage to carpeting and
flooring as a result of rust or corrosion of file cabinets, pot
holders, roller chairs, and metal objects.
Tenant's Initials:_______
<PAGE> 34
26. No person or contractor not employed by Landlord shall be used to
perform janitorial work, window washing, cleaning repair or other work
in any tenant's premises. Landlord's janitors shall not be hindered by
any tenant or its agents, servants, employees or invitees after 5:30
P.M.
27. Employees of Landlord shall not receive or carry messages for or to any
tenant or other person, nor contract with or render free or paid
services to any tenant or tenant's agents, employees, or invitees.
28. Each tenant and its employees, agents and invitees, shall observe and
comply with the driving and parking signs and markers on the premises
surrounding the building. Landlord shall not be responsible for any
damage to any vehicle towed because of noncompliance with parking
regulations.
29. Each tenant must dispose of crates, boxes, etc., which will not fit
into office wastepaper baskets.
30. Any tenant employing laborers or others outside the building shall not
have their employees paid in the building.
31. Without Landlord's express consent in writing, no tenant shall
advertise the business, profession, or activities of such tenant in any
manner which violates the letter or spirit of any code of ethics
adopted by any recognized association or organization pertaining
thereto or use the name of the building for any purpose other than that
of the business address of tenant or use any picture or likeness of the
building or the building name in any letterheads, envelopes, circulars,
notices, advertisements, containers, or wrapping material.
32. No tenant shall permit, erect and/or place drapes, furniture, fixtures,
shelving display cases or tables, lights, signs, and advertising
devices in front of or in the proximity of interior and exterior
windows, glass panels, or glass doors providing a view into the
interior of such tenant's premises unless same shall have first been
approved in writing by Landlord.
33. Landlord reserves the right to rescind any of these rules and
regulations and to make such other and further rules and regulations as
in its judgment shall from time to time be needful for the safety,
protection, care and cleanliness of the building, the operation
thereof, the preservation of good order therein and the protection and
comfort of the tenants and their agents, employees and invitees, which
rules and regulations, when made and written notice thereof is given to
a tenant, shall be binding upon tenant in like manner as if originally
herein prescribed.
Tenant's Initials:_______
<PAGE> 35
EXHIBIT I
CERTIFICATE OF THE SECRETARY
TOWNE SERVICES, INC.
The undersigned, being the duly elected, qualified and acting Secretary
of Towne Services, Inc., a Georgia corporation, does hereby certify that, at a
special meeting of the Directors of the corporation duly called and held on
December ___, 1997, the following resolutions were unanimously adopted:
RESOLVED: That this corporation enter into a lease of certain
space, containing approximately 9,957 square feet,
located at 3295 River Exchange Drive, Norcross,
Georgia, on such terms and conditions as the
officer(s) executing and delivering the same shall in
their sole and absolute discretion deem necessary or
appropriate; and be it further
RESOLVED: That Henry M. Baroco, the President of this
corporation, be, and hereby is, authorized and
directed to execute, acknowledge and deliver, on
behalf of this corporation, one or more counterparts
of such lease, the execution and delivery of such
lease by such officer being conclusive evidence in
favor of all parties of his approval of the terms and
conditions thereof.
The undersigned further certifies that (i) Henry M. Baroco, whose
signature appears below, is the duly elected, qualified and acting president of
this corporation, (ii) the charter documents and by-laws of this corporation are
in full force and effect, and all applicable requirements have been complied
with in the adoption of the foregoing Resolutions, and (iii) the foregoing
Resolutions have not been repealed, amended or modified, and remained in full
force and effect as of the date hereof.
/s/ Henry Baroco
-----------------------------------
Title: President
Signed and sealed this day of December, 1997.
----
/s/ Cleve B. Shultz
----------------------------------
Secretary
[Corporate Seal]
Tenant's Initials:_______
<PAGE> 1
EXHIBIT 10.17
PROMISSORY NOTE
$78,990.00 September 8, 1997
Henry M. Baroco (hereinafter referred to as "Maker"), for value
received, hereby promises to pay to the order of TOWNE SERVICES, INC., a Georgia
corporation (hereinafter referred to as "Payee"), the aggregate principal sum of
SEVENTY EIGHT THOUSAND NINE HUNDRED NINETY DOLLARS (78,990.00) on the earlier of
(i) September 8, 1998 or (ii) the date that Maker sells any shares of capital
stock of Payee that are held by Maker, together with interest on the unpaid
principal balance at the rate of 8.5% per annum, compounded annually. The
principal hereof and the interest thereon are payable at 6621 Bay Circle, Suite
170, Norcross, Georgia 30092, or at such other place as Payee may from time to
time designate to Maker in writing, in coin or currency of the United States of
America.
Maker may, at any time and from time to time, prepay all or any portion
of the principal of this Note remaining unpaid, without penalty or premium.
Prepayments shall be applied first to the payment of accrued but unpaid interest
on this Note and the balance to principal.
If any of the following events (an "Event of Default") shall occur and
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest
on this Note when and as the same shall become due and payable and such
default continues for 20 days after Maker receives notice from Payee of
such default; or
(b) If Maker makes an assignment for the benefit of creditors
or admits in writing an inability to pay his or its debts generally as
they become due;
(c) If an order, judgment or decree is entered adjudicating
Maker bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the
appointment of a trustee or receiver of Maker, or of any substantial
part of the assets of Maker, or commences any proceedings relating to
Maker under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act
indicates its approval thereof, consent thereto, or acquiescence
therein, or an order is entered appointing any such trustee or
<PAGE> 2
receiver, or approving the petition in any such proceedings, and such
order remains unstayed and in effect for more than 90 days.
This Note is with full recourse to any assets of Maker.
Any failure on the part of Payee at any time to require the performance
by Maker of any of the terms or provisions hereof, even if known, shall in no
way affect the right thereafter to enforce the same, nor shall any failure of
Payee to insist on strict compliance with the terms and conditions hereof be
taken or held to be a waiver of any succeeding breach or of the right of Payee
to insist on strict compliance with the terms and conditions hereof.
Time is of the essence.
This Note shall be governed by, and enforced and interpreted in
accordance with, the laws of the State of Georgia without regard to the
principles of conflict of laws.
In the event this note, or any part hereof, is collected by or through
an attorney-at-law, Maker agrees to pay all costs of collection including, but
not limited to, attorneys' fees equal to 15% of the principal and interest then
due. In the event that Maker fails to make any payment when due, Payee shall
provide written notice of default to Maker, which notice shall allow Maker ten
(10) days from the date of receipt of such notice in which to cure such default.
If such default is not cured within the time allowed, the balance hereof shall
be deemed to be immediately accelerated without further notice to Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the
date first set forth above.
MAKER:
/s/ Henry M. Baroco
--------------------------------------
<PAGE> 1
EXHIBIT 10.18
PROMISSORY NOTE
$75,000 April 1, 1998
Bruce F. Lowthers, Jr. (hereinafter referred to as "Maker"), for value
received, hereby promises to pay to the order of TOWNE SERVICES, INC., a Georgia
corporation (hereinafter referred to as "Payee"), the aggregate principal sum of
SEVENTY FIVE THOUSAND DOLLARS ($75,000) on the earlier of (i) December 31, 1999
or (ii) the date that Maker sells any shares of capital stock of Payee that are
held by Maker, together with interest on the unpaid principal balance at the
rate of 8.75% per annum, compounded annually. The principal hereof and the
interest thereon are payable at 3295 River Exchange Drive, Suite 350, Atlanta,
Georgia 30092, or at such other place as Payee may from time to time designate
to Maker in writing, in coin or currency of the United States of America.
Maker may, at any time and from time to time, prepay all or any portion
of the principal of this Note remaining unpaid, without penalty or premium.
Prepayments shall be applied first to the payment of accrued but unpaid interest
on this Note and the balance to principal.
If any of the following events (an "Event of Default") shall occur and
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest
on this Note when and as the same shall become due and payable and such
default continues for 20 days after Maker receives notice from Payee of
such default; or
(b) If Maker makes an assignment for the benefit of creditors
or admits in writing an inability to pay his or its debts generally as
they become due;
(c) If an order, judgment or decree is entered adjudicating
Maker bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the
appointment of a trustee or receiver of Maker, or of any substantial
part of the assets of Maker, or commences any proceedings relating to
Maker under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act
indicates its approval thereof, consent thereto, or acquiescence
therein, or an order is entered appointing any such trustee or
<PAGE> 2
receiver, or approving the petition in any such proceedings, and such
order remains unstayed and in effect for more than 90 days.
This Note is with full recourse to any assets of Maker.
Any failure on the part of Payee at any time to require the performance
by Maker of any of the terms or provisions hereof, even if known, shall in no
way affect the right thereafter to enforce the same, nor shall any failure of
Payee to insist on strict compliance with the terms and conditions hereof be
taken or held to be a waiver of any succeeding breach or of the right of Payee
to insist on strict compliance with the terms and conditions hereof.
Time is of the essence.
This Note shall be governed by, and enforced and interpreted in
accordance with, the laws of the State of Georgia without regard to the
principles of conflict of laws.
In the event this note, or any part hereof, is collected by or through
an attorney-at-law, Maker agrees to pay all costs of collection including, but
not limited to, attorneys' fees equal to 15% of the principal and interest then
due. In the event that Maker fails to make any payment when due, Payee shall
provide written notice of default to Maker, which notice shall allow Maker ten
(10) days from the date of receipt of such notice in which to cure such default.
If such default is not cured within the time allowed, the balance hereof shall
be deemed to be immediately accelerated without further notice to Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the
date first set forth above.
MAKER:
/s/ Bruce F. Lowthers, Jr.
--------------------------------------------
<PAGE> 1
EXHIBIT 10.19
GENERAL MARKETING AGENT AGREEMENT
TOWNE SERVICES, INC., a Georgia Corporation ("Servicer") and the undersigned
("Agent"), in consideration of their obligations in this Agreement and intending
to be legally bound, agree as follows:
1. Definitions: For purposes of this Agreement:
a) "Customer" shall mean, a bank or holding company that meets
the qualifications and criteria applicable to such offering of
services by servicer for solicitation by Agent from time to
time. "Bank Marketing Agreement" shall mean the contract in
the form, and containing the terms and conditions (including
price and payment terms), established by Servicer from time to
time for the services provided to a "Customer".
b) "Territory" shall mean the states, countries, or locations
identified on Exhibit "A" hereto.
c) "Term" shall mean that period commencing on the date hereof
and lasting for a period of twelve complete months and any
subsequent twelve month renewal period.
2. Appointment: Subject to the terms of this Agreement, Servicer engages Agent
to solicit customers to enter into Bank Marketing Agreements with Servicer
for its services. Agent may solicit customers only with respect to their
proposed use of Towne Services, Inc. services in the Territory. Servicer
reserves the right, to change the terms and conditions of its Bank
Marketing Agreement at any time, and Servicer agrees to provide 30 days
notice to Agent of any substantive changes. Agent acknowledges that this
Agreement does not confer on Agent exclusive rights in any other territory.
Agent represents and warrants to Servicer that it has the authority to
enter into this Agreement and to perform its terms fully.
3. Nature of Relationship: Agent shall be an independent contractor. Nothing
in this Agreement shall be construed to create any other relationship.
Agent is hereby advised that, as an independent contractor, it has certain
responsibilities under the federal and state tax laws.
4. Responsibilities of Agent: The duties of Agent shall be to:
a) Use its best efforts to solicit Customers to enter into Bank
Marketing Agreements;
b) Conduct its business so as to maintain and increase the
goodwill and reputation of Servicer;
c) Pay all expense incurred by Agent in the performance of its
duties under this Agreement, including (1) local and
long-distance transportation expenses: and (2) expenses in
connection with the solicitation of Customers and the
operation of Agent's business, including telephone, delivery,
entertainment, and promotional expenses; and
d) Use only promotional material mutually agreed upon for
purposed of promotion of the Servicer's business.
5. Limits of Authority: Agent shall not, without prior written approval from
an authorized representative of Servicer, take any of the following
actions:
a) Incur any expense or obligation in the name of the Servicer;
b) Disseminate any printed material regarding the Licensed
Products or Servicer's business; or
c) Use Servicer's advertising and promotional guidelines.
<PAGE> 2
6. Payment of Commissions: Agent shall be compensated by Servicer for its
services solely on the basis of fees earned and collected on any Bank
Marketing Agreements for Customers located within the Territory.
Commissions shall be set forth in a Commission Schedule attached hereto as
Exhibit "B". The payment of any commissions to Agent shall be subject to
all of the terms and conditions of this Agreement.
7. Statements: Servicer shall mail Agent a monthly statement showing fees
earned. At no time shall Servicer be obligated to reimburse Agent for any
expenses unless it agrees to do so in writing.
8. Sales Support: Servicer shall provide sales support to agent including
promotional materials and sales representative in Territory as reasonably
required by agent.
9. Voluntary Termination: Prior to completion of the initial Term or any
renewal Term, either Servicer or Agent may terminate this agreement at any
time without cause by giving the other party one hundred twenty days prior
written notice. The payment of commissions shall continue through the term
or any Bank Marketing Agreement entered into pursuant to this Agreement
between Servicer and a Customer in the event of any termination other than
involuntary termination by either party.
10. Involuntary Termination: Either party may terminate this Agreement
immediately, without notice to either party for just cause. A termination
shall be deemed "for just cause" if the other party:
a) Breaches any provision of this Agreement;
b) Violates any law or regulation; or
c) Commits any willful or dishonest act that could injure the other
party.
11. Confidentiality: Agent acknowledges that Servicer has a proprietary
interest in the association of its agents and personnel and the business of
the customers with whom such agents and personnel interact. Accordingly,
Agent shall provide Servicer with the full benefit of all work and contacts
relevant to the business of Servicer throughout the term of this Agreement.
Agent shall maintain in strict confidence, and shall not use or disclose
except as required by law or legal process, and as required to perform its
duties for Servicer, all Trade Secrets of Servicer. This obligation shall
apply during and after the term of this Agreement for so long as the
pertinent information or data remain Trade Secrets, and shall apply
regardless of whether the Trade Secrets are in written or tangible form.
For purposes of this Agreement, a Trade Secret is defined to consist of
legally protected rights in confidential information. Without limiting the
generality of the foregoing, Trade Secrets of Servicer include nonpublic
information regarding the Servicer, account invoices, training and
educational manuals, administrative manuals, and prospective customer leads
developed by Servicer regardless of whether computer or electronically
accessible "on-line". However, Trade Secrets do not include information
Agent possesses or acquires independently of Agent's activities or duties
as an agent of Servicer. The foregoing obligation shall continue to apply
for two years after termination of this Agreement.
12. Return of Materials: Upon the request of Servicer and , in any event, upon
the termination of Agent's engagement, Agent shall deliver to Servicer all
memoranda, notes, records, manuals, disks, or other documents and media
pertaining to Servicer's business or Agent's activities or duties as a
Servicer agent, including all copies, extracts, summaries, and analyses
thereof. This obligation shall not apply to publicity distributed
documentation, or internal business or personal records of Agent's own
creation that do not contain Servicer Trade Secrets.
<PAGE> 3
13. Remedies: In the event of any breach by either party identified in Section
10 of this Agreement, the resulting injuries to the other party would be
difficult or impossible to estimate accurately, but it is certain that
injury or damages will result to the business of the other party. Both
parties agree that, in the event of any such breach, the non-breaching
party shall be entitled, in addition to any available legal or equitable
remedies or damages, to an injunction to restrain the violation or
anticipated violation thereof. Should the non-breaching party have any
basis to seek such legal or equitable action, the breaching party shall pay
any and all attorney fees and court costs that the other party may incur.
The non-breaching party's rights under this section shall be in addition to
every other remedy (equitable, statutory, legal or contractual) to which
the non-breaching party may be entitled.
14. Miscellaneous: No assignment by Agent or Servicer of this Agreement or any
commissions due hereunder shall be valid unless approved in advance by an
authorized officer of Servicer or Agent, as the case may be. No
modification or waiver of any provision of this Agreement shall be binding
on Servicer unless made in writing and signed by an authorized officer of
Servicer. This Agreement is governed by the laws of the State of Georgia as
it applies to a contract executed, delivered, and performed in such state.
This Agreement supersedes and replaces any agreement previously entered
into between Agent and Servicer. Servicer's failure to enforce any
provision of this Agreement shall not constitute a waiver of any provision
of this Agreement. The provisions of this Agreement shall be deemed
severable. In the event that any provision of this Agreement is determined
to be unenforceable or invalid, such provision shall nonetheless be
enforced to the fullest extent permitted by applicable law, and such
determination shall not affect the validity and enforceability of any other
remaining provisions of this Agreement. This Agreement, together with all
schedules attached hereto and all writings incorporated herein by
reference, constitutes the entire agreement between Agent and Servicer with
respect to the subject matter of this Agreement.
Servicer: Towne Services, Inc. Agent:
By: ______________________________ By: _____________________________
Title: __________________________ Title: __________________________
Date: ___________________________ Date: ___________________________
<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
June 26, 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> 3,500,010
<SECURITIES> 0
<RECEIVABLES> 429,007
<ALLOWANCES> 70,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,529,277
<PP&E> 825,849
<DEPRECIATION> 138,486
<TOTAL-ASSETS> 5,523,501
<CURRENT-LIABILITIES> 1,370,238
<BONDS> 0
0
1,508,000
<COMMON> 10,784,733
<OTHER-SE> (9,781,632)
<TOTAL-LIABILITY-AND-EQUITY> 5,523,501
<SALES> 0
<TOTAL-REVENUES> 547,954
<CGS> 0
<TOTAL-COSTS> 4,770,264
<OTHER-EXPENSES> 133,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,289
<INCOME-PRETAX> (4,419,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,419,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,419,599)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
