<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
COMMISSION FILE NUMBER: 000-24695
TOWNE SERVICES, INC.
(Exact name of registrant in its charter)
<TABLE>
<S> <C>
Georgia 62-1618121
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3295 River Exchange Drive, Suite 350, Norcross, Georgia 30092
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (770) 734-2680
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the Registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [__]
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of Common Stock on March
24, 1999, as reported on the National Association of Securities Dealers
Automated Quotation System, was $91,988,000. As of March 24,
1999, the Registrant had 19,782,313 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE REGISTRANT'S 1999 ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON MAY 21, 1999 ARE INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K.
<PAGE> 2
INDEX OF FORM 10-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I
Item 1. Business...........................................................................................1
Item 2. Properties........................................................................................15
Item 3. Legal Proceedings.................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...............................................15
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.............................16
Item 6. Selected Financial Data...........................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........................................29
Item 8. Consolidated Financial Statements and Supplementary Data..........................................29
Item 9. Changes and Disagreements with Accountants in Accounting and Financial Disclosures................29
Part III
Item 10. Directors and Executive Officers of the Registrant................................................30
Item 11. Executive Compensation............................................................................30
Item 12. Security Ownership Of Certain Beneficial Owners And Management....................................30
Item 13. Certain Relationships And Related Transactions....................................................30
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................30
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
This Annual Report contains several "forward-looking statements"
concerning Towne Services' operations, performance, prospects, strategies and
financial condition, including its future economic performance, intent, 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. Words such as "may," "would," could," "will,"
"expect," "anticipate," "believe," "intend," "plan," and "estimate" 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:
- - Towne's limited operating history and whether it will be able to
achieve or maintain profitability;
- - whether Towne can attract and retain sales and marketing personnel or
enter new marketing alliances to grow its business;
- - whether Towne can obtain, continue and manage growth or execute
agreements with new customers;
- - whether the market will accept new products and enhancements from
Towne;
- - whether Towne can successfully integrate the operations of companies
it acquires;
- - increased competition;
- - the unknown effects of possible system failures and rapid changes in
technology; and
- - other factors discussed in this Annual Report and in Towne's
registration statement on Form S-1 (No. 333-53341) as declared
effective by the Securities and Exchange Commission on July 30, 1998,
including the "Risk Factors" section contained therein.
GENERAL
Towne Services designs, develops and markets products and services
that convert the in-house credit transactions of small businesses into
automated accounts which are processed electronically in much the same way as
credit card transactions are processed. Usually, small business 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 offers three main electronic processing systems, TOWNE
CREDIT SM, TOWNE FINANCE SM and CASHFLOW SM MANAGER, which process small
business' in-house credit transactions. These products also facilitate the
financing of these in-house credit accounts by the small business' bank.
The TOWNE CREDIT system electronically processes in-house consumer
credit transactions for small and medium size retail merchants. The TOWNE
FINANCE system, a commercial version of TOWNE CREDIT, and the CASHFLOW MANAGER
system are automated asset management and financing systems that process
business-to-business credit transactions for small commercial businesses.
Through the use of Towne's products and services, small businesses can automate
their
1
<PAGE> 4
business records, accelerate cash flow, provide better customer service, reduce
paperwork and shift many other administrative burdens to Towne Services. In
addition, Towne provides banks with complementing products and services 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. The
remaining amounts generate fee income for the bank. Towne Services also
generates 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 these business loans, 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
and CASHFLOW MANAGER products and services to small commercial businesses, such
as furniture manufacturers, equipment distributors, plumbing suppliers and
other industry supply stores. 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' STRATEGIES
Towne Services grew significantly during 1998. The total numbers of
sales people, bank contracts and business customers for TOWNE CREDIT, TOWNE
FINANCE and CASHFLOW MANAGER as of the end of each quarter in 1998 follow:
2
<PAGE> 5
<TABLE>
<CAPTION>
1998
---------------------------------------------------
March June Sept. Dec. (1)
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Sales people............. 33 61 81 99
Bank contracts........... 122 177 283 641
Business customers....... 161 279 507 1662
</TABLE>
(1) On December 1, 1998, Towne completed its acquisition of Banking
Solutions, Inc., a Texas-based provider of accounts receivable
financing products and services. The December 1998 numbers on the
above table include the effects of this acquisition.
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
During 1998, Towne Services expanded its direct sales and marketing
force from 15 persons in 7 states to 99 persons in 35 states. Of this total, 34
persons are dedicated to developing bank customer relationships and 65 persons
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 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 all 12 members of its board of directors have experience in the
management of banks or companies that have banks as customers. Towne's
management leverages these expertise and contacts to develop relationships with
banks and banking organizations. 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 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, which provide
statement processing services, collection services, lockbox management services
and internet bill payment services to complement the TOWNE CREDIT, TOWNE
FINANCE and CASHFLOW MANAGER systems. Towne Services also has agreements with
entities that have banks as their customers, under which these other companies
and organizations encourage their bank
3
<PAGE> 6
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, in December 1998,
Towne Services acquired Banking Solutions, Inc., a Texas-based provider of
accounts receivable financing products to banks and their commercial customers
under the name CASHFLOW SM MANAGER. For more information on Towne's
acquisitions, 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. The CASHFLOW MANAGER system
is similar to the TOWNE FINANCE system except that commercial business
customers manually transmit their transaction information to their banks for
processing.
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.
4
<PAGE> 7
Step 3: The business owner closes out its daily transactions and
electronically transmits transaction data to Towne Services through the
computer system across telecommunications lines.
Step 4: Towne Services processes the data, calculates receivables,
performs other accounting functions and transmits reports to the business and
its community bank upon request by the next business day.
Step 5: The community bank retrieves the sales and payment information
and advances funds to the business' bank account based upon pre-set lending
terms.
Step 6: Towne Services bills the business' customer, collects and
processes the customer's payment and transmits payment information to the bank
for credit to the business' bank account.
Steps 1 and 2. When a customer makes a purchase on account, a store
clerk records the transaction on a point of sale terminal provided by Towne
Services. The PC-based terminal stores names and addresses of customers,
account balances and payment activity, which the business owner can retrieve
quickly at the point of sale. The business can use this terminal instead of the
traditional cash register, as it will record and store information from cash
sales and credit and debit card transactions. Businesses that do not want a new
terminal can have the TOWNE CREDIT software loaded on an existing computer. The
TOWNE CREDIT system captures the transaction data, including dollar amount and
customer information, for use in billing, tracking inventory and generating
sales and tax reports. The bank leases the TOWNE CREDIT point of sale terminal
from Towne Services and provides it to the business. Towne 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 Towne'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.
Towne'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 Towne 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. Towne's network systems then transmit reports to
businesses and their banks by the business day following receipt of transaction
data.
5
<PAGE> 8
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 Towne'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 Towne. 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. Towne 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 Towne'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 account. Towne
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 Towne'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 Towne
with fee income.
TOWNE FINANCE
Towne'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
6
<PAGE> 9
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, Towne
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 Towne provides a specialized sales force, back
room processing and monitoring services. Towne Services assumes no credit risk
from the business' customers. TOWNE FINANCE allows community banks to provide a
profitable and cost effective accounts receivable financing program for its
small commercial customers. Community banks using TOWNE FINANCE gain
interest-bearing loans on funds (net of all processing expenses) and strengthen
relationships with business customers that experienced cash flow problems or
that might have otherwise turned to non-traditional lenders.
CASHFLOW MANAGER
The CASHFLOW MANAGER system is an asset management system that
addresses business-to-business credit transactions in a manner similar to TOWNE
FINANCE. The program enables the
7
<PAGE> 10
community banks that service commercial businesses to better manage and control
assets that fluctuate in value so they can make lending decisions with respect
to these assets. CASHFLOW MANAGER transaction processing occurs in much the
same way as TOWNE FINANCE processing, except that the commercial business
manually transmits the information for processing.
The CASHFLOW MANAGER system uses special deposit tickets to batch
process invoices turned into the bank. The CASHFLOW MANAGER system provides
general ledger reports that help the bank manually interface with the bank
general ledger system. Management reports are given to the business by the bank
daily, weekly and monthly, based on the needs of each business. At the end of
the month, statements are sent out to the business' customer directing payments
to the bank's lock box. The bank typically purchases all of the business'
accounts receivable and adjusts the reserve percentage after the month-end
close period. Receivables that become over 90 days old generally are reassigned
against the restricted funds after a 30-day grace period. Any excess reserves
are deposited into the business' operating account after the month-end
reconciliation.
With CASHFLOW MANAGER, banks generate income from three primary
sources: (1) the discount fee charged from each batch of receivables purchased,
(2) interest charged either to the merchant, the merchant's customers, or both
parties and (3) spread income generated from the reserve account. The bank
provides multiple services to the borrower by establishing a loan account,
operating account and restricted reserve account, as well as by implementing
the CASHFLOW MANAGER program. The restricted reserve account and the
receivables act as collateral in addition to other collateral that may be
required by the bank.
SUPPORTING SERVICES AND NEW PRODUCTS
Towne Services provides an array of value-added services in connection
with its TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER processing systems,
including marketing programs and materials and collection services. Towne 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. Towne's primary marketing tool is
its direct sales force. However, Towne 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 P.C., a national collections firm, 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.
Internet Bill Payments. To provide small business customers the ease
and convenience of receiving bills and making their payments via the internet,
Towne has an agreement with Princeton Telecom Corporation for Internet bill
payment services.
8
<PAGE> 11
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 Towne to help automate their businesses
and provide better service to their clients. For instance, Towne has recently
rolled out an automated collection processing system that offers Towne's small
businesses the opportunity to have a professional collection firm assist in the
management of the small business' bad debt. This system is designed to be
interactive between the collection agent and the small businesses utilizing
the Towne electronic link. This is the first product rolled out utilizing the
Towne computer network system established by TOWNE CREDIT and TOWNE FINANCE.
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, marketing and sales forces, market share and
geographic presence. For example, in December 1998 Towne Services acquired
Banking Solutions, Inc., a Texas-based provider of accounts receivable financing
products to banks and their commercial customers under the name CASHFLOW
MANAGER. Historically, Towne's sales force specialized in smaller merchants and
primarily retail receivables. With the addition of Banking Solutions' sales
force, Towne has added to its sales and marketing forces over 20 people who
specialize primarily in larger merchants and commercial receivables. Towne
purchased Banking Solutions, Inc. for approximately $14.9 million in cash and
stock. In connection with the acquisition of Banking Solutions, Towne issued
744,431 shares of Towne common stock at $6.73 per share. The remainder of the
purchase price was paid in cash. Towne also agreed to pay former officers of
Banking Solutions amounts of money which are contingent upon future performance
criteria. Through this acquisition, Towne more than doubled its merchant
customer base, added more than 200 bank relationships, gained a sales team with
an average of five years experience in selling commercial financing products and
increased its market presence into seven new states.
In addition, in June 1998, Towne Services acquired some of the assets
and liabilities of Credit Collection Solutions, Inc. Credit Collection has
developed computer software for processing payments and tracking collections
including COLLECTION WORKS SM, 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. Towne
Services' management believes its 1998 acquisitions continue to advance its
growth strategies by adding a complementary technology solution and greatly
increasing its customer base.
SALES AND MARKETING
As of December 31, 1998, Towne Services employed a direct sales and
marketing force of 99 persons located in 35 states. Towne's direct sales and
marketing force develops relationships with banks and small business customers.
Towne employs two distinct sales forces to market its products and services.
The bank sales force focuses on developing relationships with banks through
which
9
<PAGE> 12
TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER are marketed to business
customers. Towne'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. As of December 31, 1998, Towne had over 640 agreements with
community banks located in 33 states who work directly with Towne Services'
sales force to market TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER to the
banks' customers. 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,
TOWNE FINANCE or CASHFLOW MANAGER. 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, TOWNE FINANCE and CASHFLOW
MANAGER 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.,
The Bankers Bank of Kentucky, Independent Bankers' Bank (in Illinois), MidWest
Hardware Association, Community BancService Corporation (in Illinois), Community
Bank Services, Inc. (in North Carolina), Washington Bankers Association, Texas
Bankers Association, Community Bankers Bank in Virginia, West Virginia, Maryland
and Washington, D.C., WBA Financial Institutions Products Corp. (in Wisconsin)
and Community Bankers Service Corp. (in Minnesota) 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., Cash Management Services, Inc. and
Princeton Telecom Corporation 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 Towne access to large groups of banks and small
businesses nationwide such as bankers banks, trade associations and merchant
franchise operations.
10
<PAGE> 13
RECRUITING AND TRAINING
In June 1997, when TOWNE CREDIT was first released, Towne Services had
7 sales and marketing personnel. By December 31, 1997, Towne had more than
doubled its sales and marketing force to 15 persons. As of December 31, 1998,
Towne's sales and marketing force had increased to 99 persons located in 35
states. In addition, Towne has 10 persons in management level positions
overseeing its sales force. 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 and implemented an intensive four-week
training program for its sales force. Training is led by Towne's training, sales
and operations managers. The first week of training focuses on overviews of
Towne's policies and procedures as well as an introduction to all of the Towne
products. This includes hands on instruction on the TOWNE CREDIT and TOWNE
FINANCE products as well as use of Towne's Point of Sales System (POS).
Instruction is also presented this first week on pricing of the products to
customer banks and merchants. During the second week, sales representatives are
sent to a field location and travel with a seasoned sales representative to
observe sales calls and presentations. During the third week sales
representatives return to Towne's headquarters and discuss what they observed in
the field with others in their training class. Based on these discussions,
training techniques such as mock sales calls, role playing and formal
presentations are utilized to enhance Towne's training efforts. At the
completion of the third week of training, the new sales representatives return
to their respective territories and travel another week with an experienced
sales representative or their sales manager calling on banks and merchants in
that area. After satisfactory completion of the four weeks of training, new
members of the sales force return to their assigned territories qualified to
represent Towne Services and our products.
TECHNOLOGY
Towne's automated electronic processing systems, TOWNE CREDIT and
TOWNE FINANCE, 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. CASHFLOW MANAGER
processing is a decentralized system in which the small business manually
transmits its sales activity to its community bank for processing. 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.
Towne 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. Towne'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.
11
<PAGE> 14
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 Towne 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 CASHFLOW
MANAGER system is single- or multi-user capable and runs in Windows 95.
Towne's computer processing system stores data redundantly (at both the
customer terminal location and at Towne'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, Towne 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 separate from its main processing center. Towne 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.
CUSTOMERS
As of December 31, 1998, Towne provided processing services to a
diverse customer base of 1,662 small and medium size retail merchants and
small commercial businesses located in 33 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 and CASHFLOW MANAGER 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.
As of December 31, 1998, Towne had executed 641 contracts with
banks in 33 states. Most of Towne'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 over 10,000 financial
institutions in the United States that Towne considers to be potential bank
customers.
12
<PAGE> 15
The majority of Towne's contracts with its customers are cancelable at
will or on short notice or provide for renewal at frequent periodic intervals,
and, accordingly, Towne may have to rebid or modify such contracts on a
frequent basis. No single small business customer accounted for more than .5%
of the total revenues of Towne in 1998. No single bank customer accounted for
more than 3.5% of the total revenues of Towne in 1998. Towne 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.
Towne 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. As part of the
ongoing service of CASHFlOW MANAGER, the bank has a business specialist
assigned to it who helps structure and market to prospects selected by the
bank. This consultant works with the loan officers, attends business meetings
with the loan officers and helps the bank properly document each relationship.
Towne Services attempts to establish long-term relationships through the
continued support and interaction of its professional account managers and
consultants.
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 Towne's products and services through a
call-in support center available during normal business hours. After hours,
customers can reach Towne's technical support personnel by pager. These
customer service representatives respond to inquires about Towne's products and
services and assist merchants in resolving terminal, network and communication
problems.
COMPETITION
Towne Services is aware of other companies who have successfully
marketed business-to-business software and marketing support to banks that
allows the banks to track and finance the in-house charge accounts of its
customers similar to a factoring operation. Most of these competitors do not
offer a point of sale system, but rather require merchants to forward paper
invoices to the banks where bank personnel input the invoices onto the software
purchased by the banks. One such company has a system similar to TOWNE FINANCE
but does not market the system to banks, acting as the lender itself instead.
13
<PAGE> 16
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. Towne 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 Towne. Many of Towne's competitors have longer operating
histories, greater name recognition, larger customer bases and substantially
greater resources than Towne. 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
Towne 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 Towne's technology, products and services or to otherwise obtain and
use information that Towne regards as proprietary, despite Towne's efforts to
protect them. Third parties may claim that Towne'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,
Towne 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 Towne's business and financial results.
EMPLOYEES
At December 31, 1998, Towne had 169 full-time employees, of which 109
were in sales and marketing, 44 were in operations and 16 were corporate and
general administrative employees. Of these employees, 67 were based in
Norcross, Georgia, and 102 were based in 34 other states. Management believes
that Towne's relationship with its employees is satisfactory.
SEASONALITY
The electronic transaction processing industry is prone to seasonal
fluctuations in purchase activity. Although Towne generally experiences
seasonality in its business, fluctuations are less pronounced than in the
industry, due in part to Towne's diverse customer base. Towne 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 typically results in lower first quarter revenues.
PROPERTY AND FACILITIES
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. Towne leases its
14
<PAGE> 17
principal executive offices in Norcross, Georgia and maintains an office in
McKinney, Texas. Towne believes that its current facilities will be adequate to
support its operations at least until the mid-year of 1999 and has recently
signed a lease to relocate its headquarters to a 41,000 square foot facility in
Suwanee, Georgia.
ITEM 2. PROPERTIES
See the information provided in Item 1 above entitled "Business -
Property and Facilities" for information with respect to Towne's facilities.
ITEM 3. LEGAL PROCEEDINGS
Towne may be involved from time to time in legal proceedings arising
in the normal course of its business and otherwise. Towne is not a party to any
pending legal proceedings which it believes are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of Towne's security holders during
the fourth quarter of the year ended December 31, 1998.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
Since its initial public offering in August 1998, Towne's common stock
has traded on the Nasdaq Stock Market's National Market under the symbol TWNE.
As of March 10, 1999, Towne had approximately 1,000 beneficial holders of its
common stock. Of this total, approximately 260 were shareholders of record.
To date, Towne has not paid cash dividends on its common stock. Towne
Services does not anticipate paying cash dividends on its common stock in the
near future.
The following table sets forth the high and low sales price
information for Towne's common stock, as reported by Nasdaq, since Towne's
common stock began trading publicly in August 1998:
<TABLE>
<CAPTION>
Stock Price
------------------ -----------------
High Low
------------------ -----------------
<S> <C> <C>
Third Quarter 1998 $ 8.00 $ 5.00
Fourth Quarter 1998 $ 8.38 $ 4.63
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES.
On December 1, 1998, Towne acquired all of the outstanding capital
stock of Banking Solutions, Inc. in exchange for a total of 744,431 shares of
Towne common stock and approximately $10.4 million in cash. A portion of these
shares are subject to an escrow agreement signed in connection with the
transaction. These securities were issued in reliance upon the exemptions from
registration provided by Section 4(2) of the Securities Act of 1933 and various
interpretations and regulations provided thereunder, including Regulation D.
On December 15, 1998, Towne issued options to acquire a total of
25,000 shares of its common stock to its non-employee directors. Towne relied
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 and various interpretations and regulations provided thereunder,
including Regulation D.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
On July 30, 1998, Towne completed an initial public offering of
3,850,000 shares of common stock at an offering price of $8.00 per share
pursuant to a registration statement on Form S-1 (Commission File No.
333-53341). Net proceeds from the offering were approximately $27.0 million
after deducting underwriters discounts and commissions and expenses related to
the offering. During 1998, Towne used portions of the proceeds as follows: (i)
approximately $12.6 million in the Banking Solutions acquisition, including
$2.3 million in contract terminations, severance packages and signing bonuses;
(ii) approximately $5.3 million for working capital, including sales
16
<PAGE> 19
and marketing, hiring additional personnel and upgrading and expanding its
products and services; and (iii) approximately $2.1 million to repay
outstanding debt at the completion of the offering. The balance of the proceeds
have been and will be used for general corporate purposes, including possible
acquisitions.
17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, Towne Services'
consolidated financial statements and the related Notes thereto and other
financial information included elsewhere in this Annual Report on Form 10-K, as
well as "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 below. The selected consolidated financial data of
Towne Services as of December 31, 1996, 1997 and 1998 and for each of the four
years ended December 31, 1998 were derived from Towne Services' consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The selected consolidated balance sheet as of
December 31, 1995 was 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 Towne's financial
condition and results of operations. These results may not be indicative of
future results.
<TABLE>
<CAPTION>
INCEPTION
PERIOD ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31 ------------------------------------------
1995(1) 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES ................................................ $ 6,000 $ 105,285 $ 722,364 $ 6,397,628
COSTS AND EXPENSES:
Costs of processing, servicing and support ........... 2,250 219,621 832,102 2,027,160
Research and development ............................. 0 51,871 332,470 306,482
Sales and marketing .................................. 3,739 118,163 839,323 6,251,564
Stock compensation expense(2) ........................ 0 10,020 0 6,267,497
Employee termination costs(7) ........................ 0 0 0 2,291,102
General and administrative ........................... 18,410 358,606 1,139,642 3,858,564
------------ ------------ ------------ ------------
Total costs and expenses ........................... 24,399 758,281 3,143,537 21,002,369
------------ ------------ ------------ ------------
OPERATING LOSS .......................................... (18,399) (652,996) (2,421,173) (14,604,741)
------------ ------------ ------------ ------------
OTHER EXPENSES:
Interest expense (income), net ....................... (131) 5,802 95,946 (263,503)
Other expense (income) ............................... 357 3,509 (1,018) (5,814)
Financing costs for stock issued to nonemployees(3)... 0 0 0 323,000
------------ ------------ ------------ ------------
Total other expenses ............................... 226 9,311 94,928 53,683
------------ ------------ ------------ ------------
Loss before extraordinary loss on early .............. (18,625) (662,307) (2,516,101) (14,658,424)
extinguishment of debt
Extraordinary loss on early extinguishment of debt ... 0 0 0 476,239
------------ ------------ ------------ ------------
NET LOSS ................................................ $ (18,625) $ (662,307) $ (2,516,101) $(15,134,663)
============ ============ ============ ============
PREFERRED STOCK DIVIDENDS(4) ............................ 0 0 0 (5,108,000)
ACCRETION OF WARRANTS WITH REDEMPTION
FEATURE(4) ........................................... 0 0 0 (691,972)
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS BEFORE EXTRAORDINARY
LOSS ................................................. $ (18,625) $ (662,307) $ (2,516,101) $(20,458,397)
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE BEFORE
EXTRAORDINARY LOSS:
Basic ................................................... $ (0.00) $ (0.10) $ (0.26) $ (1.32)
============ ============ ============ ============
Diluted ................................................. $ (0.00) $ (0.10) $ (0.26) $ (1.32)
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS ......................................... $ (18,625) $ (662,307) $ (2,516,101) $(20,934,635)
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE
Basic ................................................... $ (0.00) $ (0.10) $ (0.26) $ (1.35)
============ ============ ============ ============
Diluted ................................................. $ (0.00) $ (0.10) $ (0.26) $ (1.35)
============ ============ ============ ============
Weighted Average Common Shares Outstanding(5)(6)......... 5,000,000 6,337,356 9,600,592 15,516,170 (6)
============ ============ ============ ============
OTHER OPERATING DATA AT END OF PERIOD:
Number of sales people................................ 0 2 15 99 (7)
Number of bank contracts(8)........................... 0 17 74 641 (7)
Number of business customers.......................... 0 11 96 1,662 (7)
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998
----------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $17,517 $ 1,677 1,946,175 $ 9,883,587
Total assets....................................... 28,226 366,806 3,586,432 35,419,628
Long-term debt, net of current portion............. 30,000 90,000 1,289,666 0
Shareholders' (deficit) equity(6).................. (2,875) 119,092 1,261,663 28,272,416
</TABLE>
- -------------------------------
(1) Towne Services was incorporated on October 23, 1995. The Inception
Period is from that date to December 31, 1995.
(2) During the year ended December 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 third-party sales, the independent valuation
and the anticipated offering price, Towne recorded a one-time non-cash
compensation charge for the additional value.
(3) During the year ended December 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 retained an
independent appraiser who subsequently valued the common stock at a
higher price. Based upon third-party sales, the independent valuation
and the offering price, Towne 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' consolidated
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. In
October 1998, options to purchase 200,000 shares of common stock were
exercised for $80,000. See Note 10 of notes to Towne Services'
consolidated financial statements.
(6) In July 1998, Towne Services completed an initial public offering of
its common stock. The total proceeds of the offering, net of
underwriting discounts and offering expenses, were approximately $27.0
million. Towne issued 3,850,000 shares at an offering price at $8.00
per share. Subsequent to the offering, Towne converted all outstanding
shares of Series A Preferred Stock to 1,217,903 shares of common stock
and warrants for 308,982 shares of common stock were exercised.
(7) In December 1998, Towne Services acquired the outstanding capital stock
of Banking Solutions, Inc., for approximately $14.9 million in cash and
stock. In connection with the acquisition of Banking Solutions, Towne
issued 744,431 shares of Towne's common stock at $6.73 per share. The
remainder of the purchase price was paid in cash. Towne also agreed to
pay former officers of Banking Solutions amounts of money which are
contingent upon future performance criteria. Banking Solutions is a
developer and provider of a transaction processing system, CASHFLOW
MANAGER, an accounts receivable financing program similar to the TOWNE
FINANCE product. Towne Services recorded this transaction using the
purchase method of accounting. The numbers presented reflect the
effects of this acquisition.
(8) Number of bank contracts includes each TOWNE CREDIT, TOWNE FINANCE and
CASHFLOW MANAGER processing agreement executed with a bank. In some
cases, Towne Services enters into an agreement with a bank that has
several branches and the numbers presented above do not reflect the
number of branches operated by the bank. Towne also enters into
contracts with bank holding companies that is the parent of several
different banks and may count the contract as multiple contracts to
represent the banks or communities covered by the contract.
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report contains several "forward-looking statements"
concerning Towne Services' operations, performance, prospects, strategies and
financial condition, including its future economic performance, intent, 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. Words such as "may," "would," could," "will,"
"expect," "anticipate," "believe," "intend," "plan," and "estimate" 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:
- - Towne's limited operating history and whether it will be able to
achieve or maintain profitability;
- - whether Towne can attract and retain sales and marketing personnel or
enter new marketing alliances to grow its business;
- - whether Towne can obtain, continue and manage growth or execute
agreements with new customers;
- - whether the market will accept new products and enhancements from
Towne;
- - whether Towne can successfully integrate the operations of companies
it acquires;
- - increased competition;
- - the unknown effects of possible system failures and rapid changes in
technology; and
- - other factors discussed in this Annual Report and in Towne's
registration statement on Form S-1 (No. 333-53341) as declared
effective by the Securities and Exchange Commission on July 30, 1998,
including the "Risk Factors" section contained therein.
OVERVIEW
Towne's revenues currently are generated through initial set-up fees,
discount fees and monthly transaction processing fees. Management believes the
prices charged for both the initial set-up fees and the recurring transaction
fees are based upon the relative fair value of the related services provided.
Accordingly, Towne recognizes these fees as the related services are provided.
Set-up fees include charges for installation, implementation and training of
Towne'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 Communities
served. Towne also charges set-up fees to its business customers based either
upon a flat rate or upon the expected transaction volume. Revenues are deferred
for contracts that contain certain cancellation clauses and/or return guarantees
until the cancellation or guarantee period has expired.
As with credit card transactions, Towne'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
20
<PAGE> 23
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 Towne'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. Towne 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,
Towne has capitalized certain development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86 when the products reached technological
feasibility.
Sales and marketing expenses consist primarily of salaries and
commissions, travel expenses, advertising, trade show expenses and costs of
marketing materials. These expenses also include the costs incurred to develop
Towne's indirect marketing channels.
For the years ended December 31, 1997 and 1998, Towne had net losses
of approximately $2.5 million and $15.1 million, respectively. As of December
31, 1997, Towne had an accumulated deficit of $3.2 million. As of December 31,
1998, this accumulated deficit was $24.1 million. Approximately $12.9 million
of this accumulated deficit resulted from one-time non-cash charges, and $2.3
million of this accumulated deficit resulted from a one-time charge relating to
employee termination agreements subsequent to the purchase of Banking
Solutions, Inc. in December 1998.
On July 30, 1998 Towne's initial public offering was declared
effective by the Securities and Exchange Commission. In this offering, Towne
sold 3,850,000 shares of common stock at $8.00 per share. Towne received
proceeds of $27.0 million (net), after deducting underwriting discounts and
other expenses related to the offering.
Towne's business has grown rapidly with total revenues increasing from
$722,000 for 1997 to $6.4 million in 1998. However, Towne 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 25 at
December 31, 1997 to 169 at December 31, 1998. Towne 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 Towne's limited operating history, management believes that
period to period comparisons of its operating results are not meaningful.
Although Towne has experienced significant revenue growth recently, there can
be no assurance that such growth rates are sustainable, and they
21
<PAGE> 24
should not be relied upon as indicators of future performance. Towne'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 Towne will
be successful in addressing such risks and difficulties or that it will achieve
profitability in the future.
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>
Years Ended December 31,
-----------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues............................................. $ 105,285 $ 722,364 $ 6,397,628
Costs of processing, servicing and support........... 219,621 832,102 2,027,160
Research and development............................. 51,871 332,470 306,482
Sales and marketing.................................. 118,163 839,323 6,251,564
Stock compensation expense........................... 10,020 0 6,267,497
Employee termination costs........................... 0 0 2,291,102
General and administrative........................... 358,606 1,139,642 3,858,564
----------- ----------- ------------
Total costs and expenses............................. 758,281 3,143,537 21,002,369
----------- ----------- ------------
Operating loss....................................... (652,996) (2,421,173) (14,604,741)
----------- ----------- ------------
Interest expense (income), net....................... 5,802 95,946 (263,503)
Other expense (income)............................... 3,509 (1,018) (5,814)
Financing costs for stock issued to nonemployees(3).. 0 0 323,000
----------- ----------- ------------
Total other expenses................................. 9,311 94,928 53,683
----------- ----------- ------------
Net loss before extraordinary loss on early
extinguishment of debt........................... $ (662,307) $(2,516,101) $(14,658,424)
=========== =========== ============
Net loss............................................. $ (662,307) $(2,516,101) $(15,134,663)
=========== =========== ============
Net loss attributable to common shareholders......... $ (662,307) $(2,516,101) $(20,934,635)
=========== =========== ============
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues............................................. 100 % 100 % 100 %
Costs of processing, servicing and support........... 209 115 32
Research and development............................. 49 46 5
Sales and marketing.................................. 112 116 98
Stock compensation expense........................... 10 0 98
Employee termination costs........................... 0 0 36
General and administrative........................... 340 158 60
----------- ----------- ------------
Total costs and expenses............................. 720 435 328
----------- ----------- ------------
Operating loss....................................... (620) (335) (228)
----------- ----------- ------------
Interest (income) expense, net....................... 6 13 (4)
Other expense (income)............................... 3 0 0
Financing costs for stock issued to nonemployees..... 0 0 5
----------- ----------- ------------
Total other expenses................................. 9 13 1
----------- ----------- ------------
Net loss before extraordinary loss on early
extinguishment of debt........................... (629)% (348)% (229)%
=========== =========== ============
Net loss............................................. (629)% (348)% (237)%
=========== =========== ============
Net loss attributable to common shareholders......... (629)% (348)% (327)%
=========== =========== ============
</TABLE>
22
<PAGE> 25
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Towne's revenues increased from $722,000 in 1997 to $6.4
million in 1998. During these two periods, set-up fees accounted for
approximately 53% and 51% of total revenues, respectively. Recurring revenues
accounted for approximately 18% and 35% of total revenues, respectively. The
increase in revenues during these periods resulted primarily from an increase
in the number of customers (including as a result of the acquisition of Banking
Solutions in December 1998) and higher set-up fees and transaction processing
fees charged to new customers. The increase in set-up fee revenues resulted
primarily from an increase in the number of customers and higher set-up fees
charged to new customers.
Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $832,000 in 1997 to $2.0 million for 1998.
These costs were approximately 115% and 32% 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 and additional
services and support functions necessary to support Towne's growth, including
as a result of its acquisitions. Towne anticipates that these costs will
continue to increase as new customers are added. Costs of processing, servicing
and support decreased as a percentage of revenue as a result of substantially
increased revenues and improved operating efficiencies.
Research and Development. Towne research and development expenses
decreased from $332,000 in 1997 to $306,000 in 1998. Research and development
expenses represented approximately 46% and 5% of total revenues, respectively,
during these two periods. We expect that the dollar amount of research and
development expenses will increase as Towne recruits and hires additional
experienced programmers and develops new products and services. We do not
expect to incur significant costs to make our products year 2000 compliant
because we believe our products are currently designed to properly function
through and beyond the year 2000. See "--Effects of the Year 2000."
Sales and Marketing. Sales and marketing expenses increased from
$839,000 in 1997 to $6.3 million in 1998. Sales and marketing expenses were
approximately 116% and 98% of total revenues, respectively, during these two
periods. The increase in these expenses is primarily the result of significant
increases in the number of sales personnel in remote locations, related travel
expenses and costs for marketing materials used to recruit potential bank and
business customers. Towne 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 $6.3
million for the year ended December 31, 1998. In the first quarter of 1998,
Towne 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. Towne retained an independent appraiser who subsequently valued the
common stock at a higher price. Based upon outside sales to third parties, the
independent
23
<PAGE> 26
valuation and the anticipated initial public offering price at the time, Towne
recorded a one time non-cash charge for the additional value.
Purchase of Banking Solutions, Inc. In December 1998, Towne acquired
the outstanding capital stock of Banking Solutions, Inc., for approximately
$14.9 million in cash and stock. In connection with the acquisition of Banking
Solutions, Towne issued 744,431 shares of Towne common stock at $6.73 per share.
The remainder of the purchase price was paid in cash. Towne also agreed to pay
former officers of Banking Solutions amounts of money which are contingent upon
future performance criteria. Banking Solutions is a developer and provider of a
transaction processing system, CASHFLOW MANAGER, an accounts receivable
financing program similar to the TOWNE FINANCE product. Towne recorded this
transaction using the purchase method of accounting. Towne has recorded goodwill
in the amount of $14.6 million, which is being amortized over a period of 25
years. Towne has recorded a $1.1 million intangible asset for the purchase of
BSI's customer list, which is being amortized over a period of 5 years. Towne
also recognized a one time charge in the amount of $2.3 million, in December
1998, related to employee terminations which were not identified at the date of
purchase.
General and Administrative. General and administrative expenses
increased from $1.1 million in 1997 to $3.9 million in 1998. These costs
represented approximately 158% and 60% 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 executive and administrative
employees and the costs associated with executive and administrative expenses
related to our growth. Also, Towne incurred 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. We anticipate that these expenses will continue to increase in
the near future as Towne upgrades internal and financial reporting systems to
enhance management's ability to obtain and analyze information about its
operations.
Interest (Income) Expense, Net. Towne reported net interest expense of
$96,000 in 1997 and net interest income of $264,000 in 1998. Interest expense
decreased as a result of the repayment of debt obligations and interest income
increased as a result of earnings on investments of cash proceeds received from
the initial public offering.
Extraordinary Loss. Towne reported an extraordinary loss during 1998
resulting from the early extinguishment of debt in the amount of $476,000. The
extraordinary loss was comprised of $218,000 unamortized discount on a
promissory note and $258,000 deferred debt issuance costs. See Note 5 of Notes
to Towne's Financial Statements.
Income Taxes. As of December 31, 1998, Towne Services had net operating
losses ("NOLs") of approximately $17.6 million for federal tax purposes which
will expire if not utilized beginning in 2011. Towne 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.
24
<PAGE> 27
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Towne's revenues increased from $105,000 in 1996 to $722,000
in 1997. Set-up fees accounted for approximately 44% and 53% of total revenues
in 1996 and 1997, respectively. Recurring revenues accounted for approximately
5% and 18% of total revenues in 1996 and 1997, respectively. The increases in
the dollar amount of revenues during this period 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 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 $220,000 in 1996 to $832,000 in 1997. The
costs were approximately 209% and 115% 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 our growth.
Research and Development. Towne increased its research and development
expenses from $52,000 in 1996 to $332,000 in 1997. Research and development
expenses represented approximately 49% and 46% of total revenues, respectively,
during these two periods. The increase in dollar amounts was due primarily to
the continued development of TOWNE CREDIT and TOWNE FINANCE.
Sales and Marketing. Sales and marketing expenses increased from
$118,000 in 1996 to $839,000 in 1997. Sales and marketing expenses were
approximately 112% and 116% of total revenues, respectively, during these two
periods. The increase in dollar amount was 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 $359,000 in 1996 to $1.1 million in 1997. These costs were
approximately 340% and 158% of total revenues, respectively, for these two
periods. The increase in dollar amounts was 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 our growth.
Interest (Income) Expense, net. Interest expense increased from $6,000
in 1996 to $96,000 in 1997, primarily as a result of a loan facility obtained
in late 1997.
Income Taxes. As of December 31, 1997, Towne had NOLs of approximately
$3.0 million for federal tax purposes which will expire if not utilized by 2011
and 2012. Towne 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.
25
<PAGE> 28
During Towne'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 Towne's expenses vary with its revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Towne has financed its operations primarily
through sales of its equity securities in private placements, its initial public
offering and through credit facilities. Through December 1997, Towne received
aggregate net proceeds of $4.3 million from the sale of its common stock. In
March 1998, Towne received net proceeds of $1.5 million from the sale of its
Series A Preferred Stock in a private placement. In July 1998, Towne received
net proceeds of $27.0 million from the initial public offering of its common
stock.
In August 1998, Towne paid off all then existing current and long term
debt obligations, which consisted of a $1.5 million term note and several lines
of credit, with proceeds received from its initial public offering. The early
extinguishment of some of these debt obligations resulted in an extraordinary
loss of $476,000, which is comprised of $218,000 unamortized discount on the
$1.5 million term note and $258,000 in deferred debt issuance costs.
In December 1998, Towne borrowed $5.0 million on a short-term line of
credit from First Union National Bank. The line of credit has a term of one
year with an interest rate of LIBOR plus 2.0% (7.1% at December 31, 1998). It
is secured by a deposit account Towne maintains with the lender. The line of
credit was paid in full in January 1999. Towne will continue to negotiate 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 1997 and $10.2 million for 1998. Net cash used in operating activities
during 1997 represents a $2.5 million net loss partially offset by a $599,000
increase in accounts payable and accrued expenses, a $120,000 increase in
accounts receivable and a $260,000 increase in prepaid expenses and other
assets. Net cash used in operating activities during 1998 represents a $15.1
million net loss partially offset by a $622,000 increase in accounts payable
and accrued expenses, a $3.0 million increase in accounts receivable and a
$265,000 increase in prepaid expenses and other assets.
26
<PAGE> 29
Net cash used in investing activities was approximately $531,000 for
1997 and $12.9 million for 1998. Net cash used in investing activities during
1997 represents an increase of $452,000 for the purchase of computer equipment
used in conducting Towne's business and an increase of $79,000 of notes
receivable due from a shareholder. Net cash used in investing activities during
1998 represents an increase of $10.4 million to acquire Banking Solutions, Inc.,
$1.9 million for the purchase of computer equipment and other capital equipment
used in conducting Towne's business, $510,000 to acquire some of the assets and
liabilities of Credit Collection Solutions, Inc. and $170,000 in notes due from
shareholders.
Net cash provided by financing activities was $5.0 million for 1997
and $33.7 million for 1998, which consisted primarily of $27.0 million of net
proceeds received from Towne's initial public offering, $1.5 million from the
issuance of preferred stock, $584,000 from the exercise of stock options and
$4.6 million of net proceeds from the issuance of other securities and payment
of all outstanding debt obligations.
EFFECTS OF THE YEAR 2000
Towne's business and customer relationships rely on computer software
programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
connections are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), significant system failures or
errors may result which could have a material adverse effect on the business,
financial condition, or results of operations of both the effected customers
and Towne. Towne Services has conducted tests on its proprietary point of sale
terminals, network connections and transaction processing software and believes
that its TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER products and network
connections it maintains are able to process dates after December 31, 1999. For
its internal accounting and operating systems and network communications, Towne
uses software and other products provided by third parties and has received
warranties or other assurances that most of these products are programmed to
address the Year 2000 issue. Towne plans to conduct a limited review of its
internal systems and to continue to test its network connections to help insure
that these programs and systems are adequately programmed to address the Year
2000 issue. Towne Services intends to modify or replace any products or systems
that are unable to properly function as a result of the Year 2000 issue and
currently believes it will be able to do so without incurring costs or delays
which would have a material adverse effect on its financial condition.
Towne supplies point of sale terminals and other products needed to
run its processing systems to its customers and Towne Services has not tested
any other products or systems used in its customers' businesses. If Towne's
customers do not successfully address Year 2000 issues in their operations and,
as a result, experience temporary or permanent interruptions in their
businesses, Towne may lose revenues from these customers, which could have a
material adverse effect on its business, financial condition and results of
operations. Towne Services believes that many financial institutions and small
businesses (including customers of Towne) are still in the preliminary stages
of analyzing their systems for Year 2000 issues. It is impossible to estimate
the potential expenses involved or delays which may result from the failure of
these institutions and third parties to resolve their Year 2000 issues in a
timely manner and there can be no assurance that such expenses, failures
27
<PAGE> 30
or delays will not have a material adverse effect on Towne's business,
financial condition or results of operations.
EFFECTS OF ACCOUNTING STANDARDS
In June 1997, the 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. Towne adopted SFAS No. 130 on January 1, 1998. The adoption
of SFAS 130 did not have a material impact on Towne'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 did not have an impact on
Towne's financial statements, as the Company operates in one business segment,
electronic transaction processing. Towne's operating business segments provide
electronic transaction processing for small business in-house accounts. The
separate businesses within Towne use Towne's central administrative offices for
customer support, centralized processing and sales support. In addition, Towne's
sales force markets all products within their assigned markets. Consequently,
Towne considers all of its products as one reportable segment under the
definitions in SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. A company may also implement SFAS No. 133 as of
the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1988 and thereafter). SFAS No. 133 cannot be applied
retroactively; it must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. The adoption of SFAS No. 133
will not have a material impact on Towne's financial statements.
28
<PAGE> 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Towne does not use derivative financial instruments in its operations
or investments and does not have significant operations subject to fluctuations
in foreign currency exchange rates. Towne's $5.0 million credit facility has an
interest rate which is based (at the Company's election) upon the lender's
prime rate. As of March 15, 1999, no amounts were outstanding under this credit
facility and, therefore, Towne does not believe it has a significant risk due
to potential fluctuations in interest rates at this time. Changes in interest
rates which dramatically increase the interest rate on the credit facility
would make it more costly to borrow proceeds under that facility and may impede
Towne's acquisition and growth strategies if management determines that the
costs associated with borrowing funds are too high to implement these
strategies.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Towne, including Towne's
consolidated balance sheets as of December 31, 1998 and 1997 and consolidated
statements of income, consolidated statements of cash flows and consolidated
statements of changes in shareholders' equity for the three years ended
December 31, 1998, together with the report thereto of Arthur Andersen LLP
dated February 12, 1999, and the schedule containing certain supporting
information are attached hereto as pages F-1 through F-24.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL
DISCLOSURES
Not applicable.
29
<PAGE> 32
PART III
Certain information required by Part III is omitted from this Report
because the Registrant will file a definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement")
not later than 120 days after the end of the financial year covered by this
Report, and certain information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by
reference from the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference from the Proxy Statement, except for those portions relating to the
Compensation Committee's Report on Executive Compensation and to Towne's
Comparative Performance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Towne Services,
Inc. and its subsidiaries are filed as part of this Annual Report and are
attached hereto as pages F-1 to F-24:
Report of Independent Public Accountants
Consolidated Balance Sheets of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Notes to Financial Statements
30
<PAGE> 33
(a)(2) Financial Statement Schedules
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Beginning Charged to Ending
Description 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 0 0 0
December 31, 1997 Allowance for Doubtful Accounts..... 0 25,000 0 25,000
December 31, 1998 Allowance for Doubtful Accounts..... 25,000 322,065 0 347,065
</TABLE>
(a)(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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.*
2.2 Stock Purchase Agreement dated November 30, 1998 by and
between Towne Services, Inc., BSI Acquisition Corp., Banking
Solutions, Inc. ("BSI"), and certain shareholders of BSI
(incorporated by reference to Exhibit 2.1 of the Company's
Report on Form 8-K filed on December 15, 1998).
3.1 Amended and Restated Articles of Incorporation, as filed with
the Secretary of State of the State of Georgia on July 29,
1998.*
3.2 Amended and Restated Bylaws, effective May 19, 1998.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of common stock of
the Company.
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.*
</TABLE>
31
<PAGE> 34
<TABLE>
<S> <C>
10.11 Form of TOWNE CREDIT Merchant Processing Agreement.*
10.12 Form of TOWNE FINANCE Client Processing Agreement.*
10.13 Form of CASH FLOW MANAGER Merchant Services Agreement.
10.14 Form of CASH FLOW MANAGER License Agreement.
10.15 Form of Independent Bankers Bank General Marketing Agent
Agreement.
10.16 Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.17 Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.18 Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*
10.19 Promissory note dated April 1, 1998 issued to Towne Services,
Inc. by Bruce F. Lowthers, Jr.*
10.20 Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Drew W. Edwards.
10.21 Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco.
10.22 Form of General Marketing Agent Agreement.*
10.23 Promissory Note by the Company to the order of First Union
National Bank dated December 31, 1998.
21.1 Subsidiaries of Towne Services, Inc.
23.1 Consent of Arthur Andersen, LLP.
24.1 Power of Attorney (contained or the signature page hereof).
27.1 Financial Data Schedule for the periods ending December 31,
1997 and 1998 (for SEC use only).
99.1 The following audited financing statements of Banking
Solutions, Inc. together with the report thereon by Arthur
Andersen LLP (incorporated by reference to Exhibit 99.2 of
the Company's Report on Form 8-K/A filed on February 16,
1999): Balance Sheets as of December 31, 1996, 1997 and
September 30, 1998 (unaudited). Statements of Operations for
the years ended December 31, 1995, 1996, 1997 and the nine
months ended September 30, 1998 (unaudited). Statements of
Shareholders' Equity for the years ended December 31, 1995,
1996, 1997 and the nine months ended September 30, 1998
(unaudited). Statements of Cash Flows for the years ended
December 31, 1995, 1996, 1997 and the none months ended
September 30, 1998 (unaudited). Notes to Financial
Statements.
99.2 The following unaudited pro forma financial statements of
Towne Services, Inc. and Banking Solutions, Inc.
(incorporated by reference to Exhibit 99.3 of the Company's
Report on Form 8-K/A filed on February 16, 1999): Pro Forma
Balance Sheet as of September 30, 1998. Pro Forma Statement
of Operations for the year ended December 31, 1997. Pro Forma
Statement of Operations for the nine months ended September
30, 1998. Notes to Pro Forma Condensed Consolidated Financial
Information.
</TABLE>
- ------------------
32
<PAGE> 35
* Incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1 (No. 333-53341) as declared
effective by the Securities and Exchange Commission on July 30, 1998.
** This agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
(b) Reports on Form 8-K
Form 8-K filed on December 15, 1998. Current report under Item 2
reporting that Towne, through a wholly-owned subsidiary, acquired all of the
outstanding capital stock of Banking Solutions, Inc. pursuant to a Stock
Purchase Agreement dated as of November 30, 1998.
33
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereto duly authorized.
Towne Services, Inc.
March 24, 1999 By: /s/ Drew W. Edwards
- -------------------------- -----------------------------------------------
Date Drew W. Edwards
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Drew W. Edwards
and Henry M. Baroco, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report (Form 10-K) and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchanges Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Drew W. Edwards Chairman of the Board and Chief March 24, 1999
- --------------------------------------- Chief Executive Officer
Drew W. Edwards (principal executive officer)
/s/ Bruce F. Lowthers Chief Financial Officer March 24, 1999
- --------------------------------------- (principal financial and
Bruce F. Lowthers accounting officer)
/s/ Henry M. Baroco President, Chief Operating March 24, 1999
- --------------------------------------- Officer and Director
Henry M. Baroco
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ G. Lynn Boggs Director March 24, 1999
- ---------------------------------------
G. Lynn Boggs
/s/ Frank W. Brown Director March 24, 1999
- ---------------------------------------
Frank W. Brown
/s/ John W. Collins Director March 24, 1999
- ---------------------------------------
John W. Collins
/s/ J. Stanley Mackin Director March 24, 1999
- ---------------------------------------
J. Stanley Mackin
/s/ Joe M. Rodgers Director March 24, 1999
- ---------------------------------------
Joe M. Rodgers
/s/ John D. Schneider, Jr. Director March 24, 1999
- ---------------------------------------
John D. Schneider, Jr.
/s/ J. Daniel Speight, Jr. Director March 24, 1999
- ---------------------------------------
J. Daniel Speight, Jr.
/s/ Glenn W. Sturm Director March 24, 1999
- ---------------------------------------
Glenn W. Sturm
/s/ J. Stephen Turner Director March 24, 1999
--------------------------------------
J. Stephen Turner
/s/ Bahram Yusefzadeh Director March 24, 1999
- ---------------------------------------
Bahram Yusefzadeh
</TABLE>
35
<PAGE> 38
TOWNE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and 1998................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998............................................F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998......................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998............................................F-6
NOTES TO FINANCIAL STATEMENTS........................................................F-7
</TABLE>
F-1
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Towne Services, Inc.:
We have audited the accompanying consolidated balance sheets of TOWNE SERVICES,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997 and 1998
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in Item
14(a)(2) of this Form 10-K 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 subjected to the auditing
procedures applied in the audits 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.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 12, 1999
F-2
<PAGE> 40
TOWNE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 2,536,439 $ 13,081,284
Accounts receivable, net of allowance
for uncollectible accounts of $25,000 and $347,065
in 1997 and 1998, respectively .................................................. 121,566 3,552,478
Note receivable .................................................................... 0 167,305
Other .............................................................................. 68,273 229,732
------------ ------------
Total current assets .......................................................... 2,726,278 17,030,799
PROPERTY AND EQUIPMENT, net .......................................................... 489,849 2,116,987
NOTES RECEIVABLE ..................................................................... 78,990 81,565
DEBT ISSUANCE COSTS, net ............................................................. 288,815 0
GOODWILL, net ........................................................................ 0 14,955,414
OTHER INTANGIBLES, net ............................................................... 0 1,134,614
OTHER ASSETS, net .................................................................... 2,500 100,249
------------ ------------
$ 3,586,432 $ 35,419,628
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................... $ 297,937 $ 125,763
Accrued liabilities ................................................................ 215,109 1,273,148
Accrued compensation ............................................................... 220,300 250,391
Accrued termination costs .......................................................... 0 497,910
Current portion of long-term debt .................................................. 46,757 5,000,000
------------ ------------
Total current liabilities ....................................................... 780,103 7,147,212
------------ ------------
LONG TERM DEBT, net of discount of $249,500 and
$0 in 1997 and 1998, respectively ............................................... 1,289,666 0
------------ ------------
COMMITMENTS AND CONTINGENCIES
WARRANTS WITH REDEMPTION FEATURE ..................................................... 255,000 0
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value; 20,000,000 shares authorized, 0
issued and outstanding in 1997 and 1998, respectively ........................... 0 0
Common stock, no par value; 50,000,000 shares authorized,
11,706,766 and 19,651,390 issued and outstanding in 1997
and 1998, respectively .......................................................... 4,417,696 52,363,084
Warrants outstanding ............................................................... 41,000 41,000
Accumulated deficit ................................................................ (3,197,033) (24,131,668)
------------ ------------
Total shareholders' equity ...................................................... 1,261,663 28,272,416
------------ ------------
$ 3,586,432 $ 35,419,628
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 41
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES .............................................................. $ 105,285 $ 722,364 $ 6,397,628
------------ ------------ ------------
COSTS AND EXPENSES:
Costs of processing, servicing, and support ......................... 219,621 832,102 2,027,160
Research and development ............................................ 51,871 332,470 306,482
Sales and marketing ................................................. 118,163 839,323 6,251,564
Stock compensation expense .......................................... 10,020 0 6,267,497
Employee termination costs .......................................... 0 0 2,291,102
General and administrative .......................................... 358,606 1,139,642 3,858,564
------------ ------------ ------------
Total costs and expenses ......................................... 758,281 3,143,537 21,002,369
------------ ------------ ------------
OPERATING LOSS ........................................................ (652,996) (2,421,173) (14,604,741)
------------ ------------ ------------
OTHER EXPENSES:
Interest expense (income), net ...................................... 5,802 95,946 (263,503)
Other expense (income) .............................................. 3,509 (1,018) (5,814)
Financing costs for stock issued to nonemployees .................... 0 0 323,000
------------ ------------ ------------
Total other expenses ............................................. 9,311 94,928 53,683
------------ ------------ ------------
Loss before extraordinary loss on early extinguishment
of debt ........................................................... (662,307) (2,516,101) (14,658,424)
Extraordinary loss on early extinguishment of debt .................. 0 0
476,239
------------ ------------ ------------
NET LOSS .............................................................. $ (662,307) $ (2,516,101) $(15,134,663)
============ ============ ============
PREFERRED STOCK DIVIDENDS ............................................. 0 0 (5,108,000)
ACCRETION OF WARRANTS WITH REDEMPTION FEATURE ......................... 0 0 (691,972)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
BEFORE EXTRAORDINARY LOSS .......................................... $ (662,307) $ (2,516,101) $(20,458,396)
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE BEFORE EXTRAORDINARY LOSS:
Basic ................................................................. $ (0.10) $ (0.26) $ (1.32)
============ ============ ============
Diluted ............................................................... $ (0.10) $ (0.26) $ (1.32)
============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ......................... $ (662,307) $ (2,516,101) $(20,934,635)
============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE:
Basic ................................................................. $ (0.10) $ (0.26) $ (1.35)
============ ============ ============
Diluted ............................................................... $ (0.10) $ (0.26) $ (1.35)
============ ============ ============
Weighted Average Common Shares Outstanding ............................ 6,337,356 9,600,592 15,516,170
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 42
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
TOTAL
WARRANTS ACCUMULATED SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK OUTSTANDING DEFICIT EQUITY
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 -- -- 5,000,000 $ 15,750 -- $ (18,625) $ (2,875)
--------------------------------------------------------------------------------------------
Issuance of common stock -- -- 2,905,700 720,150 -- -- 720,150
Fair value of stock options granted -- -- -- 64,124 -- -- 64,124
Net loss -- -- -- -- -- (662,307) (662,307)
--------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- -- 7,905,700 800,024 -- (680,932) 119,092
--------------------------------------------------------------------------------------------
Issuance of common stock -- -- 3,537,766 3,471,099 -- -- 3,471,099
Issuance of warrants -- -- -- -- 41,000 -- 41,000
Exercise of stock options -- -- 263,300 78,990 -- -- 78,990
Fair value of stock options granted -- -- -- 67,583 -- -- 67,583
Net loss -- -- -- -- -- (2,516,101) (2,516,101)
--------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 -- -- 11,706,766 4,417,696 41,000 (3,197,033) 1,261,663
--------------------------------------------------------------------------------------------
Issuance of preferred stock 15,000 $ 1,500,000 -- -- -- -- 1,500,000
Issuance of common stock -- -- 1,052,308 5,532,500 -- -- 5,532,500
Preferred stock dividend (Note 8) -- -- -- 5,100,000 -- (5,108,000) (8,000)
Exercise of stock options -- -- 771,000 583,500 -- -- 583,500
Employee compensation expense
for stock options granted or
amended -- -- -- 2,275,266 -- -- 2,275,266
Accretion of warrants with
redemption feature -- -- -- 691,972 -- (691,972) --
Conversion of preferred stock (15,000) (1,500,000) 1,217,903 1,508,000 -- -- 8,000
Conversion of outstanding warrants -- -- 308,982 255,000 -- -- 255,000
Initial public offering transactions,
net (Note 3) -- -- 3,850,000 26,989,129 -- -- 26,989,129
Issuance of common shares in
connection with the purchase -- -- 744,431 5,010,021 -- -- 5,010,021
of Banking Solutions, Inc.
Net loss -- -- -- -- -- (15,134,663) (15,134,663)
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 -- -- 19,651,390 $52,363,084 $41,000 $(24,131,668) $ 28,272,416
----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE> 43
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
--------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................................... $(662,307) $(2,516,101) $(15,134,663)
--------- ------------ -------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense recognized for stock option grants................. 10,020 0 6,267,497
Financing costs for stock issued to nonemployees........................ 0 0 323,000
Issuance of warrants.................................................... 0 41,000 0
Loss on disposal of property and equipment ............................. 7,234 0 0
Extraordinary loss from early extinguishment of debt.................... 0 0 476,239
Depreciation............................................................ 12,895 103,629 285,354
Amortization of goodwill and other intangibles.......................... 0 0 113,337
Amortization of debt financing fees..................................... 0 39,423 13,496
Amortization of debt discount........................................... 0 5,500 33,025
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable................................................ (1,596) (119,970) (2,969,117)
Prepaid & other assets............................................. (8,713) (259,209) (265,166)
Accounts payable................................................... 39,487 257,836 (401,993)
Accrued liabilities ............................................... 94,022 200,922 993,439
Accrued compensation............................................... 0 139,977 30,092
Deferred revenue................................................... 23,103 (23,103) 0
--------- ------------ -------------
Total adjustments......................................... 176,452 386,005 4,899,203
--------- ------------ -------------
Net cash used in operating activities..................... (485,855) (2,130,096) (10,235,460)
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from shareholders........................................... 0 (78,990) (169,880)
Purchase of Credit Collection Solutions, Inc., net of cash acquired......... 0 0 (510,000)
Purchase of Banking Solutions, Inc., net of cash acquired................... 0 0 (10,351,129)
Purchase of property and equipment, net..................................... (151,813) (451,569) (1,870,672)
--------- ------------ -------------
Net cash used in investing activities.................... (151,813) (530,559) (12,901,681)
--------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................................... 0 78,990 583,500
Repayment of debt........................................................... 0 (318,702) (2,236,761)
Proceeds from Sirrom Capital loan........................................... 0 1,500,000 0
Proceeds from short/long-term borrowings.................................... 60,000 314,625 5,628,849
Proceeds from issuance of preferred stock................................... 0 0 1,500,000
Proceeds from issuance of common stock...................................... 710,130 3,471,099 28,206,398
--------- ------------ -------------
Net cash provided by financing activities.............. 770,130 5,046,012 33,681,986
--------- ------------ -------------
NET INCREASE IN CASH......................................................... 132,462 2,385,357 10,544,845
CASH AND CASH EQUIVALENTS, beginning of period............................... 18,620 151,082 2,536,439
--------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 151,082 $ 2,536,439 $ 13,081,284
========= ============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes................................................... $ 0 $ 0 $ 0
========= ============ ============
Cash paid for interest....................................................... 0 $ 15,900 $ 235,030
========= ============ ============
Fair value of stock options granted.......................................... $ 64,124 $ 67,583 $ 0
========= ============ ============
ACQUISITION OF BSI:
Fair value of assets acquired.............................................. $ 0 $ 0 $ 413,534
Liabilities assumed........................................................ 0 0 (1,285,120)
Value of common shares issued.............................................. 0 0 (4,517,230)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 44
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED 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 in much the same
way as credit card transactions are processed 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 the following electronic processing
systems, TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER, 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. The CASHFLOW MANAGER system is an accounts receivable
financing program similar to the TOWNE FINANCE product. Through the
use of the Company'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, the Company
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
the Company'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 $662,000, $2.5 million and $15.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively. 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
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Towne
Services, Inc. and its wholly-owned subsidiary. All significant
inter-company balances and transactions have been eliminated in
consolidation.
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
F-7
<PAGE> 45
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.
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. Revenues are deferred for contracts that contain
certain cancellation clauses and/or return guarantees until the
guarantee period is expired. 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, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998 USEFUL LIVES
--------- ---------- ------------
<S> <C> <C> <C>
Furniture and fixtures $ 114,841 $ 280,144 Seven years
Automobiles 18,406 18,406 Three years
Computers and equipment 219,328 651,740 Five years
Point-of-sale equipment 193,843 1,279,644 Three years
Leasehold improvements 9,337 32,267 Five years
Computer Software 0 162,653 Five years
Software development costs 47,000 59,500 Three years
--------- ----------
602,755 2,484,354
Less accumulated depreciation (112,906) (367,367)
--------- ----------
$ 489,849 $2,116,987
========= ==========
</TABLE>
F-8
<PAGE> 46
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.
GOODWILL AND OTHER INTANGIBLES
In connection with the purchase of Credit Collection Solutions, Inc.
("CCS") (Note 4), the Company has recorded goodwill in the amount of
$440,000, which is being amortized over a period of 5 years.
In connection with the purchase of Banking Solutions, Inc. ("BSI")
(Note 4), the Company has recorded goodwill in the amount of $14.6
million, which is being amortized over a period of 25 years. The
Company has allocated $1.1 million to BSI's customer list, which is
being amortized over a period of 5 years.
OFFICERS' LIFE INSURANCE
The Company carries life insurance policies on four key executives.
The aggregate face value of these policies is $4,250,000, 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,
1997 and 1998.
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 $47,000, and
$60,000 of software development costs at December 31, 1997 and 1998,
respectively.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
effective for fiscal years ending after December 15, 1997. The Company
adopted the new guidelines for the calculation and presentation of
earnings per share, and all prior periods have been restated. Basic
loss per share is based on the weighted average number of shares
outstanding. Diluted loss per share is based on the weighted average
number of shares outstanding, and the dilutive effect of common stock
equivalent shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). All common stock
equivalents
F-9
<PAGE> 47
have been excluded, as their effect would be anti-dilutive. Therefore,
the weighted average shares used for basic and diluted earnings per
share are the same.
INCOME TAXES
The Company 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts
payable, and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.
The fair value of the Company's long-term debt is estimated based on
the current rates offered to the Company for debt of similar terms and
maturities.
RISK OF POSSIBLE SYSTEM FAILURE
The Company's operations depend on its ability to protect its network
infrastructure and equipment against damages from human error, natural
disasters, power and telecommunications failures, intentional acts of
vandalism, and similar events. Despite precautions taken by the
Company, the occurrence of human error, a natural disaster, or other
unanticipated problems could halt the Company's services, damage
network equipment, and result in substantial expense for the Company
to repair or replace damaged equipment. In addition, the failure of
the Company's telecommunications providers to supply the necessary
services could also interrupt the Company's services. The inability of
the Company to supply services to its customers could negatively
affect the Company's business and financial results and may also harm
the Company's reputation.
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
F-10
<PAGE> 48
not experienced any product recalls or product liability judgments or
claims. However, a product recall or product liability judgment
against Towne Services could negatively affect its business and
financial results.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
Towne Services believes that its technologies, trademarks and other
proprietary rights are important to its success. The Company attempts
to protect itself through a combination of copyright law, trademark
and trade secret laws, employee and third party confidentiality
agreements and other methods. However, unauthorized parties may
attempt to copy aspects of the Company's technology, products and
services or to otherwise obtain and use information that the Company
regards as proprietary, despite the Company's efforts to protect them.
Third parties may claim that the Company's current or future products
and services infringe the patent, copyright or trademark rights of
such third parties. No assurance can be given that, if such actions or
claims are brought, the Company will ultimately prevail. Any such
claims, whether with or without merit, could be costly and time
consuming, cause delays in introducing new or improved products and
services, require Towne Services to enter royalty or licensing
agreements or discontinue using the challenged technology and
otherwise could have a material adverse effect on the Company's
business and financial results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and presentation of comprehensive income and
its components in a full set of general purpose financial statements.
This statement is effective for periods beginning after December 15,
1997. The Company adopted SFAS No. 130 effective March 31, 1998. The
adoption of SFAS 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.
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. The Company's operating
business segments provide electronic transaction processing for small
business in-house accounts. The product lines offered by the Company
use the Company's central administrative offices for customer support,
centralized processing and sales support. In addition, the Company's
sales force markets all products within their assigned markets.
Consequently, the Company considers all of its products as one
reportable segment under the definitions in SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
F-11
<PAGE> 49
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. A company may also implement SFAS No. 133 as of
the beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1999 and thereafter). SFAS No. 133 cannot
be applied retroactively; it must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997. The adoption of SFAS No. 133 is not expected to
have a material impact on the Company's financial statements.
3. INITIAL PUBLIC OFFERING
In July 1998 the Company completed an initial public offering ("IPO")
of its common stock. The total proceeds of the IPO, net of
underwriting discounts and offering expenses, were approximately $27.0
million. The Company issued 3,850,000 shares at an offering price at
$8.00 per share. Subsequent to the IPO, the Company converted all
outstanding shares of Series A Preferred Stock to 1,217,903 shares of
common stock and warrants for 308,982 shares of common stock were
exercised.
4. ACQUISITIONS
In June 1998, the Company acquired certain assets and liabilities of
Credit Collection Solutions, Inc. ("CCS") for approximately $510,000
cash and the issuance of up to 100,000 shares of the Company's common
stock if certain financial results are achieved. CCS is a developer of
computer software for processing payments and tracking collections. In
connection with the purchase of CCS, the Company has recorded goodwill
in the amount of $440,000, which is being amortized over a period of 5
years. This amount includes $200,000 which was originally recognized
as purchased in-process development at the time of the acquisition.
In December 1998, the Company acquired the outstanding stock of
Banking Solutions, Inc. ("BSI") for approximately $14.9 million in cash
and stock. In connection with the acquisition of Banking Solutions, the
Company issued 744,431 shares of Towne's common stock at $6.73 per
share. The remainder of the purchase price was paid in cash. Towne also
agreed to pay former officers of Banking Solutions amounts of money
which are contingent upon future performance criteria. BSI is a
developer and provider of a transaction processing system, CASHFLOW
MANAGER, an accounts receivable financing program similar to the TOWNE
FINANCE product. The Company recorded this transaction using the
purchase method of accounting. The Company has allocated goodwill in
the amount of $14.6 million, which is being amortized over a period of
25 years. The Company has recorded $1.1 million to an intangible asset
for BSI's customer list, which is being amortized over a period of 5
years. The Company recognized a one-time charge in the amount of $2.3
million in December 1998, related to employee terminations which were
not identified at the date of purchase.
F-12
<PAGE> 50
Pro forma financial information as if the acquisitions had occurred at
the beginning of the respective periods during which they occurred
would be as follows:
<TABLE>
<CAPTION>
(Unaudited)
1997 1998
----------- ------------
<S> <C> <C>
REVENUES $ 8,808,177 $ 14,510,777
NET LOSS BEFORE EXTRAORDINARY ITEM $(3,484,053) $(15,429,602)
NET LOSS $(3,484,053) $(15,905,842)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(3,484,053) $(21,705,813)
=========== ============
NET LOSS ATTRIBUTABLE PER COMMON SHARE $ (0.34) $ (1.35)
----------- ------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Note payable to First Union Bank, interest at $ 0 $ 5,000,000
LIBOR+2.0% (7.1% at December 31, 1998)
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 owned by the Company's
principal shareholders 1,500,000 0
Notes payable to Citizens Bank, interest ranging from
9.25% to 12%, payable monthly through 2000, secured
by equipment 85,923 0
----------- -----------
1,585,923 5,000,000
Less current portion (46,757) (5,000,000)
----------- -----------
1,539,166 0
Less original issue discount (249,500) 0
----------- -----------
$ 1,289,666 $ 0
=========== ===========
</TABLE>
In August 1998, the Company repaid all of its then current and
long-term debt obligations then outstanding using proceeds of the
initial public offering. This resulted in an extraordinary one-time
charge to net income of $476,000, which is
F-13
<PAGE> 51
comprised of $218,000 unamortized discount on a note payable to Sirrom
Investments, Inc. (the "Sirrom Note") and $258,000 deferred debt
issuance costs.
In January 1999, the Company paid in full the First Union National
Bank note of $5,000,000.
6. INCOME TAXES
The following is a reconciliation of income taxes at the federal
statutory rate with income taxes recorded by the Company for the years
ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Income tax benefit computed at the
federal statutory rate $ 225,184 $ 843,568 $ 5,145,786
State income tax benefit, net of
federal income tax benefit 30,220 96,136 605,387
Other, net (2,784) (16,193) (49,994)
Change in valuation allowance (252,620) (923,511) (5,701,179)
--------- --------- -----------
$ 0 $ 0 $ 0
========= ========= ===========
</TABLE>
Deferred income tax assets and liabilities for 1996, 1997 and 1998
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, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation $ 30,523 $ 38,000 $ 76,114
Accounts receivable reserves 0 7,980 131,885
Other 10,837 16,068 70,300
Net operating loss carryforwards 211,129 1,134,584 6,693,044
---------- ----------- -----------
Deferred tax assets 252,489 1,196,632 6,971,343
Deferred tax liability:
Depreciation (131) (20,501) (94,033)
---------- ----------- -----------
252,358 1,176,131 6,877,310
Valuation allowance (252,358) (1,176,131) (6,877,310)
---------- ----------- -----------
Net deferred tax asset $ 0 $ 0 $ 0
========== =========== ===========
</TABLE>
Due to the Company's current year operating loss position and
projected losses for the fiscal year ending December 31, 1999, no
benefit for income taxes for the year ended December 31, 1998 has been
provided in the accompanying financial statements as management has
not determined it is more likely than not that such benefits will be
realized.
F-14
<PAGE> 52
At December 31, 1998, the Company has net operating loss carryforwards
("NOLs") of approximately $17.6 million which will expire if not
utilized beginning in 2011. 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. Once these net operating loss carryforwards 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.
7. WARRANTS WITH REDEMPTION FEATURE
In connection with the issuance of the Sirrom Note, the Company issued
warrants to purchase 308,982 shares of common stock at a price of
$0.01 per share. Upon completion of the IPO (Note 3), warrants for
308,982 shares of common stock were exercised. The value assigned to
these warrants was $255,000. The excess of the redemption value over
the carrying value was accrued by periodic charges to retained
earnings over the redemption period. As the redemption feature expired
upon the IPO, the total amount of $946,972 charged to retained
earnings was transferred to permanent equity subsequent to the IPO.
8. SHAREHOLDERS' EQUITY
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.
These shares were converted into common stock at a conversion price of
$1.25 per share at the completion of the Company's IPO (Note 3).
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 the issuance and the conversion price.
In July 1998 the IPO was declared effective by the Securities and
Exchange Commission (Note 3) and all outstanding shares of Series A
Preferred Stock were converted to 1,217,903 shares of common stock.
F-15
<PAGE> 53
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 $3.4 million.
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.
In October 1998, the Company issued 33,225 shares of common stock at
$5.625 per share as an incentive compensation to employees for
achieving performance expectations established in the second quarter
of 1998.
In connection with the acquisition of BSI (Note 4), Towne issued
744,431 shares of restricted common stock of the Company at $6.73 per
share. The restricted stock award grantees may not sell, transfer,
assign, pledge or otherwise encumber or dispose of these restricted
shares until June 30, 2000.
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, 1998 and 943,083 shares were purchased by employees. The
Company recorded $3.8 million as compensation expense for the
difference between the sales price to employees and the estimated fair
market value at the date of sale.
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
F-16
<PAGE> 54
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, 1998, options to purchase
1,652,000 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.
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 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 397,000 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 per share. 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 on May 2003 and the
remaining options to purchase 425,000 share 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.
F-17
<PAGE> 55
Stock option activity for the years ended December 31, 1996, 1997 and
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 1,212,675 5.23
Canceled (29,000) 1.22
Exercised (771,000) 0.76
--------- ---------
Options outstanding at December 31, 1998 3,771,036 $ 2.00
========= =========
Exercisable at December 31, 1997 2,157,361
=========
Exercisable at December 31, 1998 3,088,561
=========
</TABLE>
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 December 31, 1998:
F-18
<PAGE> 56
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ---------------------
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING WEIGHTED
EXERCISE NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE
PRICES SHARES PRICE LIFE SHARES PRICE
----------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.30-$0.50 1,938,200 $0.42 5.82 1,763,200 $0.41
$0.60 436,661 0.60 8.07 421,661 0.60
$1.00-$1.25 584,500 1.11 8.92 223,700 1.11
$6.50-$8.00 811,675 7.20 9.47 680,000 7.22
--------- ---------
Total 3,771,036 $2.00 7.27 3,088,561 $1.99
========= =========
</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
costs 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 as the Company was privately held. For options issued in
1998, the Company has determined the fair value using the
Black-Scholes pricing method. The Company used the following weighted
average assumptions for grants in 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Risk-free interest rate 5.9% TO 6.7% 6.3% TO 6.7% 4.6% TO 5.6%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives FIVE YEARS FIVE YEARS FIVE YEARS
Expected volatility 0.0% 0.0% 55%
</TABLE>
The total value of the options granted during the years ended December
31, 1996, 1997 and 1998 were computed as approximately $199,000,
$356,000 and $3.1 million, 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, 1997 and 1998 would have increased to the following
pro forma amounts:
F-19
<PAGE> 57
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Net loss attributable to
common shareholders:
As reported $(662,307) $(2,516,101) $(20,934,635)
Pro forma (669,307) (2,548,527) $(23,277,560)
Basic:
As reported $ (.10) $ (.26) $ (1.35)
Pro forma (.11) (.27) (1.50)
Diluted:
As reported (.10) (.26) (1.35)
Pro forma (.11) (.27) (1.50)
</TABLE>
WARRANTS
In October 1997, the Company issued warrants to certain principals of
Rodgers Capital Corporation in connection with services performed by
Rodgers Capital Corporation to assist the Company in securing a
marketing agreement with a third party. These warrants allow the
holders to purchase 75,000 shares of common stock for $1.00 per share.
The warrants vest immediately and expire in 2002. The Company has
recorded $41,000, the estimated fair value of these warrants at the
date of issuance using the minimum value method under SFAS No. 123, as
warrants outstanding on the accompanying balance sheet.
9. COMMITMENTS AND CONTINGENCIES
LEASES
For the year ended December 31, 1997, the Company incurred
approximately $37,000 in rent expense for leased office space from
ProVesa, Inc., a subsidiary of The InterCept Group, Inc. ("InterCept"),
a company for which a director of Towne serves as Chairman and Chief
Executive Officer. 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. For the year ended December 31, 1998, the
Company incurred approximately $210,000 in rent expense for this leased
office space. Future minimum rental payments for this noncancelable
lease are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 184,205
2000 184,205
2001 184,205
2002 184,205
2003 15,350
--------
$752,170
========
</TABLE>
F-20
<PAGE> 58
EMPLOYEE LEASING
Effective March 1998, the Company began leasing all personnel from an
independent personnel leasing company. Under the lease agreement, the
Company paid a percentage of compensation per leased employee (in
addition to compensation costs) to the employee leasing company to
cover payroll processing, unemployment insurance and workers'
compensation. This employment lease agreement was terminated in
November 1998.
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.
10. 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
1999, as amended.
On April 1, 1998, the Company loaned its Chief Financial Officer
$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
full recourse 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 the common stock purchased is sold. All shares of common stock
received upon this exercise as well as other personal assets of the
executive were pledged as collateral for the loan.
In October 1998, the Company loaned the President of the Company
$30,000 to fund the exercise of options to acquire 100,000 shares of
the Company's common stock. The full recourse loan bears interest at
8.5% per annum, and is due in full in February 2000.
In October 1998, the Company loaned the Chief Executive Officer of the
Company $50,000 to fund the exercise of options to acquire 100,000
shares of the Company's common stock. The full recourse loan bears
interest at 8.5% per annum, and is due in full in February 2000.
During the years ended December 31, 1996, 1997 and 1998, the Company
incurred fees of approximately $37,000, $55,000 and $1.0 million,
respectively, for legal services to a law firm in which a director and
shareholder of the Company is a partner. As of December 31, 1997 and
1998, approximately $42,000 and $185,000 respectively, of such fees
are included in accounts payable in the accompanying balance sheets.
During the years ended December 31, 1996, 1997 and 1998, the Company
incurred costs of approximately $4,000, $15,000, and $121,000,
respectively, for communication services from InterCept. As of
F-21
<PAGE> 59
December 31, 1998, approximately $30,000 of such fees is included in
the accrued accounts payable in the accompanying balance sheets.
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 and
$217,000 as compensation for services provided by Rodgers Capital in
connection with obtaining equity investments for the Company during
1997 and 1998, respectively.
During 1998, the Company incurred costs of approximately $21,000 from
Phoenix International for commission fees related to sales of the
Company's products. Phoenix International has a strategic marketing
alliance with the Company and its Chairman and Chief Executive Officer
is a director and shareholder of the Company. The Company also invoiced
Phoenix International approximately $585,000 for marketing-related
services of the Company's products.
During 1998, the Company incurred costs of $113,000 from
Brown Burke Capital Partners, Inc. for merger and acquisition advisory
services in connection with the purchase of BSI (Note 4). One of the
principals of this corporation is a director and shareholder of the
Company.
During 1998, the Company invoiced FLAG Financial Corporation
approximately $207,000 for set-up fee and processing services related
to the purchase of TOWNE CREDIT and TOWNE FINANCE products. The Chief
Executive Officer of FLAG Financial Corporation is a director and
shareholder of the Company.
11. QUARTERLY DATA (UNAUDITED)
Amounts for the quarter ended June 30, 1998 have been restated to
reflect reallocation of the purchase price of CCS (Note 4).
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
- ------------------------------------ ------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- -------------- -------------- ---------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUE $ 548 $ 875 $ 1,715 $ 3,260
COSTS AND EXPENSES:
Costs of processing, servicing, and support 374 403 544 706
Research and development.................................. 74 102 117 13
Sales and marketing....................................... 486 1,140 1,971 2,656
Stock compensation expense................................ 5,972 223 36 36
Employee termination costs................................ 0 0 0 2,291
General and administrative................................ 1,347 729 645 1,138
-------- ------- ------- -------
Total cost and expenses.............................. 8,253 2,597 3,313 6,840
-------- ------- ------- -------
OPERATING LOSS................................................. (7,705) (1,722) (1,598) (3,580)
-------- ------- ------- -------
OTHER EXPENSES (INCOME):
Interest expenses (income), net........................... 64 68 (158) (238)
Other expense (income), net 0 4 (9)
Financing costs for stock issued
to nonemployees...................................... 323 0 0 0
-------- ------- ------- -------
Total other expenses................................. 387 68 (154) (247)
-------- ------- ------- -------
Loss before extraordinary loss on
early extinguishment of debt......................... $ (8,092) $(1,790) $(1,444) $(3,333)
-------- ------- ------- -------
Extraordinary loss on early extinguishment
of debt.............................................. $ 0 $ 0 $ 476 $ 0
-------- ------- ------- -------
NET LOSS $ (8,092) $(1,790) $(1,920) $(3,333)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.............................................. $(13,411) $(2,074) $(2,117) $(3,333)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON
SHARE:
Basic.......................................................... $ (1.11) $(0.16) $ (0.12) $ (.17)
======== ======= ======= =======
Diluted........................................................ $ (1.11) $(0.16) $ (0.12) $ (0.17)
======== ======= ======= =======
Weighted Average Common Shares Outstanding 12,077 13,297 16,997 19,155
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED
- ------------------------------------ ------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- -------------- -------------- ---------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES $ 97 $ 88 $ 198 $ 340
COSTS AND EXPENSES:
Costs of processing, servicing, and support 103 150 222 357
Research and development............................. 11 34 114 173
Sales and marketing.................................. 94 118 207 421
General and administrative........................... 170 181 268 521
-------- ------- ------- -------
Total costs and expenses........................ 378 483 811 1,472
-------- ------- ------- -------
OPERATING LOSS............................................ (282) (395) (613) (1,132)
-------- ------- ------- -------
OTHER EXPENSES (INCOME):
Interest expenses (income), net...................... 19 26 29 22
Other expense (income), net.......................... (1) 0 0 0
Financing costs for stock issued
to nonemployees................................. 0 0 0 0
-------- ------- ------- -------
Total other expenses............................ 18 26 29 22
-------- ------- ------- -------
NET LOSS $ (300) $ (421) $ (642) $(1,154)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS: $ (300) $( 421) $( 642) $(1,154)
======== ======= ====== =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON
SHARE:
Basic..................................................... $ (0.04) $(0.05) $ (0.07) $ (0.10)
======== ======= ======= =======
Diluted................................................... $ (0.04) $(0.05) $ (0.07) $ (0.10)
======== ======= ======= =======
Weighted Average Common Shares Outstanding 8,077 9,101 9,684 11,912
======== ======= ======= =======
</TABLE>
F-22
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
Exhibit No. Description
- ----------- -----------
<S> <C>
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.*
2.2 Stock Purchase Agreement dated November 30, 1998 by and
between Towne Services, Inc., BSI Acquisition Corp., Banking
Solutions, Inc. ("BSI"), and certain shareholders of BSI
(incorporated by reference to Exhibit 2.1 of the Company's
Report on Form 8-K filed on December 15, 1998).
3.1 Amended and Restated Articles of Incorporation, as filed with
the Secretary of State of the State of Georgia on July 29,
1998.*
3.2 Amended and Restated Bylaws, effective May 19, 1998.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of common stock of
the Company.
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 Form of CASHFLOW MANAGER Merchant Services Agreement.
10.14 Form of CASHFLOW MANAGER License Agreement.
10.15 Form of Independent Bankers Bank General Marketing Agent Agreement.
10.16 Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.17 Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.18 Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*
</TABLE>
36
<PAGE> 61
<TABLE>
<S> <C>
10.19 Promissory note dated April 1, 1998 issued to Towne Services,
Inc. by Bruce F. Lowthers, Jr.*
10.20 Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Drew W. Edwards.
10.21 Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco.
10.22 Form of General Marketing Agent Agreement.*
10.23 Promissory Note by the Company to the order of First Union
National Bank dated December 31, 1998.
21.1 Subsidiaries of Towne Services, Inc.
23.1 Consent of Arthur Andersen, LLP.
24.1 Power of Attorney (contained or the signature page hereof).
27.1 Financial Data Schedule for the periods ending December 31,
1997 and 1998 (for SEC use only).
99.1 The following audited financing statements of Banking
Solutions, Inc. together with the report thereon by Arthur
Andersen LLP (incorporated by reference to Exhibit 99.2 of
the Company's Report on Form 8-K/A filed on February 16,
1999, Balance Sheets as of December 31, 1996, 1997 and
September 30, 1998 (unaudited). Statements of Operations for
the years ended December 31, 1995, 1996, 1997 and the nine
months ended September 30, 1998 (unaudited). Statements of
Shareholders' Equity for the years ended December 31, 1995,
1996, 1997 and the nine months ended September 30, 1998
(unaudited). Statements of Cash Flows for the years ended
December 31, 1995, 1996, 1997 and the none months ended
September 30, 1998 (unaudited). Notes to Financial
Statements.
99.2 The following unaudited pro forma financial statements of
Towne Services, Inc. and Banking Solutions, Inc.
(incorporated by reference to Exhibit 99.3 of the Company's
Report on Form 8-K/A filed on February 16, 1999): Pro Forma
Balance Sheet as of September 30, 1998. Pro Forma Statement
of Operations for the year ended December 31, 1997. Pro Forma
Statement of Operations for the nine months ended September
30, 1998. Notes to Pro Forma Condensed Consolidated Financial
Information.
</TABLE>
- ------------------
* Incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1 (No. 333-53341) as declared
effective by the Securities and Exchange Commission on July 30, 1998.
** This agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
37
<PAGE> 1
EXHIBIT 10.13
(CASHFLOW MANAGER LOGO)
MERCHANT SERVICES AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
OFFICER'S | INITIAL | INITIAL | LINE OF | FUNDING / | LINE OF CREDIT | CUSTOMER | LOAN
INITIALS | DISCOUNT RATE | RESERVE % | CREDIT LIMIT | AGREEMENT DATE | MATURITY DATE | NUMBER | NUMBER
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | | | |
LO[1] | RATE1[2] | RES%[3] | PRINC[4] | DOCDATE[5] | EXPDATE[6] | CNO[7] | LNO[8]
===================================================================================================================================
REFERENCES IN THE AREAS ABOVE ARE FOR BANK'S USE ONLY
<S> <C> <C>
"You" or "Your" means the Merchant named below. "We", "Us" or "Our" means the Bank named below, its successors and assigns.
MERCHANT: MERCHANTNAME[9] BANK: BANKNAME[14]
MADDRESS1[10] BADDRESS1[15]
MADDRESS2[11] BADDRESS2[16]
Tax ID or SSNumber: TIN[12] Tel. Number: TELNO[13]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS AGREEMENT is between the Bank and the Merchant identified above. We and you
agree to the following terms and conditions with respect to your participation
in our CASHFLOW MANAGER(SM) Program (the "Program"):
SECTION 1. DEFINITIONS
1.1 ACCOUNT. The term "Account" means one of your Customer's credit
accounts with you, any part of which is assigned by you to us in
conjunction with the Program.
1.2 ACCOUNT STATEMENT. The term "Account Statement" means the statement of
Account activity billed to your Customer by us on a monthly basis.
1.3 CREDIT AGREEMENT. The term "Credit Agreement" means any written
installment, charge or other written form of Credit Agreement between
you and a Customer.
1.4 CREDIT MEMO. The term "Credit Memo" means the form reflecting a credit,
other than a credit arising from a payment, to a Customer's Account.
1.5 CUSTOMER. The term "Customer" means a debtor obligated to you on
Receivables that arise from goods which you sold or services you have
rendered to a customer, client or patient.
1.6 DISCOUNT FEE. The term "Discount Fee" means the fixed percentage charge
that you agree to pay us from the Receivables purchased by us pursuant
to this Agreement. The Discount fee will be deducted from the Face
Amount of the Receivables purchased. Subject to the limitations set
forth in Section 6.2 of this Agreement, we may amend the Discount Fee
from time to time upon written notice to you based upon considerations
of transaction volume, delinquency, current economic conditions, and
other factors described herein. Initially, and except as otherwise
provided the Discount Fee will be equal to the following % of the
Receivables purchased by us:
<TABLE>
<S> <C>
DISCOUNT FEE: DISCOUNTFEE%[17] BANK INITIALS _____ MERCHANT INITIALS __________.
</TABLE>
1.7 FACE AMOUNT. The term "Face Amount" means the cash price for the goods
you sold and/or services you rendered to a Customer, less any
downpayment paid by a Customer, plus any taxes imposed on such sales
transaction.
1.8 INVOICE. The term "Invoice" means the form reflecting the sale of goods
or services to a Customer.
1.9 LINE OF CREDIT. The term "Line of Credit" means any funded or unfunded
Line of Credit agreement and/or promissory note(s) established by us
pursuant to this Agreement to secure your obligation to repurchase
Receivables as set forth in Section 6 of this Agreement.
1.10 NET AMOUNT. The term "Net Amount" means the gross amount of a
Receivable, less the Discount Fee and other discounts, returns, credits
or allowances of any nature at any time issued, owing, granted or
outstanding.
1.11 OBLIGATIONS. The term "Obligations" means all of your obligations to
us, whether pursuant to this Agreement, or under any Line of Credit
agreement, note, contract, guaranty, accommodation or otherwise,
however and whenever created, arising or evidenced, whether direct or
indirect, liquidated or contingent, now existing or arising hereafter.
1.12 OPERATING ACCOUNT. The term "Operating Account" means the depository
account(s) maintained by you with us.
1.13 RECEIVABLES. The term "Receivables" means all accounts, instruments,
contract rights, chattel paper, documents and general intangibles that
are acceptable to us and arise from your sale of goods or services, and
the proceeds thereof, and all security and guaranties therefor, whether
now existing or arising hereafter.
Page 1 of 6 Pages
<PAGE> 2
1.14 RELATED AGREEMENTS. The term "Related Agreements" mean any other
agreement(s) we have with you which relate to the Program. Initially,
these Related Agreements include those set forth in the following
documents or instruments:
DOC1[18]
DOC2[19]
DOC3[20]
DOC4[21]
DOC5[22]
DOC6[23]
BANK INITIALS ____ MERCHANT INITIALS _____.
1.15 RESERVE ACCOUNT. The term "Reserve Account" means the restricted,
interest or non-interest bearing, deposit account established pursuant
to Section 3 as a reserve against delinquent accounts.
SECTION 2. TERM OF AGREEMENT AND TERMINATION
2.1 EFFECTIVE DATE. This Agreement will become effective when it is
executed and will continue in full force thereafter until it is
terminated in accordance with this Agreement.
2.2 TERMINATION. This Agreement may be terminated by you or us upon the
giving of sixty (60) days prior written notice to the other party of
such termination.
2.3 TERMINATION IN THE EVENT OF DEFAULT IN OBLIGATIONS. We may terminate
this Agreement immediately upon written notice to you in the event you
are in default of any of your Obligations. In the event of such
termination, all further services, obligations or agreements to be
performed by us pursuant to this Agreement, or under any Related
Agreements, at our option will terminate immediately.
2.4 WINDING UP. Upon termination of this Agreement for any reason, any and
all outstanding charges shall be immediately due and payable, and all
Receivables then held by us may, at our sole option, be reassigned to
you in accordance with Section 6, or held by us until all amounts due
to us pursuant to those Receivables have been fully paid.
SECTION 3. PURCHASE AND SALE OF RECEIVABLES; RESERVE ACCOUNT
3.1 ASSIGNMENT AND SALE. We agree to purchase, and you agree to assign and
sell, and hereby assign and sell, to us as absolute owner, with
recourse as provided herein, your entire interest in such of your
presently outstanding Receivables as we determine acceptable, as well
as all of your future Receivables which are in our sole discretion
acceptable to us and that are reflected by the Invoices you deliver to
us. The assignment of Receivables to us shall automatically become
effective on the date the Receivables are funded by us by credit to
your Operating Account.
The assignment of an Account to us shall include all rights related to
the Account or securing payment of the Account, including all vendor's
privileges, security interests and guaranties and all collateral
therefor. We shall be the absolute owner of all payments and
collections received by us in connection with any Account purchased by
us. We may give notice to any Customer you have assigned that
Customer's Accounts to us, that we have a continuing security interest
in your Receivables, and that any modification, accommodation,
forbearance or release shall not be effective unless we approve it. In
the event that the balance of the Accounts purchased by us exceeds any
lending or purchase limit that we have established pursuant to the Line
of Credit, or which may apply under state or federal laws or
regulations, you agree that you will repurchase a sufficient balance of
Accounts so as to reduce the balance of Accounts purchased by us to an
amount equal to or less than such limit. The establishment of a lending
or purchase limit shall not be deemed to be a commitment by us to
purchase Receivables in that amount or any other amount, and any
purchase by us of Receivables shall be in our sole and absolute
discretion. You acknowledge and agree by executing this Agreement that
we have not entered into any separate agreement or understanding
concerning any commitment by us to purchase any of your Receivables.
3.2 PURCHASE PRICE. The purchase price of the Receivables will be the Net
Amount thereof, which shall be payable by credit to your Operating
Account on or before the next banking day after delivery to us of
acceptable Invoices.
3.3 RESERVE ACCOUNT. CREATION, GRANT OF SECURITY INTEREST, ASSIGNMENT. We
may retain a portion of the sums payable to you, the amount of which we
may adjust from time to time in our reasonable discretion, as a reserve
to provide for the delinquency of the Receivables we purchase. Amounts
retained by us pursuant to this provision shall be credited to your
Reserve Account. No amounts may be drawn or disbursed from the Reserve
Account without our consent. The initial reserve percentage will be the
following percentage of the Face Amount of the acceptable Invoices
submitted to us.
<TABLE>
<S> <C>
RESERVE PERCENTAGE: RESERVE%[24] BANK INITIALS __________ MERCHANT INITIALS __________.
</TABLE>
If checked [ ] [25] the provisions of the attached Reserve Account
Addendum will also apply to the Reserve Account under this Agreement.
You hereby pledge and grant to us a security interest in the Reserve
Account. You further hereby assign and transfer to us all of your
right, title and interest in and to your Reserve account, and all sums
now or at any time hereafter on deposit therein together with all
earnings of
Page 2 of 6 Pages
<PAGE> 3
every kind and description which may now or hereafter accrue thereon,
for the purpose of securing your repurchase and other Obligations to
us, whether such Obligations now exist or are hereafter created or
incurred, and whether it is direct or indirect, due or to become due,
absolute or contingent or joint and/or several.
You further irrevocably authorize and empower us, at any time whether
or not at such time the Obligations, or any part thereof, are due and
payable, in our own name or in your name, to demand, apply for
withdrawal, receive and give acquittance for any and all sums which are
or will become due and payable under said account, to exercise any and
all rights and privileges and receive all benefits accorded to said
account, and to execute any and all instruments required therefor, and
to apply such moneys toward payment of the Obligations, in such order
of application as we may determine, all without notice to you. Until
this assignment has been released by us in writing, you will have no
right to make any withdrawals from said account.
SECTION 4. OPERATION OF THE PROGRAM
4.1 PROGRAM FORMS AND SERVICES. We will provide you with such forms and
related support services as may be required for your participation in
the Program.
4.2 BILLING OF RECEIVABLES, FINANCE CHARGES. With respect to Receivables
purchased by us, we will send a monthly Account Statement, in
accordance with the credit terms applicable to that Customer's Account,
to each of your Customers with an outstanding balance on their Account,
itemizing the Customer's Account activity for the preceding billing
period. In addition, a finance charge will accrue on and be payable
with respect to the Receivables purchased by us in accordance with the
following provisions (check applicable box or boxes):
[ ] Except as otherwise agreed or provided herein, interest (hereinafter
referred to as a "Customer Finance Charge") will accrue on and be
billed by us to Customer Accounts in accordance with the applicable
Credit Agreement in effect with respect to that Customer at the
Customer Finance Charge rate (APR) set forth below. In the event we
agree to purchase a Receivable from you which for any reason cannot be
billed, or you do not want billed, to your Customer at the Customer
Finance Charge rate provided for herein, you agree to pay us the
difference between the amount of the Customer Finance Charge, if any,
billed to your Customer and the amount of the Customer Finance Charge
that we otherwise would have been entitled to receive pursuant to this
paragraph. In addition, if this box [OBJECT OMITTED] is checked, you
agree that we may reassign and charge back to you all or any portion of
the Customer Finance Charge billed to your Customer which is not paid
in accordance with the payment terms applicable to that Customer.
Provided, however, this agreement to pay all or any portion of a
Customer Finance Charge is expressly made subject to the limitations
set forth in Section 6.2 of this Agreement, and you do not agree to pay
and we do not intend to contract for, reserve, charge or collect any
rate of interest which is higher than the maximum rate of interest we
could charge under applicable law for an extension of credit to you.
[26]
<TABLE>
<S> <C>
CUSTOMER FINANCE CHARGE %: CFC%[27] BANK INITIALS ___________ MERCHANT INITIALS __________.
</TABLE>
[ ] Except as otherwise agreed or provided herein, interest (hereinafter
referred to as a "Merchant Payable Finance Charge") will accrue and be
payable by you on the unpaid balances of Customer Accounts at the
Merchant Payable Finance Charge rate (APR) set forth below. The
Merchant Payable Finance Charge will be payable by you to us at the
close of each month by charge to the Reserve Account established
pursuant to this Agreement. Provided, however, this agreement to pay a
Merchant Payable Finance Charge is expressly made subject to the
limitations set forth in Section 6.2 of this Agreement, and you do not
agree to pay and we do not intend to contract for, reserve, charge or
collect any rate of interest which is higher than the maximum rate of
interest we could charge under applicable law for an extension of
credit to you. [28]
<TABLE>
<S> <C>
MERCHANT PAYABLE FINANCE CHARGE %: MPFC%[29] BANK INITIALS ___________ MERCHANT INITIALS __________.
</TABLE>
4.3 APPLICATION OF PAYMENTS. Payments received by us from your Customers,
or from collection or enforcement actions, will be accounted for by us
by credit to your Customer's Account. Any such payments shall be
applied first to the payment of fees, charges and reimbursements (if
any), second to the accrued but unpaid interest (if any), with the
remainder to principal. All payments received before 10:00 A.M. (our
local time) on any banking day will be applied on that banking day.
Payments received after 10:00 A.M. or on a non-banking day, will be
applied on the next banking day. All variations, modifications or
extensions of indebtedness on Receivables purchased by us will be made
solely by us. Nothing in this Agreement authorizes you to collect any
of the Receivables assigned by you to us in connection with the
Program, but, in the event you do, you agree to remit the same to us,
properly endorsed, no later than the next banking day. You agree to pay
to us any finance charges incurred on a Customer's Account because of
delay on your part in delivering any payments or Credit Memos to us.
4.4 POWER OF ATTORNEY. You hereby appoint us as your attorney-in-fact to
receive, open, and dispose of all mail addressed to us pertaining to
your Receivables; to endorse our name upon any notes, acceptances,
checks, drafts, money orders and other evidences of payment of
Receivables that may come into our possession, and to deposit or
otherwise collect the same, and to do any and all other acts and things
necessary to carry out the terms of this Agreement. This power, being
coupled with an interest, is irrevocable while any Receivable remains
unpaid.
4.5 PAYMENT. The Discount Fee shall be payable to us by deduction from the
purchase price, resulting in a payment to you of the Net Amount of the
Account, as specified in Section 3.2 of this Agreement.
4.6 ACCOUNT COLLECTION ACTIVITY. Any Account collection notices or
activities with respect to Accounts purchased by us will be conducted
solely by us and in our sole discretion. You expressly agree that you
will not take any action to collect or enforce payment of any Customer
Page 3 of 6 Pages
<PAGE> 4
Account purchased by us from you unless and until you have repurchased
the Account from us as provided in Section 6 of this Agreement. Except
as otherwise agreed by us in writing, you expressly agree that you will
neither communicate, directly or indirectly, orally or in writing, with
the Customer for the purpose of collecting an Account purchased by us,
or otherwise take any action to enforce the payment obligations under
the Account including, but not limited to, the repossession of any
property securing the payment obligation on the Account or
discontinuance or interruption of services applicable to that Customer
Account.
YOU AGREE TO INDEMNIFY AND HOLD US HARMLESS FROM ANY CLAIM OR LIABILITY
WE MAY SUSTAIN BY VIRTUE OF OR ARISING OUT OF ANY ACTION BY YOU,
DIRECTLY OR INDIRECTLY, WHICH IS DETERMINED TO BE IN VIOLATION OF ANY
DEBT COLLECTION PRACTICES LAWS OR REGULATIONS UNDER APPLICABLE STATE OR
FEDERAL LAW.
SECTION 5. PROCEDURES AND FORMS
5.1 DOCUMENTATION. You agree to provide us on a timely basis with a copy of
your Customer's Credit Agreement (if a Customer Finance Charge is to be
billed to your Customer) in accordance with the terms set forth in
Section 4.2 above, Invoices and Credit Memos (if applicable) related to
all sales creating Customer Receivables, together with such other
documents and proof of delivery of goods or rendition of services as we
may reasonably require. You also agree to notify your Customer that
your Customer's Account has been assigned by you to us and to direct
your Customer to make payment directly to us. In the event we agree to
purchase a Customer's Receivable prior to receiving satisfactory
evidence of a signed Credit Agreement with that Customer, the Customer
Finance Charge on that Customer's Account may be billed to your
Customer at the maximum applicable statutory nonusurious rate. In such
event, and unless otherwise waived by us in writing, you agree, subject
to the limitations of Section 6.2, to pay us interest on the unpaid
balance of that Customer's Account in accordance with Section 4.2 until
you have furnished us with satisfactory evidence of a signed Credit
Agreement with that Customer.
5.2 RESPONSIBILITY FOR DOCUMENTATION. You agree that you will be solely
responsible for the adequacy, completeness and accuracy of the data
that you supply to us and its preparation in accordance with the format
prescribed by us. You also acknowledge that you understand that the
form of Credit Agreement you may use should be reviewed by your legal
counsel. You understand and agree that it is your sole responsibility
to obtain and maintain an executed written Credit Agreement with each
of your credit Customers unless otherwise agreed by us in writing.
YOU AGREE TO INDEMNIFY AND HOLD US (OR ANYONE ELSE PROVIDING DATA
PROCESSING SERVICES ON OUR BEHALF) HARMLESS FROM ANY CLAIM OR LIABILITY
SUSTAINED BY VIRTUE OF ACTING IN RELIANCE ON THE DATA THAT YOU SUPPLY
TO US. YOU AGREE TO INDEMNIFY AND HOLD US HARMLESS FROM ANY CLAIM OR
LIABILITY WE MAY SUSTAIN BY VIRTUE OF ACTING IN RELIANCE ON YOUR
OBLIGATION TO OBTAIN OR MAINTAIN WRITTEN CREDIT AGREEMENTS WITH YOUR
CUSTOMERS, OR TO PROVIDE ANY DISCLOSURES REQUIRED UNDER APPLICABLE
STATE OR FEDERAL LAW.
SECTION 6. REASSIGNMENT OF RECEIVABLES; SECURITY INTEREST
6.1 REASSIGNMENT OF RECEIVABLES. We may reassign and charge back to you all
or any portion of your outstanding Receivables purchased by us pursuant
to this Agreement:
a. if payment thereon is not received by us within ninety (90)
days after the date payment on the Account has become due as
reflected by the Account Statement sent to the Customer
obligated to pay such Receivables; or
b. ninety (90) days after any portion of that Customer's
Receivables becomes delinquent or in default, as determined by
the terms of the Credit Agreement between you and that
Customer; or
c. if any dispute arises with the Customer regarding the
Receivable, including without limitation, any alleged
deduction, defense, offset or counterclaim; or
d. if you are in default under the terms of this Agreement or
under any other agreement or Obligation you have with us; or
e. if this Agreement is terminated.
6.2 EFFECT OF REASSIGNMENT. To reassign Receivables, we may charge first
against your Reserve Account or Operating Account an amount equal to
the unpaid balance of the reassigned Receivables, including accrued and
unpaid finance charges on the date of reassignment. The reassignment
shall be effective automatically upon the chargeback to you. In the
event the Reserve Account or other account is insufficient to satisfy
the balance of the reassigned Receivable, you agree that we may
immediately fund and make advances pursuant to your Line of Credit with
us as necessary to pay the deficiency amount due to us. Notwithstanding
any provision to the contrary, you do not agree to pay and we do not
intend to contract for, reserve, charge or collect any rate of interest
which is higher than the maximum rate of interest we could charge under
applicable law for the extension of credit that is agreed to in this
Agreement. If any notice of interest accrual is sent and is in error,
you and we mutually agree to correct it, and if we actually collect
more interest than allowed by law and this Agreement, we agree to
refund the excess portion. Any interest in excess of that maximum
amount shall be credited to the principal amount of your Obligations
relating to this Agreement, or, if the principal amount of the debt has
been paid, refunded to your Operating Account.
6.3 SECURITY INTEREST. You hereby grant to us a security interest in your
present and future Receivables and all returned, repossessed and
reclaimed goods, and related books and records (together with such
security interests granted to us under the Related Agreements), to
secure all of your Obligations, and agree to execute and deliver an
appropriate UCC-1 financing statement and other related instruments as
we may require.
Page 4 of 6 Pages
<PAGE> 5
SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS
7.1 MERCHANT'S COVENANTS. You covenant that you will supply, or allow us to
review, financial information and necessary documents on you or on any
Customer upon our request.
7.2 MERCHANT'S REPRESENTATIONS AND WARRANTIES. You represent and warrant:
a. that you are fully authorized to enter into this Agreement and
to perform hereunder;
b. that this Agreement constitutes a valid and binding
obligation;
c. that you are solvent and in good standing in the State of your
formation;
d. that your Receivables are and will be in the future bona fide
and existing obligations of your Customers arising out of your
sales of goods and/or services, free and clear of all security
interests, liens or claims of any kind whatsoever of third
parties;
e. that you have a valid Credit Agreement with your Customer or
have identified each Customer with whom you do not have an
existing written Credit Agreement; and
f. that your inventory is not subject to any security interests,
liens or encumbrances of any kind whatsoever, and that you
will not permit it to become so encumbered without our prior
written consent.
g. you will have made delivery of the goods or rendered the
services to which the Receivable relates, that the
documentation pertaining to the sale is valid and genuine, and
that the goods or services have been accepted by the Customer;
h. you will have preserved and will continue to preserve any
liens and any rights to liens available by virtue of the sale
of goods or services;
i. the Customer will not be affiliated with you;
j. you will have no knowledge of any dispute or potential dispute
that might impair the validity of the transaction or the
Customer's obligation to pay the related Receivable in
accordance with its terms;
k. you have the right to render the services or to sell the goods
creating the Receivable, and will have done so in accordance
with any applicable laws; and
l. you will have paid, or provided for the payment of, all taxes
arising from the transaction creating the Receivable.
7.3 BANK'S REPRESENTATIONS AND WARRANTIES. LIMITATIONS ON LIABILITY. We
represent that the services rendered by us pursuant to the terms of
this Agreement will be performed timely and in a professional manner;
provided, however, you agree that we will not be responsible for any
indirect, special or consequential loss or damage, such as loss of
anticipated revenues or other consequential economic loss in connection
with or arising out of any unintentional breach of this Agreement. Nor
will we be liable for any errors in judgment or mistakes that may be
made in good faith when acting as your attorney-in-fact pursuant to
Section 4.4 of this Agreement. Nor will we be liable for any delay in
the performance of our duties caused by strike, lawsuit, riot, civil
disturbance, fire, shortage of supplies or materials or any other cause
reasonably beyond our control.
YOU HEREBY AGREE TO WAIVE AND RELEASE US FROM ANY CLAIM OR LIABILITY
FOR ERRORS OR MISTAKES MADE IN GOOD FAITH OR FOR ANY SUCH CONSEQUENTIAL
LOSS OR DAMAGE AS SET FORTH IN THIS SECTION 7.3.
SECTION 8. DEFAULT
8.1 EVENTS OF DEFAULT. The following events will constitute a Default under
the terms of this Agreement:
a. You fail to pay or to perform any obligation, covenant or
liability in connection with this Agreement and ten (10) days
pass after we give written notice to you of such default, or
if you fail to pay or perform any other Obligation which you
may have to us in accordance with its terms; or
b. Any warranty, representation or statement whenever made by you
in connection with this Agreement proves to be false in any
material respect when made, or if you fail to disclose that
any such warranty, representation or statement has become
untrue in any material respect; or
c. The dissolution or termination of your corporate existence or,
if an individual, your death; or
d. Your insolvency; or
e. The assignment for the general benefit of your creditors, the
appointment of a receiver or trustee for your assets, the
commencement of any proceeding under any bankruptcy or
insolvency laws by or against you or any proceeding for the
dissolution, liquidation or settlement of claims against you
or winding up of your affairs; or
f. The termination or withdrawal of any guaranty for your
Obligations; or
g. The failure to pay any tax imposed upon you in connection with
any transaction creating a Receivable; or
h. If any judgment against you remains unpaid, unstayed on
appeal, undischarged, unbonded or undismissed for a period of
thirty (30) days; or
i. You discontinue your business as a going concern; or
j. We deem in good faith that the prospect for your payment or
performance of your Obligations has been impaired.
8.2 EFFECT OF DEFAULT. Upon the occurrence of any Default, we may
immediately terminate this Agreement upon written notice of termination
to you, at which time all amounts owed to us for your Obligations, at
our sole option, shall become immediately due and payable, and our
obligations with respect to the further performance of services
hereunder shall, at our sole option, immediately terminate. Your
Obligations under this Agreement, including specifically the obligation
to repurchase Receivables, will survive a termination of this
Agreement.
Page 5 of 6 Pages
<PAGE> 6
\
SECTION 9. APPLICABLE LAW
9.1 This Agreement shall be construed under, governed and enforced in
accordance with the laws of the State where we are located, as shown by
our address on Page 1 of this Agreement.
SECTION 10. GENERAL PROVISIONS
10.1 EXPENSES AND ATTORNEY'S FEES. In the event of any default or dispute
between us and you arising under this Agreement, the party prevailing
in such dispute shall be entitled to a recovery of expenses incurred by
that party in enforcing this Agreement, including costs of court and a
reasonable attorney's fee.
10.2 NON-WAIVER. No delay or failure on our part in exercising any right,
privilege or option hereunder shall be deemed a waiver of any such
right, privilege or option and no waiver, amendment, or modification of
any provision of this Agreement shall be valid unless it is in writing
and signed by us and you.
10.3 SEVERABILITY. Should any provision of this Agreement be prohibited by
or invalid under applicable law, the validity of the remaining
provisions shall not be affected thereby.
10.4 HEADINGS. The headings herein are for convenience only and shall not
define or limit the scope, extent, meaning or intent of this Agreement.
10.5 NOTICES. All notices contemplated or required by this Agreement shall
be deemed to have been duly given when given in writing and hand
delivered to the other party, or deposited in the U.S. Mail, postage
prepaid, certified mail, return receipt requested, to the other party's
address set forth in this Agreement. Any party may change the address
for notice purposes by giving notice in accordance with this Agreement.
10.6 ENTIRE AGREEMENT, CONSTRUCTION. This Agreement, together with the
Related Agreements, embody the entire agreement between us and you with
respect to the Program. No amendment to this Agreement shall be
effective unless it is in writing and signed by you and us. In the
event of any inconsistency arising between this Agreement and any of
the Related Agreements, the agreement applicable to the specific right,
duty or obligation of yours or ours shall control to the extent
necessary to effect the purposes of this Agreement.
YOU ACKNOWLEDGE THAT THERE ARE NO ORAL STATEMENTS OR REPRESENTATIONS
UPON WHICH YOU ARE RELYING IN EXECUTING THIS AGREEMENT.
SECTION 11. SPECIAL PROVISIONS [30]
- -------------------------------------------------------------------------------
YOU HEREBY ACKNOWLEDGE THAT YOU HAVE READ, UNDERSTAND AND AGREE TO THE TERMS AND
CONDITIONS OF THIS AGREEMENT. YOU ACKNOWLEDGE RECEIVING AN EXACT COPY OF THIS
AGREEMENT. THIS AGREEMENT AND RELATED DOCUMENTS HAVE BEEN EXECUTED IN THE COUNTY
OF OUR ADDRESS UNLESS OTHERWISE SPECIFIED.
AGREEMENT DATE: DOCDATE[5]
MERCHANT SIGNATURE: BANK SIGNATURE:
MERCHANTNAME[9] BANKNAME[14]
By: By:
---------------------------------- -----------------------------------
MERCHANT SIGNATURE-TITLE[9S] BANK SIGNATURE-TITLE[14S]
[ ] [X]
<PAGE> 1
EXHIBIT 10.14
[CASH FLOW MANAGER LOGO]
License Agreement
<TABLE>
<CAPTION>
LICENSOR: LICENSEE:
<S> <C>
"We", "Us" or "Our" means the Company named above, its successors and assigns. "You" or "Your" means the
Financial Institution named above.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
You and we agree as follows:
Section 1. Grant of License. Subject to the terms and conditions set
forth in this agreement, we hereby grant to you (and to any branch
offices maintained by you) and you hereby accept (a) the non-exclusive
and non-transferable right and license to offer CashFlow Manager to
your customers; and (b) the right and license to use our CashFlow
Manager program, software, trade names, service marks, trademarks,
copyrights, patents, electronic data processing methods, accounts
receivable forms, including forms and programs presently available and
forms and programs developed by us for use with the CashFlow Manager
program. Unless the context denotes otherwise, the term "customer"
means all current and prospective customers other than financial
institutions.
Section 2. Reservation of Rights. You acknowledge our claimed interest
in and exclusive right to the CashFlow Manager program and all
component parts thereof, including without limitation, all forms,
computer programs, copyrights, trademarks and trade names, manuals,
bulletins, procedures or supplements, devices and insignia we may use
from time to time in conjunction with the CashFlow Manager program
(hereinafter "the Program").
Section 3. Program Services. We will install, setup and maintain the
computer software at one (1) site location designated by you for your
CashFlow Manager Program. You agree that you will obtain or use
computer hardware which meets the requirements specified by us. You
also agree to provide qualified personnel, either on your own premises
or through contract with some other firm, sufficient to operate the
Program for your Program customers. Prior to offering the CashFlow
Manager Program to your customers, we will provide onsite instruction
to your employees or designated representatives concerning the proper
operation of the Program, and will provide these persons with Program
operating materials. You agree that your employees or representatives
will take such instruction as we may from time to time reasonably
request. In addition, we agree to install, setup and maintain the
computer software and provide the training described in this paragraph
at additional site location(s) designated by you upon receipt of the
Multiple Site Installation Fee provided for in Section 8 of this
agreement.
Business Consulting and Marketing Services. In addition, we will
provide you with the services of one or more Program consultants who
will assist you in the marketing of the Program to your customers in
accordance with marketing plans developed between you and us. This
includes, but is not limited to, the providing of telemarketing
services to customers selected by you, customer presentations, and
other services related to approval of the customer for your Program.
You acknowledge that the consultant's services are not exclusive to
you, but that such services will be provided in accordance with
schedules mutually acceptable to you and the consultant. In the event
of any disagreement or dissatisfaction arising concerning the services
rendered to you by the consultant, we agree that we will replace such
consultant with another consultant acceptable to you within a
reasonable period if, after notice from you, such disagreement or
dissatisfaction with the consultant cannot be resolved.
Other Support. We will also provide you, your employees or your
designated representatives with Program training, forms and other
materials to assist you in compliance with federal, state and local law
applicable to the Program.
License Agreement. 1
<PAGE> 2
Section 4. Confidentiality. You acknowledge that the procedures,
electronic data processing methods, forms and techniques furnished by
us as a part of the CashFlow Manager Program and contained in the
CashFlow Manager software and manuals are unique and confidential. In
order to protect the value of the confidential information licensed to
you, you agree to retain in confidence, and to require your employees,
agents and representatives to retain in confidence, all such
information and know-how transmitted to you by us. You agree not to use
the confidential material communicated to you by us except for the
purpose and to the extent necessary for the operation of the CashFlow
Manager Program pursuant to the license granted herein. The CashFlow
Manager documentation and manuals will at all times remain our sole
property and will promptly be returned to us upon the expiration or
termination of this agreement.
We acknowledge and agree that any information or data coming into our
possession concerning you, your operations and your customers is unique
and confidential. We agree to retain in confidence, and to require our
employees, agents and representatives to retain in confidence, all such
information and will not make use of the confidential material
communicated to us by you except for the purpose and to the extent
necessary for the operation of the CashFlow Manager Program pursuant to
this agreement.
Your and our obligations under this Section will survive the expiration
or a termination of this Agreement.
Section 5. Software Modifications and Alterations. We agree that we
will furnish to you, at no additional cost to you, any updates and
upgrades developed by us for the CashFlow Manager software during the
term of this agreement. You agree to timely implement any and all
changes to the CashFlow Manager software which are deemed necessary by
us for the proper operation of the Program. You agree that the CashFlow
Manager software will be used in accordance with the instructions
contained in the instructional and operating information provided by
us. No modifications or changes will be made by you with the Program
software unless written approval is first obtained from us. In the
event modifications or changes are made by you, or your employees or
representatives, you agree that we will have the right to use such
changes and, at our option, to incorporate the changes into the
CashFlow Manager Program and to make them available to third parties.
Section 6. Operating Materials. You agree to purchase from us any
specialized forms which are required for use in conjunction with the
CashFlow Manager Program. We agree to allow and assist other reputable
and competent printers selected by you to reproduce or print the forms
required by the CashFlow Manager Program so long as such printers
conform to the standards or specifications established by us.
Section 7. Program Marketing Materials and Obligations. We will make
standard promotional material available to you at a reasonable cost.
You agree to solicit your selected creditworthy commercial customers
via letter and/or brochure mailing at least once per year. During the
term of this agreement, you also agree that you will offer no other
program of a similar nature to your customers.
Section 8. License Fees; Multiple Site Installation Fees. In
consideration of the trademark, licenses and rights herein granted by
us to you, and in consideration of the use of the trade names or
trademarks, CashFlow Manager Program and CashFlow Manager in our
confidential manuals and materials, you agree to pay us the license
fee, plus any applicable sales taxes, set forth below. License fees are
payable upon the execution of this agreement. $300.00 of the License
Fee is for the licensing, installation and use of the software, and the
balance represents consideration for the employee and customer
training, education and initial marketing program setup and support. In
the event you elect to install the Program at additional site
location(s), you agree to pay us a Multiple Site Location Fee for each
such installation to provide for our cost of installing and maintaining
the software at such location(s) and providing the technical support
and training set forth in this Agreement.
License Fee: Multiple Site Installation Fee:
Section 9. Ongoing Support Fees; Volume Rebates. As additional
consideration for our initial and continuing marketing, technical and
Program support, you agree to pay us ____% of the amount of the Initial
Balance of the receivables purchased by you from each new CashFlow
Manager customer and an ongoing support fee equal to __% of the total
discount fees charged or taken by you in each subsequent month with
respect to "ongoing purchases" of receivables from each CashFlow
Manager customer. As used herein, the term "Initial Balance" purchase
means the first purchase of receivables from a CashFlow Manager
Customer
License Agreement. 2
<PAGE> 3
(or the first 30 days' receivables acquired by you if you either (i)
acquire less than all of the CashFlow Manager customer's receivables
existing on the date of the first purchase of receivables, or (ii) if
such CashFlow Manager customer has no existing receivables which will
be purchased by you until after the date of the first purchase of
receivables). "Ongoing purchases" means purchases of receivables from a
CashFlow Manager Customer subsequent to the Initial Balance purchase.
Support Fee Rebates. We agree to pay you a marketing rebate based upon
the monthly volume levels of ongoing receivable purchases made by you
from your CashFlow Manager customers. These volume levels and the
amount of the rebate percentage applicable to each volume level as
applied to the discount fees charged or taken by you in a specific
month are as follows:
<TABLE>
<CAPTION>
LEVEL AMOUNT OF RECEIVABLES PURCHASED REBATE PERCENTAGE* (of Discount Fee)
============================================================================================================
<S> <C> <C> <C> <C>
I $ 500,000 - $1,250,000........................................... --%
II $1,250,001 - $2,500,000............................................ --%
III $2,500,001 + ............................................ --%
</TABLE>
* The net effective ongoing support fee rate at these levels is ___%, ___% and
___%, respectively.
These volume rebate percentages shown above are applied separately to each of
the specific volume levels to which they relate (e.g., the rebate percentage for
receivable purchases between $500,000 and $1,250,000 is ___% regardless of the
total receivables purchased in that month, etc.). These marketing rebates will
be processed by us approximately forty-five (45) days after the close of the
calendar month to which the rebate relates, and payable by us to you no more
than sixty (60) days beyond the close of the calendar month to which the rebate
relates. The rebates will be applicable to: (1) all ongoing support fees which
are normally processed and invoiced during a calendar month which (2) are paid
to us no later than twenty-five (25) days following the invoice date. Rebates
will not be given with respect to any ongoing support fees which are paid to us
more than 25 days beyond the invoice date.
Section 10. Reporting and Payment of Ongoing Support Fees. You agree to report
to us each month, on forms supplied by us, the amount of receivables purchased
during the preceding month, and remit by check the fees due to us under this
agreement. All ongoing support fees will be due and payable within twenty-five
(25) days of the invoice date. Amounts which are due and not paid to us as
provided in this agreement will thereafter bear interest at the rate of eighteen
percent (18.0%) per annum.
Section 11. Term of Agreement, Termination and Refund of License Fees. This
agreement will be effective on the date of execution by us and you, and will be
for an initial term of five (5) years (the "Initial Term"). At the end of the
Initial Term, and on each anniversary date thereafter, this agreement will
automatically extend for an additional year beyond the Initial Term, or renewal
term, unless we or you give written notice to the other of non-extension at
least sixty (60) days prior to the expiration date of the Initial Term, or
renewal term of this agreement.
License Fee Refund Period. The first twelve (12) months of the Initial Term of
this agreement will be deemed the license fee "Refund Period." If you have not
purchased of a minimum of $100,000 in Initial Balance purchases of receivables
(as defined in this agreement) during the Refund Period, we agree that you will
have the right and option either to: (i) terminate this agreement with a refund
of $7,500.00 of the license fee paid hereunder; or (ii) to receive a refund of
such amount without a termination of this agreement. To terminate this agreement
and receive the license fee refund, you must give us written notice of your
election to terminate within thirty (30) days following the expiration of the
Refund Period. In the event you give us notice of termination under these
circumstances, this agreement will terminate on the date specified in the
notice. If you do not give us written notice under these circumstances, we will
pay you such refund without a termination of this agreement. Any ongoing support
fees which are outstanding at the time of a termination will be immediately due
and payable to us. Thereafter, neither you nor we will have any further
obligation to the other, subject to the remaining provisions of this Section and
Section 14.
Early Termination After the Refund Period. After the Refund Period expires, we
agree that you will have the right to terminate this agreement by giving us
ninety (90) days prior written notice of termination, subject to the remaining
provisions of this Section and Section 14. In the event you terminate this
agreement prior to
License Agreement. 3
<PAGE> 4
the expiration of the Initial Term or a renewal term (except a termination which
arises out of our default), any ongoing support fees which are outstanding at
the time of a termination and all License fees which have not been paid
previously by you, other than a License fee installment refunded to you in
accordance with this Section, will be due and payable 25 days after the date of
termination specified in your notice.
Ongoing Purchase Fee Obligations After Expiration or Termination. As additional
consideration for the license and services we provide in connection with the
Program, you agree to pay an ongoing purchase fee ("OP Fee") with respect to
each CashFlow Manager customer for a period of twenty-four (24) months following
the expiration or termination of this agreement if you continue to offer an
accounts receivable financing program of a nature similar to CashFlow Manager
("replacement program") to such customer. So long as the OP Fee is payable under
these circumstances, you agree to report to us each month, on forms supplied by
us, the amount of receivables purchased during the preceding month, and remit by
check the fees due to us under this section. All OP Fees will be due and payable
on or before the 25th day of each month for purchases made in the preceding
month.
We agree that you will have no OP Fee obligation if you do not offer, or once
you discontinue to offer, your replacement program to such CashFlow Manager
customer. We also agree that you will have no OP Fee obligation with respect to
new customers added to your replacement program following a termination or
expiration of this agreement, or if the termination of this agreement arises out
of our default in obligations to you under this agreement. The OP Fee provided
for in this section shall be calculated in the same manner as the ongoing
support fees provided for in Section 9, including any applicable volume rebate
provisions.
Section 12. Program Software; Limited Warranty. As additional consideration for
this license, you agree not to reproduce copies of the CashFlow Manager software
except to the extent required to operate your CashFlow Manager Program.
Program Software and Documentation. We warrant the physical software media and
documentation to be free of defects in materials and workmanship and that each
will substantially conform to the specifications and applications set forth in
our documentation during the term of this agreement, provided it is used with
computer hardware which meets minimum specifications as determined by us during
the term of this agreement. However, we make no representation or warranty that
the software or documentation is "error-free" or meets any user's particular
standards, requirements or needs. If we receive notice of any defects in the
software from you, we will replace the defective software media or
documentation.
The entire and exclusive liability and remedy for breach of this limited
warranty is limited to replacement of the defective software or documentation,
and we will have no liability or responsibility to you or to any entity or
person with respect to any claim for or damages for any indirect, special or
consequential damages in any manner arising out of, or connected with the sale,
the use or the anticipated use of the Program software and documentation
referred to herein, or for damage caused or alleged to be caused directly or
indirectly by the computer software or documentation furnished by us, including
but not limited to the interruption of service, loss of business or anticipated
profits or consequential damages resulting from the use or operation of the
software.
If we are unable to cure the defects in the software or documentation within a
reasonable period, you have the option to terminate this agreement upon written
notice and receive a refund of all License fees paid by you prior to such
termination. Thereafter, neither of us will have any further obligation to the
other.
WE SPECIFICALLY DISCLAIM ALL OTHER WARRANTIES, REPRESENTATIONS, OR
CONDITIONS, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY
WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. ALL OTHER IMPLIED TERMS ARE EXCLUDED.
Program Services. We represent that each of our employees or representatives
assigned to perform marketing, technical support or data processing services
will have the proper skill, training and background so as to be able to perform
in a competent manner the services described in this agreement; provided,
however, you agree that we will not be responsible for any indirect, special or
consequential loss or damage, such as loss of anticipated revenues or other
consequential economic loss in connection with or arising out of any
unintentional breach of this agreement. Nor will we be liable for any errors in
judgment or mistakes that may be made in good faith when acting on your behalf.
Nor will we be liable for any delay in the performance of
License Agreement. 4
<PAGE> 5
our duties caused by strike, lawsuit, riot, civil disturbance, fire, shortage of
supplies or materials or any other cause reasonably beyond our control.
YOU HEREBY AGREE TO WAIVE AND RELEASE US FROM ANY CLAIM OR LIABILITY FOR
ERRORS OR MISTAKES MADE IN GOOD FAITH OR FOR ANY SUCH
CONSEQUENTIAL LOSS OR DAMAGE AS SET FORTH IN THIS SECTION.
Section 13. Default; Provisions for Alternative Dispute Resolution. In the event
that either you or we default in the performance of any obligation under this
agreement, and this default continues for a period of thirty (30) days after
written notice is given by the non-defaulting party, then the non-defaulting
party will have the right, at its option, to terminate this agreement by giving
written notice of such termination. Except as specifically provided otherwise,
such termination will not constitute a waiver of our rights to any sums due and
payable to us from you pursuant to the terms of this agreement.
We and you further agree that any dispute arising between the parties, either
before or after a termination of this agreement, will be submitted either to
mediation, or to non-binding arbitration in accordance with the rules of the
American Arbitration Association, prior to the commencement of any legal action
or proceeding against the other party to this agreement.
Section 14. Procedures Upon Termination. Upon the expiration or termination of
this agreement for any cause, you agree to immediately discontinue the use of,
and return to us, all trade names, trademarks, service marks, copyrights,
patents, computer software programs, manuals, materials, signs, and forms of
advertising indicative of the CashFlow Manager Program. If you fail or refuse to
comply with the provisions of this section, you agree to reimburse us for all
costs, including reasonable attorney's fees and other expenses incurred in
connection in the enforcement of this provision. In the event you terminate this
agreement, but elect to continue an accounts receivable financing program of a
nature similar to CashFlow Manager, you warrant that such replacement program
will be or has been developed without the use of any of our confidential or
proprietary information covered by this agreement.
Section 15. Binding Effect. This agreement will be effective when executed by
one of our duly authorized officers and will benefit and be binding on you and
us, and your and our successors or assigns.
Section 16. Governing Law. This agreement will be deemed to have been made and
delivered in the State of Texas, and all rights and duties will be governed by
and enforced in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, you and we have executed this agreement on the respective
dates set forth below, and is effective on the date accepted by us.
Licensee:
By: Date:
------------------------------------- ---------------------------
Its:
------------------------------------
Licensor Acceptance
The foregoing agreement is hereby accepted and approved by the undersigned duly
authorized officer of BANKING SOLUTIONS, INC. on the _____ day of
_______________, 1999.
BANKING SOLUTIONS, INC.
By:
[CASH FLOW MANAGER(SM) LOGO] ---------------------------------
Its:
---------------------------------
License Agreement. 5
<PAGE> 6
[BANKING SOLUTIONS INC. LOGO]
License Agreement. 6
<PAGE> 1
EXHIBIT 10.15
[TSI LOGO]
GENERAL MARKETING AGENT AGREEMENT
TOWNE SERVICES, INC., a Georgia Corporation ("Servicer") and the undersigned
("Agent"), in consideration of their obligations in this Agreement and intending
to be legally bound, agree as follows:
1. Definitions: For purposes of this Agreement:
a) "Customer" shall mean, a bank or holding company that meets
the qualifications and criteria applicable to such offering of
services by servicer for solicitation by Agent from time to
time. "Bank Marketing Agreement" shall mean the contract in
the form, and containing the terms and conditions (including
price and payment terms), established by Servicer from time to
time for the services provided to a "Customer".
b) "Territory" shall mean the states, countries, or locations
identified on Exhibit "A" hereto.
c) "Term" shall mean that period commencing on the date hereof
and lasting for a period of twelve complete months and any
subsequent twelve month renewal period.
2. Appointment: Subject to the terms of this Agreement, Servicer engages
Agent to solicit customers to enter into Bank Marketing Agreements with
Servicer for its services. Agent may solicit customers only with
respect to their proposed use of Towne Services, Inc. services in the
Territory. Servicer reserves the right, to change the terms and
conditions of its Bank Marketing Agreement at any time, and Servicer
agrees to provide 30 days notice to Agent of any substantive changes.
Agent acknowledges that this Agreement does not confer on Agent
exclusive rights in any other territory. Agent represents and warrants
to Servicer that it has the authority to enter into this Agreement and
to perform its terms fully.
3. Nature of Relationship: Agent shall be an independent contractor.
Nothing in this Agreement shall be construed to create any other
relationship. Agent is hereby advised that, as an independent
contractor, it has certain responsibilities under the federal and state
tax laws.
4. Responsibilities of Agent: The duties of Agent shall be to:
a) Use its best efforts to solicit Customers to enter into Bank
Marketing Agreements;
b) Conduct its business so as to maintain and increase the
goodwill and reputation of Servicer;
c) Pay all expense incurred by Agent in the performance of its
duties under this Agreement, including (1) local and
long-distance transportation expenses: and (2) expenses in
connection with the solicitation of Customers and the
operation of Agent's business, including telephone, delivery,
entertainment, and promotional expenses; and
d) Use only promotional material mutually agreed upon for
purposed of promotion of the Servicer's business.
5. Limits of Authority: Agent shall not, without prior written approval from
an authorized representative of Servicer, take any of the following
actions:
a) Incur any expense or obligation in the name of the Servicer;
b) Disseminate any printed material regarding the Licensed
Products or Servicer's business; or
c) Use Servicer's advertising and promotional guidelines.
<PAGE> 2
6. Payment of Commissions: Agent shall be compensated by Servicer for its
services solely on the basis of fees earned and collected on any Bank
Marketing Agreements for Customers located within the Territory.
Commissions shall be set forth in a Commission Schedule attached hereto
as Exhibit "B". The payment of any commissions to Agent shall be
subject to all of the terms and conditions of this Agreement.
7. Statements: Servicer shall mail Agent a monthly statement showing fees
earned. At no time shall Servicer be obligated to reimburse Agent for
any expenses unless it agrees to do so in writing.
8. Sales Support: Servicer shall provide sales support to agent including
promotional materials and sales representative in Territory as
reasonably required by agent.
9. Voluntary Termination: Prior to completion of the initial Term or any
renewal Term, either Servicer or Agent may terminate this agreement at
any time without cause by giving the other party one hundred twenty
days prior written notice. The payment of commissions shall continue
through the term or any Bank Marketing Agreement entered into pursuant
to this Agreement between Servicer and a Customer in the event of any
termination other than involuntary termination by either party.
10. Involuntary Termination: Either party may terminate this Agreement
immediately, without notice to either party for just cause. A
termination shall be deemed "for just cause" if the other party:
a) Breaches any provision of this Agreement;
b) Violates any law or regulation; or
c) Commits any willful or dishonest act that could
injure the other party.
11. Confidentiality: Agent acknowledges that Servicer has a proprietary
interest in the association of its agents and personnel and the
business of the customers with whom such agents and personnel interact.
Accordingly, Agent shall provide Servicer with the full benefit of all
work and contacts relevant to the business of Servicer throughout the
term of this Agreement. Agent shall maintain in strict confidence, and
shall not use or disclose except as required by law or legal process,
and as required to perform its duties for Servicer, all Trade Secrets
of Servicer. This obligation shall apply during and after the term of
this Agreement for so long as the pertinent information or data remain
Trade Secrets, and shall apply regardless of whether the Trade Secrets
are in written or tangible form. For purposes of this Agreement, a
Trade Secret is defined to consist of legally protected rights in
confidential information. Without limiting the generality of the
foregoing, Trade Secrets of Servicer include nonpublic information
regarding the Servicer, account invoices, training and educational
manuals, administrative manuals, and prospective customer leads
developed by Servicer regardless of whether computer or electronically
accessible "on-line". However, Trade Secrets do not include information
Agent possesses or acquires independently of Agent's activities or
duties as an agent of Servicer. The foregoing obligation shall continue
to apply for two years after termination of this Agreement.
12. Return of Materials: Upon the request of Servicer and , in any event,
upon the termination of Agent's engagement, Agent shall deliver to
Servicer all memoranda, notes, records, manuals, disks, or other
documents and media pertaining to Servicer's business or Agent's
activities or duties as a Servicer agent, including all copies,
extracts, summaries, and analyses thereof. This obligation shall not
apply to publicity distributed documentation, or internal business or
personal records of Agent's own creation that do not contain Servicer
Trade Secrets.
<PAGE> 3
13. Remedies: In the event of any breach by either party identified in
Section 10 of this Agreement, the resulting injuries to the other party
would be difficult or impossible to estimate accurately, but it is
certain that injury or damages will result to the business of the other
party. Both parties agree that, in the event of any such breach, the
non-breaching party shall be entitled, in addition to any available
legal or equitable remedies or damages, to an injunction to restrain
the violation or anticipated violation thereof. Should the
non-breaching party have any basis to seek such legal or equitable
action, the breaching party shall pay any and all attorney fees and
court costs that the other party may incur. The non-breaching party's
rights under this section shall be in addition to every other remedy
(equitable, statutory, legal or contractual) to which the non-breaching
party may be entitled.
14. Miscellaneous: No assignment by Agent or Servicer of this Agreement or
any commissions due hereunder shall be valid unless approved in advance
by an authorized officer of Servicer or Agent, as the case may be. No
modification or waiver of any provision of this Agreement shall be
binding on Servicer unless made in writing and signed by an authorized
officer of Servicer. This Agreement is governed by the laws of the
State of Georgia as it applies to a contract executed, delivered, and
performed in such state. This Agreement supersedes and replaces any
agreement previously entered into between Agent and Servicer.
Servicer's failure to enforce any provision of this Agreement shall not
constitute a waiver of any provision of this Agreement. The provisions
of this Agreement shall be deemed severable. In the event that any
provision of this Agreement is determined to be unenforceable or
invalid, such provision shall nonetheless be enforced to the fullest
extent permitted by applicable law, and such determination shall not
affect the validity and enforceability of any other remaining
provisions of this Agreement. This Agreement, together with all
schedules attached hereto and all writings incorporated herein by
reference, constitutes the entire agreement between Agent and Servicer
with respect to the subject matter of this Agreement.
Servicer: Towne Services, Inc. Agent:
By: By:
------------------------------------ ----------------------------
Title: Title:
--------------------------------- --------------------------
Date: Date:
---------------------------------- ---------------------------
<PAGE> 4
EXHIBIT A
Towne Services will pay ___ % of initial bank license fees and ___% of the
ongoing revenue net of incremental processing expenses and sales commissions.
<PAGE> 1
EXHIBIT 10.20
PROMISSORY NOTE
$50,000.00 October 8, 1998
Drew W. Edwards (hereinafter referred to as "Maker"), for value
received, hereby promises to pay to the order of TOWNE SERVICES, INC., a Georgia
corporation (hereinafter referred to as "Payee"), the aggregate principal sum of
FIFTY THOUSAND DOLLARS ($50,000.00) on the earlier of (i) February 8, 2000 or
(ii) the date that Maker sells any shares of capital stock of Payee that are
held by Maker, together with interest on the unpaid principal balance at the
rate of 8.5% per annum, compounded annually. The principal hereof and the
interest thereon are payable at 3295 River Exchange Drive, Suite 350, Atlanta,
Georgia 30092, or at such other place as Payee may from time to time designate
to Maker in writing, in coin or currency of the United States of America.
Maker may, at any time and from time to time, prepay all or any portion
of the principal of this Note remaining unpaid, without penalty or premium.
Prepayments shall be applied first to the payment of accrued but unpaid interest
on this Note and the balance to principal.
If any of the following events (an "Event of Default") shall occur and
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest on
this Note when and as the same shall become due and payable and
such default continues for 20 days after Maker receives notice
from Payee of such default; or
(b) If Maker makes an assignment for the benefit of creditors or
admits in writing an inability to pay his or its debts generally
as they become due;
(c) If an order, judgment or decree is entered adjudicating
Maker bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the
appointment of a trustee or receiver of Maker, or of any
substantial part of the assets of Maker, or commences any
proceedings relating to Maker under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now
or hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act
indicates its approval thereof,
<PAGE> 2
consent thereto, or acquiescence therein, or an order is
entered appointing any such trustee or receiver, or approving
the petition in any such proceedings, and such order remains
unstayed and in effect for more than 90 days.
This Note is with full recourse to any assets of Maker.
Any failure on the part of Payee at any time to require the performance
by Maker of any of the terms or provisions hereof, even if known, shall in no
way affect the right thereafter to enforce the same, nor shall any failure of
Payee to insist on strict compliance with the terms and conditions hereof be
taken or held to be a waiver of any succeeding breach or of the right of Payee
to insist on strict compliance with the terms and conditions hereof.
Time is of the essence.
This Note shall be governed by, and enforced and interpreted in
accordance with, the laws of the State of Georgia without regard to the
principles of conflict of laws.
In the event this note, or any part hereof, is collected by or through
an attorney-at-law, Maker agrees to pay all costs of collection including, but
not limited to, attorneys' fees equal to 15% of the principal and interest then
due. In the event that Maker fails to make any payment when due, Payee shall
provide written notice of default to Maker, which notice shall allow Maker ten
(10) days from the date of receipt of such notice in which to cure such default.
If such default is not cured within the time allowed, the balance hereof shall
be deemed to be immediately accelerated without further notice to Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the
date first set forth above.
MAKER:
/s/ Drew W. Edwards
----------------------------
Drew W. Edwards
<PAGE> 1
EXHIBIT 10.21
PROMISSORY NOTE
$30,000.00 October 8, 1998
Henry M. Baroco (hereinafter referred to as "Maker"), for value
received, hereby promises to pay to the order of TOWNE SERVICES, INC., a Georgia
corporation (hereinafter referred to as "Payee"), the aggregate principal sum of
THIRTY THOUSAND DOLLARS ($30,000.00) on February 8, 2000 or (ii) the date that
Maker sells any shares of capital stock of Payee that are held by Maker,
together with interest on the unpaid principal balance at the rate of 8.5% per
annum, compounded annually. The principal hereof and the interest thereon are
payable at 3295 River Exchange Drive, Suite 350, Atlanta, Georgia 30092, or at
such other place as Payee may from time to time designate to Maker in writing,
in coin or currency of the United States of America.
Maker may, at any time and from time to time, prepay all or any portion
of the principal of this Note remaining unpaid, without penalty or premium.
Prepayments shall be applied first to the payment of accrued but unpaid interest
on this Note and the balance to principal.
If any of the following events (an "Event of Default") shall occur and
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest on
this Note when and as the same shall become due and payable and
such default continues for 20 days after Maker receives notice
from Payee of such default; or
(b) If Maker makes an assignment for the benefit of creditors or
admits in writing an inability to pay his or its debts generally
as they become due;
(c) If an order, judgment or decree is entered adjudicating
Maker bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the
appointment of a trustee or receiver of Maker, or of any
substantial part of the assets of Maker, or commences any
proceedings relating to Maker under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now
or hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act
indicates its approval thereof,
<PAGE> 2
consent thereto, or acquiescence therein, or an order is
entered appointing any such trustee or receiver, or approving
the petition in any such proceedings, and such order remains
unstayed and in effect for more than 90 days.
This Note is with full recourse to any assets of Maker.
Any failure on the part of Payee at any time to require the performance
by Maker of any of the terms or provisions hereof, even if known, shall in no
way affect the right thereafter to enforce the same, nor shall any failure of
Payee to insist on strict compliance with the terms and conditions hereof be
taken or held to be a waiver of any succeeding breach or of the right of Payee
to insist on strict compliance with the terms and conditions hereof.
Time is of the essence.
This Note shall be governed by, and enforced and interpreted in
accordance with, the laws of the State of Georgia without regard to the
principles of conflict of laws.
In the event this note, or any part hereof, is collected by or through
an attorney-at-law, Maker agrees to pay all costs of collection including, but
not limited to, attorneys' fees equal to 15% of the principal and interest then
due. In the event that Maker fails to make any payment when due, Payee shall
provide written notice of default to Maker, which notice shall allow Maker ten
(10) days from the date of receipt of such notice in which to cure such default.
If such default is not cured within the time allowed, the balance hereof shall
be deemed to be immediately accelerated without further notice to Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the
date first set forth above.
MAKER:
/s/ Henry M. Baroco
-------------------------------------
/s/ Henry M. Baroco
<PAGE> 1
EXHIBIT 10.23
PROMISSORY NOTE
$5,000,000.00 December 31, 1998
Towne Services, Inc.
3295 River Exchange Drive, Suite 350
Norcross, Georgia 30092
(Individually and collectively "Borrower")
First Union National Bank
999 Peachtree Street - GA9104
Atlanta, Georgia 30309
(Hereinafter referred to as the "Bank")
Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, at its office indicated above or wherever else Bank may
specify, the sum of Five Million and No/100 Dollars ($5,000,000.00) or such sum
as may be advanced and outstanding from time to time with interest on the unpaid
principal balance at the rate and on the terms provided in this Promissory Note
(including all renewals, extensions or modifications hereof, this "Note").
SECURITY. Borrower has granted Bank a security interest in the collateral
described in the Loan Documents, including, but not limited to, personal
property collateral described in that certain Security Agreement of even date
herewith.
INTEREST RATE. Interest shall accrue on the unpaid principal balance of this
Note from the date hereof at the LIBOR Market Index Rate plus 2.0% as that rate
may change from day to day in accordance with changes in the LIBOR Market index
Rate ("Interest Rate"). "LIBOR Market Index Rate", for any day, is the rate for
1 month U.S. dollar deposits as reported on Telerate page 3750 as of 11:00 a.m.,
London time, on such day, or if such day is not a London business day, then the
immediately preceding London business day (or if not so reported, then as
determined by Bank from another recognized source or interbank quotation).
DEFAULT RATE. In addition to all other rights contained in this Note, if a
Default (defined herein) occurs and as long as a Default continues, all
outstanding Obligations shall bear interest at the Interest Rate plus 3%
("Default Rate"). The Default Rate shall also apply from acceleration until the
Obligations or any judgment thereon is paid in full.
INTEREST AND FEE(S) COMPUTATION. (ACTUAL/360). Interest and fees, if any, shall
be computed on the basis of a 360-day year for the actual number of days in the
applicable period ("Actual/360 Computation"). The Actual/360 Computation
determines the annual effective yield by taking the stated (nominal) rate for a
year's period and then dividing said rate by 360 to determine the daily periodic
rate to be applied for each day in the applicable period. Application of the
Actual/360 Computation produces an annualized effective rate exceeding that of
the nominal rate.
REPAYMENT TERMS. This Note shall be due and payable in consecutive monthly
payments of accrued interest only commencing on February 1, 1999, and on the
same day of each month thereafter until fully paid. In any event, all principal
and accrued interest shall be due and payable on December 31, 1999.
<PAGE> 2
APPLICATION OF PAYMENTS. Monies received by Bank from any source for application
toward payment of the Obligations shall be applied to accrued interest and then
to principal. If a Default occurs, monies may be applied to the Obligations in
any manner or order deemed appropriate by Bank.
If any payment received by Bank under this Note or other Loan Documents is
rescinded, avoided or for any reason returned by Bank because of any adverse
claim or threatened action, the returned payment shall remain payable as an
obligation of all persons liable under this Note or other Loan Documents as
though such payment had not been made.
DEFINITIONS. LOAN DOCUMENTS. The term "Loan Documents" used in this Note and
other Loan Documents refers to all documents executed in connection with the
loan evidenced by this Note and any prior notes which evidence all or any
portion of the loan evidenced by this Note, and may include, without limitation,
a commitment letter that survives closing, a loan agreement, this Note, guaranty
agreements, security agreements, security instruments, financing statements,
mortgage instruments, any renewals or modifications, whenever any of the
foregoing are executed, but does not include swap agreements (as defined in 11
U.S.C. ss. 101). OBLIGATIONs. The term "Obligations" used in this Note refers to
any and all indebtedness and other obligations under this Note, all other
obligations under any other Loan Document(s), and all obligations under any swap
agreements as defined in 11 U.S.C. ss. 101 between Borrower and Bank whenever
executed. CERTAIN OTHER TERMs. All terms that are used but not otherwise defined
in any of the Loan Documents shall have the definitions provided in the Uniform
Commercial Code.
LATE CHARGE. If any payments are not timely made, Borrower shall also pay to
Bank a late charge equal to 5% of each payment past due for 15 or more days.
Acceptance by Bank of any late payment without an accompanying late charge shall
not be deemed a waiver of Bank's right to collect such late charge or to collect
a late charge for any subsequent late payment received.
ATTORNEYS' FEES AND OTHER COLLECTION COSTS. Borrower shall pay all of Bank's
reasonable expenses incurred to enforce or collect any of the Obligations,
including, without limitation, reasonable arbitration, paralegals', attorneys'
and experts' fees and expenses, whether incurred without the commencement of a
suit, in any trial, arbitration, or administrative proceeding, or in any
appellate or bankruptcy proceeding.
USURY. If at any time the effective interest rate under this Note would, but for
this paragraph, exceed the maximum lawful rate, the effective interest rate
under this Note shall be the maximum lawful rate, and any amount received by
Bank in excess of such rate shall be applied to principal and then to fees and
expenses, or, if no such amounts are owing, returned to Borrower.
CURE PERIOD. Except as provided below, a Default may be cured within five days
("Cure Period") of Bank mailing written notice to Borrower ("Right to Notice and
Cure"). During the Cure Period Bank shall not exercise its remedies to collect
the Obligations except as the Bank reasonably deems necessary to protect its
interest in collateral securing the Obligations. The Right to Notice and Cure is
applicable only to curable Defaults and only to one occurrence of Default during
any one year period. This Right to Notice and Cure shall have no effect with
respect to subsequent Defaults within such one year period and shall not be
applicable to False Warranty, Cessation or Bankruptcy Defaults.
DEFAULT. If any of the following occurs, a default ("Default") under this Note
shall exist: NONPAYMENT; NONPERFORMANCE. The failure of timely payment or
performance of the Obligations or
Page 2
<PAGE> 3
Default under this Note or any other Loan Documents. FALSE WARRANTY. A warranty
or representation made or deemed made in the Loan Documents or furnished Bank in
connection with the loan evidenced by this Note proves materially false, or if
of a continuing nature, becomes materially false. CROSS DEFAULT. At Bank's
option, any default in payment or performance of any obligation under any other
loans, contracts or agreements of Borrower, any Subsidiary or Affiliate of
Borrower, any general partner of or the holder(s) of the majority ownership
interests of Borrower with Bank or its affiliates ("Affiliate" shall have the
meaning as defined in 11 U.S.C. ss. 101, except that the term "debtor" therein
shall be substituted by the term "Borrower" herein; "Subsidiary" shall mean any
business in which Borrower holds, directly or indirectly, a controlling
interest). CESSATION; BANKRUPTCY. The death of, appointment of guardian for,
dissolution of, termination of existence of, (except as disclosed this date to
Bank) loss of good standing status by, appointment of a receiver for, assignment
for the benefit of creditors of, or commencement of any bankruptcy or insolvency
proceeding by or against the Borrower, its Subsidiaries or Affiliates, if any,
or any general partner of or the holder(s) of the majority ownership interests
of Borrower, or any party to the Loan Documents. MATERIAL CAPITAL STRUCTURE OR
BUSINESS ALTERATION. Without prior written consent of Bank, (i) a material
alteration in the kind or type of Borrower's business or that of Borrower's
Subsidiaries or Affiliates, if any; (ii) the sale of substantially all of the
business or assets of Borrower, any of Borrower's Subsidiaries or Affiliates or
guarantor or a material portion (10% or more) of such business or assets if such
a sale is outside the ordinary course of business of Borrower, or any of
Borrower's Subsidiaries or Affiliates or any guarantor or more then 50% of the
outstanding stock or voting power of or in any such entity in a single
transaction or a series of transactions; (iii) should any Borrower, or any of
Borrower's Subsidiaries or Affiliates or any guarantor enter into any merger or
consolidation where Borrower or Borrower's Subsidiaries are not the surviving
entity.
REMEDIES UPON DEFAULT. If a Default occurs under this Note or any Loan
Documents, Bank may at any time thereafter, take the following actions: BANK
LIEN. Foreclose its security interest or lien against Borrower's accounts
without notice. ACCELERATION UPON DEFAULT. Accelerate the maturity of this Note
and all other Obligations, and all of the Obligations shall be immediately due
and payable. CUMULATIVE. Exercise any rights and remedies as provided under the
Note and other Loan Documents, or as provided by law or equity.
ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 90 days
after the close of each fiscal year, audited financial statements reflecting its
operations during such fiscal year, including, without limitation, a balance
sheet, profit and loss statement and statement of cash flows, with supporting
schedules; all on a consolidated and consolidating basis and in reasonable
detail, prepared in conformity with generally accepted accounting principles,
applied on a basis consistent with that of the preceding year. All such
statements shall be examined by an independent certified public accountant
acceptable to Bank. The opinion of such independent certified public accountant
shall not be acceptable to Bank if qualified due to any limitations in scope
imposed by Borrower or its Subsidiaries, if any. Any other qualification of the
opinion by the accountant shall render the acceptability of the financial
statements subject to Bank's approval. Financial statements filed by Borrower
with the Securities Exchange Commission are acceptable to Bank.
PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank unaudited
management-prepared quarterly financial statements, including, without
limitation, a balance sheet, profit and loss statement and statement of cash
flows, with supporting schedules, as soon as available and in any event within
45 days after the close of each such period; all in reasonable detail and
prepared in conformity with generally accepted accounting principles, applied on
a basis consistent with that of the preceding year. Such statements shall be
certified as to their correctness by a principal financial officer of Borrower.
Financial statements filed by Borrower with the Securities Exchange Commission
are acceptable to Bank.
Page 3
<PAGE> 4
FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information
as Bank may reasonably request from time to time, including without limitation,
financial statements and information pertaining to Borrower's financial
condition. Such information shall be true, complete, and accurate in all
material respects.
YEAR 2000 COMPATIBILITY. Borrower shall take all action necessary to ensure that
Borrower's computer based systems are able to operate and effectively process
data including dates on and after January 1, 2000. At the request of Bank,
Borrower shall provide Bank assurance acceptable to Bank of Borrower's Year 2000
compatibility.
LINE OF CREDIT ADVANCES. Borrower may borrow, repay and reborrow, and Bank may
advance and readvance under this Note respectively from time to time until the
maturity hereof (each an "Advance" and together the "Advances"), so long as the
total indebtedness outstanding at any one time does not exceed the lower of the
principal amount stated on the face of this Note or 100% of the aggregate
balance in the collateral account described in that certain Security Agreement
of even date herewith. Bank's obligation to make Advances under this Note shall
terminate if Borrower is in Default or a representation in any of the Loan
Documents is false or has become false. As of the date of each proposed Advance,
Borrower shall be deemed to represent that each representation made in the Loan
Documents is true as of such date.
If Borrower subscribes to Bank's cash management services and such services are
applicable to this line of credit, the terms of such service shall control the
manner in which funds are transferred between the applicable demand deposit
account and the line of credit for credit or debit to the line of credit.
WAIVERS AND AMENDMENTS. No waivers, amendments or modifications of this Note and
other Loan Documents shall be valid unless in writing and signed by an officer
of Bank. No waiver by Bank of any Default shall operate as a waiver of any other
Default or the same Default on a future occasion. Neither the failure nor any
delay on the part of Bank in exercising any right, power, or remedy under this
Note and other Loan Documents shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or remedy.
Each Borrower or any person liable under this Note waives presentment, protest,
notice of dishonor, demand for payment, notice of intention to accelerate
maturity, notice of acceleration of maturity, notice of sale and all other
notices of any kind. Further, each agrees that Bank may extend, modify or renew
this Note or make a novation of the loan evidenced by this Note for any period
and grant any releases, compromises or indulgences with respect to any
collateral securing this Note, or with respect to any other Borrower or any
other person liable under this Note or other Loan Documents, all without notice
to or consent of each Borrower or each person who may be liable under this Note
or other Loan Documents and without affecting the liability of Borrower or any
person who may be liable under this Note or other Loan Documents.
MISCELLANEOUS PROVISIONS. ASSIGNMENT. This Note and other Loan Documents shall
inure to the benefit of and be binding upon the parties and their respective
heirs, legal representatives, successors and assigns. Bank's interests in and
rights under this Note and other Loan Documents are freely assignable, in whole
or in part, by Bank. In addition, nothing in this Note or any of the Loan
Documents shall prohibit Bank from pledging or assigning this Note or any of the
Loan Documents or any interest therein to any Federal Reserve Bank. Borrower
shall not assign its rights and interest hereunder without the prior written
consent of Bank, and any attempt by Borrower to assign without Bank's prior
written consent is null and void. Any assignment shall not release Borrower from
the Obligations. APPLICABLE LAW; CONFLICT BETWEEN DOCUMENTS. This Note and other
Loan Documents shall be governed by and
Page 4
<PAGE> 5
construed under the laws of the state named in Bank's address shown above
without regard to that state's conflict of laws principles. If the terms of this
Note should conflict with the terms of the loan agreement or any commitment
letter that survives closing, the terms of this Note shall control.
JURISDICTION. Borrower irrevocably agrees to non-exclusive personal jurisdiction
in the state named in Bank's address shown above. SEVERABILITY. If any provision
of this Note or of the other Loan Documents shall be prohibited or invalid under
applicable law, such provision shall be ineffective but only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Note or other such document.
NOTICES. Any notices to Borrower shall be sufficiently given, if in writing and
mailed or delivered to the Borrower's address shown above or such other address
as provided hereunder, and to Bank, if in writing and mailed or delivered to
Bank's office address shown above or such other address as Bank may specify in
writing from time to time. In the event that Borrower changes Borrower's address
at any time prior to the date the Obligations are paid in full, Borrower agrees
to promptly give written notice of said change of address by registered or
certified mail, return receipt requested, all charges prepaid. PLURAL; CAPTIONS.
All references in the Loan Documents to Borrower, guarantor, person, document or
other nouns of reference mean both the singular and plural form, as the case may
be, and the term "person" shall mean any individual, person or entity. The
captions contained in the Loan Documents are inserted for convenience only and
shall not affect the meaning or interpretation of the Loan Documents. BINDING
CONTRACT. Borrower by execution of and Bank by acceptance of this Note agree
that each party is bound to all terms and provisions of this Note. ADVANCES.
Bank in its sole discretion may make other Advances under this Note pursuant
hereto. POSTING OF PAYMENTS. All payments received during normal banking hours
after 2:00 p.m. local time at the office of Bank first shown above shall be
deemed received at the opening of the next banking day. JOINT AND SEVERAL
Obligations. Each Borrower is jointly and severally obligated under this Note.
FEES AND TAXES. Borrower shall promptly pay all documentary, intangible
recordation and/or similar taxes on this transaction whether assessed at closing
or arising from time to time.
ARBITRATION. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any claim or controversy arising out of
or relating to the Loan Documents between parties hereto (a "Dispute") shall be
resolved by binding arbitration conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes
may include, without limitation, tort claims, counterclaims, a dispute as to
whether a matter is subject to arbitration, claims brought as class actions, or
claims arising from documents executed in the future. A judgment upon the award
may be entered in any court having jurisdiction. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes under or related to swap
agreements. SPECIAL RULES. All arbitration hearings shall be conducted in the
city named in the address of Bank first stated above. A hearing shall begin
within 90 days of demand for arbitration and all hearings shall conclude within
120 days of demand for arbitration. These time limitations may not be extended
unless a party shows cause for extension and then for no more than a total of 60
days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration
Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators
shall be licensed attorneys selected from the Commercial Financial Dispute
Arbitration Panel of the AAA. The parties do not waive applicable Federal or
state substantive law except as provided herein. PRESERVATION AND LIMITATION OF
REMEDIES. Notwithstanding the preceding binding arbitration provisions, the
parties agree to preserve, without diminution, certain remedies that any party
may exercise before or after an arbitration proceeding is brought. The parties
shall have the right to proceed in any court of proper jurisdiction or by
self-help to exercise or prosecute the following remedies, as applicable. (i)
all rights to foreclose against any real or personal property or other security
by exercising a power of sale or under applicable law by judicial foreclosure
including a proceeding to confirm the sale; (ii) all rights of self-help
including peaceful occupation of real property and collection of rents, set-off,
and peaceful possession of personal property; (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
Page 5
<PAGE> 6
attachment, appointment of receiver and filing an involuntary bankruptcy
proceeding; and (iv) when applicable, a judgment by confession of judgment. Any
claim or controversy with regard to any party's entitlement to such remedies is
a Dispute. WAIVER OF EXEMPLARY DAMAGES. The parties agree that they shall not
have a remedy of punitive or exemplary damages against other parties in any
Dispute and hereby waive any right or claim to punitive or exemplary damages
they have now or which may arise in the future in connection with any Dispute
whether the Dispute is resolved by arbitration or judicially. WAIVER OF JURY
TRIAL. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE
IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A
DISPUTE.
IN WITNESS WHEREOF, Borrower, on the day and year first above written, has
caused this Note to be executed under seal.
Towne Services, Inc.
Taxpayer Identification Number 62-1618121
CORPORATE By: /s/ Drew Edwards
SEAL -------------------------------------
Drew Edwards, Chief Executive Officer
Page 6
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF TOWNE SERVICES, INC.
BSI Acquisition Corp., a Georgia corporation and wholly-owned subsidiary of
Towne Services, doing business under the name "Banking Solutions."
Banking Solutions, Inc., a Texas corporation and wholly-owned
subsidiary of BSI Acquisition Corp., doing business under the name
"Banking Solutions."
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into Towne Services, Inc.'s previously
filed Registration Statement File No. 333-53341.
/s/ Arthur Andersen LLP
- ------------------------------------
Arthur Andersen LLP
Atlanta, Georgia
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,081,284
<SECURITIES> 0
<RECEIVABLES> 4,066,848
<ALLOWANCES> (347,065)
<INVENTORY> 0
<CURRENT-ASSETS> 17,030,799
<PP&E> 2,484,354
<DEPRECIATION> 367,367
<TOTAL-ASSETS> 35,419,628
<CURRENT-LIABILITIES> 7,147,212
<BONDS> 0
0
0
<COMMON> 52,363,084
<OTHER-SE> (24,131,668)
<TOTAL-LIABILITY-AND-EQUITY> 28,272,416
<SALES> 6,397,628
<TOTAL-REVENUES> 6,391,628
<CGS> 2,027,160
<TOTAL-COSTS> 21,002,369
<OTHER-EXPENSES> 317,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (263,503)
<INCOME-PRETAX> (14,658,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,658,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 476,239
<CHANGES> 0
<NET-INCOME> (15,134,663)
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
