<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998
REGISTRATION NO. 333-53341
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 2 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>
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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. [ ]
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.
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<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 JULY 10, 1998
PROSPECTUS
(TOWNE SERVICES, INC. LOGO)
4,200,000 SHARES
TOWNE SERVICES, INC.
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 this 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 $8.00 and $10.00 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>
<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>
------------------------
Throughout this prospectus, we refer to Towne Services as either "Towne
Services," "Towne" 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 $9.00 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
[Fold-out of inside front cover]
TOWNE SERVICES, INC. A Closer Look.
[Color graphic of flowchart depicting Towne's automated processing system
and how data can be retrieved from this system.]
[Two color maps depicting Towne's customer locations as of June 30, 1997
and June 30, 1998. States where Towne's customers are located are
highlighted in green.]
<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's 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 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's products, banks can
monitor customers' accounts receivable and generate detailed status reports, and
may attract new business customers who, in turn, may become customers of Towne
Services.
HOW TOWNE SERVICES' PRODUCTS WORK
Towne 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 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's 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,
equipment distributors, plumbing suppliers and other industry supply stores.
Towne Services believes there are
3
<PAGE> 6
more than 5 million small and medium size retail merchants and 12 million small
commercial businesses in the United States. Many of these small businesses
extend in-house credit and process these credit transactions manually. Towne's
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
---------------------------------------- ----------------------------------------
JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MARCH APRIL MAY JUNE
---- ---- ----- ---- ---- ---- ---- ---- ----- ----- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales people.............. 8 9 13 14 11 15 16 17 33 45 54 61
Bank contracts............ 34 41 41 58 65 74 85 97 122 130 152 177
Business customers........ 38 49 59 69 81 96 117 135 161 189 225 279
</TABLE>
Towne's 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 61
persons located in 25 states. Towne 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 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
The executive officers and directors of Towne Services 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's management
leverages this experience and these contacts to develop relationships with
banks and banking organizations. These banks market Towne's 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 intends to provide new products and services, such as a
lease financing and processing system currently being developed, that may
allow 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.
4
<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 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's systems. Towne 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 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........... $9.00
Estimated net proceeds to Towne Services
(after deducting expenses
related to this offering)................. $32,280,000
Use of proceeds............................. Towne Services expects to use
the proceeds to enhance its
sales and marketing efforts,
expand its products and
services, pay off certain debts
and for general corporate
purposes, including
acquisitions.
Towne Services will not receive
any of the proceeds from any
shares sold by the selling
shareholders.
Dividend policy............................. Towne Services does not plan to
pay cash dividends in the near
future.
Nasdaq National Market symbol............... TWNE
6
<PAGE> 9
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
INCEPTION DECEMBER 31, MARCH 31,
PERIOD ENDED ------------------------------------- ------------------------------------------
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 5,971,590(3) 5,971,590
General and administrative.... 18,410 358,606 1,139,642 1,644,747 170,416 1,347,282 1,408,061
---------- ---------- ----------- ---------- ---------- ------------ ------------
Total costs and expenses...... 24,399 758,281 3,143,537 3,770,682 378,668 8,252,586 8,356,500
---------- ---------- ----------- ---------- ---------- ------------ ------------
Operating loss................ (18,399) (652,996) (2,421,173) (2,818,653) (282,005) (7,704,632) (7,759,263)
Financing costs for stock
issued to nonemployees...... 0 0 0 0 0 323,000(4) 323,000
---------- ---------- ----------- ---------- ---------- ------------ ------------
Net loss...................... (18,625) (662,307) (2,516,101) (2,977,418) (300,420) (8,091,921) (8,165,727)
========== ========== =========== ========== ========== ============ ============
Dividends on preferred
stock(5).................... 0 0 0 0 0 (5,108,000) (5,108,000)
Accretion of warrants with
redemption feature(5)....... 0 0 0 0 0 (211,000) (211,000)
Net loss attributable to
common shareholders......... (18,625) (662,307) (2,516,101) (2,977,418) (300,420) (13,410,921) (13,484,727)
========== ========== =========== ========== ========== ============ ============
Net loss per common
share(6).................... $ (0.00) $ (0.10) $ (0.26) $ (0.31) $ (0.04) $ (1.11) $ (1.12)
========== ========== =========== ========== ========== ============ ============
Weighted average common shares
outstanding(6).............. 5,000,000 6,337,356 9,600,592 9,600,592 8,006,626 12,077,352 12,077,352
========== ========== =========== ========== ========== ============ ============
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 PRO FORMA(8) AS ADJUSTED(9)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $3,159,039 $2,709,090 $33,942,129
Total assets................................................ 5,523,501 6,023,501 36,306,591
Long-term debt, net of discounts............................ 1,289,162 1,289,162 28,559
Shareholders' equity........................................ 2,398,101 2,398,101 34,907,794
</TABLE>
7
<PAGE> 10
- ---------------
(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's
acquisition of some of the assets and liabilities of Credit Collection
Solutions, Inc. as if this purchase had occurred at the beginning of the
periods presented. The pro forma financial information does not necessarily
represent what Towne's 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 elsewhere 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. Based upon outside sales to third parties, the independent valuation
and the anticipated offering price, Towne Services recorded a one time
non-cash compensation charge for the additional value. 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 nonemployees 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. Based upon outside sales to third parties, the independent valuation
and the anticipated offering price, Towne Services recorded a one time
financing cost for the additional value. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(5) Dividends have been 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. Accretion has been recorded with respect to warrants
with a redemption feature which were issued on December 18, 1997 based upon
the estimated fair market value of the common stock issuable upon exercise
of the warrants. 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) Derived from the March 31, 1998 unaudited financial statements of Towne
Services and of Credit Collection Solutions, Inc. appearing elsewhere in
this prospectus.
(9) 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."
8
<PAGE> 11
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's
activities consisted of raising capital, hiring personnel and performing
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 $8.1 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's 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's 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's 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 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's 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's growth and could have a material adverse effect on its business,
financial condition and operating 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's growth has placed, and will continue to
place, significant demands on all aspects of its business, including its systems
and personnel. There can be no assurance that 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
<PAGE> 12
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's 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's 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's 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 Towne'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's 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's operations depend on its ability to protect its network
infrastructure and equipment against damage from human error, natural disasters,
power and telecommunications failures, intentional acts of vandalism and similar
events. Despite precautions taken by 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's
business. The inability to supply services to its customers could negatively
affect Towne Services' business, financial condition and results of operations
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's 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 some of its executive officers, but
if members of management become unable or unwilling to continue in their present
positions, its business, financial condition and results of operations 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, financial condition and results of operations.
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's 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
At March 31, 1998, Towne Services had net operating loss carryforwards
("NOLs") of approximately $4.8 million which will expire if not utilized by 2011
and 2012. Due to changes in its ownership structure as of October 1, 1997,
Towne's use of approximately $2.5 million of these NOLs will be limited to
approximately $550,000 in any given year to offset future taxes. If Towne's
taxable income in future years is less than the NOLs it is permitted to use,
some NOLs will not be realized. 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 $4.8
million. Once these NOLs are utilized or expire, the projected effective tax
rate will increase, which will adversely affect Towne's operating results and
financial condition. In addition, Towne Services may become subject to state
taxation of fees charged for its transaction processing products and services,
which would decrease its profits, if any, and may have a negative impact on its
financial condition and results of operations.
CONCENTRATION OF STOCK OWNERSHIP
Following this offering, Towne's 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."
11
<PAGE> 14
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,
financial condition and results of operations.
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, financial
condition and results of operations. 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 Towne Services'
common stock. Towne 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. Because the initial public offering price for the common
stock will be determined by negotiation between Towne Services and the
underwriters, it may not reflect the market price of the common stock after this
offering. Four members of Towne's 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. Sales by members of senior management 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. See "-- Shares
Eligible for Future Sale; Possible Adverse Effect on Market Price," "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 $7.15 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 Towne Services, 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 Towne Services to raise additional funds in the
future through the sale of common stock.
12
<PAGE> 15
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's 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, Towne's chief
executive officer and some of its shareholders have registration rights allowing
them to cause Towne Services to register their shares for sale under certain
circumstances. See "Management -- Employment Agreements," "Certain
Transactions," "Underwriting" and "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS; EMPLOYMENT AGREEMENTS
Some provisions of Towne'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 Towne'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
$32.3 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.
See "Business -- Acquisitions of Complementary Companies and Products."
Towne Services intends to use the balance of the net proceeds, expected to
be approximately $21.3 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 plans to carry on discussions with potential acquisition
candidates. Other than the acquisition of assets from Credit Collection
Solutions, 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 "-- 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 Towne Services at March 31, 1998 was $2.1
million, or $0.16 per share. Net tangible book value per share represents the
amount by which the Company's net tangible assets exceed its 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 $34.6 million, or $1.85 per share.
This represents an immediate increase of $1.69 in net tangible book value per
share to existing shareholders and an immediate dilution of $7.15 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............................... $9.00
Net tangible book value before this offering.............. $0.16
Increase attributable to the sale of shares offered
hereby................................................. 1.69
Pro forma net tangible book value after this offering....... 1.85
-----
Dilution in net tangible book value to new investors........ $7.15
=====
</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% $ 7,509,848 17.3% $ 0.51
New investors................................ 4,000,000 78.8 36,000,000 82.7 9.00
---------- ----- ----------- -----
Total.............................. 18,823,734 100.0% 43,509,848 100.0%
========== ===== =========== =====
</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. The table also includes 76,000 shares issued in
April 1998 from the exercise of stock options. 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 $.60 per share which are not included in
the above table. See "Management -- Stock Option Plans" and Note 6 of the notes
to Towne Services' 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's financial statements and the related notes thereto
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............................ 466,000 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).......... 17,457,055 51,714,145
Warrants outstanding...................................... 41,000 41,000
Accumulated deficit....................................... (16,607,954) (16,847,351)
----------- ------------
Total shareholders' equity........................ 2,398,101 34,907,794
----------- ------------
Total capitalization.............................. $ 4,195,230 $ 34,978,320
=========== ============
</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 $.60
per share and assumes that warrants for 308,982 shares of common stock will
be exercised on or before completion of this offering. See "Management --
Stock Option Plans" and Notes 5 and 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, Towne Services' 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, for its Inception Period ended December 31,
1995 and for the years ended December 31, 1996 and 1997 were derived from Towne
Services' 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 this purchase had occurred at the
beginning of the periods presented (for the statements of operations data) and
at March 31, 1998 (for the balance sheet data). The pro forma financial
information does not necessarily represent what the Company's results of
operations would have been if this transaction 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 are
reasonable. See the pro forma financial information included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
INCEPTION DECEMBER 31, MARCH 31,
PERIOD ENDED ------------------------------------- --------------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1995(1) 1996 1997 1997 1997 1998 1998
------------ --------- ----------- ----------- --------- ------------ -----------
<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 5,971,590(2) 5,971,590
General and administrative... 18,410 358,606 1,139,642 1,644,747 170,416 1,347,282 1,408,061
--------- --------- ----------- ----------- --------- ------------ -----------
Total costs and expenses..... 24,399 758,281 3,143,537 3,770,682 378,668 8,252,586 8,356,500
--------- --------- ----------- ----------- --------- ------------ -----------
Operating loss............... (18,399) (652,996) (2,421,173) (2,818,653) (282,005) (7,704,632) (7,759,263)
--------- --------- ----------- ----------- --------- ------------ -----------
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 0 323,000(3) 323,000
--------- --------- ----------- ----------- --------- ------------ -----------
Total other expenses......... 226 9,311 94,928 158,765 18,415 387,289 406,464
--------- --------- ----------- ----------- --------- ------------ -----------
Net loss..................... (18,625) (662,307) (2,516,101) (2,977,418) (300,420) (8,091,921) (8,165,727)
========= ========= =========== =========== ========= ============ ===========
Preferred stock
dividends(4)............... 0 0 0 0 0 (5,108,000) (5,108,000)
Accretion of warrants with
redemption feature(4)...... 0 0 0 0 0 (211,000) (211,000)
Net loss attributable to
common shareholders........ (18,625) (662,307) (2,516,101) (2,977,418) (300,420) (13,410,921) (13,484,727)
========= ========= =========== =========== ========= ============ ===========
Net loss per common
share(5)................... $ (0.00) $ (0.10) $ (0.26) $ (0.31) $ (0.04) $ (1.11) $ (1.12)
========= ========= =========== =========== ========= ============ ===========
Weighted average common
shares outstanding(5)...... 5,000,000 6,337,356 9,600,592 9,600,592 8,006,626 12,077,352 12,077,352
========= ========= =========== =========== ========= ============ ===========
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
INCEPTION DECEMBER 31, MARCH 31,
PERIOD ENDED ------------------------------- ---------------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1995(1) 1996 1997 1997 1997 1998 1998
------------ ------- -------- ---------- --------- ----------- -----------
<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 PROFORMA AS ADJUSTED(7)
------- -------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $17,517 $ 1,677 $2,025,165 $3,159,039 $2,709,090 $33,942,129
Total assets.............................. 28,226 366,806 3,586,432 5,523,501 6,023,501 36,306,591
Long-term debt............................ 30,000 90,000 1,289,666 1,289,162 1,289,162 28,559
Shareholders'(deficit) equity............. (2,875) 119,092 1,261,663 2,398,101 2,398,101 34,907,794
</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,
officers 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. Based
upon third party sales, the independent valuation and the anticipated
offering price, the Company recorded a one time non-cash compensation charge
for the additional value. 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 nonemployees 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. Based upon third party sales, the independent valuation and the
anticipated offering price, the Company recorded a one time financing cost
for the additional value. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(4) Dividends have been 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. Accretion has been recorded with respect to warrants
with a redemption feature which were issued on December 18, 1997 based upon
the estimated fair market value of the common stock issuable upon exercise
of the warrants. See notes (2) and (3) above and Note 9 of notes to Towne
Services' financial statements.
(5) See Note 2 of notes to Towne Services' 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 Towne Services'
financial statements and the related notes thereto 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's 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's products, banks can monitor customers' accounts receivable and generate
detailed status reports, and may attract new business customers who, in turn,
may become customers of Towne Services.
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 bank and
business customers. Towne Services 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. Towne Services 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 $8.1 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 $16.6 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 Towne Services employees 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
Towne Services, in dollars and as a percentage of total revenues, for the
periods indicated.
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS ENDED
PERIOD ENDED YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 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 5,971,590
General and administrative... 18,410 358,606 1,139,642 170,416 1,347,282
-------- --------- ----------- --------- ------------
Total costs and expenses..... 24,399 758,281 3,143,537 378,668 8,252,586
-------- --------- ----------- --------- ------------
Operating loss............... (18,399) (652,996) (2,421,173) (282,005) (7,704,632)
-------- --------- ----------- --------- ------------
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 0 323,000
-------- --------- ----------- --------- ------------
Total other expenses......... 226 9,311 94,928 18,415 387,289
-------- --------- ----------- --------- ------------
Net loss..................... $(18,625) $(662,307) $(2,516,101) $(300,420) $ (8,091,921)
======== ========= =========== ========= ============
Net loss attributable to
common shareholders........ $(18,625) $(662,307) $(2,516,101) $(300,420) $(13,410,921)
======== ========= =========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS ENDED
PERIOD ENDED YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 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 1,090
General and administrative... 307 340 158 176 246
-------- --------- ----------- --------- ------------
Total costs and expenses..... 407 720 435 392 1,506
-------- --------- ----------- --------- ------------
Operating loss............... (307) (620) (335) (292) (1,406)
-------- --------- ----------- --------- ------------
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 59
-------- --------- ----------- --------- ------------
Total other expenses......... 4 9 13 19 71
-------- --------- ----------- --------- ------------
Net loss..................... (311)% (629)% (348)% (311)% (1,477)%
======== ========= =========== ========= ============
Net loss attributable to
common shareholders........ (311)% (629)% (348)% (311)% (2,447)%
======== ========= =========== ========= ============
</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 50% and
68% of total revenues, respectively. Recurring revenues accounted for
approximately 4% and 35% of total revenues, respectively, during these two
periods. The increase in revenues during these
21
<PAGE> 24
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. Towne
Services 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 97% 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. Towne Services 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 was $6.0 million
for the three months ended March 31, 1998. During the three months ended March
31, 1998, Towne Services 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. Based upon outside sales
to third parties, the independent valuation and the anticipated offering price,
the Company recorded a one time non-cash charge for the additional value.
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. Towne
Services 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 $4.8 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. Set-up fees accounted for
approximately 0%, 44% and 53% 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 $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
in remote locations, related travel expenses and increased costs for marketing
materials used to recruit potential bank and business 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 158% 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 Towne Services' 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 11 34 114 173 74
Sales and marketing........... 15 34 31 38 94 118 207 421 486
Stock compensation expense.... -- -- -- 10 -- -- -- -- 5,972
General and administrative.... 24 74 70 190 170 181 268 521 1,347
---- ----- ----- ----- ----- ----- ----- ------- --------
Total costs and expenses...... 56 142 142 418 378 483 811 1,472 8,253
---- ----- ----- ----- ----- ----- ----- ------- --------
Operating loss................ (50) (123) (113) (367) (282) (395) (613) (1,132) (7,705)
---- ----- ----- ----- ----- ----- ----- ------- --------
Interest (income) expense,
net......................... -- 2 2 2 19 26 29 22 64
Other expense (income)........ -- -- -- 3 (1) -- -- -- --
Financing costs for stock
issued
to nonemployees............. -- -- -- -- -- -- -- -- 323
---- ----- ----- ----- ----- ----- ----- ------- --------
Total other expenses.......... -- 2 2 5 18 26 29 22 387
---- ----- ----- ----- ----- ----- ----- ------- --------
Net loss...................... $(50) $(125) $(115) $(372) $(300) $(421) $(642) $(1,154) $ (8,092)
==== ===== ===== ===== ===== ===== ===== ======= ========
Net loss attributable to
common shareholders......... $(50) $(125) $(115) $(372) $(300) $(421) $(642) $(1,154) $(13,411)
==== ===== ===== ===== ===== ===== ===== ======= ========
</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 12 39 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 1,090
General and administrative.... 400 389 241 372 176 206 135 153 246
---- ----- ----- ----- ----- ----- ----- ------- --------
Total costs and expenses...... 933 747 490 819 391 549 410 433 1,506
---- ----- ----- ----- ----- ----- ----- ------- --------
Operating loss................ (833) (647) (390) (719) (291) (449) (310) (333) (1,406)
---- ----- ----- ----- ----- ----- ----- ------- --------
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 59
---- ----- ----- ----- ----- ----- ----- ------- --------
Total other expenses.......... 0 11 7 10 19 30 15 6 71
---- ----- ----- ----- ----- ----- ----- ------- --------
Net loss...................... (833)% (658)% (397)% (729)% (310)% (479)% (324)% (339)% (1,477)%
==== ===== ===== ===== ===== ===== ===== ======= ========
Net loss attributable to
common shareholders......... (833)% (658)% (397)% (729)% (310)% (479)% (324)% (339)% (2,447)%
==== ===== ===== ===== ===== ===== ===== ======= ========
</TABLE>
24
<PAGE> 27
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: 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's 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's operations.
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. Towne Services 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, Towne Services 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, Towne Services 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. On June 5, 1998, Towne Services entered into the
Citizens Loan under which it borrowed $500,000 to purchase some of the assets
and liabilities of Credit Collection Solutions, Inc. The terms of the Sirrom
Loan Facility, the lines of credit and the Citizens Loan require the Company to
satisfy certain covenants and 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 was for $250,000,
matured on June 4, 1998 and accrued interest at the lender's prime rate. The
Citizens Loan matures on September 3, 1998 and accrues interest at 8.5% per
year. Towne Services plans to terminate the Sirrom Loan Facility, the lines of
credit and the Citizens Loan 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 $2.1 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 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 prepaid expenses and other assets. Net cash used in operating
activities for the quarter ended March 31, 1998 represents a net loss of $8.1
million partially offset by a $600,000 increase in accounts payable and accrued
expenses, $240,000 of growth in accounts receivable and a $150,000 increase in
prepaid expenses and 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.
25
<PAGE> 28
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 $30.3 million. Towne Services
believes that such remaining net proceeds, together with existing cash and cash
equivalents and cash generated from operations, will be sufficient to fund its
anticipated operating costs and to meet its anticipated working capital and
liquidity needs for the next 12 months. The Company currently intends to use
such remaining net proceeds for working capital and general corporate purposes,
including enhancing its sales and marketing efforts, expanding its products and
services and for possible acquisitions. However, no assurance can be made with
respect to the actual timing and amount of the expenditures and any
acquisitions. In addition, no assurance can be given that the Company will
complete any acquisitions on terms favorable to the Company, if at all, or that
additional sources of financing will not be required during these time periods
or thereafter. The Company's estimates are forward looking statements that 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 SFAS No. 123 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 Towne Services' 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 Towne Services' 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's 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 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's products, banks can
monitor customers' accounts receivable and generate detailed status reports and
may attract new business customers who, in turn, may become customers of Towne
Services.
Towne's 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 Towne'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's 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 which may be less convenient and are
subject to terms established by the credit card company or debit card
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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
---------------------------------------- ----------------------------------------
JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MARCH APRIL MAY JUNE
---- ---- ----- ---- ---- ---- ---- ---- ----- ----- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales people................. 8 9 13 14 11 15 16 17 33 45 54 61
Bank contracts............... 34 41 41 58 65 74 85 97 122 130 152 177
Business customers........... 38 49 59 69 81 96 117 135 161 189 225 279
</TABLE>
Towne's 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 61 persons located in 25
states. Of this total, 30 persons are dedicated to developing bank customer
relationships and 31 are focused on developing small business customers. Towne
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 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
The executive officers and directors of Towne Services 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's management leverages these
expertise and contacts to develop relationships with banks and banking
organizations. These banks market Towne's 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 intends to provide new
products and services, such as a lease financing and processing system currently
being developed, that may allow 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
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, collection 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,
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under which these other companies and organizations encourage their bank
customers to use Towne's systems. Towne 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 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's automated processing systems, TOWNE CREDIT and TOWNE
FINANCE, process in-house credit transactions for small businesses in much the
same way as credit card transactions are processed.
TOWNE CREDIT
TOWNE CREDIT is an automated transaction processing system designed for
consumer-based credit transactions conducted by small businesses. The system
uses remote point of sale terminals and communications networks to capture and
transmit transaction data and generate a "virtual credit card" account funded by
a business' bank. A typical in-house credit transaction for Towne Services'
business customers is processed through TOWNE CREDIT as follows:
Step 1: The participating business sells goods or services on an
in-house account. No money changes hands and no credit cards are used.
Step 2: The business enters sales information at the point of sale
into an electronic cash register or computer terminal loaded with Towne
Services' proprietary computer software.
Step 3: The business owner closes out its daily transactions and
electronically transmits transaction data to Towne Services through the
computer system across telecommunications lines.
Step 4: Towne Services processes the data, calculates receivables,
performs other accounting functions and transmits reports to the business
and its community bank upon request by the next business day.
Step 5: The community bank retrieves the sales and payment
information and advances funds to the business' bank account based upon
pre-set lending terms.
Step 6: Towne Services bills the business' customer, collects and
processes the customer's payment and transmits payment information to the
bank for credit to the business' bank account.
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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.
Towne'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. Towne'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's 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 Towne's processing network to verify or
update information.
Towne Services also settles payments for its customers. Settlement involves
managing a record of each business transaction and transferring funds received
to the business' community bank for credit to its bank
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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 specialized sales force, back
room processing and monitoring services. Towne Services assumes no credit risk
from the business' customers.
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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. Towne'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 61 persons located in 25
states. Towne'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 170 agreements with community banks located
in 18 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 Towne'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's 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., Inc. and The
Bankers Bank of Kentucky to cross-market its products and services to their
customers. In addition, Towne Services has agreements with Datamatx Inc.,
Wallace and de Mayo P.C. and Cash Management Services, Inc. to incorporate their
products into Towne's 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 June 30, 1998, the
sales force had increased to 61 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's training and sales managers. The first week
includes three days of instruction on point of sale systems and the Company's
policies and procedures, followed by two days of assisting on sales calls with
selected members of the bank and small business sales forces. During the second
week, the training focuses on more specific aspects of TOWNE CREDIT and TOWNE
FINANCE, such as installation and training, pricing models and a review of
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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
270 small and medium size retail merchants and small commercial businesses
located in 18 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 170 contracts with banks in 18 states. Most
of the Company's current bank customers have asset sizes of $2 billion or less.
These bank customers market Towne's 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's 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.
Towne Services maintains a staff of trained client service representatives.
This staff trains customers on the use of Towne's processing system and hardware
at the customer location. Customer service representatives provide technical
support for all of the Company's products and services through a call-in support
center available during normal business hours. After hours, customers can reach
the Company's technical support personnel by pager. These customer service
representatives respond to inquires about the Company's products and services
and assist merchants in resolving terminal, network and communication problems.
COMPETITION
Towne Services is aware of other companies who have successfully marketed
business-to-business software and marketing support to banks that allows the
banks to track and finance the in-house charge accounts of its customers similar
to a factoring operation. Most of these competitors do not offer a point of sale
system, but rather require merchants to forward paper invoices to the banks
where bank personnel input the
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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 June 30, 1998, the Company had 107 full-time employees, of which 66 were
in sales and marketing, 29 were in operations and 12 were corporate and general
administrative employees. Of these employees, 53 were based in Norcross,
Georgia, and 54 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 may be involved from time to time in legal proceedings arising
in the normal course of its business. The Company is not a party to any pending
legal proceedings which it believes are material.
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<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 in Georgia since August 1993. Before
joining The
37
<PAGE> 40
Bankers Bank, Mr. Shultz served as campaign director for Representative John
Linder's successful 1992 campaign for the U.S. House of Representatives, 4th
Congressional District of Georgia.
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.
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.
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 nonemployee 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 plans
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 $1.00 beyond the
budgeted revenue goal, provided that the corresponding margins are in line with
the budget. If the bonuses are paid, the Company's executive officers will
receive the following percentages of the total bonus pool: Mr. Edwards, 20%; Mr.
Baroco, 20%; Mr. Lowthers, 15%; and Mr. Shultz, 12%. Bonuses are payable as
follows: 12.5% of the pool is payable following the end of each quarter if the
Company meets its goals for that quarter, and the remaining 50% of the pool is
payable following the end of the fiscal year if the Company has met its goals
for the entire year.
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<PAGE> 43
OPTION GRANTS
The following table sets forth information concerning each grant of stock
options to the Company's executive officers during the year ended December 31,
1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES OF
NUMBER OF OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/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 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 Company's executive officers,
as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS(#) OPTIONS($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Drew W. Edwards.................................. 230,923 100,000 1,956,893 850,000
Henry M. Baroco.................................. 800,923 385,000 6,910,893 3,324,500
Bruce F. Lowthers, Jr............................ 75,000 225,000 600,000 1,800,000
Cleve B. Shultz.................................. 230,923 100,000 1,956,893 850,000
</TABLE>
- ---------------
(1) Based upon the price of the common stock to be sold in this offering, which
is assumed to be $9.00 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.
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<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 Company intends to receive shareholder approval of the 1998 Plan prior
to completion of this offering. 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.
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<PAGE> 45
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, Sturm, Turner and Yusefzadeh. The Audit Committee
consists of Messrs. Rodgers, Speight and Turner, and the Executive Committee
consists of Messrs. Boggs, Brown, Collins, Edwards, Sturm and Yusefzadeh.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas A. Bryan, who served as the chairman of the Compensation Committee
during 1997, served without compensation as the Treasurer and Secretary of the
Company from its inception in October 1995 until 1996.
On December 11, 1996, the Company entered into a $250,000 line of credit
with Citizens Bank, Vienna, Georgia, to fund its working capital needs. J.
Daniel Speight, Jr., a director of the Company, is the president and chief
executive officer of Citizens Bank. The interest rate for any borrowings under
the line of credit was 9.25% per year, but no money was drawn on this line of
credit. The following directors and officers personally guaranteed this line of
credit: Drew W. Edwards, Henry M. Baroco, Cleve B. Shultz, Thomas M. Bryan, G.
Lynn Boggs, John W. Collins and Glenn W. Sturm. In consideration of their
guaranties, the Company issued each of these directors and officers options to
acquire 71,400 shares of common stock at an exercise price of $0.50 per share.
This loan matured in December 1997 and was not renewed. On June 5, 1998, the
Company entered into the Citizens Loan under which it borrowed $500,000 to fund
its acquisition of assets and liabilities from Credit Collection Solutions. The
Citizens Loan matures on 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. See "Use of Proceeds."
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
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<PAGE> 46
Capital Partners, of which Mr. Brown is a partner, purchased 100,000 shares of
common stock from the Company at a price of $1.00 per share in October 1997 and
50,000 shares of common stock upon the exercise of options at an exercise price
of $1.25 per share in March 1998.
The Company and Phoenix International Ltd., Inc. entered into a General
Marketing Agent Agreement, dated as of June 5, 1998, under which Phoenix
International agrees to market Towne's products and services to Phoenix
International's bank customers. Bahram Yusefzadeh, a director and member of the
Compensation Committee of Towne Services, is the Chairman of the Board and Chief
Executive Officer of Phoenix International and Glenn W. Sturm is a director of
both companies and serves on Towne's Compensation Committee.
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.
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<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 July 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(3)......................... 2,010,490 14.7% 100,000 1,910,490 9.9%
Henry M. Baroco(4)......................... 1,426,133 10.0 87,000 1,339,133 6.8
Bruce F. Lowthers, Jr.(5) ................. 279,033 2.1 279,033 1.5
Cleve B. Shultz(6)......................... 627,935 4.6 40,000 587,935 3.1
G. Lynn Boggs(7)........................... 1,725,923 12.8 176,500 1,549,423 8.1
Frank W. Brown(8).......................... 1,367,903 9.4 1,367,903 7.3
John W. Collins(9)......................... 512,623 3.8 512,623 2.7
J. Stanley Mackin(10)...................... 50,000 * 50,000 *
Joe M. Rodgers(11)......................... 271,648 2.0 271,648 1.4
J. Daniel Speight, Jr.(12)................. 431,700 3.2 50,000 381,700 2.0
Glenn W. Sturm(13)......................... 360,923 2.7 360,923 1.9
J. Stephen Turner(14)...................... 552,500 4.1 552,500 2.9
Bahram Yusefzadeh.......................... 102,500 * 102,500 *
All directors and executive officers as a
group (13 persons)....................... 9,719,311 56.6 9,265,811 43.2
OTHER PRINCIPAL AND SELLING SHAREHOLDERS
Thomas A. Bryan(15)........................ 1,671,923 12.5 176,500 1,495,423 7.9
FLAG Financial Corporation(16)............. 361,700 2.7 50,000 311,700 1.7
Sirrom Investments, Inc.(17)............... 308,982 2.3 200,000 108,942 *
Capital Appreciation Partners, L.P.(18).... 1,217,903 9.2 1,217,903 6.5
</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
July 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, Inc. 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 currently exercisable options to purchase 400,923 shares of common
stock.
(4) Includes currently exercisable options to purchase 970,923 shares of common
stock.
(5) Includes currently exercisable options to purchase 120,000 shares of common
stock.
(6) Includes currently exercisable options to purchase 315,923 shares of common
stock.
(7) Includes currently exercisable options to purchase 200,923 shares of common
stock.
(8) 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
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<PAGE> 48
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."
(9) Includes (i) 331,700 shares of common stock held by Mr. Collins, (ii)
50,000 shares of common stock held by The InterCept Group, Inc., of which
Mr. Collins is Chief Executive Officer, Chairman of the Board and a
significant shareholder, and (iii) options to acquire 130,923 shares of
common stock held by Mr. Collins. Mr. Collins disclaims beneficial
ownership with respect to the shares held by The InterCept Group, Inc.
(10) Includes options to acquire 50,000 shares of common stock.
(11) 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.
(12) 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.
(13) Includes currently exercisable options to purchase 130,923 shares of common
stock.
(14) Includes currently exercisable options to purchase 52,500 shares of common
stock.
(15) Includes currently exercisable options to purchase 130,923 shares of common
stock. 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.
(16) FLAG Financial Corporation's address is 101 North Greenwood Street, P.O.
Box 3007, LaGrange, Georgia 30240.
(17) Sirrom Investments, Inc.'s address is 500 Church Street, Suite 200,
Nashville, Tennessee 37219.
(18) 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 their 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. 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. On June 23, 1998, Towne and the
InterCept Group entered into a Strategic Marketing and Processing Agreement
under which the parties agree to jointly offer certain on-line services to
Towne's business customers.
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. See "Management -- Compensation Committee Interlocks and Insider
Participation."
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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 holders 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 July 1, 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 shares outstanding 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 outstanding shares of Series A Preferred Stock are convertible into
common stock at the option of the holder at any time and automatically convert
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
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<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 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,
contract to sell, loan, pledge or otherwise dispose of or grant any options,
rights or warrants to purchase with respect to, or otherwise transfer or reduce
any risk of ownership of, directly or indirectly, any shares of common stock of
the Company, or any securities that are convertible into or exchangeable or
exercisable for common stock owned by them, 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
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<PAGE> 55
eligible for resale in the public market without restriction by persons who are
not affiliates of the Company 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.
53
<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 generally with the Representatives not to offer, sell, 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; and 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 except certain
affiliates of Wheat First Securities, Inc. and J.C. Bradford & Co., 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 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 the 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 contain information derived from and make reference to a report
prepared by Smerkovitz and Associates, an independent appraiser. These financial
statements and the information derived from the report referenced therein are
included herein in reliance upon the authority of said firms 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
55
<PAGE> 58
of the Commission. Statements contained in this prospectus as to the contents of
any contract or other document referred to are necessarily summaries, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this prospectus forms
a 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. Upon the later of the filing of a
registration statement on Form 8-A and 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.
/s/ 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)... 0 255,000 466,000
--------- ----------- ------------
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 17,457,055 19,431,055
Warrants outstanding...................... 0 41,000 41,000 41,000
Accumulated deficit....................... (680,932) (3,197,033) (16,607,954) (16,607,954)
--------- ----------- ------------ -----------
Total shareholders' equity........ 119,092 1,261,663 2,398,101 $ 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 5,971,590
General and administrative..... 18,410 358,606 1,139,642 170,416 1,347,282
---------- ---------- ----------- ---------- ------------
Total costs and
expenses............. 24,399 758,281 3,143,537 378,668 8,252,586
---------- ---------- ----------- ---------- ------------
OPERATING LOSS................... (18,399) (652,996) (2,421,173) (282,005) (7,704,632)
---------- ---------- ----------- ---------- ------------
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 0 323,000
---------- ---------- ----------- ---------- ------------
Total other expenses... 226 9,311 94,928 18,415 387,289
---------- ---------- ----------- ---------- ------------
NET LOSS......................... $ (18,625) $ (662,307) $(2,516,101) $ (300,420) $ (8,091,921)
========== ========== =========== ========== ============
PREFERRED STOCK DIVIDENDS........ 0 0 0 0 (5,108,000)
ACCRETION OF WARRANTS WITH
REDEMPTION FEATURE............. 0 0 0 0 (211,000)
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS:
Basic.......................... $ (18,625) $ (662,307) $(2,516,101) $ (300,420) $(13,410,921)
========== ========== =========== ========== ============
Diluted........................ $ (18,625) $ (662,307) $(2,516,101) $ (300,420) $(13,410,921)
========== ========== =========== ========== ============
NET LOSS PER COMMON SHARE:
Basic.......................... $ (0.0) $ (0.10) $ (0.26) $ (0.04) $ (1.11)
========== ========== =========== ========== ============
Diluted........................ $ (0.0) $ (0.10) $ (0.26) $ (0.04) $ (1.11)
========== ========== =========== ========== ============
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 41,000 0 41,000
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 (2,516,101) (2,516,101)
------ ---------- ---------- ----------- ------- ------------ -----------
BALANCE, December 31, 1997........ 0 0 11,706,766 4,417,696 41,000 (3,197,033) 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 5,345,609 0 0 5,345,609
Stock subscription receivable
(Note 9)........................ 0 0 495,000 427,500 0 0 427,500
Compensation expense for stock
options granted or amended (Note
9).............................. 0 0 0 2,166,250 0 0 2,166,250
Preferred stock dividend (Note
9).............................. 0 0 0 5,100,000 0 (5,100,000) 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 (211,000) (211,000)
Net loss.......................... 0 0 0 0 0 (8,091,921) (8,091,921)
------ ---------- ---------- ----------- ------- ------------ -----------
BALANCE, March 31, 1998
(unaudited)..................... 15,000 $1,508,000 13,220,849 $17,457,055 $41,000 $(16,607,954) $ 2,398,101
====== ========== ========== =========== ======= ============ ===========
</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) $(2,516,101) $(300,420) $(8,091,921)
-------- --------- ----------- --------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense recognized for stock
option grants................................ 0 10,020 0 0 5,971,590
Financing costs for stock issued to
nonemployees................................. 0 0 0 0 323,000
Issuance of warrants........................... 0 0 41,000 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) 6,576,714
-------- --------- ----------- --------- -----------
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 subscription receivable (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
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's 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 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's products, banks can
monitor customers' accounts receivable and generate detailed status reports, and
may attract new business customers who, in turn, may become customers of Towne
Services.
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 $2,516,101
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 $8,091,921. 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........................................ $ (8,091,921)
Dividends on convertible preferred shares................... (5,108,000)
Accretion of warrants with redemption feature............... (211,000)
------------
Net loss attributable to common shareholders................ $(13,410,921)
============
</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) (15,931)
Change in valuation allowance.......................... (3,602) (252,620) (923,773)
------- -------- ---------
$ 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)
At March 31, 1998, the Company has net operating loss carryforwards
("NOLs") of approximately $4.8 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 $4.8 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 $211,000 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 0.59
=========
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) $(2,516,101)
Pro forma................................................ (669,307) (2,548,527)
Basic:
As reported.............................................. $ (.10) $ (.26)
Pro forma................................................ (.11) (.27)
Diluted:
As reported.............................................. (.10) (.26)
Pro forma................................................ (.11) (.27)
</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. As the warrants were granted for services to nonemployees, the Company has
recorded $41,000, the estimated fair value of these warrants at the date of
issuance using the Black-Scholes option valuation model, as warrants outstanding
on the accompanying balance sheet. To calculate the estimated fair value of the
warrants, the Company used the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.06%
Volatility.................................................. 55%
Life of warrant............................................. 5 years
Dividend rate............................................... 0
</TABLE>
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>
CO-EMPLOYMENT ARRANGEMENT
Effective March 31, 1998, the Company began a co-employment arrangement
involving all its personnel with an independent company. Under the co-employment
agreement, the Company pays a percentage of compensation per co-employee (in
addition to compensation costs) to the independent 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 20,000,000 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 $5.1 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
subsequently valued the common stock at a higher price. The Company has
subsequently increased the fair market value of its common stock based on the
anticipated public offering.
F-17
<PAGE> 76
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Company sold 76,000 shares of common stock to third
parties at $1.25 per share. The Company recorded $323,000 as financing costs for
stock issued to nonemployees for the difference between the sale price to these
third parties and the estimated fair market value on the date of sale.
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. The Company recorded $3,805,340 as
compensation expense for the difference between the sales price to employees and
the estimated fair market value at the date of sale.
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. The Company will record $726,750
($145,350 per year) of compensation expense over the five year vesting period of
the Options for the difference between the exercise price and the estimated fair
market value on 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 of the date of the amendment, options to purchase 150,000
of these shares were already vested. As this change in vesting period created a
new measurement date, the Company recorded compensation expense of $1,188,750
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. The Company has recorded
$977,500 as compensation expense for the difference between the exercise price
and the estimated fair market value on the date of grant.
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 $8 -- $10 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.
/s/ ARTHUR ANDERSEN LLP
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 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 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)(d) $ 3,490,154
Accounts receivable, net of allowance for
uncollectible accounts........................... 359,007 59,907 0 418,914
Note receivable.................................... 78,990 0 0 78,990
Stock subscriptions receivable..................... 427,500 0 0 427,500
Other.............................................. 163,770 0 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 0 439,022(b) 439,022
OTHER ASSETS......................................... 2,500 0 0 2,500
----------- --------- --------- -----------
$ 5,523,501 $ 70,978 $ 429,022 $ 6,023,501
=========== ========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 125,505 $ 17,268 (17,268)(b) $ 125,505
Accrued liabilities................................ 296,469 42,241 (42,241)(b) 296,469
Accrued compensation............................... 906,297 44,353 (44,353)(b) 906,297
Current portion of long-term debt.................. 41,967 85,000 500,000(d) 541,967
(85,000)(b)
Payroll taxes payable.............................. 0 46,468 (46,468)(b) 0
Due to shareholders................................ 0 163,119 (163,119)(b) 0
Due to employees................................... 0 24,984 (24,984)(b) 0
Due to related party............................... 0 213,518 (213,518)(b) 0
----------- --------- --------- -----------
Total current liabilities................... 1,370,238 636,951 (136,951) 1,870,238
----------- --------- --------- -----------
LONG-TERM DEBT, net of discount...................... 1,289,162 0 0 1,289,162
----------- --------- --------- -----------
WARRANTS WITH REDEMPTION FEATURE..................... 466,000 0 0 466,000
----------- --------- --------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock.................................... 1,508,000 0 0 1,508,000
Common stock....................................... 17,457,055 100,000 (100,000)(c) 17,457,055
Warrants outstanding............................... 41,000 0 0 41,000
Accumulated deficit................................ (16,607,954) (665,973) 665,973(c) (16,607,954)
----------- --------- --------- -----------
Total shareholders' equity (deficit)........ 2,398,101 (565,973) 565,973 2,398,101
----------- --------- --------- -----------
$ 5,523,501 $ 70,978 $ 429,022 $ 6,023,501
=========== ========= ========= ===========
</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. The $510,000 cash
was paid directly to creditors of Credit Collection Solutions, Inc. Towne
Services did not assume any liabilities of Credit Collection Solutions. In
addition to $510,000 cash, Towne Services, Inc. will issue up to 100,000
shares of its common stock to the shareholders of Credit Collection
Solutions, Inc. based upon certain earn-out agreements. These shares will be
recorded as part of the purchase price based upon the fair value of the
shares on the date of issuance. If these shares are issued, future earnings
will be decreased based upon the amortization of additional goodwill.
<TABLE>
<S> <C>
Total consideration......................................... $510,000
Fair value of assets acquired............................... 70,978
--------
Excess of purchase price over fair value of assets
acquired.................................................. 439,022
</TABLE>
The excess of the purchase price over the fair value of assets acquired has
been allocated to goodwill, which will be amortized over a 5 year life.
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 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 $ 0 $ 952,029
Costs and expenses
Costs of processing, servicing, and
support.............................. 832,102 51,749 0 883,851
Research and development................ 332,470 70,291 0 402,761
Sales and marketing..................... 839,323 0 0 839,323
General and administrative.............. 1,139,642 457,305 87,800(c) 1,644,747
(40,000)(d)
------------ --------- ----------- ------------
Total costs and expenses.................... 3,143,537 579,345 47,800 3,770,682
------------ --------- ----------- ------------
Operating loss.............................. (2,421,173) (349,680) (47,800) (2,818,653)
Interest expense, net....................... 95,946 21,337 42,500(b) 159,783
Other income................................ (1,018) 0 0 (1,018)
------------ --------- ----------- ------------
Net loss.................................... $ (2,516,101) $(371,017) $ (90,300) $ (2,977,418)
============ ========= =========== ============
Net loss attributable to common
shareholders......................... (2,516,101) (2,977,418)
============ ============
Net loss per common share............... (0.26) (0.31)
============ ============
Weighted average common shares
outstanding.......................... 9,600,592 9,600,592
============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31, 1998
--------------------------------------------------------------
HISTORICAL
CREDIT
HISTORICAL COLLECTION PRO FORMA
TOWNE SERVICES(A) SOLUTIONS(A) ADJUSTMENTS PRO FORMA
----------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues.................................... $ 547,954 $ 49,283 $ 0 $ 597,237
Costs and expenses
Costs of processing, servicing, and
support.............................. 374,128 26,560 0 400,688
Research and development................ 74,024 16,575 0 90,599
Sales and marketing..................... 485,562 0 0 485,562
Stock compensation expense.............. 5,971,590 0 0 5,971,590
General and administrative.............. 1,347,282 78,829 21,950(c) 1,408,061
(40,000)(d)
------------ --------- ----------- ------------
Total costs and expenses.................... 8,252,586 121,964 18,050 8,356,500
------------ --------- ----------- ------------
Operating loss.............................. (7,704,632) (72,681) 18,050 (7,759,263)
Interest expense, net....................... 64,289 8,550 10,625(b) 83,464
Financing costs for stock issued to
nonemployees.............................. 323,000 0 0 323,000
------------ --------- ----------- ------------
Net loss.................................... $ (8,091,921) $ (81,231) $ 7,425 $ (8,165,727)
============ ========= =========== ============
Dividends on preferred stock............ (5,108,000) (5,108,000)
Accretion of warrants with redemption
feature.............................. (211,000) (211,000)
Net loss attributable to common
shareholders......................... (13,410,921) (13,484,727)
============ ============
Net loss per common share............... $ (1.11) $ (1.12)
============ ============
Weighted average common shares
outstanding.......................... 12,077,352 12,077,352
============ ============
</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.
F-30
<PAGE> 89
[Top half inside back cover]
Photograph: Business representative executing transaction with a customer.
Photograph: Business representative talking to a customer.
Photograph: Two children, customers of a small business.
Supporting text: Towne Credit(SM)
Towne Credit electronically processes the in-house consumer credit
transactions of small and medium size retail merchants. This product links
banks with business owners to provide electronic billing, collections and
funding of daily accounts receivables, essentially converting them to credit
card transactions.
[Bottom half of inside back cover]
Photograph: Dentist working with a patient.
Photograph: Business representative assisting a customer.
Photograph: Business representative entering transaction information into
a computer.
Supporting text: Towne Finance(SM)
Towne Finance, the commercial version of TOWNE CREDIT, is an automated
asset management and financing system that processes "business to business"
credit transactions for small commercial businesses, with both products,
businesses increase cash flow and are relieved of administrative burdens such as
sending statements and collecting payments.
<PAGE> 90
----------------------------------------------------------
----------------------------------------------------------
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.
(TOWNE SERVICES, INC. LOGO)
COMMON STOCK
--------------------
PROSPECTUS
--------------------
WHEAT FIRST UNION
J.C. BRADFORD&CO.
STEPHENS INC.
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 91
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> 92
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> 93
(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 Shultz dated as of May 19, 1998+
10.9 -- Form of Towne Credit Bank Marketing Agreement+
</TABLE>
II-3
<PAGE> 94
<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)
23.3 -- Consent of Smerkovitz & Associates
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>
- ---------------
** 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> 95
(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> 96
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 July 10, 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 July 10, 1998
- ----------------------------------------------------- Chairman of the board of
Drew W. Edwards directors (Principal Executive
Officer)
* President, Chief Operating July 10, 1998
- ----------------------------------------------------- Officer and Director
Henry M. Baroco
/s/ BRUCE F. LOWTHERS, JR. Chief Financial Officer July 10, 1998
- ----------------------------------------------------- (Principal Financial and
Bruce F. Lowthers, Jr. Accounting Officer)
* Director July 10, 1998
- -----------------------------------------------------
G. Lynn Boggs
* Director July 10, 1998
- -----------------------------------------------------
Frank W. Brown
* Director July 10, 1998
- -----------------------------------------------------
John W. Collins
* Director July 10, 1998
- -----------------------------------------------------
J. Stanley Mackin
* Director July 10, 1998
- -----------------------------------------------------
Joe M. Rodgers
* Director July 10, 1998
- -----------------------------------------------------
J. Daniel Speight, Jr.
</TABLE>
II-6
<PAGE> 97
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director July 10, 1998
- -----------------------------------------------------
Glenn W. Sturm
* Director July 10, 1998
- -----------------------------------------------------
J. Stephen Turner
* Director July 10, 1998
- -----------------------------------------------------
Bahram Yusefzadeh
*By: /s/ DREW W. EDWARDS
- -----------------------------------------------------
Attorney-in-Fact pursuant to powers of attorney
granted in Registration Statement filed on May
21, 1998 and amended on June 29, 1998.
</TABLE>
II-7
<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 Shultz 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)
23.3 -- Consent of Smerkovitz & Associates
24.1 -- Power of Attorney+
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>
- ---------------
** 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 1.1
4,200,000 SHARES
TOWNE SERVICES, INC.
COMMON STOCK
------------
UNDERWRITING AGREEMENT
------------
WHEAT FIRST SECURITIES, INC.
J.C. BRADFORD & CO.
STEPHENS INC.
As Representatives (the "Representatives") of the Several Underwriters
c/o Wheat First Securities, Inc.
Riverfront Plaza
901 East Byrd Street
Richmond, Virginia 23219 ___________ __, 1998
Ladies and Gentlemen:
Towne Services, Inc., a Georgia corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
underwriters named in Schedule I hereto (the "Underwriters") 4,000,000 shares of
Common Stock, no par value per share ("Common Stock"), of the Company (the
"Company Shares"), and the shareholder of the Company named in Schedule II
hereto (the "Firm Selling Shareholder") proposes to sell to the Underwriters
200,000 shares of Common Stock (the "Selling Shareholder Shares"). The Company
Shares and the Selling Shareholder Shares are hereinafter referred to as
the "Firm Shares." The Firm Shares are to be sold to the Underwriters, acting
severally and not jointly, in such amounts as are set forth in Schedule I hereto
opposite the name of each Underwriter. Additionally, the shareholders of the
Company named in Schedule II hereto (the "Option Selling Shareholders") propose
to grant to the Underwriters an option to purchase up to 630,000 additional
shares of Common Stock (the "Optional Shares") as provided in Section 2 of this
Agreement solely for the purpose of covering over-allotments in connection with
the distribution and sale of the Firm Shares. The Firm Shares and the Optional
Shares, if any, that the Underwriters elect to purchase pursuant to Section 2
hereof are collectively called the "Shares,"
<PAGE> 2
and the Firm Selling Shareholder and the Option Selling Shareholders are
collectively referred to herein as the "Selling Shareholders" and individually
as a "Selling Shareholder."
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with, the
Underwriters that:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File
No. 333-53341) under the Securities Act of 1933, as amended (the "Act"),
and as a part thereof a preliminary prospectus, in respect of the Shares,
and has filed one or more amendments thereto. Such registration statement,
as amended, has been declared effective by the Commission, and no stop
order suspending the effectiveness of such registration statement has been
issued and no proceeding for that purpose has been instituted or, to the
knowledge of the Company, threatened by the Commission. Copies of such
registration statement and any amendments, including any post-effective
amendments, and all forms of the related prospectuses contained therein and
any supplements thereto, have been delivered to you. Such registration
statement, together with any registration statement filed by the Company
pursuant to Rule 462(b) of the Act, including the prospectus, Part II, all
financial schedules and exhibits thereto, and all information deemed to be
a part of such registration statement pursuant to Rule 430A under the Act
at the time when it became effective, is herein referred to as the
"Registration Statement." The form of final prospectus that discloses all
the information that was omitted from the prospectus contained in the
Registration Statement on the effective date pursuant to Rule 430A of the
rules and regulations of the Commission under the Act and in the form filed
pursuant to Rule 424(b) under the Act is herein referred to as the
"Prospectus." The prospectus included in the Registration Statement, and
each prospectus included in any amendment thereto, prior to the effective
date of the Registration Statement, is referred to herein as a "Preliminary
Prospectus."
(ii) The Company has not received and has no knowledge of any order
preventing or suspending the use of any Preliminary Prospectus and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects with the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by the Underwriters through
you expressly for use therein (it being understood that the only
information so provided is the information included under the caption
"Underwriting" in the Prospectus);
2
<PAGE> 3
(iii) The Registration Statement conforms, and the Prospectus and any
amendments or supplements thereto will conform, in all material respects to
the requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date as
to the Registration Statement and any amendment thereto and as of the
applicable filing date as to the Prospectus and any amendment or supplement
thereto, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein (in the light of the circumstances under which they were
made, in the case of the Prospectus and any amendments or supplements
thereto) not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by the Underwriters through you expressly for use therein (it being
understood that the only information so provided is the information
included under the caption "Underwriting" in the Prospectus);
(iv) The Company does not own more than 5% of the equity interests of
any other business entity;
(v) The Company has not sustained, since the date of the latest
audited financial statements included in the Prospectus, any material loss
or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the outstanding capital stock
or long-term debt of the Company, or any issuance of options, warrants or
rights to purchase capital stock of the Company, or any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the business, financial condition or results of operations
of the Company, otherwise than as set forth or contemplated in the
Prospectus;
(vi) The Company is a corporation in good standing under the laws of
the State of Georgia, with corporate power under such laws to own, lease
and operate its properties and conduct its business as described in the
Prospectus, and the Company has been qualified to transact business as a
foreign corporation in all states in which it is required to be so
qualified, except where the failure to so qualify would not result in a
material adverse effect on the business, financial condition or results of
operations of the Company;
(vii) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned
by it, free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and proposed
to be made of such property by the Company; and any real property and
buildings held under lease by the Company are held by it under valid,
subsisting and enforceable leases with such exceptions as are not material
and do not
3
<PAGE> 4
interfere with the use made and proposed to be made of such property and
buildings by the Company;
(viii) The Company has authorized and issued capital stock as set
forth in the Prospectus; all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and nonassessable and conform to the description of the capital stock of
the Company contained in the Prospectus; except as described in the
Prospectus, there are no preemptive or other similar rights to subscribe
for or to purchase any securities of the Company; except as described in
the Prospectus, the Company has issued no warrants, options or other
similar rights to purchase any securities of the Company; and except as
disclosed in the Prospectus, neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights for or relating to the registration of
any securities of the Company with respect to such filing, offering or
sale;
(ix) The Shares have been duly and validly authorized and, when the
Firm Shares are issued and delivered against payment therefor as provided
herein, will be validly issued, fully paid and nonassessable and will
conform to the description of the Shares contained in the Prospectus;
(x) The Company has full legal right, power and authority to enter
into this Agreement and to issue, sell and deliver the Firm Shares to the
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, except as may be limited by bankruptcy and other
creditor rights laws and general principles of equity, including the
availability of the equitable remedy of specific performance. The issue and
sale of the Firm Shares by the Company and the performance of this
Agreement and the consummation by the Company of the transactions herein
contemplated will not conflict with or result in a breach or violation of
any terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company is a party or to which it or any of its properties or
assets is subject, nor will such action result in any violation of the
provisions of the Articles of Incorporation or bylaws of the Company (each
as amended to date the "Charter" and "Bylaws", respectively) or any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties or
assets, except for any such conflict, breach, violation or default which
would not have a material adverse effect on the business, financial
condition or results of operations of the Company; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue and
sale of the Firm Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Act and under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
4
<PAGE> 5
(xi) There are no legal or governmental proceedings pending to which
the Company is a party or of which any properties or assets of the Company
are the subject, other than as set forth or contemplated in the Prospectus,
which, if determined adversely to the Company, would individually or in the
aggregate have a material adverse effect on the business, financial
condition or results of operations of the Company, and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or by others;
(xii) Arthur Andersen LLP, who have certified certain financial
statements of the Company, are independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder;
(xiii) The Company has previously disclosed and delivered or made
available to the Underwriters or their representatives prior to the date
the Registration Statement was declared effective copies of all pension,
retirement, profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus or other incentive plans,
all other written employee programs, arrangements or agreements, all
medical, vision, dental or other health plans, all life insurance plans and
all other employee benefit plans or fringe benefit plans, including,
without limitation, "employee benefit plans" as that term is defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), adopted, maintained, sponsored in whole or in part or
contributed to by the Company for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors or other beneficiaries are eligible to
participate (collectively, the "Company Benefit Plans").
The Company has maintained all Company Benefit Plans (including
filing all reports and returns required to be filed with respect thereto)
in accordance with their terms and in compliance with the applicable terms
of ERISA, the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and any other applicable federal and state laws the breach
or violation of which would have, individually or in the aggregate, a
material adverse effect on the business, financial condition or results of
operations of the Company. Each Company Benefit Plan which is intended to
be qualified under Section 401(a) of the Internal Revenue Code has either
received a favorable determination letter from the Internal Revenue Service
or timely requested such a letter and has at all times been maintained in
accordance with Section 401 of the Internal Revenue Code, except where any
failure to receive or seek such a favorable determination letter or so
maintain such Company Benefit Plan would not have, individually or in the
aggregate, a material adverse effect on the business, financial condition
or results of operations of the Company. The Company has not engaged in a
transaction with respect to any Company Benefit Plan that, assuming the
taxable period of such transaction expired as of the date hereof, would
subject the Company to a tax or penalty imposed by either Section 4975 of
the Internal Revenue Code or Section 502(i) of ERISA in amounts which are
reasonably likely to
5
<PAGE> 6
have, individually or in the aggregate, a material adverse effect on the
business, financial condition or results of operations of the Company.
The Company is not obligated to provide post-retirement medical
benefits or any other unfunded post-retirement welfare benefits (except
COBRA continuation coverage required to be provided by ERISA Section 601),
which such liabilities to the Company would have, individually or in the
aggregate, a material adverse effect on the business, financial condition
or results of operations of the Company. Neither the Company nor any member
of a group of trades or businesses under common control (as defined in
ERISA Sections 4001(a)(14) and 4001(b)(1)) with the Company has at any time
within the last six years sponsored, contributed to or been obligated under
Title I or IV of ERISA to contribute to a "defined benefit plan" (as
defined in ERISA Section 3(35)). Within the last six years, neither the
Company nor any member of a group of trades or businesses under common
control (as defined in ERISA Sections 4001(a)(14) and 4001(b)(1)) with
Company has had an "obligation to contribute" (as defined in ERISA Section
4212) to a "multiemployer plan" (as defined in ERISA Sections 4001(a)(3)
and 3(37)(A));
(xiv) The financial statements of the Company, together with the
related notes, as set forth in the Registration Statement present fairly
the financial position and the results of operations of the Company at the
indicated dates and for the indicated periods; such financial statements
have been prepared in accordance with generally accepted accounting
principles, consistently applied throughout the periods presented except as
noted in the notes thereon, and all adjustments necessary for a fair
presentation of results for such periods have been made; and the selected
financial information included in the Prospectus presents fairly the
information shown therein and has been compiled on a basis consistent with
the financial statements presented therein;
(xv) The Company has filed all federal, state and any foreign income
tax returns which have been required to be filed (or has received an
extension with respect thereto) and has paid, or made adequate reserves
for, all taxes indicated by said returns and all assessments received by it
to the extent that such taxes have become due and are not being contested
in good faith;
(xvi) The property, assets and operations of the Company comply in
all material respects with all applicable federal, state or local law,
common law, doctrine, rule, order, decree, judgment, injunction, license,
permit or regulation relating to environmental matters (the "Environmental
Laws"), except to the extent that failure to comply with such Environmental
Laws would not have a material adverse effect on the business, financial
condition or results of operations of the Company. To the knowledge of the
Company, none of the property, assets or operations of the Company is the
subject of any foreign, federal, state or local investigation evaluating
whether any remedial action is needed to respond to a release into the
environment of any substance regulated by, or form the basis of liability
under, any Environmental Laws (a "Hazardous Material") or is in
contravention
6
<PAGE> 7
of any Environmental Law that would have a material adverse effect on the
business, financial condition or results of operations of the Company. The
Company has not received any notice or claim, nor are there pending,
reasonably anticipated or, to the Company's knowledge, threatened lawsuits
against the Company with respect to violations of an Environmental Law or
in connection with the release of any Hazardous Material into the
environment. The Company has no material contingent liability in connection
with any release of Hazardous Material into the environment;
(xvii) No relationship, direct or indirect, exists between or among
the Company on the one hand and the directors, officers, shareholders,
customers or suppliers of the Company on the other hand that is required by
the Act or by the rules and regulations thereunder to be described in the
Registration Statement and the Prospectus that is not so described;
(xviii) The Company has not taken and will not take, directly or
indirectly, any action that is designed to or that has constituted or that
might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares;
(xix) The Company owns or possesses, or can acquire on reasonable
terms, adequate licenses, copyrights, trademarks, service marks and trade
names (collectively, "intellectual property") necessary to carry on its
business as presently operated by it, except where the failure to own or
possess or have the ability to acquire any such intellectual property would
not, individually or in the aggregate, have a material adverse effect on
the business, financial condition or results of operations of the Company,
and the Company has not received any notice and is not otherwise aware of
any infringement of or conflict with asserted rights of others with respect
to any intellectual property or of any facts which would render any
intellectual property invalid or inadequate to protect the interest of the
Company therein and which infringement or conflict could have a material
adverse effect on the business, financial condition or results of
operations of the Company;
(xx) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and adequate for the conduct of its business and the value of its
properties and is customary for companies engaged in similar industries;
and the Company does not have any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a comparable cost;
(xxi) The Shares have been approved for listing, subject to notice
of issuance, on the Nasdaq Stock Market's National Market;
(xxii) There are no contracts or other documents required by the Act
or by the rules and regulations of the Commission thereunder to be
described in the Registration
7
<PAGE> 8
Statement, any Preliminary Prospectus or the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or
filed as required;
(xxiii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (a) transactions are
executed in accordance with management's general or specific authorization;
(b) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (c) access to assets
is permitted only in accordance with management's general or specific
authorization; (d) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences and (e) such controls would prevent or
detect errors or irregularities in amounts that would be material in
relation to the Company's financial statements. Neither the Company nor any
director, officer, agent, employee or other person acting, with the
Company's knowledge, on behalf of the Company has, directly or indirectly,
used any funds of the Company for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity,
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
funds of the Company, violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, or made any bribe, rebate, payoff,
influence payment, kickback or other payment, or received or retained any
funds, in violation of any law, rule or regulation;
(xxiv) The Company operates its business in each jurisdiction in
which it is doing business in conformity with all applicable statutes,
ordinances, decrees, orders, rules and regulations of all applicable
governmental bodies, including federal, state and local governing bodies in
the United States and all foreign governments in areas outside of the
United States. The Company has all material licenses, permits, approvals
and consents necessary to operate its business in all locations in which
such business is currently being operated, and the Company is not aware of
any existing or imminent matter which may adversely impact its operations
or business prospects other than as specifically disclosed in the
Prospectus. The Company has not engaged in any activity, whether alone or
in concert with one of its customers, creating exposure to civil or
criminal monetary liability or other material sanctions under federal or
state laws regulating consumer credit transactions, debt collection
practices or other violations of law;
(xxv) The Company has filed with or submitted to the applicable
regulatory authorities each statement, report, information or form required
by any applicable law, regulation or order; all such filings or submissions
were in compliance with applicable laws when filed and no deficiencies have
been asserted by any regulatory commission, agency or authority with
respect to such filings or submissions. The Company maintains in full force
and effect all licenses and permits necessary for the conduct of its
business and has not received any notification that any revocation or
limitation thereof is threatened or pending. To the knowledge of the
Company, there is not pending any change under any law, regulation, license
or permit which could have a material adverse effect on the
8
<PAGE> 9
business, financial condition or results of operations of the Company. The
Company has not received any notice of violation of or been threatened with
a charge of violating and, to the knowledge of the Company, is not under
investigation with respect to a possible violation of any provision of any
law, regulation or order;
(xxvi) No labor dispute exists with the Company's employees or is
imminent which could have a material adverse effect on the business,
financial condition or results of operations of the Company. The Company is
not aware of any existing or imminent labor disturbance by its employees
which could be expected to have a material adverse effect on the business,
financial condition or results of operations of the Company;
(xxvii) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment company"
or a company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended (the "1940 Act");
(xxviii) The Company has not violated any applicable laws relating to
immigration and has employed only individuals authorized to work in the
United States and has never been the subject of any inspection or
investigation relating to its compliance with or violation of the
Immigration Reform and Control Act of 1986 and all Regulations promulgated
thereunder;
(xxix) Other than as set forth in the Prospectus, the Company's
internal systems and software and the network connections it maintains are
adequately programmed to address the Year 2000 issue;
(xxx) The Company has not received any communication (written or
oral) relating to the termination or modification or threatened termination
or modification of any of the agreements specifically named in the
Prospectus, nor has it received any communication (written or oral)
relating to any determination not to renew or extend any agreement
specifically named in the Prospectus at the end of the current term of any
such agreement, except where any such termination, modification,
non-renewal or non-extension would not have a material adverse effect on
the business, financial condition or results of operations of the Company;
and
(xxxi) Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
9
<PAGE> 10
(b) Each of the Selling Shareholders, severally and not jointly, represents
and warrants to, and agrees with, the Underwriters and the Company that:
(i) Such Selling Shareholder has duly executed and delivered a
Custody Agreement and Power of Attorney (the "Custody Agreement") in the
form previously delivered to the Representatives, appointing each of
______________ and _____________ as such Selling Shareholder's duly
authorized attorney-in-fact (the "Attorney-in-Fact") and First Union
National Bank as the duly authorized custodian (the "Custodian") of any
Shares to be sold by such Selling Shareholder. The Attorneys-in-Fact are
authorized to execute, deliver and perform this Agreement on behalf of such
Selling Shareholder, to deliver any Shares to be sold by such Selling
Shareholder hereunder, to accept payment therefor and otherwise to act on
behalf of such Selling Shareholder in connection with this Agreement.
Shares of Common Stock, in suitable form for transfer, representing the
Shares to be sold by such Selling Shareholder hereunder have been deposited
with the Custodian pursuant to the Custody Agreement for the purpose of
delivery pursuant to this Agreement. Such Selling Shareholder agrees that
its Shares on deposit with the Custodian are subject to the interest of the
Underwriters hereunder, that the arrangements made for such custody and the
appointment of the Attorneys-in-Fact are to that extent irrevocable, and
that the obligations of such Selling Shareholder hereunder shall not be
terminated by any act or deed of the Selling Shareholder (or by any other
person, firm or corporation, including the Company or the Custodian)
without the prior written consent of the Underwriters or by operation of
law (including the death of the Selling Shareholder) or by the occurrence
of any other event or events, except as provided in this Agreement and the
Custody Agreement. If such Selling Shareholder should die or become
incapacitated or if any other event should occur before the delivery of any
Shares to be sold by such Selling Shareholder hereunder which renders such
Selling Shareholder incapable of acting on its own behalf, to the fullest
extent provided by law the Selling Shareholder's obligations hereunder
shall continue and any Shares deposited with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such death, incapacity, or other event had not
occurred, regardless of whether or not the Custodian or the
Attorneys-in-Fact shall have received notice thereof;
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<PAGE> 11
(ii) Such Selling Shareholder, acting individually or through the
Attorneys-in-Fact, has duly executed and delivered this Agreement. Each of
this Agreement and the Custody Agreement constitutes a legal, valid and
binding obligation of such Selling Shareholder, enforceable against such
Selling Shareholder in accordance with its terms, except as may be limited
by bankruptcy and other creditor rights laws and general principles of
equity, including the availability of the equitable remedy of specific
performance. All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Shareholder of this
Agreement and the Custody Agreement and for the sale and delivery of any
Shares to be sold by such Selling Shareholder hereunder have been obtained,
except such as may be required under the Act or state securities or Blue
Sky laws in connection with any purchase and distribution of Shares by the
Underwriters; and such Selling Shareholder has full right, power and
authority to enter into this Agreement and to sell, assign, transfer and
deliver any Shares to be sold by such Selling Shareholder hereunder;
(iii) Any sale of Shares to be sold by such Selling Shareholder
hereunder and the performance of this Agreement and the Custody Agreement
and the consummation by such Selling Shareholder of the transactions herein
and therein contemplated will not conflict with or result in a breach or
violation of any terms or provisions of, or constitute a default under, any
statute, any indenture, mortgage, deed of trust, loan agreement, guarantee
or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder is subject, or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over such Selling Shareholder or the property of such Selling
Shareholder;
(iv) Immediately prior to the Delivery Date or the Second Delivery
Date (as hereinafter defined), as applicable, such Selling Shareholder will
have good and marketable title to the Shares to be sold by such Selling
Shareholder hereunder, free and clear of all liens, encumbrances, equities
or claims; and, upon delivery of such Shares and payment therefor pursuant
hereto, good and marketable title to all of such Optional Shares, free and
clear of all liens, encumbrances, equities or claims, will pass to the
Underwriters;
(v) Such Selling Shareholder agrees that for a period beginning on
the date of the Prospectus and ending 180 days thereafter, such Selling
Shareholder will not, except pursuant to this Agreement, directly or
indirectly (x) make, agree to or cause any offer, sale (including short
sale), loan, pledge, or other disposition of, or grant any options, rights
or warrants to purchase with respect to, or otherwise transfer or reduce
any risk of ownership of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
Common Stock or other capital stock of the Company or (y) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of the Common Stock (regardless
of whether any of the transactions described in clause (x) or (y) is to be
settled by the delivery of Common Stock, or such other securities, in cash
or otherwise),
11
<PAGE> 12
nor will such Selling Shareholder make any demand for or exercise any right
with respect to the registration of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, without
the prior written consent of Wheat First Securities, Inc., which shall not
be unreasonably withheld, conditioned or delayed; provided, however, that
nothing contained herein shall prohibit (i) the exercise of stock options
or other purchases of Common Stock under stock option plans or other
incentive compensation arrangements for employees or directors previously
approved by the Company's Board of Directors or (ii) the gift, pledge or
assignment of any such securities without the prior consent of Wheat First
Securities, Inc. if the donee, pledgee or assignee agrees, in writing
delivered to Wheat First Securities, Inc. within five days after such gift,
pledge or assignment, to be bound by the terms of this letter.
(vi) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(vii) Such Selling Shareholder is familiar with the Registration
Statement and the Prospectus and verifies that the information set forth
therein respecting it is true and complete;
(viii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982, as amended, with respect to the transactions
herein contemplated, such Selling Shareholder agrees to deliver to you
prior to or at the First Delivery Date or the Second Delivery Date (as
hereinafter defined), as applicable, a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof);
(ix) Such Selling Shareholder specifically agrees that the Shares to
be sold by such Selling Shareholder are subject to the interests of the
Underwriters hereunder. Such Selling Shareholder agrees that its
obligations hereunder shall not be terminated by operation of law, whether
by death or incapacity or by the occurrence of any other event that is not
by the terms of this Agreement a condition to such Selling Shareholder's
obligations hereunder;
(x) The Registration Statement and the Prospectus do not and will
not, as of the applicable effective date as to the Registration Statement
and any amendment thereto, and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein (in the light
of the circumstances under which they were made, in the case of the
Prospectus and any amendments or supplements thereto) not misleading;
provided, however, that this representation and warranty shall not apply to
any statements or omissions made in
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reliance upon and in conformity with information furnished in writing to
the Company by the Underwriters through you expressly for use therein;
(viii) Such Selling Shareholder believes that all of the
representations and warranties of the Company contained in Section 1(a)
hereof are true and correct in all material respects; and
(xii) Any certificate signed by or on behalf of such Selling
Shareholder as such and delivered to the Representatives or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Selling Shareholder to each Underwriter as to the matters covered thereby.
2. PURCHASE AND SALE.
Subject to the terms and conditions herein set forth, (a) the Company
agrees to sell 4,000,000 Firm Shares and the Firm Selling Shareholder agrees to
sell 200,000 Firm Shares to the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company and the Firm
Selling Shareholders, at a purchase price per share of $_____, the number of
Firm Shares to be purchased by such Underwriter as set forth opposite the name
of such Underwriter in Schedule I hereto and (b) in the event and to the extent
that the Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Option Selling Shareholders listed on Schedule II hereto
agree, severally and not jointly, to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Option Selling Shareholders, at the purchase price set forth in clause (a) of
this Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional securities) determined by multiplying such number of Optional Shares
by a fraction, the numerator of which is the maximum number of Optional Shares
that such Underwriter is entitled to purchase as set forth opposite the name of
such Underwriter in Schedule I hereto, and the denominator of which is the
maximum number of the Optional Shares that all of the Underwriters are entitled
to purchase.
Each Option Selling Shareholder listed on Schedule II hereto hereby grants
to the Underwriters an option to purchase at their election up to the number of
Optional Shares set forth on Schedule II opposite the name of such Option
Selling Shareholder, at the purchase price per share set forth in the paragraph
above, for the sole purpose of covering over-allotments in the sale of the Firm
Shares. Any such election to purchase Optional Shares may be exercised no more
than once by written notice from you to the Option Selling Shareholders listed
on Schedule II hereto, given within a period of 30 days after the date of this
Agreement, setting forth the aggregate amount of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
you but in no event earlier than the Second Delivery Date (as defined in Section
4 hereof) or, unless you otherwise agree in writing, earlier than two or later
than 10 business days after the date of such notice.
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3. OFFERING BY THE UNDERWRITERS.
Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale to the public
upon the terms and conditions set forth in the Prospectus.
4. DELIVERY AND PAYMENT.
Certificates in definitive form for the Shares to be purchased by each
Underwriter hereunder, and in such denominations and registered in such names as
Wheat First Securities, Inc. may request upon at least two business days' prior
notice to the Company or the Selling Shareholders, as applicable, shall be
delivered by or on behalf of the Company or the Selling Shareholders, as
applicable, to or upon the order of Wheat First Securities, Inc., for the
account of each Underwriter, against payment by such Underwriter or on its
behalf of the purchase price therefor. Payment of the purchase price for the
Shares shall be made by wire transfer of immediately available funds. The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
9:00 a.m., Richmond, Virginia time, on _______ __, 1998 or at such other time
and date as you and the Company may agree upon in writing, and, with respect to
the Optional Shares, 9:00 a.m., Richmond, Virginia time, on the date specified
by you in the written notice given by you of the Underwriters' election to
purchase such Optional Shares, or at such other time and date as you and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Delivery Date," such time and date for
delivery of the Optional Shares, if not the First Delivery Date, is herein
called the "Second Delivery Date," and each such time and date for delivery is
herein called a "Delivery Date." Such certificates will be made available for
checking and packaging at least 24 hours prior to each Delivery Date at the
offices of Wheat First Securities, Inc. at the address set forth in Section 13
hereof or such other location designated by Wheat First Securities, Inc. to the
Company and the Selling Shareholders, as applicable.
5. AGREEMENTS OF THE COMPANY.
The Company agrees with the Underwriters:
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<PAGE> 15
(a) To prepare the Prospectus in a form reasonably approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement or, if applicable, such earlier time as
may be required by Rule 430A(a)(3) under the Act; to make no amendment or
supplement to the Registration Statement or Prospectus prior to any Delivery
Date which is disapproved by you promptly after reasonable notice thereof; to
advise you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes effective or
any supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to file promptly all reports and any definitive
proxy or information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and for so long as the
delivery of a Prospectus is required in connection with the offering or sale of
the Shares; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, of any request by the Commission for the amending or supplementing of
the Registration Statement or Prospectus or for additional information and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus or suspending
any such qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) Promptly from time to time to take such actions as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions for
as long as may be necessary to complete the distribution of the Shares;
provided, however, that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) To furnish the Underwriters with copies of the Registration Statement
and the Prospectus in such quantities as you may from time to time reasonably
request during such period following the date hereof that a prospectus is
required to be delivered in connection with offers or sales of the Shares, and,
if the delivery of a prospectus is required during this period and if at such
time any event shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus to comply
with the Act, to notify you and upon your request to file such document and to
prepare and furnish without charge to you and to any dealer in securities as
many copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such statement
or omission or effect such compliance;
(d) To make generally available to its shareholders and to deliver to you
an earnings statement of the Company, conforming with the requirements of
Section 11(a) of the Act and
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Rule 158 under the Act, covering a period of at least 12 months beginning after
the effective date of the Registration Statement;
(e) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders and deliver to you
(i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission, the Nasdaq Stock Market or
any national securities exchange on which any class of securities of the Company
is then listed; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request;
(f) To apply the net proceeds from the sale of the Company Shares for the
purposes set forth in the Prospectus and report the use of such proceeds in
accordance with Rule 463 under the Act;
(g) The Company will, from time to time, after the effective date of the
Registration Statement file with the Commission such reports as are required by
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, and shall also file
with state securities commissions in states where the Shares have been sold by
you (as you shall have advised us in writing) any such reports as are required
to be filed by the securities acts and the regulations of those states;
(h) If at any time during the 25 day period after the Registration
Statement is declared effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which, in your opinion, the
market price for the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising it to do so, prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event;
(i) Neither the Company nor any of its officers, directors or affiliates
will take, directly or indirectly, any action designed to cause or result in, or
which might constitute or be expected to constitute, stabilization or
manipulation of the price of the Common Stock;
(j) The Company will cause the Shares to be listed on the Nasdaq Stock
Market's National Market (or such other trading market as shall be approved by
you) at each Delivery Date and will use its best efforts to cause the Shares to
be so listed for at least one year from the date hereof;
(k) The Company will not invest or otherwise use the proceeds received by
the Company from its sale of the Company Shares in such a manner as would
require the Company to register as an investment company under the 1940 Act;
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(l) The Company will maintain a transfer agent and, if necessary under the
laws of the State of Georgia, a registrar for the Common Stock; and
(m) On the First Delivery Date, the Company will sell to Wheat First
Securities, Inc., for $500 in cash, a warrant to purchase 30,000 shares of
Common Stock and will sell to J.C. Bradford & Co., for $500 in cash, a warrant
to purchase 20,000 shares of Common Stock, such warrants to be substantially in
the form set forth in Exhibit A hereto.
6. PAYMENT OF EXPENSES.
The Company and the Selling Shareholders agree with the Underwriters that
(a) whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay all fees and
expenses incident to the performance of the obligations of the Company and the
Selling Shareholders, including, but not limited to, (i) the Commission's
registration fee, (ii) the expenses of printing (or reproducing) and
distributing the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), each Preliminary Prospectus,
the Prospectus, any amendments or supplements thereto, and this Agreement and
other underwriting documents, including Underwriter's Questionnaires,
Underwriter's Powers of Attorney, Blue Sky Memoranda, Agreements Among
Underwriters and Selected Dealers Agreements, (iii) fees and expenses of
accountants and counsel for the Company and the Selling Shareholders, (iv)
expenses of registration or qualification of the Shares under state securities
or Blue Sky laws, including the reasonable fees and disbursements of counsel to
the Underwriters in connection therewith, (v) filing fees paid or incurred by
the Underwriters and related reasonable fees and expenses of counsel to the
Underwriters in connection with filings with the National Association of
Securities Dealers, Inc. (the "NASD"), (vi) expenses of listing the Shares on
the Nasdaq Stock Market's National Market, (vii) any expenses for travel,
lodging and meals incurred by the Company in connection with marketing, dealer
and other meetings attended by the Company and the Underwriters in marketing the
Shares, (viii) the costs and charges of the Company's transfer agent and
registrar and the cost of preparing the certificates for the Common Stock, and
(ix) all other costs and expenses incident to the performance of its obligations
hereunder not otherwise provided for in this Section; and (b) all out-of-pocket
expenses, including counsel fees, disbursements and expenses, incurred by the
Underwriters in connection with investigating, preparing to market and marketing
the Shares and proposing to purchase and purchasing the Shares under this
Agreement will be borne and paid by the Company if the sale of the Shares
provided for herein is not consummated by reason of the termination of this
Agreement by the Representatives pursuant to Sections 7(g)(i) or 10 or otherwise
because of any failure or refusal on the part of the Company or the Selling
Shareholders to comply with the terms in all material respects or fulfill in all
material respects any of the conditions of this Agreement. To the extent, if at
all, that any Shareholders engage special legal counsel to represent them in
connection with the transactions contemplated by this Agreement, the fees and
expenses of such counsel shall be borne by such Selling Shareholders. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Company and the Selling Shareholders pro rata. The Company
and the Selling Shareholders have agreed between themselves with regard to the
sharing of fees and expenses. It is understood, however, that
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except as provided in this Section 6 and Sections 8 and 10, the Underwriters
will pay all of their own costs and expenses, including the fees of their
counsel and any advertising expenses in connection with any offers they may
make.
7. CONDITIONS TO OBLIGATIONS OF UNDERWRITERS.
The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Delivery Date, shall be subject, in their discretion, to the
condition that all representations and warranties and other statements of the
Company and the Selling Shareholders herein are, at and as of such Delivery
Date, true and correct, the condition that the Company and the Selling
Shareholders shall have performed all of their respective obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective not later than 4:00 p.m., Washington, D.C. time, on
the date of this Agreement, or such later time and date as shall have been
consented to by the Representatives, and all filings required by Rule 424, Rule
430A, Rule 434 or Rule 462(b), if applicable, of the rules and regulations of
the Commission shall have been made; no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall have
been complied with to your reasonable satisfaction; and no Underwriter shall
have advised the Company that the Registration Statement or any amendment
thereto contains an untrue statement of fact which, in your judgment, is
material or omits to state a fact which, in your judgment, is material and is
required to be stated therein or necessary to make the statements therein not
misleading, or that any Preliminary Prospectus, the Prospectus or any supplement
thereto contains an untrue statement of fact which, in your judgment, is
material, or omits to state a fact which, in your judgment, is material and is
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
(b) Alston & Bird LLP, counsel for the Underwriters, shall have furnished
to you their written opinion, dated such Delivery Date, with respect to the
incorporation of the Company, the validity of the Shares being issued at such
Delivery Date, the Registration Statement, the Prospectus, and other related
matters as you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to pass
upon such matters;
(c) Nelson, Mullins, Riley & Scarborough L.L.P., as counsel for the
Company, shall have furnished to you their written opinion, dated such Delivery
Date, in form reasonably satisfactory to you, to the effect that:
(i) The Company is a corporation in good standing under the laws of
the State of Georgia, with corporate power under such laws to own, lease
and operate its properties and conduct its business as described in the
Prospectus. The Company is qualified to
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transact business as a foreign corporation in all states in which it is
required to be so qualified, except where the failure to be so qualified
would not have a material adverse effect on the business, financial
condition or results of operations of the Company;
(ii) The Company has authorized and issued capital stock as set
forth in the Prospectus;
(iii) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable; and none of the outstanding shares of capital stock were
issued in violation of the preemptive rights of any shareholder of the
Company;
(iv) The Company Shares have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company against payment of the consideration set forth
herein, will be validly issued, fully paid and nonassessable and no holder
thereof will be subject to personal liability by reason of being such a
holder; and the Company Shares are not subject to the preemptive rights of
any shareholder of the Company;
(v) Upon issuance and delivery of the Company Shares to or for the
account of the Underwriters and payment therefor as provided herein
(assuming the Underwriters are purchasing such Company Shares in good faith
and without notice of any adverse claim), the Underwriters will receive
good and marketable title to the Company Shares, free and clear of all
liens, pledges, charges, encumbrances, equities, claims, security
interests, restrictions, shareholders agreements and voting trusts
whatsoever;
(vi) The Shares conform in all material respects as to legal matters
to the description thereof in the Prospectus under the caption "Description
of Capital Stock;"
(vii) The form of certificate evidencing the Shares complies in all
material respects with all applicable statutory requirements, any
applicable requirements of the Charter and Bylaws of the Company and the
requirements of the Nasdaq Stock Market's National Market;
(viii) To the knowledge of such counsel, all sales of the Company's
securities prior to the date hereof were at all relevant times duly
registered under the Act or exempt from the registration requirements of
the Act, or if such securities were not registered or exempt in compliance
with the Act, any private rights of action for rescission or damages
arising from the failure to register any such securities are time barred by
applicable statutes of limitations or equitable principles, including
laches;
(ix) To the knowledge of such counsel, neither the filing of the
Registration Statement nor the offer or sale of the Shares as contemplated
thereby gives rise to any rights for or related to the registration of any
shares of Common Stock or any other
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<PAGE> 20
securities of the Company which have not been waived by the holder or
holders thereof prior to the date of this Agreement;
(x) The Company has duly authorized the execution and delivery of
this Agreement and the performance by the Company hereunder and has duly
executed and delivered this Agreement, and assuming the due authorization,
execution and delivery of this Agreement by the other parties hereto, this
Agreement is enforceable against the Company, except to the extent that (a)
enforceability may be limited by applicable bankruptcy, insolvency,
liquidation, reorganization, moratorium and other laws relating to or
affecting the rights and remedies of creditors generally, (b) the remedy of
specific performance and other forms of equitable relief may be subject to
certain defenses and to the discretion of the court before which a
proceeding may be brought, and (c) the enforcement of rights to indemnity
and contribution under this Agreement may be limited by federal and state
securities laws or principles of public policy underlying such laws;
(xi) The execution and delivery by the Company of this Agreement did
not, and the performance by the Company hereunder, the consummation by the
Company of the transactions contemplated hereby, the issuance and sale of
the Company Shares by the Company pursuant hereto and the compliance by the
Company with all of the provisions hereof will not (with or without the
giving of notice or the passage of time or both), result in any violation
by the Company of the Charter or Bylaws of the Company or any breach of or
default under any indenture, mortgage, deed of trust, loan agreement, lease
or other written agreement or instrument to which the Company is a party or
by which it or any of its properties or assets is bound except for any such
breach or default which would not have a material adverse effect on the
business, financial condition or results of operations of the Company, and,
to the knowledge of such counsel, will not result in any creation or
imposition of a contractual lien or security interest in, on or against any
property or assets of the Company or violate in any material respect any
existing federal or state constitution, statute, regulation, rule, order or
law (assuming compliance with all applicable state securities or "blue sky"
laws, as to which such counsel need express no opinion), or any judicial or
administrative decree, writ, judgment or order to which, to the knowledge
of such counsel, the Company or any of its properties or assets is subject;
(xii) No consent, approval, authorization or other action by, or
filing with, any governmental authority of the United States or the State
of Georgia is required on the part of the Company for the performance by
the Company of this Agreement and the offering, issuance and sale of the
Shares, except such as have been obtained under the Act and the Exchange
Act and the rules and regulations of the Commission thereunder and such as
may be required under state securities or "blue sky" laws in connection
with the offer, sale and distribution of the Shares by the Underwriters (as
to which such counsel need express no opinion);
(xiii) The Registration Statement and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates
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(other than the financial statements and the notes thereto and the related
schedules and other financial and statistical data included therein or
omitted therefrom and the section therein captioned "Underwriting," as to
all of which such counsel need express no opinion), complied as to form in
all material respects with the applicable requirements of the Act and the
rules and regulations of the Commission thereunder. All required filings
pursuant to Rules 424 and 430A have been made in the manner and within the
time period required;
(xiv) To the knowledge of such counsel, there is no litigation or
governmental proceeding pending or overtly threatened by a written
communication against the Company, or to which the Company or any of its
properties or assets is subject, that is required to be described in the
Prospectus but is not described as required;
(xv) Such counsel has reviewed all contracts and other documents
referred to in the Registration Statement and the Prospectus, and the
summaries of and other disclosures regarding such contracts and other
documents included in the Registration Statement and the Prospectus fairly
present the information required to be disclosed with respect thereto; and,
to the knowledge of such counsel, there are no additional contracts or
other documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as required;
(xvi) All descriptions in the Registration Statement and the
Prospectus of statutes, regulations or legal or governmental proceedings
are fair summaries thereof and fairly present the information required to
be shown with respect to such matters;
(xvii) The Registration Statement has been declared effective under
the Act, and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued under the
Act and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission;
(xviii) The Shares have been authorized for quotation on the Nasdaq
Stock Market's National Market, subject to notice of issuance; and the
Common Stock has been registered under the Exchange Act; and
(xix) The Company is not, and will not be as a result of the
consummation of the transactions contemplated by this Agreement, an
"investment company" or an entity "controlled" by an "investment company"
within the meaning of the 1940 Act;
In addition, such counsel shall state it has reviewed certain
corporate records and other documents of the Company and the Selling
Shareholders and has participated in conferences with officers and other
representatives of the Company, the Selling Shareholders and their
representatives, the Company's independent public accountants, and your
representatives and your counsel at which the contents of the Registration
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Statement and the Prospectus were discussed and revised. Such counsel shall
state that although it has not independently verified, is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the information and statements contained in the Registration
Statement and the Prospectus, other than as mentioned in paragraphs (xv)
and (xvi) above, on the basis of the foregoing, no facts have come to such
counsel's attention that lead such counsel to believe that the Registration
Statement or any amendment thereto, at the time such Registration Statement
or any such amendment became effective, contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus or any amendment or supplement thereto, at the time the
Prospectus was issued, at the time any such amended or supplemented
prospectus was issued or on the date such opinion is issued, included or
includes any untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that such counsel need not express any belief regarding
the financial statements and notes thereto and the related schedules and
other financial and statistical data contained in or omitted from the
Registration Statement or the Prospectus or any amendment or supplement
thereto.
Such opinion may be furnished subject to such stated assumptions,
limitations and qualifications as shall be acceptable to Alston & Bird LLP,
counsel for the Underwriters.
(d) With respect to the Selling Shareholder Shares and, if the Underwriters
shall exercise the election to purchase Optional Shares from the Option Selling
Shareholders pursuant to Section 2 of this Agreement, the Optional Shares,
counsel for the respective Selling Shareholders (which shall be reasonably
acceptable in each case to you and your counsel) shall have furnished to
you their written opinions, dated the First Delivery Date or the Second Delivery
Date, as appropriate, in form and substance satisfactory to you, to the effect
that:
(i) The Shares being sold by such Selling Shareholder have been duly
authorized and validly issued and are fully paid and nonassessable; no
holder thereof is or will be subject to personal liability by reason of
being such a holder; and none of such shares of Common Stock were issued in
violation of the preemptive rights of any shareholder of the Company;
(ii) Such Selling Shareholder has duly executed and delivered each of
this Agreement and the Custody Agreement, and assuming the execution and
delivery of this Agreement and the Custody Agreement by the other parties
hereto and thereto, each of this Agreement and the Custody Agreement is
enforceable against such Selling Shareholder except to the extent that (a)
enforceability may be limited by applicable bankruptcy, insolvency,
liquidation, reorganization, moratorium and other laws relating to or
affecting the rights and remedies of creditors generally, (b) the remedy of
specific performance and other forms of equitable relief may be subject to
certain defenses and to the discretion of the court before which a
proceeding may be brought, and (c) the
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enforcement of rights to indemnity and contribution under this Agreement
may be limited by federal and state securities laws or principles of public
policy underlying such laws;
(iii) The execution and delivery by such Selling Shareholder of this
Agreement and the Custody Agreement did not, and the performance by such
Selling Shareholder under such agreements, the consummation by such Selling
Shareholder of the transactions contemplated hereby, the sale of the Shares
being sold by such Selling Shareholder pursuant hereto and the compliance
by such Selling Shareholder with all of the provisions hereof will not, to
the knowledge of such counsel (with or without the giving of notice or the
passage of time or both), result in any breach of or default under any
indenture, mortgage, deed of trust, loan agreement, lease or other written
agreement or instrument known to such counsel and to which such Selling
Shareholder is a party or by which it or any of its properties or assets is
bound, and, to the knowledge of such counsel, did not and will not result
in any creation or imposition of a contractual lien or security interest
in, on or against any property or assets of such Selling Shareholder or
violate in any material respect any existing federal or state constitution,
statute, regulation, rule, order or law (assuming compliance with all
applicable state securities or "blue sky" laws, as to which such counsel
need express no opinion), or any judicial or administrative decree, writ,
judgment or order to which, to the knowledge of such counsel, such Selling
Shareholder or any of its properties or assets is subject;
(iv) To the knowledge of such counsel, no consent, approval,
authorization or other action by, or filing with, any governmental
authority of the United States or the State of Georgia is required on the
part of such Selling Shareholder for the performance by such Selling
Shareholder of this Agreement or the Custody Agreement and the offering and
sale of the Shares being sold by such Selling Shareholder, except such as
have been obtained under the Act and the Exchange Act and the rules and
regulations of the Commission thereunder and such as may be required under
state securities or "blue sky" laws in connection with the offer, sale and
distribution of the such Shares by the Underwriters (as to which such
counsel need express no opinion); and
(v) Such Selling Shareholder is the sole registered owner of the
Optional Shares to be sold by such Selling Shareholder, and upon delivery
of such Optional Shares to or for the account of the Underwriters against
payment therefor as provided herein (assuming the Underwriters are
purchasing such Shares in good faith and without notice of any adverse
claim), the Underwriters will have acquired all of the rights of the
Selling Shareholder in the Shares sold by him or it free of any adverse
claim, any lien in favor of the Company and any restrictions on transfer
imposed by the Company.
Such opinion may be furnished subject to such stated assumptions,
limitations and qualifications as shall be acceptable to Alston & Bird LLP,
counsel for the Underwriters.
(e) At each Delivery Date, Arthur Andersen LLP shall have furnished to you
a letter or letters, dated the respective date of delivery thereof, in form and
substance reasonably
23
<PAGE> 24
satisfactory to you, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and other financial information relating to
the Company contained in the Registration Statement and the Prospectus;
(f) (i) The Company shall not have sustained, since the date of the latest
audited financial statements included in the Prospectus, any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus, there shall not have been any change in
the outstanding capital stock or long-term debt of the Company or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operations of the Company otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in your reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Delivery Date on the terms and in the
manner contemplated by the Prospectus;
(g) On or prior to the Delivery Date On or after the date hereof there
shall not have occurred any of the following: (i) trading in securities of the
Company shall have been suspended; (ii) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange or the Nasdaq
Stock Market's National Market; (iii) a general moratorium on commercial banking
activities in New York, Virginia or Georgia declared by either federal or New
York, Virginia or Georgia authorities; (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war, if any such event specified in this clause (iv)
would have such a materially adverse effect, in your reasonable judgment, as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Delivery Date on the terms and in
the manner contemplated in the Prospectus; or (v) such a material adverse change
in general economic, political, financial or international conditions affecting
financial markets in the United States having a material adverse impact on
trading prices of securities in general as, in your reasonable judgment, makes
it inadvisable to proceed with the payment for and delivery of the Shares;
(h) The Company shall have furnished to you copies of agreements between
the directors and executive officers of the Company and certain shareholders
of the Company, in form and content reasonably satisfactory to you, pursuant to
which such persons agree that for a period beginning on the date of the
Prospectus and ending 180 days thereafter, they will not, except pursuant to
this Agreement, directly or indirectly (i) make, agree to or cause any offer,
sale (including short sale), loan, pledge, or other disposition of, or grant any
options, rights or warrants to purchase with respect to, or otherwise transfer
or reduce any risk of ownership of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
Common Stock or other capital stock of the Company or (ii) enter into any swap
or other arrangement that transfers all or a portion of the economic
24
<PAGE> 25
consequences associated with the ownership of the Common Stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of Common Stock, or such other securities, in cash or
otherwise), or make any demand for or exercise any right with respect to the
registration of Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock, without the prior written consent of Wheat
First Securities, Inc., which shall not be unreasonably withheld, conditioned or
delayed; provided, however, that nothing contained therein shall prohibit (x)
the exercise of stock options or other purchases of Common Stock under stock
option plans or other incentive compensation arrangements for employees or
directors previously approved by the Company's Board of Directors or (y) the
gift, pledge or assignment of any such securities without the prior consent of
Wheat First Securities, Inc. if the donee, pledgee or assignee agrees, in
writing delivered to Wheat First Securities, Inc. within five days after such
gift, pledge or assignment, to be bound by the terms of such agreement; and
(i) The Company and the Selling Shareholders shall have furnished or caused
to be furnished to you at such Delivery Date certificates of officers of the
Company and the Selling Shareholders, as applicable, reasonably satisfactory to
you as to the accuracy of the respective representations and warranties of the
Company and the Selling Shareholders, as applicable, herein at and as of such
Delivery Date, as to the performance by the Company and the Selling
Shareholders, as applicable, of all of their obligations hereunder to be
performed at or prior to such Delivery Date, as to the matters set forth in
subsections (a) and (f) of this Section and as to such other matters as you may
reasonably request.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and, if any Optional Shares are sold to the Underwriters
pursuant to this Agreement, Selling Shareholders Drew W. Edwards, Henry M.
Baraco, Cleve B. Schultz, G. Lynn Boggs and FLAG Financial Corporation, jointly
and severally, will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will promptly reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating, preparing to defend or defending, or appearing as a
third-party witness in connection with, any such action or claim; provided,
however, that the Company and such Selling Shareholders shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by the Underwriters through you expressly for use therein; provided,
further, that the foregoing
25
<PAGE> 26
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities.
(b) Subject to subsection (f) of this Section, each Selling Shareholder
other than those named in the first sentence of Section 8(a) above will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which the Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
promptly reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating, preparing to
defend or defending, or appearing as a third-party witness in connection with,
any such action or claim; provided, however, that any such Selling Shareholder
shall only be liable in his or its capacity as a Selling Shareholder pursuant to
this Section 8(b) to the extent that any statements in or omissions or alleged
omissions to state in the Registration Statement, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto are based upon written
information furnished to the Company by such Selling Shareholder in his or its
capacity as such specifically for use therein or to the extent that any such
Selling Shareholder in his or its capacity as such has failed to bring to the
attention of the Underwriters anything that has come to the attention of such
Selling Shareholder to cause such Selling Shareholder to believe that there is
any untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement, the Prospectus or any
amendment or supplement thereto or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; and provided, further, that such Selling
Shareholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by the Underwriters through you expressly
for use therein; and provided, further, that the foregoing indemnity agreement
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation
26
<PAGE> 27
of the sale of the Shares to such person, and if the Prospectus (as so amended
or supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities.
(c) Each Underwriter will indemnify and hold harmless the Company and the
Selling Shareholders against any losses, claims, damages or liabilities to which
the Company or the Selling Shareholders may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company and the Selling Shareholders for any legal or other expenses reasonably
incurred by the Company and the Selling Shareholders in connection with
investigating, preparing to defend or defending, or appearing as a third-party
witness in connection with, any such action or claim. The Company and the
Selling Shareholders acknowledge that the statements set forth under the heading
"Underwriting" in the Preliminary Prospectus and the Prospectus constitute the
only information furnished in writing by or on behalf of the several
Underwriters for inclusion in the Preliminary Prospectus or the Prospectus, and
you, as the Representatives, confirm that such statements are correct.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have been advised by
counsel that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. It is understood that the indemnifying party shall, in
connection with any such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys together with appropriate local counsel at any time
for all indemnified parties.
27
<PAGE> 28
Upon receipt of notice from the indemnifying party to such indemnified party of
its election so to appoint counsel to defend such action and approval by the
indemnified party of such counsel, the indemnifying party will not be liable for
any settlement entered into without its consent and will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence, (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party; and except that, if clause (i) or (iii) is
applicable, such liability shall be only in respect of the counsel referred to
in such clause (i) or (iii). Notwithstanding the immediately preceding sentence
and the first sentence of this paragraph, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement.
(e) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Shareholders (to
the extent applicable) on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (d) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and the
Selling Shareholders (to the extent applicable) on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders (to the extent applicable) on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering (after deducting the total underwriting discount, but before
deducting expenses) received by the Company and the Selling Shareholders (to the
extent applicable) bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged
28
<PAGE> 29
omission to state a material fact relates to information supplied by the Company
or the Selling Shareholder on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, the Selling
Shareholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this subsection (e) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations under this subsection (e) are several in proportion to
their respective underwriting obligations and not joint.
(f) The liability of each Selling Shareholder under this Section 8 shall be
limited to an amount equal to the initial public offering price less the
underwriting discount of any Shares sold by such Selling Shareholder to the
Underwriters.
(g) The obligations of the Company and the Selling Shareholders under this
Section 8 shall be in addition to any liability which the Company and the
Selling Shareholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the Underwriters may otherwise have
and shall extend, upon the same terms and conditions, to each officer and
director of the Company and to each person, if any, who controls the Company
within the meaning of the Act and to the Selling Shareholders.
9. DEFAULT OF UNDERWRITERS.
(a) If any Underwriter shall default in its obligation to purchase the
Shares that it has agreed to purchase hereunder at a Delivery Date, you may in
your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within 36 hours after such default
by any Underwriter you do not arrange for the purchase of such Shares, then the
Company or the Selling Shareholders, as applicable, shall be entitled to a
further period of 36 hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company or the
Selling Shareholders, as applicable, that you have so arranged for the
29
<PAGE> 30
purchase of such Shares, or the Company or the Selling Shareholders notify you
that they have so arranged for the purchase of such Shares, you or the Company
or the Selling Shareholders, as applicable, shall have the right to postpone
such Delivery Date for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion, exercised in consultation with Alston & Bird
LLP, may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company or the
Selling Shareholders as provided in subsection (a) above, the aggregate number
of such Shares that remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Delivery Date, then
the Company or the Selling Shareholders, as applicable, shall have the right to
require each non-defaulting Underwriter to purchase the number of Shares that
such Underwriter agreed to purchase hereunder at such Delivery Date and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares that such Underwriter agreed to purchase
hereunder at such Delivery Date) of the share of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company or the
Selling Shareholders, as applicable, as provided in subsection (a) above, the
aggregate number of such Shares that remains unpurchased exceeds one-eleventh of
the aggregate number of all the Shares to be purchased at such Delivery Date, or
if the Company or the Selling Shareholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase and of the Option Selling Shareholders to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriters or the Company or the Selling Shareholders, except
for the expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from liability
for its default.
10. DEFAULT BY THE SELLING SHAREHOLDERS.
If the Selling Shareholders shall fail to sell the number of Shares that
the Selling Shareholders are obligated to sell, the Representatives may, at
their option, by notice to the Company, either (a) require the Company to sell
and deliver the number of Shares as to which the Selling Shareholders have
defaulted or such lesser number as may be requested by the Representatives, or
(b) terminate this Agreement without liability on the part of the Underwriters
30
<PAGE> 31
or the Company, except for the provisions of Section 8 hereof and the expenses
to be paid or reimbursed by the Company pursuant to Section 6 hereof.
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation (or any statement as to the results thereof) made by or on behalf
of the Underwriters or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, or the
Selling Shareholders, and shall survive delivery of and payment for the Shares.
12. TERMINATION AND PAYMENT OF EXPENSES.
If this Agreement shall be terminated pursuant to Section 9 hereof, the
Company and the Selling Shareholders shall not then be under any liability to
any Underwriter except as provided in Section 6 and Section 8 hereof; but if
this Agreement shall be terminated by the Representatives pursuant to Sections
7(g)(i) or 10 or otherwise because of any failure or refusal on the part of the
Company or the Selling Shareholders to comply with the terms in all material
respects or fulfill in all material respects any of the conditions of this
Agreement, the Company will reimburse the Underwriters through you for all
out-of-pocket expenses, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company and the Selling
Shareholders shall then be under no further liability to any Underwriter except
as provided in Section 6 and Section 8 hereof.
13. NOTICES.
In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you.
All statements, requests, notices and agreements hereunder shall be in
writing and if to the Underwriters shall be sufficient in all respects if
delivered or sent by reliable courier, first-class mail, telex or facsimile
transmission to Wheat First Securities, Inc. at Riverfront Plaza, 901 East Byrd
Street, Richmond, Virginia 23219, Attention: Corporate Finance Department, with
a copy (which shall not constitute notice) to Alston & Bird LLP, counsel for the
Underwriters; if to the Company or the Selling Shareholders shall be sufficient
in all respects if delivered or sent by reliable courier, first-class mail,
telex, or facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Drew W. Edwards, with a copy (which shall not
constitute notice) to Nelson, Mullins, Riley & Scarborough L.L.P.; provided,
however, that any notice to any Underwriter pursuant to Section 8 hereof shall
be delivered or sent by reliable
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<PAGE> 32
courier, first-class mail, telex or facsimile transmission to such Underwriter
at its address set forth in the Underwriters' Questionnaire, which address will
be supplied to the Company or the Selling Shareholders by you upon request. Any
such statements, requests, notices or agreements shall take effect upon receipt
thereof.
14. SUCCESSORS.
This Agreement shall be binding upon, and inure solely to the benefit of,
the Underwriters, the Company and the Selling Shareholders and, to the extent
provided in Sections 8 and 11 hereof, the officers and directors of the Company
and the Selling Shareholders and each person who controls the Company or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
15. TIME OF THE ESSENCE.
Time shall be of the essence in this Agreement.
16. BUSINESS DAY.
As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
17. APPLICABLE LAW.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Virginia.
18. CAPTIONS.
The captions included in this Agreement are included solely for convenience
of reference and shall not be deemed to be a part of this Agreement.
19. COUNTERPARTS.
This Agreement may be executed by any one or more of the parties in any
number of counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
[Signatures on the Following Page]
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<PAGE> 33
If the foregoing is in accordance with your understanding, please sign and
return to us four counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
among each of the Underwriters, the Company and each of the Selling
Shareholders. It is understood that your acceptance of this Agreement on behalf
of each of the Underwriters is pursuant to the authority set forth in a form of
Agreement Among Underwriters, the form of which will be submitted to the Company
and the Selling Shareholders for examination, upon request, but without warranty
on your part as to the authority of the signers thereof.
Very truly yours,
TOWNE SERVICES, INC.
By:
---------------------------------------
Drew W. Edwards
Chief Executive Officer and Chairman of
the Board of Directors
SELLING SHAREHOLDERS
By:
---------------------------------------
Attorney-in-Fact
Accepted as of the date hereof
at Richmond, Virginia:
WHEAT FIRST SECURITIES, INC.
J.C. BRADFORD & CO.
STEPHENS INC.
As Representatives of the Several Underwriters
By: WHEAT FIRST SECURITIES, INC.
By:
-------------------------------------
By:
Its:
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SCHEDULE I
<TABLE>
<CAPTION>
OPTIONAL
SHARES
TO BE PURCHASED
FIRM SHARES IF MAXIMUM
UNDERWRITER TO BE PURCHASED OPTION EXERCISED
- ----------- --------------- ----------------
<S> <C> <C>
Wheat First Securities, Inc...................................
J. C. Bradford & Co...........................................
Stephens Inc..................................................
Total.................................................... 4,200,000 630,000
========== =========
</TABLE>
<PAGE> 35
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
SHARES
<TABLE>
<CAPTION>
NUMBER OF SHARES TO BE
SELLING SHAREHOLDER: SOLD
- -------------------- ----
<S> <C>
A. Firm Selling Shareholder
Sirrom Investments, Inc............................................... 200,000
B. Option Selling Shareholders
Drew W. Edwards....................................................... 100,000
Henry M. Baraco....................................................... 87,000
Cleve B. Schultz...................................................... 40,000
G. Lynn Boggs......................................................... 176,500
Thomas A. Bryan....................................................... 176,500
FLAG Financial Corporation............................................ 50,000
-------
630,000
TOTAL........................................................ 830,000
</TABLE>
<PAGE> 36
EXHIBIT A
THIS WARRANT AND ANY SHARES ACQUIRED FROM THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT IS NON-TRANSFERABLE AND MAY NOT
BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, EXCEPT AS OTHERWISE
PERMITTED IN PARAGRAPH 8(a) HEREOF, UNLESS PREVIOUSLY CONSENTED TO BY TOWNE
SERVICES, INC.
No. ____ Right to Purchase
______ Shares of
Common Stock
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, in consideration of $500 paid in cash this date by
("Purchaser") to Towne Services, Inc., a Georgia corporation (the "Company"),
Purchaser is entitled to purchase from the Company, at any time during the
period specified in Paragraph 2 hereof, up to _________ (_______) fully paid and
non-assessable shares of the Company's common stock, par value $.01 per share
(the "Common Stock"), at an exercise price per share of $_______ (the "Exercise
Price"). The term "Warrant Shares", as used herein, refers to the shares of
Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price
are subject to adjustment as provided in Paragraphs 4 and 5 hereof.
This Warrant is subject to the following terms, provisions and conditions:
1. Manner and Exercise; Issuance of Certificates; Payment for Shares.
(a) Subject to the provisions hereof, this Warrant may be exercised by
the holder hereof, in whole or in part (any partial exercise to be in increments
of not less than one thousand (1,000) shares or any lesser remaining number of
shares subject to the Warrant), within the time period specified in Paragraph 2
hereof by the surrender of this Warrant, together with a completed Exercise
Agreement in the form attached hereto, to the Company during normal business
hours on any business day at the Company's principal office in Norcross, Georgia
(or such other office or agency of the Company as it may designate by notice to
the holder hereof), and payment to the Company in cash, by certified or official
bank check or immediately available federal funds of the Exercise Price for the
Warrant Shares specified in said Exercise Agreement. Notwithstanding the
preceding sentence, the holder, at its sole option, may elect (upon delivery to
the Company of satisfactory documentation of such election, including an opinion
of counsel if reasonably required), in lieu of the payment of the Exercise Price
in cash, check or federal funds, to receive from the Company a lesser number of
Warrant Shares having a fair market value on the date of exercise equal to the
difference between (i) the fair market value on the date of exercise of the full
number of Warrant Shares as to which exercise is being made and (ii) the
aggregate Exercise Price of the full number of Warrant Shares as to which
exercise is being made (such
<PAGE> 37
lesser number of Warrant Shares so issuable to the holder shall be considered as
and included within the meaning of the term "Warrant Shares" for all remaining
purposes hereof).
(b) Warrant Shares purchased by the holder hereof shall be deemed to
be issued to the holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been surrendered, the
completed Exercise Agreement (and other documentation reasonably request by the
Company) delivered, and payment made for such shares as aforesaid. Certificates
for the Warrant Shares so purchased, representing the aggregate number of shares
specified in said Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be requested by
the holder hereof and shall be registered in the name of said holder unless
otherwise specified by the holder in the Exercise Agreement. In case of an
exercise in part only, the Company will deliver to the holder a new Warrant of
like tenor in the name of the holder evidencing the right to purchase the number
of Warrant Shares as to which this Warrant has not been exercised.
2. Period of Exercise. This Warrant is exercisable at any time on or
after one (1) year from date of issuance, and before 5:00 p.m. Norcross,
Georgia, local time on fifth (5th) anniversary of date of issuance.
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance,
be validly issued, fully paid and non-assessable and free from all taxes,
liens and charges created or through the Company with respect to the issue
thereof.
(b) Reservation of Shares. During the period within which this Warrant
may be exercised, the Company will at all times have authorized, and
reserved for the purpose of issue upon exercise of this Warrant, a
sufficient number of shares of Common Stock to provide for the exercise of
this Warrant.
4. Protection Against Dilution. The number of shares of Common Stock
purchasable pursuant to the exercise of the rights under this Warrant and the
Exercise Price shall be adjusted as hereinafter set forth
(a) Stock Dividends, Subdivisions, Reclassifications, Etc. In case at
any time or from time to time after the date hereof the Company shall:
(i) take a record of the holders of its issued and outstanding
Common Stock for the purpose of entitling them to receive a
dividend payable in, or other distribution of, Common Stock,
or
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
- 2 -
<PAGE> 38
then, and in each such case, the Exercise Price shall be adjusted to that
price determined by multiplying the Exercise Price in effect immediately
prior to such event by a fraction (i) the numerator of which shall be the
total number of outstanding shares of Common Stock immediately prior to
such event, and (ii) the denominator of which shall be the total number of
outstanding shares of Common Stock immediately after such event.
(b) Adjustment of Number of Shares Purchasable. Upon each adjustment
in the Exercise Price pursuant to Paragraph 4(a) above, such number of
shares of Common Stock purchasable hereunder shall be adjusted by
multiplying the number of shares of Common Stock by a fraction, (i) the
numerator of which shall be the Exercise Price immediately prior to such
adjustment and (ii) the denominator of which shall be the Exercise Price in
effect upon such adjustment.
(c) Other Reclassifications. In case the Company reclassifies its
capital structure in a manner not covered by Paragraph 4(a) and (b) hereof,
an appropriate adjustment shall be made by the Company in its reasonable
discretion to the Exercise Price and number of Warrant Shares.
5. Adjustment for Reorganization, Consolidation, Merger, Etc.
(a) Prior to the expiration date of this Warrant, the Company shall
not consolidate with or merge into another corporation, or convey all or
substantially all of its assets to any other corporation or corporations,
whether affiliated or unaffiliated (any such corporation being included
within the meaning of the term "successor corporation"), or agree to so
consolidate, merge or convey assets unless and until, prior to consummation
of such consolidation, merger or conveyance, the successor corporation
thereto shall assume, by written instrument executed and mailed to the
holder of this Warrant, at such time, the obligation to issue and deliver
to such holder such shares of stock, securities or property as, in
accordance with the provisions of paragraph 5(b) below, such holder shall
be entitled to purchase or receive upon its exercise of this Warrant and
payment of the Exercise Price.
(b) In case any capital reorganization or reclassification of the
Common Stock of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this
Warrant) after the date of execution of this Warrant or in case, after such
date, the Company (or any such other corporation) shall consolidate with or
merge into another corporation, then and in each such case the holder of
this Warrant, upon its exercise of this Warrant and payment of the Exercise
Price, at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu
of the Common Stock of the Company (or such other corporation) the
proportionate share of all stock, securities or other property issued, paid
or delivered for or on all of the Common Stock of the Company (or such
other corporation) as is allocable to the shares of Common Stock then
called for by this Warrant, as if such holder had exercised this Warrant
immediately prior thereto, all subject to further adjustment as provided in
Paragraph 4 and 5 hereof.
6. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof.
- 3 -
<PAGE> 39
7. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
8. Transfer, Exchange and Replacement of Warrant.
(a) Warrant Transfer Provisions. PRIOR TO TWO (2) YEARS FROM DATE OF
ISSUANCE, THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT TO AFFILIATES OF THE HOLDER, UNLESS
PREVIOUSLY REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
CONSENTED TO IN WRITING BY THE COMPANY AFTER CONSULTATION WITH COUNSEL, AND
NO SALE, TRANSFER, ASSIGNMENT, HYPOTHECATION OR OTHER DISPOSITION OF THIS
WARRANT PRIOR TO SUCH DATE, EXCEPT TO AFFILIATES OF THE HOLDER, SHALL BE
VALID OR EFFECTIVE UNLESS PREVIOUSLY REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR CONSENTED TO IN WRITING BY THE COMPANY. For purposes
hereof, "Affiliates" shall man any officers, employees or partners, as
applicable, of the holder or any entity or person owning 100% of the
capital stock or other ownership interest of the holder of which the holder
owns 100% of the capital stock or other ownership interest. Any transfer of
this Warrant, if previously consented to by the Company, is registrable at
the office or agency of the Company referred to in Paragraph 8(d) below by
the holder hereof in person or by his duly authorized attorney, upon
surrender of this Warrant properly endorsed.
(b) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation
of this Warrant and, in the case of any such loss, theft or destruction,
upon delivery of an indemnity agreement reasonably satisfactory in form and
amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense,
will execute and deliver, in lieu thereof, a new Warrant of like tenor.
(c) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any permitted transfer or any replacement as
provided in this Section 8, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer
taxes) and all other expenses and charges payable in connection with the
preparation, execution and delivery of a Warrant pursuant to this Paragraph
8(c).
(d) Register. The Company shall maintain at its principal office in
Norcross, Georgia (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose
name this Warrant has been issued, as well as the name and address of each
permitted transferee, if any, and each prior owner of this Warrant, if any.
- 4 -
<PAGE> 40
(e) Exercise or Transfer Without Registration. Anything in this
Warrant to the contrary notwithstanding, if, at the time of the surrender
of this Warrant in connection with any exercise, transfer or exchange of
this Warrant, this Warrant or the Warrant Shares shall not be registered
under the Securities Act of 1933, as amended, and under applicable state
securities or blue sky laws, the Warrant Shares issuable upon any exercise
of this Warrant shall contain a legend in form and content satisfactory to
the Company, and the Company may require, as a condition of allowing such
exercise, transfer or exchange, that (i) the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the
effect that such exercise, transfer or exchange may be made without
registration under said Act and under applicable state securities or blue
sky laws and (ii) the holder or transferee execute and deliver to the
Company an investment letter in form and substance acceptable to the
Company. The holder of this Warrant, by taking and holding the same,
represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
9. Notices. All notices, requests and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail, postage prepaid and addressed, to such holder at the address
shown for such holder on the books of the Company, or at such other address as
shall have been furnished to the Company by notice from such holder. All
notices, requests and other communications required or permitted to be given or
delivered hereunder to the Company shall be in writing and shall be personally
delivered, or shall be sent by certified or registered mail, postage prepaid and
addressed, to the office of the Company at 3295 River Exchange Drive, Suite 350,
Norcross, Georgia 30092, or at such other address as shall have been furnished
to the holder of this Warrant by notice from the Company. Any such notice,
request or other communication may be sent by telegram, facsimile or telex, but
shall in such case be subsequently confirmed by a writing personally delivered
or sent by certified or registered mail as provided above. All notices, requests
and other communications shall be deemed to have been given either at the time
of the delivery thereof to (or the receipt by, in the case of a telegram,
facsimile or telex) the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 10, or, if mailed, at the completion
of the third full day following the date of such mailing thereof to such
address, as the case may be.
11. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA.
12. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may not be
changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party (or any predecessor in interest thereof)
against which enforcement of the same is sought.
(b) Descriptive Headings. The descriptive headings of the several
Paragraphs of this Warrant are inserted for purposes of reference only and
shall not affect the meaning or construction of any of the provisions
hereof.
- 5 -
<PAGE> 41
(c) Successors and Assigns. This Warrant shall be binding upon any
entity succeeding to the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized undersigned officer as of ______________________, 1998.
TOWNE SERVICES, INC.
By:
-------------------------------------
DREW W. EDWARDS
Chief Executive Officer
Attest:
By:
---------------------------
Name:
Title:
- 6 -
<PAGE> 42
FORM OF EXERCISE AGREEMENT
Dated:
-------------------------
To: Towne Services, Inc.
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby exercises said Warrant with regard to _________ of the shares of
Common Stock covered by such Warrant, and makes payment herewith in full
therefor at the price per share provided by such Warrant either (i) in cash or
by certified or official bank check or by immediately available federal funds in
the amount of $________________ as provided in the first sentence of Paragraph
1(a) of the Warrant or (ii) by acceptance of a lesser number of shares of Common
Sock as provided in the second sentence of Paragraph 1(a) of the Warrant. Please
issue a certificate or certificates for the Common Stock in the name of the
undersigned and pay any cash for any fractional share to the undersigned. If
this is an exercise of the Warrant in part only, please deliver to the
undersigned a new Warrant of like tenor in the name of the undersigned
evidencing the right to purchase the number of shares of Common Stock as to
which the within Warrant is not being exercised.
If the name(s) in which the shares of Common Stock are to be issued differ
from the name of the holder set forth on the within Warrant, or if the address
to which the certificate(s) representing such shares is to be forwarded is
different from the address of the holder of the Warrant as shown on the records
of the Company, or if more than one stock certificate is to be issued with
regard to such shares, the name(s) and denominations in which the stock
certificate(s) should be issued and/or the address to which the stock
certificate(s) should be forwarded is set forth below.
Name:
----------------------------------------
Signature:
-----------------------------------
Title of Signing Officer or Agent (if any):
---------------------------------------------
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant or with the name of
the assignee appearing in the
assignment form.
<PAGE> 43
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within Warrant to:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
---------------- ------- -------------
<S> <C> <C>
</TABLE>
, and hereby irrevocably constitutes and appoints ____________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated:
-------------------------
In the presence of:
- -------------------------------
Name:
----------------------------------------
Signature:
-----------------------------------
Title of Signing Officer or Agent (if any):
---------------------------------------------
Address:
-------------------------------------
-------------------------------------
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
<PAGE> 1
TWNE
COMMON STOCK NO PAR VALUE
TOWNE SERVICES, INC.
CUSIP 892148 10 7
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
TOWNE SERVICES, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney, upon the surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile signatures of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK
(CHARLOTTE, NC) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE CHIEF EXECUTIVE OFFICER SECRETARY
AND CHAIRMAN OF THE BOARD
<PAGE> 2
TOWNE SERVICES, INC.
The Corporation will furnish without charge to each shareholder who so
requests a statement or summary of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof which the Corporation is authorized to issue and of the
qualifications, limitations or restrictions of such preferences and/or rights.
Such request may be made to the office of the Secretary of the Corporation or
the Transfer Agent named on the face of this Certificate.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM-D - as tenants in common UNIF GIFT MIN ACT-D Custodian
TEN ENT-D - as tenants by the entireties -------------- ----------
JT TEN-D - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
-----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------
Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------
-------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE(S)GUARANTEED:
----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED
OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A
CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
LAW OFFICES
Nelson Mullins Riley & Scarborough, L.L.P.
A REGISTERED LIMITED LIABILITY PARTNERSHIP
999 PEACHTREE STREET, N.E. OTHER OFFICES:
FIRST UNION PLAZA Charleston, South Carolina
SUITE 1400 Charlotte, North Carolina
Columbia, South Carolina
Atlanta, Georgia 30309 Greenville, South Carolina
TELEPHONE (404) 817-6000 Myrtle Beach, South Carolina
FACSIMILE (404) 817-6050
www.nmrs.com
July 10, 1998
Towne Services, Inc.
3295 River Exchange Drive
Suite 350
Norcross, Georgia 30092
We have acted as counsel to Towne Services, Inc. (the "Company") in
connection with the filing of a Registration Statement on Form S-1 (Reg. No.
333-53341) (the "Registration Statement") under the Securities Act of 1933,
covering the offering of up to 4,830,000 shares (the "Shares") of the Company's
Common Stock, no par value per share. In connection therewith, we have examined
such corporate records, certificates of public officials and other documents and
records as we have considered necessary or proper for the purpose of this
opinion.
This opinion is limited by and is in accordance with, the January 1,
1992, edition of the Interpretive Standards applicable to Legal Opinions to
Third Parties in Corporate Transactions adopted by the Legal Opinion Committee
of the Corporate and Banking Law Section of the State Bar of Georgia.
Based on the foregoing, and having regard to legal considerations which
we deem relevant, we are of the opinion that the Shares, when issued and
delivered as described in the Registration Statement, will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Nelson Mullins Riley & Scarborough, LLP
<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
July 10, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF SMERKOVITZ & ASSOCIATES
The undersigned consents to being named in Towne Services' Registration
Statement on Form S-1 (No. 333-53341) filed with the Securities and Exchange
Commission and the use therein of information from the undersigned's independent
appraisal dated May 21, 1998, as amended.
Smerkovitz & Associates
/s/ Smerkovitz & Associates
Name: /s/ Jerry C. Huskins
Title: President
Dated: July 10, 1998
<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>
<RESTATED>
<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> 17,457,055
<OTHER-SE> (16,566,954)
<TOTAL-LIABILITY-AND-EQUITY> 5,523,501
<SALES> 0
<TOTAL-REVENUES> 547,954
<CGS> 0
<TOTAL-COSTS> 8,252,586
<OTHER-EXPENSES> 323,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,289
<INCOME-PRETAX> (8,091,921)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,091,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,091,921)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
