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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
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GEORGIA 62-1618121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3950 JOHNS CREEK COURT, SUITE 100, 30024
SUWANEE, GEORGIA (Zip Code)
(Address of principal executive offices)
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(Registrant's telephone number, including area code): (678) 475-5200
Securities registered pursuant to Section 12(b) of the Act:
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NONE NONE
(Title of class) (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
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 its
Common Stock on March 21, 2000, as reported on the National Association of
Securities Dealers Automated Quotation System, was approximately $44,376,000. As
of March 21, 2000, the Registrant had 27,230,592 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE REGISTRANT'S 2000 ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON MAY 23, 2000 ARE INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10-K. PORTIONS OF THE REGISTRANT'S REGISTRATION STATEMENTS ON
FORM S-4 (NO. 333-76493) DECLARED EFFECTIVE ON JUNE 10, 1999, AND FORM S-1 (NO.
333-76659) DECLARED EFFECTIVE ON JUNE 23, 1999, AND THE "RISK FACTORS" SECTIONS
CONTAINED THEREIN ARE INCORPORATED BY REFERENCE IN PARTS I AND II OF THIS FORM
10-K.
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INDEX OF FORM 10-K
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 24
Item 8. Consolidated Financial Statements and Supplementary Data.... 24
Item 9. Changes and Disagreements with Accountants in Accounting and
Financial Disclosures....................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 25
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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 as a result
of several factors including those described on page 5, 15, 20 and 21 of this
Annual Report.
GENERAL
Towne Services, Inc. provides services and products that process sales and
payment information and related financing transactions for small businesses and
banks in the United States. We deliver these services and products online via an
electronic hub, or gateway, that links business and bank customers with us and
other providers of products and services that can benefit these customers. We
use this electronic gateway to deliver a variety of business and management
solutions using internet and telecommunication connections.
The primary business capabilities we offer our customers include a virtual
credit card system and merchandise forecasting system. Our virtual credit card
system processes the in-house credit transactions of small businesses and
includes an automated receivables management system that allows banks to quickly
finance the working capital needs of their small business customers. Towne
Services' merchandise forecasting system, or RMSA Forecast, processes sales and
inventory transactions of retailers, giving them greater control over inventory
levels and the ability to make better inventory purchase decisions, improve
cashflow and improve operating margins.
We offer the following automated business management systems: (a) TOWNE
CREDIT(R), which processes consumer credit transactions for small and medium
size retail merchants; (b) TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which
process business-to-business credit transactions for small commercial
businesses; and (c) RMSA Forecast, which processes sales and inventory
transactions and provides merchandising information for small specialty retail
stores. Through the use of our online services and products, our business
customers are able to:
- utilize the internet to conduct business electronically;
- accelerate cash flow;
- develop and implement retail marketing plans;
- improve customer services;
- improve retail merchandising strategies; and
- automate their records, reduce paperwork and shift other administrative
burdens to Towne.
Our systems also benefit our bank customers who can:
- receive secure, reliable and prompt information;
- closely monitor customer accounts;
- generate status reports;
- finance the accounts receivable of their small business customers; and
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- generate fee income and potential new customers.
Our 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 we collect our transaction fees. The remaining amounts generate fee
income for the bank. We also generate revenue by charging our business and bank
customers initial set-up fees.
Our merchandise forecasting and point of sale systems enable business
customers to compete with larger chain retailers by providing automated
processing and business management capabilities similar to those used by larger
companies. We generate revenue from these systems by charging initial set-up and
recurring monthly service fees.
TOWNE'S MARKET
We provide our products and services to small and mid-sized businesses that
extend in-house credit to their customers and to the banks these businesses use.
We believe that the electronic transaction processing industry generally has not
offered our business customers a way to process their in-house credit
transactions electronically, focusing instead on credit and debit card
transactions.
A variety of small and medium size businesses use the TOWNE CREDIT system,
including hardware stores, clothing stores, florists, auto parts stores and
pharmacies. We market 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. We
market the RMSA Forecast to small and mid-sized independent specialty retail
businesses, such as men's and women's apparel stores, sporting goods stores,
golf pro shops, shoe stores and college bookstores.
Many of these businesses process a large portion of their sales using
in-house credit and use labor-intensive manual processes and products to run
their businesses. These credit receivables are generally collected manually
through a month-end billing process. We believe that the manual billing and
collections process utilized by many small businesses is highly inefficient,
causing them to carry excess receivables and bad debts. In addition, because of
the difficulties in tracking and managing receivables from this manual process,
banks have been reluctant to finance these businesses based on their
receivables. Our processing systems allow small businesses to automate many of
their manual business tasks including the processing of in-house accounts,
payment processing and bad debt collections and permits banks to provide
financing for these businesses based upon their receivables.
In addition, most small businesses face difficulties competing with larger
businesses due to their more limited resources. They generally do not have large
office staffs to perform essential management functions and do not have
efficient practices and procedures to track their inventory and sale
information. Our merchandise forecasting and transaction systems use
sophisticated software to assist retailers in the day-to-day management of their
businesses. By using our products and systems, businesses can improve their
profitability by effectively managing their day-to-day operations, including
markups, markdowns, proper flow of receipts and sales. By improving the
business' efficiency, our systems can also help improve our customers' cash
flow.
TOWNE'S STRATEGIES
Our goal is to become one of the leading providers of electronic commerce
business solutions for small and medium size businesses in the United States. We
plan to attain this goal by implementing the following key business strategies:
Maximize Electronic Gateway to Customers
When a business customer installs TOWNE CREDIT and TOWNE FINANCE, it
establishes an electronic gateway that links it with Towne, the business' bank
and other companies that provide products and services that can benefit its
business. We intend to maximize this distribution channel by developing,
acquiring
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and implementing the business and management tools that small businesses need to
succeed in an electronic commerce marketplace.
Enter New Relationships For Marketing and Product Enhancements
We have established marketing and other business relationships that enhance
our services and products and channels of distribution. In 1999 we entered into
several agreements with companies such as Princeton eCom, Lynxus, Concord EFS,
NOVA Information Systems, Total Debt Management and TransUnion, which have
allowed us to expand the number of our products and services that complement our
existing systems. In January 2000, we announced that we have entered into
agreements with providers of e-commerce business solutions, including internet
service, credit reporting and scoring, payroll processing and internet bill
payment and presentment services, to launch our Business Suite for our
customers.
Expand Direct Sales and Marketing Efforts Nationwide
As of December 31, 1999, we had 166 direct sales representatives in 41
states performing sales and marketing tasks. Of this total, 32 persons are
dedicated to developing bank customer relationships and 134 persons are focused
on developing small business customers.
Continue to Leverage Bank Relationships
We have relationships with businesses and organizations that have large
numbers of banks and small businesses as their customers. In addition, our
executive officers and directors have extensive experience in the electronic
processing and financial services industries, and several members of the board
of directors have experience in the management of banks or companies that have
banks as customers. Through these relationships, we believe we attract customers
that would be difficult to reach through traditional marketing methods.
PRODUCTS AND SERVICES
We design our products and services to be simple to use, fast and reliable.
Our 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. Our RMSA Forecast
product processes sales and inventory transactions and organizes merchandise
information for small specialty retail stores.
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 our business
customers is processed through TOWNE CREDIT as follows:
Step 1: The participating business sells goods or services on an
in-house account.
Step 2: The business enters sales information at the point of sale
into an electronic cash register or computer terminal loaded with our
proprietary computer software.
When a customer makes a purchase on account, a store clerk records the
transaction on a point of sale terminal. 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 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.
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Step 3: The business closes out its daily transactions and
electronically transmits transaction data to Towne through the computer
system across internet or telecommunications lines.
Step 4: We process the data, calculate receivables, perform other
accounting functions and transmit reports electronically to the business
and its community bank upon request by the next business day.
On a daily basis, the business owner or manager transmits the sales
activity by batch to our computer processing center across an ordinary
telephone line or internet connection. Our customer communication software
supports a wide range of business customers, including those in rural
areas. Our systems process data from purchase transactions, calculate
receivables, post these transactions and perform other accounting functions
automatically and can be programmed to generate daily customized reports.
Our network systems then transmit reports to businesses and their banks by
the business day following receipt of transaction data.
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: We bill the business' customer, collect and process the
customer's payment and transmit payment information to the bank for credit
to the business' bank account.
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 our 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 we collect them. TOWNE CREDIT works as a supplement to 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. We assume no credit risk from business customers in these
transactions.
With TOWNE CREDIT, many administrative burdens of running a small business
are outsourced to us. We generate and print statements and send them to the
businesses' customers. We maintain an automated lock box through which payments
can be received. 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 our 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 our processing network to verify or update
information.
We also settle payments for our customers. We transmit, upon request,
transaction information directly to the bank and arrange for funds to be
transferred from our 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.
Through TOWNE CREDIT, businesses are able to 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 is able to generate 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 still is able to generate
fee income. In both cases, the TOWNE CREDIT processing system provides us with
fee income.
Towne Finance
Our automated asset management and financing software system, TOWNE
FINANCE, is a commercial version of TOWNE CREDIT that addresses
business-to-business credit transactions. TOWNE FINANCE facilitates accounts
receivable financing for small commercial businesses by allowing these
businesses and their community banks to better manage and control assets that
fluctuate in value. With TOWNE
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FINANCE, businesses have the ability to convert the invoices to needed cash to
finance their ongoing operations.
Using TOWNE FINANCE, banks can assign percentage values to specific assets
of their 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 as a supplement to the banks' current loan processing systems and
creates the general ledger account entries necessary for community banks to
account for these asset-based loans.
Once a bank customer agrees to use TOWNE FINANCE, the bank must approve a
credit line for the customer. After credit is established, we load historical
invoice data onto our host computer. 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. We then take over the statement rendering and remittance
processing functions for the bank much like we do 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, we process the payments and transmit 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 we provide a specialized sales force, back room
processing and monitoring services. TOWNE FINANCE allows community banks to
provide a 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 have 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 also
addresses business-to-business credit transactions. The software program enables
the 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's general
ledger system. At the end of the month, statements are sent 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. Any excess reserves are deposited into the
business' operating account after the month-end reconciliation.
With CASHFLOW MANAGER, banks generate income from the discount fee charged
from each batch of receivables purchased, interest charged either to the
merchant, the merchant's customers, or both parties and 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.
RMSA Forecast
We develop each customized RMSA Forecast using a combination of data
supplied by the customer coupled with proprietary business models. The RMSA
Forecast enables our business customers to manage
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inventory at the classification level, such as women's blouses or men's suits.
We need four basic pieces of information about each class of merchandise offered
by the business: sales, markdowns, merchandise received and merchandise on order
but not yet delivered. This data is collected monthly and transmitted to our
computer systems, which also house historical information such as sales,
markdowns and merchandise receipts for each individual business customer.
Merchandise forecasting models for the particular industry, geographical region,
season and other current business trends are also incorporated into each RMSA
Forecast. The RMSA Forecast is then provided to our retail business customers
electronically or via hard copy, at their option.
Our forecasting customers receive on a monthly basis:
- the current month's sales forecast and a rolling forecast up to ten
months into the future;
- a review of markdowns, timing of deliveries and the other factors needed
to achieve optimal sales;
- analysis of sales history for missed opportunities;
- a review of current profitable sales trends; and
- specific information so clients know how much to buy and when to receive
it.
The Charter System
The Charter System uses sophisticated point-of-sale software to assist
retailers in the day-to-day management of their business. The Charter System
also enables us to easily collect the data necessary to develop the RMSA
Forecast.
The Charter System operates as a stand-alone system separate from the RMSA
Forecast. Clients have the opportunity to purchase or lease the Charter System
software. With this software, a client receives a point of sale system with
features that provide a full range of capabilities to track inventory and
perform simple or sophisticated transactions quickly and efficiently. Charter
allows our business customers to work with data at the stock keeping unit, or
SKU, or summary levels and provides specific recommendations on what merchandise
to re-order, markdown and transfer.
The Charter System can track merchandise on many attributes including
style, size, vendor, color and other SKU categories. The sales and inventory
report that can be generated by the Charter System enables the retailer to
determine what inventory is selling quickly and what inventory is moving slowly.
This retail purchase order management system provides a complete overview of
merchandise on hand and on order. It also provides comprehensive customer
profiles designed to enable the retailer to collect detailed information ranging
from vendor preferences to customer's birthdays.
ANCILLARY SERVICES AND NEW PRODUCTS
We provide an array of value-added services in connection with our
processing systems, including:
The Business Suite. In January 2000, we integrated many of our services
and products with a variety of other e-commerce solutions to launch our Business
Suite of products for the benefit of our bank customers and the business
customers they serve. The Business Suite includes:
- consumer and commercial credit reporting and scoring provided by
TransUnion LLC;
- credit card processing capabilities;
- internet bill payment and presentment provided by Princeton eCom;
- internet service provided by Lynxus; and
- payroll processing provided by Pay Systems of America, a subsidiary of
Concord EFS.
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The Business Suite affords our community bank customers pricing advantages and
access to the critical back office products and services that we offer to small
businesses, thereby virtually eliminating the need to resort to competitors for
specialized services.
Collection Services. Our processing systems help our customers identify
delinquent accounts. We maintain an agreement with Total Debt Management,
formerly Wallace and DeMayo, P.C., a national collections firm, that enables our
customers to have on-line access to professional debt collection services. We
maintain an electronic interface with Total Debt Management so account
information is readily delivered to assist in collecting past due amounts.
Document Imaging and Archiving Products. We began offering AUGUSTA and
EzVIEW VAULT(TM) after our July 1999 acquisition of Imaging Institute, Inc. Both
products are imaging software and equipment that offer unique and functional
document imaging and archiving solutions tailored for small to medium-sized
businesses. The AUGUSTA product is an active file folder document imaging system
designed for small to medium sized organizations. It is designed to quickly
scan, file, and retrieve documents electronically. With EzVIEW VAULT(TM),
documents are quickly scanned onto the Mastering Station, saved in electronic
"folders", and finally archived permanently onto a CD-ROM disc. Each disc also
contains a self-running Windows viewing module which will allow the viewing,
printing, and faxing of documents from any Windows-based computer with a CD-ROM
drive.
We plan to design and develop new and improved products and services that
small business customers can access through our electronic gateway to help
automate their businesses and provide better service to their clients. We also
plan to enter new agreements and relationships with other companies and
organizations to give our customers access to a variety of other business
management tools.
1999 ACQUISITIONS OF COMPLEMENTARY COMPANIES AND PRODUCTS
Forseon Acquisition
In June 1999, we acquired Forseon Corporation, a provider of products and
services that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports for retail businesses in the United States and Canada. Forseon's
management reports assist customers in developing and implementing their
merchandising strategies as well as receivables management and marketing plans.
Forseon's business was founded in 1955. It now operates as a subsidiary of Towne
using Retail Merchandising Service Automation, or RMSA, as a trade name. Forseon
customers generally are small to mid-sized independent specialty retail
businesses, such as men's and women's apparel stores, sporting goods stores,
golf pro shops, shoe stores and college bookstores throughout the United States.
We issued a total of 2,075,345 shares of our common stock in exchange for
all outstanding stock and options to acquire stock in Forseon. Ten percent of
the Towne common stock was held back in escrow to satisfy the indemnification
obligations of Forseon stockholders under the merger agreement. The merger was
accounted for as a pooling of interests.
Imaging Institute Acquisition
In July 1999, we acquired Imaging Institute, Inc., a Minnesota-based
document imaging and archiving company. Total consideration for the transaction
was approximately $2.0 million paid in a combination of cash and Towne Services
common stock. Imaging Institute, Inc., was founded in 1996, and, as a subsidiary
of Towne, now offers unique and functional document management products.
Imaging's two primary products, AUGUSTA (for small networks) and EzVIEW
VAULT(TM) (for stand alone PCs), are easy to use and more cost effective for
small institutions than traditional document management solutions. Pursuant to
the terms of the registration rights agreement that we entered into in
connection with the Imaging Institute acquisition, we are required to purchase
from the Imaging Institute shareholders, upon their request, up to 81,016 shares
of our common stock at a price of $9.50 per share on the one year anniversary of
the transaction.
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SALES AND MARKETING
We employ three distinct sales forces to market our products and services.
The bank sales force focuses on developing relationships with banks through
which TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER are marketed to business
customers. Our business representatives call on small business customers of
banks that have contracted with us, as well as other merchants who might use our
products. We also employ a direct sales force, our analysts, to market our
products and services that process inventory, accounts receivable and point of
sale transaction information for retail businesses. These analysts play the dual
roles of being business consultants for our existing customers and salespeople
who promote our products and services to potential new customers.
In addition to direct sales, we also market TOWNE CREDIT, TOWNE FINANCE and
CASHFLOW MANAGER through several strategic alliances that have merchants and
banks across the United States as their customers or members. These alliances
enable us to reach and provide services to large groups of banks and small
businesses in new geographic markets. We will continue to pursue additional
alliances with companies and organizations that will provide us access to large
groups of banks and small businesses nationwide such as bankers banks, trade
associations and merchant franchise operations.
We mainly market our RMSA Forecast by focusing on lead generation. We
achieve this lead generation primarily through direct mail, trade shows and
educational seminars. We also market our RMSA Forecast product through alliances
with associations in many of the industries that we service. Our alliances serve
to promote our RMSA Forecast services while improving business performance for
members of the respective associations. Our association alliances include, for
the college industry: The National Association of College Stores, Independent
College Bookstores Association, and Connect 2 One. Additionally, we have
relationships with a Christian bookstore association, the Parable Group, and
several golf organizations, including Marriott Properties, Club Course of
America, and Golf USA. These relationships are designed to expose association
members to our RMSA Forecast products and services. We also sell our RMSA
Forecast through an alliance with Riverview Systems Limited, a leading
independent automated campus store management systems provider. Towne and
Riverview offer college stores the ability to greatly enhance total store
performance by jointly using our RMSA Forecast and Riverview's products and
services.
We have leveraged our board members' and senior managers' expertise and
contacts to develop relationships with banks and banking organizations. We
believe that endorsements by local bankers are the most effective sales tools to
reach small businesses. Banks often have long standing relationships with their
small business customers and provide immediate credibility and access for our
products and services. We believe that our relationships with banks enable us to
attract small business customers that would be difficult and expensive to reach
when employing traditional marketing methods.
RECRUITING AND TRAINING
We hire sales personnel who are experienced in marketing products and
services to banks and small businesses. In recruiting experienced sales
personnel, we focus on hiring people who have established relationships with
banks and small businesses in a particular market. We have developed and
implemented an intensive four-week training program for our sales force led by
our training, sales and operations managers. The first week of training focuses
on overviews of our policies and procedures as well as an introduction to all of
our products. 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 our 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 our 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, at which point they return to their assigned territories qualified to
represent us and our products.
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TECHNOLOGY
Our automated electronic processing systems communicate data to and from
remote customer locations and our computer processing center. We use our
proprietary technologies together with third party telecommunications networks
to transmit and process transaction data for our customers. Transactions are
interactively processed and returned to the sending system. Our systems can use
telephone lines and internet connections to transport transaction data. This
system architecture allows us to access customers located across the country.
We designed our communications systems to support a large number of
telecommunications lines and high volumes of data traffic. This configuration is
scalable, allowing us to add new servers and new communications lines as needed
without having to rebuild our communications system. Our communications servers
process multiple data protocols. This allows us to service a wide range of
customers without requiring them to change the communications systems they
currently use.
Our 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 also
scalable.
We designed our systems using software and hardware capable of interacting
with the variety of operating platforms used by our customers, including
client/server and mainframe operating systems. We have developed software to
support a wide range of operating systems used by our customers. Our transaction
reporting software is not hardware dependent, which allows us to change our
equipment to take advantage of the most recent technologies in our 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, 98 and Windows NT.
Our computer processing system stores data redundantly at both the customer
terminal location and at our 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, we keep mirror servers on location, create
daily digital backup tapes and store them in fireproof safes and maintain a full
"hot-site" backup processing center at another location separate from our main
processing center. We believe that our system configuration and disaster
recovery measures adequately protect us against system failures that may occur
due to destruction of our processing center, natural disasters, bomb threats or
other loss or impairment of our network capabilities.
CUSTOMERS
As of December 31, 1999, we provided processing services to a diverse
customer base of 3,861 small and medium size retail merchants and small
commercial businesses located in all 50 states as well as the District of
Columbia. A variety of small and medium size retail merchants use the TOWNE
CREDIT system, including hardware stores, clothing stores, florists, auto parts
stores and pharmacies. TOWNE FINANCE and CASHFLOW MANAGER products and services
are marketed to small commercial businesses, such as furniture manufacturers,
equipment distributors, plumbing suppliers and agricultural supply stores. In
addition, we market our RMSA Forecast to small to mid-sized independent
specialty retail businesses, such as men's and women's apparel stores, sporting
goods stores, golf pro shops, shoe stores and college bookstores.
As of December 31, 1999, we had executed 823 contracts with banks in 33
states. Most of our current bank customers have asset sizes of $2 billion or
less. These bank customers market our products and services to small businesses
in their communities.
The majority of our contracts with our customers are cancelable at will or
on short notice or provide for renewal at frequent periodic intervals, and,
accordingly, we may have to rebid or modify such contracts on a frequent basis.
Because our customer base is relatively diverse and includes thousands of small
businesses and hundreds of banks, we do not rely on any single business or bank
for a significant portion of our revenue. No single small business customer
accounted for more than 1.0% of our total revenues in 1999. No single bank
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customer accounted for more than 2.0% of our total revenues in 1999. We do not
anticipate that one or more new customers will continue to account for large
portions of the set-up fee revenues generated for particular quarters in which
the underlying contracts are signed.
CUSTOMER SERVICE
Our products are supported by the following levels of customer service.
Each customer bank provides first line customer service support to the merchants
on accounting and loan related issues and we provide a help desk for technical
support for our network systems and terminals. We provide many service features
to our merchants, including toll-free customer service and terminal support
during business hours and on an emergency basis, 48-hour hardware replacement,
turnkey installation and training for new merchants and flexible reporting
capabilities. 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. We attempt to establish long-term relationships through
the continued support and interaction of our professional account managers and
consultants.
We assign a support specialist to each client and field representative to
service and maintain our RMSA Forecast product. The support specialist is
responsible for complete set-up of new client information, including all
historical data, classification set-up with start-up factors and annual rate and
profile information, and for the processing of monthly data for entry into the
RMSA Forecast product. Our support staff communicates with clients and analysts
about the need for specific basic monthly information and explains monthly
reports and client information.
Our Charter System product is supported by a staff of trained individuals
who provide help desk technical support to all clients and analysts using the
Charter Monitor and Advisor software. They are responsible for insuring ongoing
operation of the applications as intended and monitoring clients closely. We
provide training for new clients on site and off site in all applications and
procedures for our Charter System products, and we fully train all of our new
analysts. In addition, all prospective clients are supplied with a complete,
professional proposal outlining the functions and hardware needs for the Charter
System products for their review in making their implementation decision.
Our staff of client representatives trains customers on the use of our
processing system and hardware at the customer location. Customer service
representatives provide technical support for all of our products and services
through a call-in support center available during normal business hours. After
hours, customers can reach our technical support personnel by pager.
COMPETITION
There are numerous other providers of online processing products and
services. In addition, many other companies market business-to-business software
and marketing support to banks that allows the banks to track and finance the
in-house charge accounts of their 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.
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. We believe there are low barriers to entry
in our markets. We 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 us. Many of our
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater resources than we have. 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.
There is limited organized competition in the area of inventory management.
To our knowledge, there is only one competitor that provides forecasting and
planning service to retailers that are similar to our RMSA
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Forecast product. This company also provides point of sale systems and products,
but to date, we have not found them to present a significant threat to our
potential for growth.
Our Charter System product has numerous competitors on the national and
regional level, several of which offer more advanced solutions that allow them
to garner significant market share. Several of these competitors also offer
e-commence and accounting modules in addition to services comparable to our
Charter System product.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
We attempt to protect ourselves through a combination of copyright law,
trademark and trade secret laws, employee and third party confidentiality
agreements and other methods. We do not have patents on our systems and
products. Unauthorized parties may attempt to copy aspects of our technology,
products and services or to otherwise obtain and use information that we regard
as proprietary, despite our efforts to protect them. Third parties may claim
that our current or future products and services infringe their patent,
copyright or trademark rights. No assurance can be given that, if such actions
or claims are brought, we 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 us to enter royalty
or licensing agreements or discontinue using the challenged technology and
otherwise could have a material adverse effect on our business and financial
results.
EMPLOYEES
At December 31, 1999, we had 336 full-time employees, of which 171 were in
sales and marketing, 115 were in operations and 50 were general administrative
employees. Of these employees, 98 were based in Suwanee, Georgia, and 238 were
based in 40 other states. Management believes that our relationship with our
employees is satisfactory.
SEASONALITY
The electronic transaction processing industry is prone to seasonal
fluctuations in purchasing activity. Although we generally experience
seasonality in our business, fluctuations are less pronounced than in the
industry, due in part to our diverse customer base. We expect our 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.
ITEM 2. PROPERTIES
Our principal executive offices were located until June 7, 1999 at 3295
River Exchange Drive, Suite 350, Norcross, Georgia 30092. On June 7, 1999, we
relocated our offices to 3950 Johns Creek Court, Suite 100, Suwanee, Georgia
30024, and our main telephone number is (678) 475-5200. We lease our principal
executive offices in Georgia and maintain offices in Riverside, California,
Phoenix, Arizona, Seattle, Washington, New York, New York and Dallas, Texas. We
believe that our new 41,000 square foot facilities will be adequate to support
our operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Except as described below, we are not a party to, and none of our material
properties is subject to, any material litigation other than routine litigation
incidental to our business.
Thomas J. Golab v. Towne Services, Inc., Drew W. Edwards, Henry M. Baroco,
and Bruce F. Lowthers; Case No. 1:99-CV-2641-JTC; Filed in U.S. District,
Northern District of Georgia on October 12, 1999.
James E. Bolen v. Towne Services, Inc., Drew W. Edwards, Henry M. Baroco,
and Bruce F. Lowthers; Case No. 1:99-CV-3067; Filed in U.S. District, Northern
District of Georgia in November, 1999.
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<PAGE> 14
These two suits are purported securities class actions brought by the named
individual shareholders against Towne Services and two of its current officers
and a former officer. No class has yet been certified. The complaint alleges,
among other claims, that Towne Services should have disclosed in the prospectus
used for its secondary public offering in June 1999 that it allegedly
experienced serious problems with its network infrastructure and processing
facilities during the move of its corporate headquarters in June 1999, and that
these problems allegedly led to a higher than usual number of customers
terminating their contracts during the second quarter. The complaint seeks an
unspecified award of damages. A Motion to Consolidate the Golab and Bolen cases
is pending. Discovery has not yet commenced. Towne Services believes that the
allegations in the complaints are without merit and intends to defend the
lawsuits vigorously.
Edward H. Sullivan, Jr. and Lisa Sullivan v. Towne Services, Inc., Towne
Services, Inc., as the successor to Banking Solutions, Inc., Banc Leasing.Com,
Inc., the successor to BSI Capital Funding, Inc., Moseley & Standerfer, P.C.,
David R. Frank, Don G. Shafer, and Shannon W. Webb; filed in the District Court
of Collin County, Texas; Judicial District 199; Civil Action No. 199-1848-99, on
or about November 15, 1999.
This lawsuit arises out of Towne Services' acquisition of Banking
Solutions, Inc. ("BSI") through a stock purchase made by its subsidiary, BSI
Acquisition Corp. in December 1998. Plaintiff Edward Sullivan, Jr. was a
shareholder in, and had an employment contract with, BSI. Sullivan alleges,
among other claims, that he entered into a Buy Out Agreement with BSI and
certain BSI shareholders under which, in certain circumstances, Sullivan was to
receive a commission based on the gross sales price paid by any purchaser of
BSI. Sullivan contends that BSI and other shareholders allegedly fraudulently
induced him to release them from the agreement by fraudulently misrepresenting
the gross sales price paid by Towne Services' subsidiary in the stock purchase.
Sullivan contends that Towne Services is liable to him as the successor to BSI,
and also for allegedly tortiously interfering with the agreement. Sullivan also
contends Towne Services conspired with the other defendants to misrepresent the
"gross purchase price". Towne Services denies all allegations of the petition.
Mr. Sullivan and his wife seek an unspecified amount of damages including a
percentage of the gross sales price paid by Towne Services' subsidiary for the
acquisition of BSI, as well as punitive damages, attorneys' fees, and
prejudgment and post-judgment interest. Discovery has not yet begun. Towne
Services believes that the allegations in the complaint are without merit and
intends to defend the lawsuit vigorously.
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, 1999.
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
December 31, 1999, Towne had approximately 5,187 beneficial holders of its
common stock. Of this total, approximately 437 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.
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<PAGE> 15
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.......................................... $8.25 $4.63
Fourth Quarter 1998......................................... 8.50 4.38
First Quarter 1999.......................................... 10.63 5.38
Second Quarter 1999......................................... 8.13 7.13
Third Quarter 1999.......................................... 3.88 2.88
Fourth Quarter 1999......................................... 4.53 3.00
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES.
In July 1999, we issued 81,016 shares of our common stock to shareholders
of Imaging Institute, Inc. as part of the consideration for the purchase by
Towne of the outstanding stock of Imaging Institute, Inc.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, our consolidated financial
statements and related notes 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, 1997,
1998 and 1999 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 and
1996 were derived from unaudited financial statements which, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of Towne's financial condition and
results of operations. All amounts presented have been restated for pooling of
interests resulting from the acquisition of Forseon Corporation in June 1999.
The acquisition of Imaging Institute, Inc. in July 1999 is accounted for as a
purchase. These results may not be indicative of future results. All numbers
have been rounded and are in thousands, except for per share data.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues........................................... $ 11,728 $ 11,933 $ 12,897 $ 18,149 $ 29,774
Costs and Expenses:
Costs of processing, servicing and support....... 2,512 2,692 3,389 4,302 7,338
Research and development......................... 281 857 968 1,041 536
Sales and marketing.............................. 6,802 6,791 7,988 13,389 20,014
Stock compensation expense....................... -- 112 -- 6,268 145
Employee termination costs....................... -- -- -- 2,291 1,320
Acquisition expense.............................. -- -- -- -- 2,343
General and administrative, excluding stock
compensation, employee termination and
acquisition expenses noted above............... 1,390 1,677 2,680 5,569 10,947
-------- -------- -------- -------- --------
Total costs and expenses.................. 10,985 12,129 15,025 32,860 42,643
-------- -------- -------- -------- --------
Operating income (loss)............................ 743 (196) (2,128) (14,711) (12,869)
-------- -------- -------- -------- --------
Other expenses:
Interest expense (income), net................... 106 52 155 (226) (711)
Other expense (income)........................... -- 4 (1) (6) 4
Financing costs for stock issued to
nonemployees................................... -- -- -- 323 --
-------- -------- -------- -------- --------
Total other expenses...................... 106 56 154 91 (707)
-------- -------- -------- -------- --------
</TABLE>
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (Loss) before provision (benefit) from
income taxes, extraordinary loss on early
extinguishment of debt and cumulative effect of
an accounting change........................... $ 637 $ (252) $ (2,282) $(14,802) $(12,162)
-------- -------- -------- -------- --------
Provision (benefit) for income taxes............. 319 182 104 (11) 222
Income (Loss) before extraordinary loss on early
extinguishment of debt and cumulative effect of
an accounting change........................... $ 318 $ (434) $ (2,386) $(14,791) $(12,384)
-------- -------- -------- -------- --------
Extraordinary loss on early extinguishment of
debt........................................... -- -- -- 476 --
Cumulative effect of an accounting change........ -- -- -- -- 3,183
-------- -------- -------- -------- --------
Net income (loss).................................. $ 318 $ (434) $ (2,386) $(15,267) $(15,567)
======== ======== ======== ======== ========
Preferred stock dividends.......................... -- -- -- (5,108) (94)
Accretion of warrants with redemption feature...... -- -- -- (692) --
Net income (loss) attributable to common
shareholders before extraordinary loss and
cumulative effect of accounting change:
Basic............................................ $ 318 $ (434) $ (2,386) $(20,591) $(12,478)
======== ======== ======== ======== ========
Diluted.......................................... $ 318 $ (434) $ (2,516) $(20,591) $(12,478)
======== ======== ======== ======== ========
Net income (loss) attributable to common
shareholders per common share before
extraordinary loss and cumulative effect of
accounting change:
Basic............................................ $ 0.04 $ (0.06) $ (0.21) $ (1.18) $ (0.51)
======== ======== ======== ======== ========
Diluted.......................................... $ 0.04 $ (0.06) $ (0.21) $ (1.18) $ (0.51)
======== ======== ======== ======== ========
Net income (loss) attributable to common
shareholders:
Basic............................................ $ 318 $ (434) $ (2,386) $(21,067) $(15,661)
======== ======== ======== ======== ========
Diluted.......................................... $ 318 $ (434) $ (2,386) $(21,067) $(15,661)
======== ======== ======== ======== ========
Net income (loss) attributable to common
shareholders per common share:
Basic............................................ $ 0.04 $ (0.05) $ (0.21) $ (1.21) $ (0.64)
======== ======== ======== ======== ========
Diluted.......................................... $ 0.04 $ (0.05) $ (0.21) $ (1.21) $ (0.64)
======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding....... 7,225 8,588 11,513 17,432 24,533
======== ======== ======== ======== ========
OTHER OPERATING DATA AT END OF PERIOD:
Number of sales people........................... 75 77 86 170 166
Number of bank contracts......................... -- 17 74 641 823
Number of business customers..................... 1,323 1,378 1,492 3,043 3,861
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 910 $ 815 $ 2,638 $ 10,258 $ 21,692
Total assets..................................... 4,414 4,289 7,200 38,747 57,737
Long-term debt, net of current portion............. 351 197 1,642 55 1,028
Shareholders' (deficit) equity..................... 1,152 1,601 2,722 29,394 49,672
</TABLE>
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,"
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<PAGE> 17
"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:
- whether Towne can successfully hire a new chief financial officer quickly
and complete transitions in its management and operations;
- the possible negative impact of lawsuits which have been filed against
Towne on the company's stock price and ability to meet its business
objectives, implement its growth strategies, and improve its financial
condition and results of operations;
- the distraction of management's time and attention and other possible
adverse effects on the company's business and operations as a result of
the loss of its chief financial officer and such lawsuits;
- whether Towne can attain its business goals or achieve or continue its
growth;
- whether Towne can successfully complete the integration of acquired
businesses and products;
- market acceptance of new products and services;
- Towne's limited operating history and whether it will be able to achieve
or maintain profitability;
- whether Towne can continue and manage growth or execute agreements with
new customers or strategic acquisition candidates;
- competition; and
- other factors discussed in this Annual Report and in Towne's filings with
Securities and Exchange Commission, including its registration statements
on Form S-4 (No. 333-76493) as declared effective on June 10, 1999, and
Form S-1 (No. 333-76659) declared effective on June 23, 1999, and the
"Risk Factors" sections contained therein.
OVERVIEW
Towne Services, Inc. provides services and products that process sales and
payment information and related financing transactions for small businesses and
banks in the United States. We deliver these services and products online via an
electronic hub, or gateway, that links business and bank customers with the
Company and other providers of products and services that can benefit these
customers. We use this electronic gateway to deliver a variety of business and
management solutions using internet and telecommunication connections. Towne
Services currently generates revenues through the deployment and use of three
primary products: TOWNE CREDIT(R), which processes consumer credit transactions
for small and medium size retail merchants; TOWNE FINANCE(R) and CASHFLOW
MANAGER(SM), which process business-to-business credit transactions for small
commercial businesses; RMSA Forecast, which processes sales and inventory
transactions and provides merchandising information for small specialty retail
stores; and ancillary services related to these products. With each of these
products, we generate initial set-up fees, discount fees and recurring 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.
Bank set-up fees include charges for installation, implementation and
training of our bank and business customers. In response to the issuance of the
Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," ("SAB No. 101") we began recognizing all
revenues from set-up fees on a deferred basis over the estimated life of the
contract terms and for certain cancellation clauses and/or return guarantees
until the guarantee period is expired. The effects of this change in accounting
principle were applied cumulatively as of the beginning of the fourth quarter of
1999. Prior to the adoption of SAB No. 101, we recognized set-up fees upon
execution of the related contract. Set-up fees charged to each bank vary
depending on the asset size of the bank and the number of communities served.
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<PAGE> 18
Set-up fees are also charged to our business customers based either upon a flat
rate or upon the expected transaction volume.
With each of our transaction processing products, our 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. We generate recurring revenue by
collecting a portion of the discount fee and, if applicable, 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, telephone and
software support services, rental fees and collecting debts.
Other revenues include non-recurring charges for software license fees,
maintenance agreements, the sale of hardware and equipment and marketing
materials and supplies.
Costs of processing, servicing and support include installation costs for
our 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. Most research and
development expenditures are expensed as incurred; however, we 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 costs, trade show expenses, hiring costs and costs
of marketing materials. These expenses also include the costs incurred to
develop our indirect marketing channels.
In August 1998, we completed our initial public offering ("IPO") of our
common stock. The total proceeds of the IPO, net of underwriting discounts and
offering expenses, were approximately $27.0 million. We issued 3,850,000 shares
of common stock 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 of 308,982 shares of common stock
were exercised.
In December 1998, we acquired the outstanding capital stock of Banking
Solutions, Inc. ("Banking Solutions"), for approximately $14.9 million in cash
and stock. 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. In connection with the acquisition of
Banking Solutions, we issued 744,431 shares of common stock at $6.73 per share.
The remainder of the purchase price was paid in cash. We recorded this
transaction using the purchase method of accounting. We have recorded goodwill
in the amount of $14.6 million as a result of this merger, which is being
amortized over a period of 12 years.
In June 1999, we completed a public offering of 4,500,000 shares of common
stock at an offering price to the public of $7.125 per share and on July 20,
1999, 675,000 shares of common stock were issued and sold pursuant to an
underwriters' over-allotment provision in connection with this public offering.
The total proceeds to Towne from the public offering, net of underwriting
discounts and offering expenses, were approximately $33.0 million.
In June 1999, we acquired Forseon Corporation, a company based in
Riverside, California. Forseon provides products and services for retail
businesses that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports. We issued a total of 2,075,345 shares of our common stock in exchange
for all outstanding stock and options to acquire stock in Forseon. The merger
was accounted for as a pooling of interests. Ten percent of the Towne common
stock has been held back in escrow to satisfy the indemnification obligations of
Forseon stockholders under the merger agreement. We incurred approximately $2.3
million in expenses related to the acquisition of Forseon.
In July 1999, we acquired all of the issued and outstanding stock of
Imaging Institute, Inc., a Bloomington, Minnesota-based company, for
approximately $1.2 million cash and the issuance of up to 81,016 shares of our
common stock. Imaging Institute's main products include AUGUSTA and EzVIEW
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<PAGE> 19
VAULT(TM), which offer unique and functional document imaging and archiving
solutions tailored for small to medium size businesses. In connection with the
purchase of Imaging Institute, we recorded goodwill in the amount of $1.9
million, which will be amortized over a five-year period.
For the years ended December 31, 1997, 1998 and 1999, we had net losses of
approximately $2.4 million, $15.3 million and $15.6 million, respectively. As of
December 31, 1998, our accumulated deficit was $24.2 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 related to the purchase of
Banking Solutions, Inc. in December 1998. As of December 31, 1999, we had an
accumulated deficit of $39.8 million, of which $15.6 million related to 1999.
Approximately $7.8 million of this $15.6 million increase in accumulated deficit
resulted from one-time charges, including a non-cash charge of $3.2 million
related to a cumulative effect of an accounting change resulting from adoption
of Staff Accounting Bulletin No. 101, a charge of $2.3 million related to the
acquisition of Forseon, a charge of 1.6 million related to employee severance
packages and a loss on a sublease agreement and a non-cash charge of $595,000
related to a deferred tax asset from Forseon.
Our business has grown rapidly with total revenues increasing from $12.9
million for 1997 to $18.1 million in 1998 and $29.8 million in 1999. However, we
have experienced net losses in each of these periods and expect to continue to
incur losses for the foreseeable future. Although we have experienced
significant revenue growth, there can be no assurance that these growth rates
are sustainable, and they should not be relied upon as indicators of future
performance. Our 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 we will be successful in addressing these risks and difficulties or that we
will achieve profitability in the future.
RESULTS OF OPERATIONS
The following table sets forth our condensed historical operating
information, as a percentage of total revenues, for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................... 100% 100% 100%
Costs of processing, servicing, and support............... 26 24 25
Research and development.................................. 7 5 2
Sales and marketing....................................... 62 74 67
Stock compensation expense................................ -- 35 --
Employee termination costs................................ -- 13 4
Acquisition expense....................................... -- -- 8
General and administrative, excluding stock compensation,
employee termination and acquisition expenses noted
above.................................................. 21 31 37
--- ---- ---
Total costs and expenses.......................... 116 182 143
--- ---- ---
Operating Loss.............................................. (16) (81) (43)
Interest expense (income), net.............................. 1 (1) (2)
Other expense (income), net................................. -- -- --
Financing costs for stock issued to nonemployees............ -- 2 --
--- ---- ---
Total other expenses.............................. 1 1 (2)
--- ---- ---
Net loss before provision (benefit) from income taxes,
extraordinary loss and cumulative effect of an accounting
change.................................................... (18)% (82)% (41)
=== ==== ===
Net loss before extraordinary item and cumulative effect of
an accounting change...................................... (19)% (81)% (42)%
=== ==== ===
Net loss.................................................... (19)% (84)% (52)%
=== ==== ===
Net loss attributable to common shareholders................ (19)% (116)% (53)%
=== ==== ===
</TABLE>
17
<PAGE> 20
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenues. Our revenues increased from $18.1 million in 1998 to $29.8
million in 1999. During these two periods, recurring revenues accounted for
approximately 69% and 73% of total revenues, respectively. Set-up fees accounted
for approximately 20% and 15% of total revenues, respectively. Other
nonrecurring revenues accounted for approximately 11% and 12% of total revenues,
respectively. The increase in revenues during these periods is attributed
primarily to an increase in transaction processing revenues and set-up fees as a
result of the increase in the number of customers. The increase in other
nonrecurring revenues is primarily a result of an increase in software license
fee revenues of our inventory management, collection works and document imaging
products.
Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $4.3 million in 1998 to $7.3 million in 1999. These
costs were approximately 24% and 25% of total revenues, respectively, for these
two periods. Costs of processing, servicing and support increased as a result of
additional services and support functions necessary to support our growth both
through the acquisition of new customers and the acquisition of complementary
businesses. Towne anticipates that these costs will continue to increase as its
customer base expands.
Research and Development. Research and development expenses decreased from
$1.0 million in 1998 to $536,000 in 1999. Research and development expenses
represented approximately 5% and 2% of total revenues, respectively, during
these two periods. Research and development costs have decreased compared to
1998 as a result of our products reaching technological feasibility and being
capitalized in accordance with FASB 86. In addition, we did not incur
significant costs to make our products year 2000 compliant because our products
are currently designed to properly function through and beyond the year 2000.
Please see "-- Effects of the Year 2000" for further discussion about the
efforts we made to make our systems and operations ready for the year 2000.
Sales and Marketing. Sales and marketing expenses increased from $13.4
million in 1998 to $20.0 million in 1999. Sales and marketing expenses were
approximately 74% and 67% of total revenues, respectively, during these two
periods. The increase in the dollar amount of these expenses is primarily the
result of a significant increase in the number of sales personnel in remote
locations, related business travel expenses, recruiting expenses to attract new
sales employees and increased costs for marketing materials used to recruit
potential bank and business customers. Towne anticipates that sales and
marketing expenses will continue to increase as we expand our sales and
marketing efforts. Costs of sales and marketing decreased as a percentage of
revenues as a result of substantially increased revenues and improved operating
efficiencies.
Stock Compensation Expense. Stock compensation expense was $6.3 million in
1998 and $145,000 in 1999. 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. We will record $725,000 ($145,000 per year) of stock compensation
expense over the five-year vesting period of the options.
Employee Termination Costs. Employee termination costs decreased from $2.3
million in 1998 to $1.3 million in 1999. These expenses represented
approximately 13% and 4% of total revenues, respectively, during these two
periods. In connection with the acquisition of Banking Solutions in December
1998, Towne recognized a one-time charge in the amount of $2.3 million relating
to employee terminations that were not finalized at the date of the purchase. In
1999, Towne recorded $1.3 million relating to severance benefits for two former
employees. The severance benefits consisted of $1.0 million in cash payments and
$234,000 related to the early vesting of previously unvested stock options.
Acquisition expense. Acquisition expense for the year ended December 31,
1999 was approximately $2.3 million, all of which related to the acquisition of
Forseon. This cost represented approximately 8% of total revenues for this
period. We incurred no similar acquisition expense for the year ended December
31, 1998. In June 1999, Towne acquired Forseon Corporation. Towne issued a total
of 2,075,345 shares of our common stock in exchange for all outstanding stock
and options to acquire stock in Forseon. The merger was accounted
18
<PAGE> 21
for as a pooling of interests. Ten percent of the Towne common stock has been
held back in escrow to satisfy the indemnification obligations of Forseon
stockholders under the merger agreement.
General and Administrative. General and administrative expenses increased
from $5.6 million in 1998 to $10.9 million in 1999. These costs represented
approximately 31% and 37% of total revenues, respectively, for these two
periods. The increase in these expenses was primarily the result of increases in
the number of executive and administrative employees and expenses related to our
growth, amortization expenses relating to acquisitions, write-offs of
uncollectible accounts receivables, costs incurred for relocation to our new
office facility and a one-time charge relating to a sublease agreement that was
terminated early. Also, Towne incurred additional costs related to being a
public company, including annual and other public reporting expenses, directors'
and officers' liability insurance, investor relations programs and professional
services fees. We anticipate that general and administrative expenses will
continue to increase in the near future as Towne continues the upgrade of
internal systems to enhance management's ability to obtain and analyze
information about its operations.
Interest Expense (Income), Net. Towne reported net interest income of
$226,000 in 1998 and $711,000 in 1999. Net interest income increased as a result
of earnings on investments of cash proceeds received from our initial public
offering in August 1998 and our second public offering in June 1999.
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 consolidated financial statements. We incurred no similar
extraordinary losses for the corresponding year ended December 31, 1999.
Cumulative Effect of Accounting Change. Towne reported a cumulative effect
of an accounting change during 1999 in the amount of $3.2 million related to
revenue recognition of its initial set-up fees. In response to the issuance of
the Securities and Exchange Commission Staff Accounting Bulletin No.
101 -- "Revenue Recognition in Financial Statements," the Company began
recognizing all revenues from set-up fees on a deferred basis. The effect of
this change in accounting principle was applied cumulatively as of the beginning
of the fourth quarter of 1999.
Income Taxes. As of December 31, 1999, Towne Services had net operating
loss carry forwards ("NOLs") of approximately $27.3 million for federal tax
purposes, which will expire if not utilized beginning 2012. Due to changes in
the Company's ownership structure, the Company's use of its NOLs as of October
1, 1997 of approximately $2.5 million will be limited to approximately $550,000
in any given year to offset future taxes. In addition, due to the Company's
acquisitions during 1998 and 1999, NOLs of approximately $6.1 million will be
limited to approximately $1.6 million in any given year to offset future taxes.
If Towne does not realize taxable income in excess of the limitation in future
years, certain NOLs will be unrealizable. 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Our revenues increased from $12.9 million in 1997 to $18.1
million in 1998. During these two periods, recurring revenues accounted for
approximately 83% and 69% of total revenues, respectively. Set-up fees accounted
for approximately 6% and 20%, respectively, of total revenues in 1997 and 1998.
Other nonrecurring revenues accounted for approximately 11% and 11% of total
revenues, respectively. The increase in the revenues during these periods is
attributed primarily to an increase in transaction processing revenues
(including as a result of the acquisition of Banking Solutions in December
1998). The increase in dollar amount of other nonrecurring revenues is primarily
a result of an increase in software license fee revenues of our collection works
products.
Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $3.4 million in 1997 to $4.3 million in 1998. These
costs were approximately 26% and 24% of total revenues, respectively, for these
two periods. The dollar amount of costs of processing, servicing and support
increased as
19
<PAGE> 22
a result of additional services and support functions necessary to support
Towne's growth, both through the acquisition of new customers and the
acquisition of complementary businesses. Costs of processing, servicing and
support decreased as a percentage of revenues as a result of substantially
increased revenues and improved operating efficiencies.
Research and Development. Research and development expenses increased from
$968,000 in 1997 to $1.0 million in 1998. Research and development expenses
represented approximately 7% and 5% of total revenues, respectively, during
these two periods. The increase in dollar amounts was due primarily to the
continued development of new products.
Sales and Marketing. Sales and marketing expenses increased from $8.0
million in 1997 to $13.4 million in 1998. Sales and marketing expenses were
approximately 62% and 74% 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.
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. We will record $725,000 ($145,000 per year) of stock
compensation expense over the five-year vesting period of the options.
Employee Termination Costs. In connection with the acquisition of Banking
Solutions in December 1998, Towne a one-time charge in the amount of $2.3
million relating to employee terminations that were not finalized at the date of
purchase. We incurred no similar employee termination costs for the year ended
December 31, 1997.
General and Administrative. General and administrative expenses increased
from $2.7 million in 1997 to $5.6 million in 1998. These costs represented
approximately 21% and 31% of total revenues, respectively, for these two
periods. The increase in these expenses was primarily the result of increases in
the number of executive and administrative employees, the executive and
administrative expenses related to our growth and amortization expenses related
to acquisitions. 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.
Interest Expense (Income), Net. Towne reported net interest expense of
$155,000 in 1997 and net interest income of $226,000 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 had net operating losses, or
NOLs, of approximately $14.2 million for federal tax purposes, which will expire
in 2011, if not utilized.
During Towne's short history, our 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 we can successfully hire a new chief financial officer quickly
and complete transitions in our management team and operations;
- the possible negative impact of lawsuits which have been filed against
Towne on the company's stock price and ability to meet is business
objectives, implement its growth strategies, and improve its financial
condition and results of operations;
20
<PAGE> 23
- the distraction of management's time and attention and other possible
adverse effects on the company's business and operations as a result of
the loss of its chief financial officer and such lawsuits;
- whether Towne can attain its business goals or achieve or continue its
growth;
- whether Towne can successfully complete the integration of acquired
businesses and products;
- market acceptance of new products and services;
- Towne's limited operating history and whether it will be able to achieve
or maintain profitability;
- whether Towne can continue and manage growth or execute agreements with
new customers or strategic acquisition candidates;
- competition; and
- other factors discussed in this Annual Report and in Towne's filings with
Securities and Exchange Commission, including its registration statements
on Form S-4 (No. 333-76493) as declared effective on June 10, 1999, and
Form S-1 (333-76659) declared effective on June 23, 1999, and the "Risk
Factors" sections contained therein.
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. We establish our expenditure levels for product
development, sales and marketing and other operating expenses based, in large
part, on our 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 our expenses varies with
revenues.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through sales of equity
securities in private placements, our initial public offering, our second public
offering and through credit facilities. During 1997, we received aggregate net
proceeds of $3.5 million from the sale of common stock in private transactions.
In March 1998, we received net proceeds of $1.5 million from the sale of Series
A preferred stock in a private placement. In July 1998, we received net proceeds
of approximately $27.0 million from the initial public offering of our common
stock. In June 1999, we received net proceeds of approximately $33.0 million
from a second public offering of our common stock and approximately $2.0 million
from the sale of our Series B preferred stock in a private placement.
In December 1998, Towne borrowed $5.0 million on a short-term line of
credit from First Union National Bank. The line of credit had a term of one year
with an interest rate of LIBOR plus 2.0%, or 7.1% at December 31, 1998. It was
secured by a deposit account maintained with the lender. The line of credit was
paid in full and terminated in January 1999.
In June 1999, we entered into a five-year capital lease obligation with
Synovus Leasing Company to finance the purchase of office furniture and
fixtures. The capital lease obligation of $633,000 includes interest expense of
$122,000 or 8.75% of the principal. The amount of the minimum monthly lease
obligation, consisting of principal and interest, is $11,000.
In June 1999, we entered into a five-year capital lease obligation with NEC
America, Inc. to finance the purchase of office telecommunications equipment.
The capital lease obligation of $546,000 includes interest expense of $104,000
or 8.61% of the principal. The amount of the minimum monthly lease obligation,
consisting of principal and interest, is $9,000.
In August 1999, we entered into a five-year capital lease obligation with
Synovus Leasing Company to finance the purchase of a generator. The capital
lease obligation of $510,000 includes interest expense of $98,000, or 8.75%, of
the principal. The amount of the minimum monthly lease obligation, consisting of
principal and interest, is $8,500.
21
<PAGE> 24
Net cash used in operating activities was approximately $1.9 million in
1997, $9.9 million in 1998 and $9.8 million in 1999. Net cash used in 1997
represents (a) a $2.4 million net loss, (b) a $238,000 increase in accounts
receivable and (c) a $249,000 increase in prepaid expense and other assets,
partially offset by (d) a $412,000 increase in accounts payable and accrued
expenses. Net cash used in operating activities during 1998 primarily represents
(a) a $15.3 million net loss and (b) a $3.1 million increase in accounts
receivable, partially offset by (c) $6.4 million in non-cash compensation
expense and (d) $975,000 in accrued expenses. Net cash used in operating
activities during 1999 primarily represents (a) a $15.6 million net loss,
partially offset by (b) a $2.2 million increase in accounts receivable, (c) a
$1.5 million increase in accounts payable and accrued expenses and (d) a $2.0
million increase in deferred revenue.
Net cash used in investing activities was approximately $663,000 for 1997,
$13.0 million for 1998 and $12.1 million in 1999. Net cash used in investing
activities during 1997 represents $584,000 for the purchase of computer
equipment used in conducting our business and $79,000 of notes receivable due
from a shareholder. Net cash used in investing activities during 1998 represents
(a) an increase of $10.4 million to acquire Banking Solutions, Inc., (b) $1.9
million for the purchase of computer equipment and other capital equipment used
in conducting our business, (c) $510,000 to acquire some of the assets and
liabilities of Credit Collection Solutions, Inc. and (d) $170,000 in notes due
from shareholders. Net cash used in investing activities during 1999 represents
(a) an increase of $1.8 million of expenses related to acquisitions, (b) $1.0
million in notes due from shareholders, (c) $1.4 million for the purchase of
short-term investments and (d) $7.9 million for the purchase of computer
equipment and other capital equipment used in conducting our business.
Net cash provided by financing activities was $4.8 million, $33.3 million
and $28.8 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Net cash provided by financing activities for 1997 included (a)
$2.5 million of proceeds from borrowings, (b) $79,000 related to stock option
exercises and (c) $2.8 million from sales of our common stock, offset by (d) the
repayment of $550,000 of outstanding debt. Net cash provided by financing
activities for 1998 consisted primarily of (a) $28.2 million of net proceeds
received from sales of our common stock, (b) $1.5 million from the issuance of
preferred stock, (c) $584,000 from the exercise of stock options and (d) $3.1
million of net proceeds from the issuance of other securities and payment of
outstanding debt obligations. Net cash provided by financing activities for 1999
consisted primarily of (a) $35.0 million of proceeds from the issuance of
securities, offset by (b) $5.4 million for the repayment of outstanding
short-term debt obligations and (c) $391,000 related to stock option exercises
and repurchases of common stock.
EFFECTS OF THE YEAR 2000
Our business and customer relationships rely on computer software programs,
internal operating systems and telephone and other network communication
connections. If any of these programs, systems or network connections have not
been 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 our company and our affected customers. During
1999 we tested our proprietary point of sale terminals and connections and
transaction processing software to ensure that our products and the related
network connections we maintain are able to process dates after December 31,
1999. We also completed the remediation and testing of the Charter System, and
all of our Charter System clients are now using the remediated version. Year
2000 compliance testing on our mainframe-based forecasting system was completed
on July 1, 1999 and we have implemented the remediated version of this
mainframe-based forecasting system and have experienced no significant problems
with the remediated system. The cost to us for the remediation or replacement of
these products was not material.
We transmit data to and from our clients electronically. Our electronic
data transmissions are functioning to date. We also use certain third party
software, operating systems and software development tools in our operations. We
have completed the assessment of our third party software and development tools
and have determined that this software meets our Year 2000 compliance standards.
We have not experienced any significant problems with our internal accounting
and operating systems and network communications. Our personnel will continue to
monitor our network connections to help ensure that these programs and systems
continue to remain operational. We intend to modify or replace any products or
systems that are unable to
22
<PAGE> 25
properly function as a result of the Year 2000 issue and believe we will be able
to do so without incurring costs or delays which would have a material adverse
effect on our financial condition.
We supply software products needed to run our processing systems to our
customers that are installed on customer-supplied computer systems and did not
test any other products or systems used in our customers' businesses. We do not
know of any material Year 2000 problems experienced by our customers related to
our products and services. If our customers have not successfully addressed Year
2000 issues in their operations and, as a result, experience temporary or
permanent interruptions in their businesses, we may lose revenues from these
customers, which could have a material adverse effect on our business, financial
condition and results of operations.
RECENT 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 No. 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 our financial
statements, as we operate in only one business segment, electronic transaction
processing. Our operating business segments provide electronic transaction
processing for small business in-house accounts. The segments use our central
administrative offices for customer support, centralized processing and sales
support. In addition, our sales force markets all products within their assigned
markets. We consequently consider all of our 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, 2000. 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.
In response to the issuance of the Securities and Exchange Commission Staff
Accounting Bulletin No. 10, "Revenue Recognition in Financial Statements," the
Company began recognizing all revenues from set-up fees on a deferred basis. The
effects of this change in accounting principle were applied cumulatively as of
the beginning of the fourth quarter of 1999.
23
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates.
Our short term and long term investments are deposited principally in a
single financial institution with significant assets and consist of U.S.
Treasury bills and notes with maturities of less than three years. We do not
consider the interest rate risk for these investments to be material. In
addition, we do not have any material outstanding borrowings and, therefore, we
do not have a significant risk due to potential fluctuations in interest rates
for loans at this time.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Towne, including Towne's
consolidated balance sheets as of December 31, 1999 and 1998 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, 1999, together with the report thereto of Arthur Andersen LLP dated March 3,
2000, 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.
PART III
Some information required by Part III is omitted from this Annual Report
because we 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 Annual Report, and this
information is incorporated herein by reference into this Annual Report.
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.
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<PAGE> 27
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, 1998 and 1999
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999
Notes to Consolidated Financial Statements
(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, 1997 Allowance for Doubtful Accounts..... 63,000 77,000 69,000 71,000
December 31, 1998 Allowance for Doubtful Accounts..... 71,000 375,000 48,000 398,000
December 31, 1999 Allowance for Doubtful Accounts..... 398,000 1,644,000 1,510,000 532,000
</TABLE>
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
2.1 -- Agreement and Plan of Merger by and among Towne Services,
Inc., TSI Acquisition One, Inc., Forseon Corporation and
certain of the stockholders of Forseon Corporation dated as
of March 25, 1999.***
2.2 -- Escrow Agreement dated June 19, 1999 by and among Towne
Services, Inc., Dan Paul and Allen Merrill, each in their
capacity as a stockholder representative, and First Union
National Bank (incorporated by reference to the Company's
Quarterly Report on Form 10-Q filed on August 16, 1999).
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.**
3.3 -- Articles of amendment to the Amended and Restated Articles
of Incorporation of Towne Services Inc., as filed with the
Secretary of State of Georgia on May 21, 1999.**
3.4 -- Amendment to the Amended and Restated Bylaws of Towne
Services Inc., effective May 21, 1999.**
3.5 -- Articles of Amendment to the Amended and Restated Articles
of Incorporation of Towne Services Inc., as filed with the
Secretary of State of Georgia on June 11, 1999.**
4.1 -- See Exhibits 3.1 through 3.5 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).*/+
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
10.3 -- Form of Non-Qualified Stock Option Agreement.*/+
10.4 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997.*/+
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Shultz dated as of May 19, 1998.*/+
10.6 -- Form of TOWNE CREDIT Bank Marketing Agreement.*
10.7 -- Form of TOWNE FINANCE Bank Marketing Agreement.*
10.8 -- Form of TOWNE CREDIT Merchant Processing Agreement.*
10.9 -- Form of TOWNE FINANCE Client Processing Agreement.*
10.10 -- Form of CASH FLOW MANAGER Merchant Services Agreement
(incorporated by reference to the exhibits to Towne's Annual
Report on Form 10-K filed on March 26, 1999).
10.11 -- Form of CASH FLOW MANAGER License Agreement (incorporated by
reference to the exhibits to Towne's Annual Report on Form
10-K filed on March 26, 1999).
10.12 -- Form of Independent Bankers Bank General Marketing Agent
Agreement (incorporated by reference to the exhibits to
Towne's Annual Report on Form 10-K filed on March 26, 1999).
10.13 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.14 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.15 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*+
10.16 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.*+
10.17 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco (incorporated by reference
to the exhibits to the Company's Annual Report on Form 10-K
filed on March 26, 1999).+
10.18 -- Promissory note dated July 22, 1999 issued to Towne
Services, Inc. by Cleve B. Schultz.+
10.19 -- Promissory note dated July 22, 1999 issued to Towne
Services, Inc. by Henry M. Baroco.+
10.20 -- Promissory note dated July 22, 1999 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.+
10.21 -- Form of General Marketing Agent Agreement.*
10.22 -- Sublease Agreement by and among Technology Park/Atlanta,
Inc. and Towne Services, Inc. dated March 9, 1999
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on May 7, 1999).
10.23 -- Director Stock Option Plan, adopted April 15, 1999
(incorporated by reference to Appendix B to the Company's
definitive Proxy Statement for its 1999 Annual Meeting filed
on April 26, 1999).+
10.24 -- Stock Purchase Warrant by and between Towne Services Inc.,
and Synovus Financial Corporation dated June 16, 1999
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on August 16, 1999).
10.25 -- Form of promissory notes for executive officers
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on November 12, 1999).
10.26 -- Registration Rights Agreement dated as of July 19, 1999
between Towne Services, Inc. and the shareholders of Imaging
Institute, Inc.
10.27 -- Private Label Internet Service Provider Agreement dated
December 14, 1999 between Towne Services, Inc. and Lynxus,
Inc.
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
10.28 -- Contract for Payroll Services dated December 15, 1999
between Towne Services, Inc. and Pay System of America, a
subsidiary of Concord EFS.
10.29 -- Referral Agreement dated December 15, 1999 between Towne
Services Inc. and NOVA Information Systems, Inc.
10.30 -- Master License Agreement dated December 8, 1999 between
Towne Services, Inc. and Trans Union LLC.
10.31 -- Agreement dated June 24, 1998 between Towne Services, Inc.
and Total Debt Management, formerly Wallace and De Mayo,
P.C.
10.32 -- Agreement dated December 22, 1998 between Towne Services,
Inc. and Princeton eCom Corporation.
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 period ending December 31,
1999 (for SEC use only).
27.2 -- Restated Financial Data Schedule for the period ending
December 31, 1998 (for SEC use only).
27.3 -- Restated Financial Data Schedule for the period ending
December 31, 1997 (for SEC use only).
</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.
** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-76859) as declared effective by the
Securities and Exchange Commission on June 23, 1999.
*** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-4 (No. 333-76493) as declared by the Securities and
Exchange Commission on June 10, 1999.
+ 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
There were no reports filed on Form 8-K during the three month period ended
December 31, 1999.
27
<PAGE> 30
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.
By: /s/ G. LYNN BOGGS
------------------------------------
G. Lynn Boggs
Chairman and Chief Executive Officer
March 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, G. Lynn Boggs 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>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ G. LYNN BOGGS Chairman of the Board and March 29, 2000
- ----------------------------------------------------- Chief Executive Officer
G. Lynn Boggs (principal executive officer)
/s/ MICHELE A. BOWMAN Vice President and Controller March 29, 2000
- ----------------------------------------------------- (principal financial and
Michele A. Bowman accounting officer)
/s/ HENRY M. BAROCO President, Chief Operating March 29, 2000
- ----------------------------------------------------- Officer and Director
Henry M. Baroco
/s/ FRANK W. BROWN Director March 29, 2000
- -----------------------------------------------------
Frank W. Brown
/s/ JOHN W. COLLINS Director March 29, 2000
- -----------------------------------------------------
John W. Collins
/s/ J. STANLEY MACKIN Director March 29, 2000
- -----------------------------------------------------
J. Stanley Mackin
/s/ JOE M. RODGERS Director March 29, 2000
- -----------------------------------------------------
Joe M. Rodgers
/s/ JOHN D. SCHNEIDER, JR. Director March 29, 2000
- -----------------------------------------------------
John D. Schneider, Jr.
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. DANIEL SPEIGHT, JR. Director March 29, 2000
- -----------------------------------------------------
J. Daniel Speight, Jr.
/s/ GLENN W. STURM Director March 29, 2000
- -----------------------------------------------------
Glenn W. Sturm
/s/ J. STEPHEN TURNER Director March 29, 2000
- -----------------------------------------------------
J. Stephen Turner
/s/ BAHRAM YUSEFZADEH Director March 29, 2000
- -----------------------------------------------------
Bahram Yusefzadeh
</TABLE>
29
<PAGE> 32
TOWNE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999....................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
</TABLE>
F-1
<PAGE> 33
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, 1998
and 1999 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 2 to the financial statements, effective October 1,
1999 the Company changed its method of accounting for initial set-up fees upon
adoption of Securities and Exchange Commission Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements."
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
16(b) of this registration statement 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
March 3, 2000
F-2
<PAGE> 34
TOWNE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,060,000 $ 20,981,000
Investments............................................... -- 1,350,000
Accounts receivable, net of allowance for uncollectible
accounts of $398,000 and $532,000 at December 31, 1998
and December 31, 1999, respectively.................... 4,384,000 5,289,000
Notes receivable from employees........................... 167,000 509,000
Other..................................................... 411,000 600,000
------------ ------------
Total current assets.............................. 19,022,000 28,729,000
------------ ------------
Property and equipment, net................................. 3,453,000 11,120,000
Notes receivable from employees............................. 82,000 804,000
Goodwill, net............................................... 14,955,000 15,905,000
Other intangibles, net...................................... 1,135,000 1,034,000
Other assets, net........................................... 100,000 145,000
------------ ------------
$ 38,747,000 $ 57,737,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 240,000 $ 1,516,000
Accrued liabilities....................................... 1,327,000 1,903,000
Accrued compensation...................................... 1,199,000 950,000
Accrued termination costs................................. 498,000 230,000
Deferred Revenue.......................................... 226,000 2,207,000
Current portion of long-term debt......................... 5,274,000 231,000
------------ ------------
Total current liabilities......................... 8,764,000 7,037,000
------------ ------------
Long term debt.............................................. 55,000 1,028,000
Commitments and Contingencies (Note 10)..................... -- --
Redeemable common stock..................................... 534,000 --
Shareholders' equity:
Preferred stock, $100 par value; 20,000,000 shares
authorized, 0 and 20,000 issued and outstanding at
December 31, 1998 and December 31, 1999,
respectively........................................... -- 1,880,000
Common stock, no par value; 50,000,000 shares authorized,
21,567,032 and 27,197,722 issued and outstanding
December 31, 1998 and December 31, 1999,
respectively........................................... 53,520,000 87,460,000
Warrants outstanding...................................... 41,000 161,000
Accumulated deficit....................................... (24,167,000) (39,829,000)
------------ ------------
Total shareholders' equity........................ 29,394,000 49,672,000
------------ ------------
$ 38,747,000 $ 57,737,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 35
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues.............................................. $12,897,000 $ 18,149,000 $ 29,774,000
----------- ------------ ------------
Costs and expenses:
Costs of processing, servicing, and support......... 3,389,000 4,302,000 7,338,000
Research and development............................ 968,000 1,041,000 536,000
Sales and marketing................................. 7,988,000 13,389,000 20,014,000
Stock compensation expense.......................... -- 6,268,000 145,000
Employee termination costs.......................... -- 2,291,000 1,320,000
Acquisition expense................................. -- -- 2,343,000
General and administrative, net of stock
compensation, employee termination and
acquisition expenses noted above................. 2,680,000 5,569,000 10,947,000
----------- ------------ ------------
Total costs and expenses.................... 15,025,000 32,860,000 42,643,000
----------- ------------ ------------
Operating loss........................................ (2,128,000) (14,711,000) (12,869,000)
----------- ------------ ------------
Other expenses:
Interest expense (income), net...................... 155,000 (226,000) (711,000)
Other expense (income), net......................... (1,000) (6,000) 4,000
Financing costs for stock issued to nonemployees.... -- 323,000 --
----------- ------------ ------------
Total other expenses........................ 154,000 91,000 (707,000)
----------- ------------ ------------
Loss before provision (benefit) from income taxes,
extraordinary loss and cumulative effect of an
accounting change................................ (2,282,000) (14,802,000) (12,162,000)
----------- ------------ ------------
Provision (benefit) for income taxes................ 104,000 (11,000) 222,000
Loss before extraordinary item and cumulative effect
of an accounting change.......................... (2,386,000) (14,791,000) (12,384,000)
----------- ------------ ------------
Extraordinary loss on early extinguishment of
debt............................................. -- 476,000 --
Cumulative effect of an accounting change........... -- -- 3,183,000
Net loss.............................................. $(2,386,000) $(15,267,000) $(15,567,000)
=========== ============ ============
Preferred stock dividends............................. -- (5,108,000) (94,000)
Accretion of warrants with redemption feature......... -- (692,000) --
----------- ------------ ------------
Net loss attributable to common shareholders before
extraordinary loss and cumulative effect of an
accounting change................................... $(2,386,000) $(20,591,000) $(12,478,000)
=========== ============ ============
Net loss attributable to common shareholders per
common share before extraordinary loss and
cumulative effect of an accounting change:
Basic............................................... $ (0.21) $ (1.18) $ (0.51)
=========== ============ ============
Diluted............................................. $ (0.21) $ (1.18) $ (0.51)
=========== ============ ============
Net loss attributable to common shareholders.......... $(2,386,000) $(21,067,000) $(15,661,000)
=========== ============ ============
Net loss attributable to common shareholders per
common share:
Basic............................................... $ (0.21) $ (1.21) $ (0.64)
=========== ============ ============
Diluted............................................. $ (0.21) $ (1.21) $ (0.64)
=========== ============ ============
Weighted Average Common Shares Outstanding............ 11,512,803 17,431,812 24,533,401
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 36
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
--------------------- ------------------------ WARRANTS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT OUTSTANDING DEFICIT EQUITY
------- ----------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ -- $ -- 10,156,743 $ 1,524,000 $ -- $ 78,000 $ 1,602,000
------- ----------- ---------- ----------- -------- ------------ ------------
Issuance of common stock.......... -- -- 3,537,766 3,471,000 -- -- 3,471,000
Issuance of warrants.............. -- -- -- -- 41,000 -- 41,000
Exercise of stock options......... -- -- 263,300 79,000 -- -- 79,000
Fair value of stock options
granted......................... -- -- -- 68,000 -- -- 68,000
Repurchase of redeemable common
stock........................... -- -- (338,832) (1,000) -- (711,000) (712,000)
Change in value of redeemable
common stock.................... -- -- -- 559,000 -- -- 559,000
Net loss.......................... -- -- -- -- -- (2,386,000) (2,386,000)
------- ----------- ---------- ----------- -------- ------------ ------------
BALANCE, DECEMBER 31, 1997........ -- -- 13,618,977 5,700,000 41,000 (3,019,000) 2,722,000
------- ----------- ---------- ----------- -------- ------------ ------------
Issuance of preferred stock....... 15,000 1,500,000 -- -- -- -- 1,500,000
Issuance of common stock.......... -- -- 1,052,308 5,532,000 -- -- 5,532,000
Preferred stock dividend.......... -- -- -- 5,100,000 -- (5,108,000) (8,000)
Exercise of stock options......... -- -- 813,636 670,000 -- -- 670,000
Employee compensation expense..... -- -- -- 2,275,000 -- 2,275,000
---
Accretion of warrants with
redemption feature.............. -- -- -- 692,000 -- (692,000) --
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............... -- -- 3,850,000 26,989,000 -- -- 26,989,000
Issuance of common shares for
purchase of Banking Solution,
Inc............................. -- -- 744,431 5,010,000 -- -- 5,010,000
Repurchase of redeemable common
stock........................... -- -- (39,205) -- -- (82,000) (82,000)
Change in value of redeemable
common stock.................... -- -- -- (210,000) -- -- (210,000)
Net loss.......................... -- -- -- -- -- (15,267,000) (15,267,000)
------- ----------- ---------- ----------- -------- ------------ ------------
BALANCE, DECEMBER 31, 1998........ -- -- 21,567,032 53,521,000 41,000 (24,168,000) 29,394,000
======= =========== ========== =========== ======== ============ ============
Accrued preferred stock
dividends....................... -- -- -- -- -- (94,000) (94,000)
Exercise of stock options......... -- -- 217,901 73,000 -- -- 73,000
Employee compensation expense..... -- -- -- 379,000 -- -- 379,000
Private Placement Offering........ 20,000 1,880,000 -- -- 120,000 -- 2,000,000
Secondary public offering
transactions, net............... -- -- 5,175,000 32,648,000 -- -- 32,648,000
Issuance of common shares for
purchase of Imaging Institute,
Inc............................. -- -- 81,016 770,000 -- -- 770,000
Conversion of redeemable common
stock and impact of cashless
option exercise................. -- -- 156,773 69,000 -- -- 69,000
Net loss.......................... -- -- -- -- -- (15,567,000) (15,567,000)
------- ----------- ---------- ----------- -------- ------------ ------------
BALANCE, DECEMBER 31, 1999........ 20,000 $ 1,880,000 27,197,722 $87,460,000 $161,000 $(39,829,000) $ 49,672,000
======= =========== ========== =========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 37
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................... $(2,386,000) $(15,267,000) $(15,567,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation expense recognized for stock option grants
and employee termination costs.......................... -- 6,353,000 379,000
Financing Costs for stock issued to nonemployees........ -- 323,000 --
Loss on disposal of property and equipment.............. -- -- 86,000
Extraordinary loss on extinguishment of debt............ -- 476,000 --
Depreciation and amortization........................... 280,000 454,000 1,378,000
Amortization of intangibles and goodwill................ -- 114,000 1,820,000
Amortization of debt financing fees..................... 39,000 14,000 --
Amortization of debt discount........................... 5,000 33,000 --
Provision for doubtful accounts......................... 72,000 165,000 1,315,000
Changes in operating assets and liabilities, net of
assets acquired:
Accounts receivable................................... (238,000) (3,087,000) (2,220,000)
Prepaid & Other Assets................................ (249,000) (234,000) (366,000)
Deferred tax benefit.................................. 151,000 (17,000) 132,000
Accounts payable...................................... 136,000 (459,000) 1,276,000
Accrued liabilities................................... 50,000 551,000 482,000
Accrued compensation.................................. 226,000 (74,000) (250,000)
Deferred revenue...................................... (23,000) 226,000 1,981,000
Accrued termination costs............................. -- 498,000 (267,000)
----------- ------------ ------------
Total Adjustments.................................. 449,000 5,336,000 5,746,000
----------- ------------ ------------
Net cash used in operating activities.............. (1,937,000) (9,931,000) (9,821,000)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable from shareholders.......................... (79,000) (170,000) (1,064,000)
Purchase of short-term investments.......................... -- -- (1,350,000)
Purchase of property and equipment, net..................... (584,000) (1,941,000) (7,906,000)
Acquisitions, net of cash acquired.......................... -- (10,861,000) (1,764,000)
----------- ------------ ------------
Net cash used in investing activities.............. (663,000) (12,972,000) (12,084,000)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................... 79,000 584,000 73,000
Repayment of debt........................................... (550,000) (2,520,000) (5,431,000)
Proceeds from Sirrom Investments loan....................... 1,500,000 -- --
Proceeds from short/long-term borrowings.................... 1,008,000 5,633,000 --
Proceeds from issuance of preferred stock................... -- 1,500,000 1,880,000
Proceeds from warrants issued on preferred stock............ 41,000 -- 120,000
Proceeds from issuance of common stock...................... 3,471,000 28,206,000 32,648,000
Repurchase of common stock.................................. (712,000) (83,000) (464,000)
----------- ------------ ------------
Net cash provided by financing activities.......... 4,837,000 33,320,000 28,826,000
----------- ------------ ------------
NET INCREASE IN CASH........................................ 2,237,000 10,417,000 6,921,000
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD............... 1,406,000 3,643,000 14,060,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS ENDING OF PERIOD.................. $ 3,643,000 $ 14,060,000 $ 20,981,000
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes.................................. $ 51,000 $ 10,000 $ 151,000
=========== ============ ============
Cash paid for interest...................................... $ 73,000 $ 213,000 $ 89,000
=========== ============ ============
Fair value of stock options granted......................... $ 68,000 $ -- $ --
=========== ============ ============
Acquisitions of property and equipment through capital
leases.................................................... $ -- $ -- $ 1,360,000
=========== ============ ============
ACQUISITIONS:
Fair value of assets acquired............................. -- 414,000 168,000
Liabilities assumed....................................... -- (1,290,000) (46,000)
Value of common shares issued............................. -- (5,010,000) (770,000)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 38
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Towne Services, Inc. ("Towne Services" or the "Company") provides services
and products that process sales and payment information and related financing
transactions for small businesses and community banks in the United States.
Towne Services delivers these services and products online via an electronic
hub, or gateway, that links business and bank customers with the Company and
other providers of products and services that can benefit these customers. Towne
Services uses this electronic gateway to deliver a variety of business and
management solutions using internet and telecommunication connections. The
Company's primary business capabilities include a "virtual credit card" system
that processes the in-house credit transactions of small businesses and an
automated receivables management system that allows banks to quickly finance the
working capital needs of their small business customers.
The virtual credit card system processes the in-house credit transactions
of small businesses and includes an automated receivables management system that
allows banks to quickly finance the working capital needs of their small
business customers. Towne Services' merchandise forecasting system processes
sales and inventory transactions of small businesses, giving small business
owners greater control over inventory levels and the ability to make better
inventory purchase decisions and to improve cash flow and operating margins.
The Company's automated asset management systems are TOWNE CREDIT(R), which
processes consumer credit transactions for small and medium size retail
merchants, TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which process
business-to-business credit transactions for small commercial businesses, and
RMSA Forecast System, which processes sales and inventory transactions and
provides merchandising information for small specialty retail stores.
As discussed in Note 4, the Company acquired Forseon Corporation in 1999
under the pooling-of-interests basis in accounting, and, accordingly the
Company's historical consolidated financial statements have been restated as if
the acquisition occurred as of the earliest period presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The accompanying financial statements include the accounts of Towne
Services, Inc. and its wholly-owned subsidiaries. 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 amounts of assets and liabilities, the
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,
recurring monthly transaction processing fees and software license fees. In
response to the issuance of the Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," the Company is required to recognize revenues related to the
initial set-up fees on a deferred basis over the estimated life of the contract
terms and in the case of certain cancellation clauses and/or return guarantees,
until the guarantee period is expired. Prior to the adoption of SAB No. 101,
F-7
<PAGE> 39
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company recognized initial set-up fees upon the execution of the related
contract. Transaction fees are recognized on a monthly basis as earned. Revenues
related to software license fees are recognized in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2,
"Software Revenue Recognition," ("SOP 97-2"), as amended. 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.
CHANGES IN ACCOUNTING PRINCIPLES
In response to the issuance of SAB No. 101, the Company began recognizing
all revenues from set-up fees on a deferred basis. The effects of this change in
accounting principle were applied cumulatively as of the beginning of the fourth
quarter ended December 31, 1999. The pro forma results of this adjustment on
years ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Revenues................................................... $12,642,000 $ 15,827,000
Net loss attributable to common shareholders before
extraordinary item....................................... (2,627,000) (22,913,000)
Net loss attributable to common shareholders............... (2,627,000) (23,389,000)
Net loss attributable to common shareholders per common
share before extraordinary loss.......................... $ (0.23) $ (1.31)
Net loss attributable to common shareholders per common
share.................................................... $ (0.23) $ (1.34)
</TABLE>
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, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999 USEFUL LIVES
----------- ----------- ---------------------
<S> <C> <C> <C>
Furniture and fixtures................ $ 932,000 $ 2,060,000 Five -- Seven years
Automobiles........................... 45,000 45,000 Three -- Five years
Computers and equipment............... 1,391,000 3,251,000 Three -- Seven years
Point-of-sale equipment............... 1,280,000 2,007,000 Three years
Land.................................. 404,000 404,000 --
Buildings............................. 931,000 931,000 Thirty years
Five -- Nineteen
Leasehold improvements................ 183,000 1,171,000 years
Computer software..................... 251,000 4,509,000 Three -- five years
Software development costs............ 60,000 113,000 Three years
----------- -----------
5,477,000 14,491,000
Less accumulated depreciation......... (2,024,000) (3,371,000)
----------- -----------
$ 3,453,000 $11,120,000
=========== ===========
</TABLE>
F-8
<PAGE> 40
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and intangibles, to determine whether any
impairments are other than temporary. The Company reviews the value of its long
lived assets by calculating whether the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those assets.
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 12 years. The Company has allocated $1.1
million to BSI's customer list, which is being amortized over a period of 5
years.
In connection with the purchase of Imaging Institute, Inc. ("III"), (Note
4), the Company has recorded goodwill in the amount of $1.9 million, which is
being amortized over a period of five years.
The balance of accumulated amortization for goodwill and other intangibles
at December 31, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1998 1999
------- ----------
<S> <C> <C>
Goodwill.................................................... $90,000 $1,675,000
Other intangibles........................................... -- 236,000
------- ----------
Total............................................. $90,000 $1,911,000
======= ==========
</TABLE>
OFFICERS' LIFE INSURANCE
The Company carries life insurance policies on three key executives. The
aggregate face value of these policies is $3,750,000, 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, 1998 and 1999.
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 capitalized
approximately $60,000 and $113,000 of software development costs at December 31,
1998 and 1999, respectively.
NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
outstanding. Diluted loss per share is based on the weighted average number of
shares outstanding, and the dilutive effect of common stock equivalent shares
issuable upon the exercise of stock options and warrants (using the treasury
stock method). All common stock equivalents have been excluded, as their effect
would be anti-dilutive. Therefore, the weighted average shares used for basic
and diluted earnings per share are the same.
F-9
<PAGE> 41
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, investments, 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 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
F-10
<PAGE> 42
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
RECENT 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 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.
As noted above, the Company adopted SAB No. 101 effective as of the
beginning of the fourth quarter ended December 31, 1999.
3. PUBLIC OFFERING
In August 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,
F-11
<PAGE> 43
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In June 1999, the Company completed a second public offering of 4,500,000
shares of common stock at an offering price to the public of $7.125 per share
and on July 20, 1999, 675,000 shares of common stock were issued and sold by the
Company pursuant to an underwriters' over-allotment provision in connection with
this public offering. The total proceeds from this public offering, net of
underwriting discounts and offering expenses, were approximately $33.0 million.
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 specified
sales levels of Collection Works Software are achieved. If the contingent
consideration is earned during the eighteen month period ended December 31,
1999, the value of the shares will be treated as additional goodwill to be
amortized over the remaining useful life. As of December 31, 1999, the specified
sales levels have not been achieved, therefore, no shares will be issued. 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 were contingent upon performance of the
acquired company through March 1999. As of December 31, 1999, no amounts were
due and none have been paid under this agreement. Any amounts earned under these
performance criteria will be treated as additional goodwill to be amortized over
the remaining useful life. No additional goodwill has been recorded for these
contingencies as of December 31, 1999. 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 12 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
consisting of $1.8 million in cash and $0.5 million in stock in December 1998
relating to employee terminations which were not identified at the date of
purchase. The terminations included 21 administrative, technical and sales
employees. Of the $1.8 million in cash payments, $1.6 million was paid from
December 1998 through December 1999, and the remaining $231,000 will be paid
during fiscal year 2000. BSI's operations have been included in the operations
of the Company since acquisition.
The detail of the allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 402
Prepaid expenses............................................ 12
Accounts payable............................................ (216)
Accrued liabilities......................................... (1,074)
Goodwill.................................................... 14,605
Other intangibles........................................... 1,135
-------
Total Consideration............................... $14,864
=======
</TABLE>
F-12
<PAGE> 44
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1999, the Company acquired Forseon Corporation, a company based in
Riverside, California. Forseon provides products and services for retail
businesses that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports. Towne issued a total of 2,075,345 shares of its common stock in
exchange for all outstanding stock and options to acquire stock in Forseon. The
merger was accounted for as a pooling of interests. Ten percent of the Towne
common stock has been held back in escrow to satisfy the indemnification
obligations of Forseon stockholders under the merger agreement. The Company
incurred approximately $2.3 million in expenses related to the acquisition of
Forseon.
On July 20, 1999, the Company acquired all of the issued and outstanding
stock if Imaging Institute, Inc. ("III"), a Bloomington, Minnesota-based
company, for approximately $1.2 million cash and the issuance of 81,016 shares
of the Company's common stock. III's main products include AUGUSTA and EzVIEW
VAULT(TM), which offer unique and functional document imaging and archiving
solutions tailored for small to medium size businesses. Pursuant to the terms of
the registration rights agreement that we entered into in connection with the
Imaging Institute acquisition, we are required to purchase from the Imaging
Institute shareholders, upon their request, up to 81,016 shares of our common
stock at a price of $9.50 per share on the one year anniversary of this
transaction. In connection with the purchase of III, the company has recorded
goodwill in the amount of $1.9 million, which will be amortized over a five-year
period.
The detail of the allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 12,586
Accounts receivable......................................... 19,076
Other Assets................................................ 23,350
Property, Plant & Equipment, net............................ 38,004
Intangible assets, net...................................... 74,592
Accounts payable............................................ (43,780)
Accrued liabilities......................................... (2,461)
Goodwill.................................................... 1,858,276
----------
Total Consideration............................... $1,979,643
==========
</TABLE>
Pro forma financial information as if the acquisitions, excluding Forseon,
had occurred at the beginning of the respective periods during which they
occurred would be as follows (unaudited):
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues...................................... $21,299,041 $ 26,568,724 $ 29,981,455
Net loss before extraordinary item............ (4,079,078) (15,706,623) (12,545,815)
Net loss...................................... (4,079,078) (16,182,863) (15,728,659)
Net loss attributable to common
shareholders................................ $(4,079,078) $(21,982,834) $(15,823,165)
=========== ============ ============
Net loss attributable per common share........ $ (0.33) $ (1.20) $ (.64)
=========== ============ ============
</TABLE>
F-13
<PAGE> 45
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Note payable to First Union Bank, interest at LIBOR+2.0%
(7.1% at December 31, 1998)............................... $ 5,000,000 $ --
Promissory note for purchase of 105,000 shares of common
stock from Mr. Vernon Rossi, annual principal and interest
payments of approximately $248,000 interest rate of 8.25%,
due December 31, 1999..................................... 236,000 --
Notes payable to former ESOP participants, annual principal
payments of approximately $46,000, average interest rate
of 7%, due from 1998 to 2002.............................. 93,000 --
Lease payable to Synovus Leasing Company, monthly principal
and interest payments of approximately $11,000, average
interest rate of 8.75%, due June 24, 2004................. -- 470,000
Lease payable to NEC America, Inc., monthly principal and
interest payments of approximately $9,000, average
interest rate of 8.61%, due July 22, 2004................. -- 400,000
Lease payable to Synovus Leasing Company, monthly principal
and interest payments of approximately $8,500, average
interest rate of 8.75%, due August 15, 2004............... -- 389,000
Less current portion........................................ (5,274,000) (231,000)
----------- ----------
Long-term debt.................................... $ 55,000 $1,028,000
=========== ==========
</TABLE>
The aggregate annual maturities for long-term debt in fiscal years
subsequent December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 231,000
2001........................................................ 258,000
2002........................................................ 282,000
2003........................................................ 307,000
2004........................................................ 181,000
----------
$1,259,000
==========
</TABLE>
In August 1998, the Company repaid all of its then current and outstanding
long-term debt obligations using proceeds of the initial public offering. This
resulted in an extraordinary one-time charge to net income of $476,000, which is
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 and terminated the First Union
National Bank note of $5,000,000 and the corresponding credit facility.
In June 1999, in conjunction with the merger of Forseon Corporation (Note
4), the Company paid in full the Notes to former ESOP participants of $93,000
and the promissory note from Mr. Vernon Rossi of $236,000.
F-14
<PAGE> 46
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The following is a reconciliation of income taxes at the federal statutory
rate with the (provision) benefit for income taxes recorded by the Company for
the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit computed at the federal
statutory rate................................. $ 776,000 $ 5,195,000 $ 5,217,000
State income tax benefit, net of federal income
tax benefit.................................... 91,000 611,000 614,000
Effect of change in accounting principle......... -- -- (1,202,000)
Other, net....................................... (47,000) (94,000) (214,000)
Change in valuation allowance.................... (924,000) (5,701,000) (4,637,000)
--------- ----------- -----------
$(104,000) $ 11,000 $ (222,000)
========= =========== ===========
</TABLE>
Deferred income tax assets and liabilities for 1997, 1998 and 1999 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences that give rise to deferred tax assets and liabilities at December
31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenues............................ $ 20,000 $ 16,000 $ 796,000
Amortization of intangibles.................. -- -- 415,000
Deferred compensation........................ 91,000 132,000 94,000
Accounts receivable reserves................. 27,000 153,000 200,000
Other........................................ 15,000 70,000 131,000
AMT Carryforward............................. -- 15,000 --
Net operating loss carryforwards............. 1,135,000 6,714,000 10,289,000
----------- ----------- ------------
Deferred tax assets.................. 1,288,000 7,100,000 11,925,000
Deferred tax liability:
Depreciation................................. (10,000) (91,000) (411,000)
----------- ----------- ------------
1,278,000 7,009,000 11,514,000
Valuation allowance............................ (1,176,000) (6,877,000) (11,514,000)
----------- ----------- ------------
Net deferred tax asset............... $ 102,000 $ 132,000 $ --
=========== =========== ============
</TABLE>
Due to the Company's current year operating loss position and projected
losses for the fiscal year ending December 31, 2000, no benefit for income taxes
for the year ended December 31, 1999 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.
At December 31, 1999, the Company had net operating loss carryforwards
("NOLs") of approximately $27.3 million which will expire if not utilized
beginning in 2012. Due to changes in the Company's ownership structure, the
Company's use of its NOLs as of October 1, 1997 of approximately $2.5 million
will be limited to approximately $550,000 in any given year to offset future
taxes. In addition, due to the Company's acquisitions during 1998 and 1999, NOLs
of approximately $6.1 million will be limited to approximately $1.6 million 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. 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.
F-15
<PAGE> 47
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. WARRANTS WITH REDEMPTION FEATURE AND REDEEMABLE COMMON STOCK
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 $947,000 charged to
retained earnings was transferred to permanent equity subsequent to the IPO.
Historically, Forseon could be required to repurchase common stock
distributed to separated ESOP participants. Generally, Forseon would repurchase
this stock at its most recent appraised value, as determined annually by an
independent valuation. Forseon could, at its option, pay for the repurchased
stock through equal annual installments over five years, plus interest, or in a
lump sum. At December 31, 1998, Forseon could be required to repurchase a
maximum of $245,000 of common stock, if all separated ESOP participants
exercised their rights to have the Company repurchase their stock. As the share
distributed to these participants in the pooling of interests transaction will
be freely tradeable on the open market, the obligation would no longer exist and
was reclassified to equity at the date of the transaction.
Historically, Forseon could be required to repurchase common stock owned by
two former directors of Forseon. Forseon would repurchase this stock at its most
recent appraised value, as determined annually by an independent valuation. At
December 31, 1998, Forseon could be required to purchase $99,000 of common stock
from these individuals. These obligations cease upon a change in control in
accordance with the original terms of the agreements, and were reclassified to
equity at the date of the transaction.
Historically, Forseon could also be required to repurchase up to 25% of the
common stock in the accounts of certain ESOP participants, to provide these
participants an opportunity to diversify their ESOP investments. This common
stock must be repurchased at its most recent appraised value.
At December 31, 1998, Forseon could be required to purchase $190,000 of
common stock from the participants. As a result of the pooling of interests
transaction, the ESOP participants have the ability to sell shares on the open
market to diversify their investment. Therefore, the obligation to Forseon would
no longer exist and was reclassified to equity at the date of the transaction.
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 $1.5
million.
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 at a conversion price of $1.25 per
share. 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 June 1999, the Company sold 20,000 shares of Series B Preferred Stock
and issued a warrant to purchase 30,000 shares of the Company's common stock to
Synovus Financial Corporation for $2.0 million. The shares are convertible into
common stock at a conversion price equal to $9.08. The Series B Preferred Stock
is redeemable at any time on or after June 30, 2002 at the option of the Company
for cash, in whole or
F-16
<PAGE> 48
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
part, on at least 10 business days but not more than 90 calendar days' notice.
The Company allocated $1.8 million and $120,000 to the preferred stock and
warrants, respectively, based on the relative fair value at the date of
issuance.
The holders of the Series B Preferred Stock are entitled to receive
cumulative cash dividends when, as and if declared by the Board of Directors out
of any funds legally available therefore at the rate of $2.00 per share of
Series B Preferred Stock per quarter. Dividends are payable quarterly on March
31, June 30, September 30 and December 31 in each year. Dividends accrue on each
share of Series B Preferred Stock beginning June 1999 and accrue from day to
day, whether or not earned or declared and whether or not there are funds
legally available for the payment of such dividends. Any accumulation of
dividends on the Series B Preferred Stock does not bear interest. The accrued
balance of Series B Preferred Stock dividends is $94,000 at December 31, 1999.
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 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.
In connection with the acquisition of Forseon (Note 4), Towne issued a
total of 2,075,345 shares of its common stock in exchange for all outstanding
stock and options to acquire stock in Forseon. The merger was accounted for as a
pooling of interests. Ten percent of the Towne common stock has been held back
in escrow to satisfy the indemnification obligations of Forseon stockholders
under the merger agreement.
In connection with the acquisition of III (Note 4), the Company issued
81,016 shares of the common stock at $9.50 per share.
STOCK SALE TO EMPLOYEES
In February 1998, the board of directors authorized the sale of the
Company's common stock to all employees of the Company for approximately $1.19
per share. The stock sale was available through March 6, 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.
1996 STOCK OPTION PLAN
In November 1996, the Company adopted the Towne Services, Inc. 1996 Stock
Option Plan. As of December 31, 1999, options to acquire 2,090,000 shares had
been authorized for issuance and options to acquire 1,517,800 shares were
outstanding. All of these options were issued at the fair market value of the
F-17
<PAGE> 49
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock as determined by the Board of Directors. Effective May 19, 1998, we
decided not to issue any additional options under this plan.
1998 STOCK OPTION PLAN
In May 1998, the Company adopted the Towne Services, Inc. 1998 Stock Option
Plan. The 1998 plan advances the interests of Towne and its subsidiaries by
giving eligible employees, directors, key consultants and advisors an
opportunity to acquire or increase their proprietary interests in our company.
This gives them an incentive to achieve Towne's objectives by allowing them to
participate in our success and growth.
Awards under the plan can be incentive stock options, non-qualified stock
options or restricted stock. These awards are granted by the Compensation and
Stock Option Committee of the Board of Directors. This committee must have at
least two non-employee independent directors. This committee generally has
discretion to determine the terms of an option grant, within limitations,
including the following:
- the number of shares subject to options granted to a person in a year may
not exceed 500,000 shares;
- if an award is intended to be an incentive stock option and is granted to
a shareholder holding more than 10% of the combined voting power of all
classes of stock, the option price per share may not be less than 110% of
the fair market value of such share at the time of grant; and
- the term of an incentive stock option may not exceed 10 years, or 5 years
if granted to a shareholder owning more than 10% of the total combined
voting power of all classes of stock.
When it was adopted, the 1998 plan provided that no more than 2,000,000
shares may be subject to outstanding options. This number automatically
increases on January 1 of each year by the lesser of three percent of the number
of shares outstanding on the preceding trading day or 500,000 shares.
Accordingly, as of December 31, 1999, there are 2,500,000 shares available for
grant under the 1998 plan. At December 31, 1999, there were 872,250 options
outstanding under the 1998 plan.
The 1998 plan may be amended by the Board of Directors without the consent
of the shareholders. However, an amendment, although effective when made, will
be subject to shareholder approval within one year after approval by the Board
if it does any of the following:
- increases the total number of shares issuable pursuant to incentive stock
options;
- changes the class of employees eligible to receive incentive stock
options that may participate; or
- otherwise materially increases the benefits to recipients of incentive
stock options.
1999 DIRECTOR STOCK OPTION PLAN
The Company also has a stock option plan for non-employee directors of the
Company (the "Director Plan") which provides for the issuance of options to
purchase up to 250,000 shares of the Company's common stock. The options are
non-qualified stock options, but are usually granted at an exercise price which
is no less than fair value as determined by the board of directors. The options
generally vest immediately, but directors are prohibited from disposing of any
shares acquired by exercise for at least six months after the date of grant.
Options granted under the Director Plan generally expire five years from the
date of grant. Under the plan, the number of shares available for issuance will
increase automatically on January 1 of each year by the lesser of 50,000 shares
or an amount equal to 1% of the total number of shares of common stock
outstanding on the last trading day before January 1, but not above 500,000
shares in total. The number of shares available for issuance may also be
adjusted upon the occurrence of certain events described below. At December 31,
1999, options to purchase 243,160 shares of common stock were available for
future grant under the Director Plan.
F-18
<PAGE> 50
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plan provides for options to be granted to non-employees directors
automatically;
- on the later of November 15, 1999 or the date the plan is approved by the
shareholders;
- on the date of initial election as a director of Towne of a subsidiary;
and
- on January 1 of each calendar year.
All options granted will be evidenced by an option agreement between Towne
and the optionee. Other than these automatic grants of options, no other options
will be granted under the plan to directors of Towne. However, the Board of
Directors, as administrator of the plan, may grant options under the plan to
directors of subsidiaries who are not directors of Towne.
OPTIONS
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 $1.9 million
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 $978,000 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.
In August 1999, the board granted options to purchase 10,000 shares to two
non-employee directors in consideration for their service on a subcommittee
formed to search for a new CEO and assist in the management transition. All of
these options vested immediately and had an exercise price of $4.19. No
compensation was recorded for these options, as the price was established at the
estimated fair value of the common stock at the date of grant.
In September 1999, the board of directors granted Incentive Stock Options
("ISO's") to employees to purchase 172,000 shares of common stock. These options
vest at 33% per year beginning in September 2000 and have an exercise price of
$3.84 per share.
F-19
<PAGE> 51
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1999, the board of directors granted ISO's to certain sales
employees to purchase 160,250, shares of common stock. Of the 160,250 options
granted, 60,000 of these options vest at 50% per year beginning in November
2000, and the remaining 100,250 options vest at 100% beginning in November 2000.
All options have an exercise price of $2.59 per share.
In November 1999, the board of directors granted options to nonemployee
board members to purchase an aggregate of 6,840 shares of common stock as
compensation for their services performed during 1999. All of these options vest
immediately and have an option price of $3.38 per share. 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.
In 1999, the Company recognized approximately $234,000 for severance
benefits relating to the acceleration of unvested stock options issued and
outstanding for two former key employees.
Stock option activity for the years ended December 31, 1997, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES SUBJECT AVERAGE EXERCISE
TO OPTIONS PRICE PER SHARE
-------------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1996.................. 2,953,421 $0.54
Granted................................................. 1,041,047 0.86
Canceled................................................ (14,695) 1.68
Exercised............................................... (263,000) 0.30
--------- -----
Options outstanding at December 31, 1997.................. 3,716,473 0.64
Granted................................................. 1,275,257 4.88
Canceled................................................ (55,449) 1.45
Exercised............................................... (872,444) 0.84
--------- -----
Options outstanding at December 31, 1998.................. 4,062,837 1.87
Granted................................................. 837,090 3.49
Canceled................................................ (33,418) 4.94
Exercised............................................... (488,704) 1.10
--------- -----
Options outstanding at December 31, 1999.................. 4,377,805 $2.87
========= =====
Exercisable at December 31, 1997........................ 2,495,110
=========
Exercisable at December 31, 1998........................ 3,374,246
=========
Exercisable at December 31, 1999........................ 3,317,803
=========
</TABLE>
F-20
<PAGE> 52
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS OUTSTANDING AVERAGE OPTIONS EXERCISABLE
- ------------------------------------------- REMAINING -------------------------
RANGE OF NUMBER WEIGHTED CONTRACTUAL NUMBER WEIGHTED
EXERCISE PRICES OF SHARES AVERAGE PRICE LIFE OF SHARES AVERAGE PRICE
- --------------- --------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
$0.30-$0.50.. 1,813,504 $0.48 6.81 1,795,900 $0.42
$0.60-$1.00.. 713,539 0.79 7.34 576,638 0.75
$1.25........ 215,000 1.25 8.13 100,700 1.25
$2.00-$4.69.. 370,590 3.28 9.76 26,840 3.98
$5.50-$6.75.. 116,000 6.56 8.91 40,500 6.49
$7.00-$7.75.. 696,675 7.20 8.40 639,225 7.22
$7.88-$9.125.. 452,500 8.59 9.42 138,000 8.60
--------- ----- ---- --------- -----
Total........ 4,377,805 $2.87 7.79 3,317,803 $2.25
========= ===== ==== ========= =====
</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 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 and 1999, the Company has determined the fair
value using the Black-Scholes pricing method. The Company used the following
weighted average assumptions for grants in 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate................. 6.3% to 6.7% 4.6% to 5.6% 4.7% to 6.4%
Expected dividend yield................. 0.0% 0.0% 0.0%
Expected lives.......................... Five years Five years Four to Five Years
Expected volatility..................... 0.0% 55% 92%
</TABLE>
The total value of the options granted during the years ended December 31,
1997, 1998 and 1999 were computed as approximately $378,000, $3.2 million 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
F-21
<PAGE> 53
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, and 1999 would have
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common
shareholders:
As reported.............................. $(2,386,000) $(21,067,000) $(15,661,000)
Pro forma................................ (2,431,000) $(23,479,000) $(17,233,000)
Basic:
As reported.............................. $ (0.21) $ (1.21) $ (0.64)
Pro forma................................ (0.21) (1.35) (0.70)
Diluted:
As reported.............................. $ (0.21) $ (1.21) $ (0.64)
Pro forma................................ (0.21) (1.35) (0.70)
</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 vested 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.
In connection with the issuance of the Series B Preferred Stock, the
Company issued a warrant to purchase 30,000 shares of the Company's common stock
for $9.08 per share and is exercisable beginning 12 months after the issue date.
The term of the warrant is 5 years. The Company allocated $120,000 to the
warrant based on the relative fair value of the warrant using the Black-Scholes
pricing method.
9. EMPLOYEE BENEFIT PLANS
On January 1, 1997, Forseon Corporation adopted a 401(k) defined
contribution plan covering employees 21 years of age with at least six months of
employment at the Company. Employees may contribute between 2% and 15% of their
pay, with a maximum annual contribution of $10,000. The Company contributes in
cash amounts equal to 25% of employee's contribution up to 6% of the employee's
pay. The amount expensed for the Company match provision of this plan was
$67,000, $78,000 and $32,000 for years ended December 31, 1997, 1998 and 1999,
respectively. As a result of the merger with Towne Services, Inc., contributions
to this plan ceased on August 15, 1999. Effective August 31, 1999, employees of
Forseon Corporation began participating in the 401(k) defined contribution plan
under Towne Services, Inc.
On January 1, 1999, Towne Service, Inc. adopted a 401(k) defined
contribution plan covering employees 18 years of age with at least one month of
employment at the Company. Employees may contribute between 1% and 15% of their
pay, with a maximum annual contribution of $10,500. The Company contributes in
cash amounts equal to 25% of employee's contribution up to 6% of the employee's
pay. Company matching contributions vest 20% per year beginning in the second
year of employment. The amount expensed for the Company match provision of this
plan was $87,063 for the year ended December 31, 1999.
10. COMMITMENTS AND CONTINGENCIES
LEASES
For the year ended December 31, 1997, the Company incurred approximately
$37,000 in rent expense for its corporate facility leased from ProVesa, Inc., a
subsidiary of The InterCept Group, Inc. ("InterCept"), a
F-22
<PAGE> 54
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for its corporate
facility under a noncancelable operating lease agreement with a nonrelated third
party expiring in January 2003. For the years ended December 31, 1998 and 1999,
the Company incurred approximately $210,000 and $172,000 respectively, in rent
expense for this leased office space. In May 1999, the Company began leasing
office space for its corporate facility under a noncancelable operating lease
agreement with a nonrelated third party expiring in July 2004. For the year
ended December 31, 1999, the company incurred approximately $300,000 in rent
expense on this leased office space. In addition to the operating lease for its
corporate facility, the Company leases certain office space under operating
leases which are, for the most part, renewable. For the years ended December 31,
1997, 1998 and 1999, the Company incurred approximately $172,000, $154,000 and
$147,000 respectively, in rent expense on these leased offices.
Future minimum rental payments for all noncancelable leases are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 475,000
2001........................................................ 475,000
2002........................................................ 479,000
2003........................................................ 439,000
2004........................................................ 239,000
----------
$2,107,000
==========
</TABLE>
As a result of relocation to a new corporate facility in May 1999, the
Company entered into a sublease agreement on the previously leased facility, in
August 1999, with a nonrelated third party expiring in January 2003. The Company
recognized a one-time non-cash charge of $0.2 million related to the loss on
this sublease agreement.
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.
11. RELATED-PARTY TRANSACTIONS
In September 1997, the Company loaned its President $79,000 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 March 2001, as amended.
On April 1, 1998, the Company loaned its former 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, 2000, as amended 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 its President $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.
F-23
<PAGE> 55
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1998, the Company loaned the former 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. The note was paid in full in March
2000.
In July 1999, the Company loaned the former Chief Executive Officer of the
Company $300,000. The full recourse loan bears interest at 8.00% per annum, and
is due in full in July 2004. The note was paid in full in March 2000.
In July 1999, the Company loaned its President $300,000. The full recourse
loan bears interest at 8.00% per annum, and is due in full in July 2002.
In July 1999, the Company loaned the former Chief Financial Officer of the
Company $100,000. The full recourse loan bears interest at 8.00% per annum, and
is due in full in July 2002.
In July 1999, the Company loaned the Executive Vice President of the
Company $50,000. The full recourse loan bears interest at 8.00% per annum, and
is due in full in July 2002.
The former Chief Executive Officer received a cash payment of $1.0 million
for severance benefits in accordance with the employment agreement between the
executive and the Company.
During the years ended December 31, 1997, 1998 and 1999, the Company
incurred fees of approximately $55,000, $1.0 million and $1.4 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, 1998 and 1999,
approximately $185,000 and $6,000 respectively, of such fees are included in
accounts payable in the accompanying balance sheets.
During the years ended December 31, 1997, 1998 and 1999, the Company
incurred costs of approximately $15,000, $121,000 and $313,000, respectively,
for communication services from InterCept. As of December 31, 1998 and 1999,
approximately $30,000 and $35,000 respectively, of such fees is included in the
accrued accounts payable in the accompanying balance sheets. The Company also
invoiced InterCept $825,000 during 1999 for license fees related to the
Collection Works Software and Imaging Software products.
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, $217,000 and $438,000 as compensation
for services provided by Rodgers Capital in connection with obtaining equity
investments for the Company during 1997, 1998 and 1999, respectively.
During the years ended December 31, 1998 and 1999, the Company incurred
costs of approximately $21,000 and $167,000, respectively from Phoenix
International for commission fees related to sales of the Company's products. In
addition, the Company incurred costs of $276,000 in 1999 for the development of
the Company's web page. As of December 31, 1999, approximately $80,000 of fees
are included in the accounts payable in the accompanying balance sheets. 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
in 1998 for marketing-related services of the Company's products.
During the years ended December 31, 1998 and 1999, the Company incurred
costs of approximately $113,000 and $100,000 respectively, from Brown Burke
Capital Partners, Inc. for merger and acquisition advisory services in
connection with the purchase of BSI in December 1998 and Imaging Institute in
July 1999 (Note 4). One of the principals of this corporation is a director and
shareholder of the Company.
During the years ended 1998 and 1999, the Company invoiced FLAG Financial
Corporation $207,000 and $219,000 respectively, 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.
F-24
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
2.1 -- Agreement and Plan of Merger by and among Towne Services,
Inc., TSI Acquisition One, Inc., Forseon Corporation and
certain of the stockholders of Forseon Corporation dated as
of March 25, 1999.***
2.2 -- Escrow Agreement dated June 19, 1999 by and among Towne
Services, Inc., Dan Paul and Allen Merrill, each in their
capacity as a stockholder representative, and First Union
National Bank (incorporated by reference to the Company's
Quarterly Report on Form 10-Q filed on August 16, 1999).
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.**
3.3 -- Articles of amendment to the Amended and Restated Articles
of Incorporation of Towne Services Inc., as filed with the
Secretary of State of Georgia on May 21, 1999.**
3.4 -- Amendment to the Amended and Restated Bylaws of Towne
Services Inc., effective May 21, 1999.**
3.5 -- Articles of Amendment to the Amended and Restated Articles
of Incorporation of Towne Services Inc., as filed with the
Secretary of State of Georgia on June 11, 1999.**
4.1 -- See Exhibits 3.1 through 3.5 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 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997.*/+
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Shultz dated as of May 19, 1998.*/+
10.6 -- Form of Towne Credit Bank Marketing Agreement.*
10.7 -- Form of Towne Finance Bank Marketing Agreement.*
10.8 -- Form of Towne Credit Merchant Processing Agreement.*
10.9 -- Form of Towne Finance Client Processing Agreement.*
10.10 -- Form of CASH FLOW MANAGER Merchant Services Agreement
(incorporated by reference to the exhibits to Towne's Annual
Report on Form 10-K filed on March 26, 1999).
10.11 -- Form of CASH FLOW MANAGER License Agreement (incorporated by
reference to the exhibits to Towne's Annual Report on Form
10-K filed on March 26, 1999).
10.12 -- Form of Independent Bankers Bank General Marketing Agent
Agreement (incorporated by reference to the exhibits to
Towne's Annual Report on Form 10-K filed on March 26, 1999).
10.13 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.14 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.15 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*+
10.16 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.*+
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
10.17 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco (incorporated by reference
to the exhibits to the Company's Annual Report on Form 10-K
filed on March 26, 1999).+
10.18 -- Promissory note dated July 22, 1999 issued to Towne
Services, Inc. by Cleve B. Schultz.+
10.19 -- Promissory note dated July 22, 1999 issued to Towne
Services, Inc. by Henry M. Baroco.+
10.20 -- Promissory note dated July 22, 1999 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.+
10.21 -- Form of General Marketing Agent Agreement.*
10.22 -- Sublease Agreement by and among Technology Park/Atlanta,
Inc. and Towne Services, Inc. dated March 9, 1999
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on May 7, 1999).
10.23 -- Director Stock Option Plan, adopted April 15, 1999
(incorporated by reference to Appendix B to the Company's
definitive Proxy Statement for its 1999 Annual Meeting filed
on April 26, 1999).+
10.24 -- Stock Purchase Warrant by and between Towne Services Inc.,
and Synovus Financial Corporation dated June 16, 1999
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on August 16, 1999).
10.25 -- Form of promissory notes for executive officers
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on November 12, 1999).
10.26 -- Registration Rights Agreement dated as of July 19, 1999
between Towne Services, Inc. and the shareholders of Imaging
Institute, Inc.
10.27 -- Private Label Internet Service Provider Agreement dated
December 14, 1999 between Towne Services, Inc. and Lynxus,
Inc.
10.28 -- Contract for Payroll Services dated December 15, 1999
between Towne Services, Inc. and Pay Systems of America, a
subsidiary of Concord EFS.
10.29 -- Referral Agreement dated December 13, 1999 between Towne
Services, Inc. and NOVA Information Systems, Inc.
10.30 -- Master License Agreement dated December 8, 1999 between
Towne Services, Inc. and Trans Union LLC.
10.31 -- Agreement dated June 24, 1998 between Towne Services, Inc.
and Total Debt Management, formerly Wallace and De Mayo,
P.C.
10.32 -- Agreement dated December 22, 1998 between Towne Services,
Inc. and Princeton eCom Corporation.
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 period ending December 31,
1999 (for SEC use only).
27.2 -- Restated Financial Data Schedule for the period ending
December 31, 1998 (for SEC use only).
27.3 -- Restated Financial Data Schedule for the period ending
December 31, 1997 (for SEC use only).
</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.
** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-76859) as declared effective by the
Securities and Exchange Commission on June 23, 1999.
*** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-4 (No. 333-76493) as declared by the Securities and
Exchange Commission on June 10, 1999.
+ 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).
<PAGE> 1
Exhibit 10.18
PROMISSORY NOTE
$50,000 JULY 22, 1999
CLEVE B. SHULTZ (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 ($50,000) on July 31, 2002, together with interest on the unpaid
principal balance at the rate of 8.0% per annum, compounded annually. The
principal hereof and the interest thereon are payable at 3950 Johns Creek Court,
Suite 100, Suwanee, Georgia 30024, or at such other place as Payee may from time
to time designate to Maker in writing, in coin or currency of the United States
of America.
Maker may, at any time and from time to time, prepay all or any portion of
the principal of this Note remaining unpaid, without penalty or premium.
Prepayments shall be applied first to the payment of accrued but unpaid interest
on this Note and the balance to principal.
If any of the following events (an "Event of Default") shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest on this
Note when and as the same shall become due and payable and such default
continues for 20 days after Maker receives notice from Payee of such default; or
(b) If Maker makes an assignment for the benefit of creditors or
admits in writing an inability to pay his or its debts generally as they become
due;
(c) If an order, judgment or decree is entered adjudicating Maker
bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the appointment
of a trustee or receiver of Maker, or of any substantial part of the assets of
Maker, or commences any proceedings relating to Maker under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act indicates its
approval thereof, consent thereto, or acquiescence therein, or an order is
entered appointing any such trustee or receiver, or approving the petition in
any such proceedings, and such order remains unstayed and in effect for more
than 90 days.
<PAGE> 2
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 to
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, attorney's 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/ Cleve B. Shultz
--------------------------------------------
<PAGE> 1
Exhibit 10.19
PROMISSORY NOTE
$300,000
JULY 22, 1999
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
three hundred thousand ($300,000) on July 31, 2002, together with interest on
the unpaid principal balance at the rate of 8.0% per annum, compounded annually.
The principal hereof and the interest thereon are payable at 3950 Johns Creek
Court, Suite 100, Suwanee, Georgia 30024, or at such other place as Payee may
from time to time designate to Maker in writing, in coin or currency of the
United States of America.
Maker may, at any time and from time to time, prepay all or any portion of
the principal of this Note remaining unpaid, without penalty or premium.
Prepayments shall be applied first to the payment of accrued but unpaid interest
on this Note and the balance to principal.
If any of the following events (an "Event of Default") shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise), then this Note shall thereupon be and become, forthwith due and
payable, without any further notice or demand of any kind whatsoever, all of
which are hereby expressly waived:
(a) If Maker defaults in the payment of principal or interest on this
Note when and as the same shall become due and payable and such default
continues for 20 days after Maker receives notice from Payee of such
default; or
(b) If Maker makes an assignment for the benefit of creditors or
admits in writing an inability to pay his or its debts generally as they
become due;
(c) If an order, judgment or decree is entered adjudicating Maker
bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the appointment
of a trustee or receiver of Maker, or of any substantial part of the assets
of Maker, or commences any proceedings relating to Maker under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now or
hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act indicates
its approval thereof, consent thereto, or acquiescence therein, or an order
is entered appointing any such trustee or
<PAGE> 2
receiver, or approving the petition in any such proceedings, and such order
remains unstayed and in effect for more than 90 days.
This Note is with full recourse to any assets of Maker.
Any failure on the part of Payee at any time to require the performance by
Maker of any of the terms or provisions hereof, even if known, shall in no way
affect the right thereafter to enforce the same, nor shall any failure of Payee
to insist on strict compliance with the terms and conditions hereof be taken or
held to be a waiver of any succeeding breach or of the right of Payee to insist
on strict compliance with the terms and conditions hereof.
Time is of the essence.
This Note shall be governed by, and enforced and interpreted in accordance
with, the laws of the State of Georgia without regard to the principles of
conflict of laws.
In the event this note, or any part hereof, is collected by or through an
attorney-at-law, Maker agrees to pay all costs of collection including, but not
limited to, attorneys' fees equal to 15% of the principal and interest then
due. In the event that Maker fails to make any payment when due, Payee shall
provide written notice of default to Maker, which notice shall allow Maker ten
(10) days from the date of receipt of such notice in which to cure such
default. If such default is not cured within the time allowed, the balance
hereof shall be deemed to be immediately accelerated without further notice to
Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the date
first set forth above.
MAKER:
/s/ Henry M. Baroco
-----------------------------
<PAGE> 1
Exhibit 10.20
PROMISSORY NOTE
$100,000 July 22, 1999
BRUCE F. LOWTHERS JR. (hereinafter referred to as "Maker"), for value
received, hereby promises to pay to the order of TOWNE SERVICES, INC., a
Georgia corporation (hereinafter referred to as "Payee"), the aggregate
principal sum of One hundred thousand ($100,000) on July 31, 2002, together
with interest on the unpaid principal balance at the rate of 8.0% per annum,
compounded annually. The principal hereof and the interest thereon are payable
at 3950 Johns Creek Court, Suite 100, Suwanee, Georgia 30024, 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, judgement or decree is entered adjudicating Maker
bankrupt or insolvent;
(d) If Maker petitions or applies to any tribunal for the appointment
of a trustee or receiver of Maker, or of any substantial part of the assets
of Maker, or commences any proceedings relating to Maker under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now or
hereafter in effect; or
(e) If any such petition or application is filed, or any such
proceedings are commenced, against Maker, and Maker by any act indicates its
approval thereof, consent thereto, or acquiescence therein, or an order is
entered appointing any such trustee or receiver, or approving the petition in
any such proceedings, and such order remains unstayed and in effect for more
than 90 days.
<PAGE> 2
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 even 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 future notice to
Maker.
IN WITNESS WHEREOF, Maker has executed this Note under seal as of the date
first set forth above.
MAKER:
/s/ Bruce F. Lowthers, Jr.
---------------------------------------
<PAGE> 1
EXHIBIT 10.26
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of July
19, 1999, is entered into by and between Towne Services, Inc., a Georgia
corporation (the "Company"), and the shareholders of the Company named on the
signature pages hereto (collectively, the "Shareholders" and each, a
"Shareholder").
RECITALS:
WHEREAS, the Company and Imaging Institute, Inc., a Minnesota
corporation ("Imaging") have entered into an Agreement and Plan of Merger dated
as of July 16, 1999 (the "Merger Agreement"), pursuant to which, among other
things, the Company has agreed to issue to the Shareholders shares of the
Company's common stock, without par value (the "Common Stock"), pursuant to the
merger of Imaging with and into Merger Sub, a Georgia corporation and
wholly-owned subsidiary of the Company;
WHEREAS, the Shareholders will acquire as a result of the merger a
total of 81,016 Shares of Common Stock; and
WHEREAS, the Company and the Shareholders desire to provide for the
rights of the Shareholders with respect to the registration of the shares of
Common Stock to be received by the Shareholders pursuant to the Merger
Agreement (the "Shares");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Definitions. For purposes of this Agreement:
(a) "Act" shall mean the United States Securities Act of 1933, as amended,
or any similar U.S. federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time;
(b) "Commission" shall mean the United States Securities and Exchange
Commission or any other U.S. federal agency at the time administering the Act;
(c) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of effectiveness of such
registration statement by the Commission;
(d) "Registrable Securities" shall mean shares of Common Stock issued or
issuable to the Shareholders pursuant to the Merger Agreement and any Common
Stock issued as a dividend or other distribution with respect to, or in exchange
or replacement of, the foregoing but shall not include any other shares of
Common Stock acquired by Shareholders other than the foregoing;
<PAGE> 2
(e) "Holder" shall mean a Shareholder if the Shareholder continues to hold
at least 50% of his or her Registrable Securities as of the date of this
Agreement; provided, however, that any person who acquires any of the
Registrable Securities in a distribution or transfer pursuant to a registration
statement filed by the Company under the Act or pursuant to a sale under Rule
144, Regulation S or any other exemption from registration under the Act, shall
not be considered a Holder;
(f) "1934 Act" shall mean the United States Securities Exchange Act of
1934, as amended, or any similar U.S. federal statute enacted hereafter, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect from time to time; and
(g) All other capitalized terms used herein but not otherwise defined shall
have the meanings ascribed to them in the Merger Agreement.
2. Piggyback Registration. Subject to Section 8, if at any time during the
12-month period beginning on the date hereof the Company proposes to register
any of its securities under the Act, either for its own account or for the
account of other holders of Common Stock (other than on a Form S-8, Form S-4 or
similar registration statement), in connection with the public offering of such
securities solely for cash, on a registration form that would also permit the
registration of Registrable Securities, the Company shall, with respect to any
such registration, promptly give each Holder written notice of such proposal.
Upon the written request of any Holder given within 15 days after mailing of any
such notice by the Company, the Company shall use all commercially reasonable
efforts to cause to be included in such registration under the Act all the
Registrable Securities that each such Holder has requested be registered.
3. Obligations of the Company. Whenever required under this Agreement to
use all commercially reasonable efforts to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the Commission a registration statement covering
such Registrable Securities and use all commercially reasonable efforts to cause
such registration statement to be declared effective by the Commission as
expeditiously as possible and to keep such registration effective until the
earlier of (i) the date when all Registrable Securities covered by the
registration statement have been sold or (ii) 60 days from the effective date of
the registration statement; provided, that before filing a registration
statement or prospectus or any amendments or supplements thereto, the Company
will furnish to each Holder of Registrable Securities covered by such
registration statement and the underwriters, if any, copies of all such
documents proposed to be filed (excluding exhibits, unless any such person shall
specifically request exhibits), which documents will be subject to the review of
such Holders and underwriters. The Company agrees that it will not file such
registration statement or any amendment thereto or any prospectus or any
supplement thereto (including any documents incorporated by reference therein)
with the Commission if the information in such registration statement or
prospectus concerning a particular selling Holder has changed and such Holder or
the underwriters, if any, shall reasonably object; provided, that the Company
may file and amend the registration statement under this clause if it removes
the Holder and
<PAGE> 3
any incorrect or outdated information from the registration statement before
such filing or amendment.
(b) Prepare and file with the Commission such amendments and post-effective
amendments to such registration statement as may be necessary to keep such
registration statement effective during the period referred to in Section 3(a)
and to comply with the provisions of the Act with respect to the disposition of
all securities covered by such registration statement, and cause the prospectus
to be supplemented by any required prospectus supplement, and as so supplemented
to be filed with the Commission pursuant to Rule 424 under the Act.
(c) Furnish to the selling Holders such numbers of copies of such
registration statement, each amendment thereto, the prospectus included in such
registration statement (including each preliminary prospectus), each supplement
thereto and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use all commercially reasonable efforts to register and qualify the
Registrable Securities under such other securities laws of such jurisdictions as
shall be reasonably requested by any selling Holder and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
selling Holder to consummate the disposition of the Registrable Securities owned
by such Holder in such jurisdictions; provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to
transact business or to file a general consent to service of process in any such
counties, states or jurisdictions; and provided further that (anything in this
Agreement to the contrary notwithstanding with respect to the bearing of
expenses) if any jurisdiction in which the Registrable Securities shall be
qualified shall require that expenses incurred in connection with the
qualification of the Registrable Securities in that jurisdiction be borne by
selling shareholders, then such expenses shall be payable by the selling Holders
pro rata, to the extent required by such jurisdiction, including but not limited
to filing fees and expenses of counsel and other advisors and any commissions or
discounts related to the registration of Registrable Securities in such other
jurisdictions.
(e) Promptly notify each selling Holder of such Registrable Securities at
any time when a prospectus relating thereto is required to be delivered under
the Act of the happening of any event as a result of which the prospectus
included in such registration statement contains an untrue statement of a
material fact or omits any fact necessary to make the statements therein not
misleading and, at the request of any such Holder, the Company will prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
an untrue statement of a material fact or omit to state any fact necessary to
make the statements therein not misleading.
(f) Provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement.
<PAGE> 4
(g) Promptly notify the Holders of Registrable Securities of the following
events: (i) the filing of the prospectus or any prospectus supplement and the
registration statement and any amendment or post-effective amendment thereto
and, with respect to the registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such documents, (ii) any
requests by the Commission for amendments or supplements to the registration
statement or the prospectus or for additional information, (iii) the issuance or
threat of issuance by the Commission of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose and (iv) the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities for
sale in any jurisdiction or the initiation or threat of initiation of any
proceeding for such purpose.
(h) Make every commercially reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and obtain at
the earliest possible moment the withdrawal of any such order, if entered.
(i) Cooperate with the selling Holders of Registrable Securities and the
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not bearing any
restrictive legends, and enable such Registrable Securities to be in such lots
and registered in such names as the underwriters may request at least two
business days prior to any delivery of Registrable Securities to the
underwriters.
(j) Provide a CUSIP number for all Registrable Securities not later than
the effective date of the registration statement.
(k) Otherwise use all commercially reasonable efforts to comply with all
applicable rules and regulations of the Commission.
4. Termination of Registration. Notwithstanding any other provision in this
Agreement, at any time before or after the filing of a registration statement,
the Company may, in its sole discretion, abandon or terminate such registration
without the consent of or any liability to the Holders.
5. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the Holders shall furnish to the Company such information regarding them, the
Registrable Securities held by them, and the intended method of disposition of
such Registrable Securities as the Company shall reasonably request and as shall
be required or, in the opinion of the Company, reasonably necessary, in
connection with the action to be taken by the Company.
6. Suspension of Disposition of Registrable Securities. Each selling Holder
of Registrable Securities agrees by acquisition of such Registrable Securities
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 3(e) hereof, such Holder will forthwith
discontinue disposition of Registrable Securities until such Holder's receipt of
copies of a supplemented or amended prospectus contemplated by Section 3(e)
hereof, or until it is advised in writing (the "Advice") by the Company that the
use of the prospectus may be resumed, and has received copies of any additional
or supplemental
<PAGE> 5
filings which are incorporated by reference in the prospectus, and, if so
directed by the Company, such Holder will deliver to the Company (at the expense
of the Company) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the time periods mentioned in Section 3(a) hereof shall be
extended by the number of days during the period from and including the date of
the giving of such notice pursuant to Section 3(e) hereof to and including the
date when each selling Holder of Registrable Securities shall have received the
copies of the supplemented or amended prospectus contemplated by Section 3(e)
hereof or the Advice.
7. Expenses of Registration. All expenses incurred in connection with a
registration pursuant to this Agreement (excluding underwriters' discounts and
commissions and costs and expenses and costs and expenses described in Section
3(d)), including all registration and qualification fees, printing and
accounting fees, and fees and disbursements of counsel for the Company, shall be
borne by the Company.
8. Underwriting Requirements; Priorities.
(a) The Company shall select the investment banker(s) and manager(s) to
administer the offering, if any. If the managing underwriters advise the Company
in writing that in their opinion the number of securities requested to be
included in such registration pursuant to this Agreement exceeds the number
which can be sold at the desired price in such offering, the Company will
include in such registration (i) first, all of the securities the Company
proposes to sell, (ii) second, the number of Registrable Securities requested to
be included, which in the opinion of such underwriters can be sold, pro rata
among the respective Holders of Registrable Securities requesting such
registration on the basis of the number of shares of Registrable Securities
owned by each such Holder and (iii) third, all other securities requested to be
included in such registration.
(b) No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's securities on the basis
provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the term of such underwriting arrangements.
9. Termination of the Company's Obligations.
(a) The Company shall not be obligated to register or include in any
registration Registrable Securities that any Holder has requested to be
registered if the Company shall furnish such Holder with a written opinion of
counsel reasonably satisfactory to such Holder, that all Registrable Securities
that such Holder holds may be publicly offered, sold and distributed without
registration under the Act pursuant to Rule 144, Regulation S or other exemption
from registration promulgated by the Commission under the Act (whether or not
subject to applicable volume limitations thereunder).
<PAGE> 6
(b) The Company shall not be obligated to register or include in any
registration Registrable Securities of any Holder who has had an opportunity to
sell Registrable Securities pursuant to Section 2 of this Agreement within the
preceding 120 days;
(c) With a view to making available to the Holders the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the Commission
that may at any time permit a Holder to sell securities of the Company to the
public without registration, the Company agrees to use all commercially
reasonable efforts to:
(i) file with the Commission in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act at any time
after it is subject to such registration requirements; and
(ii) furnish to any Holder so long as such Holder owns any of the
Registrable Securities forthwith upon request a written statement by the Company
that it has complied with the reporting requirements the 1934 Act (at any time
for which it remains subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed by the Company as may be reasonably requested by any Holder
in availing any Holder of any rule or regulation of the Commission permitting
the selling of any such securities without registration.
(d) The rights of the Holders and the obligations of the Company under this
Agreement shall expire on the first anniversary of the Closing Date.
10. Lockup Agreement. Each Holder agrees that upon the request of the
underwriters managing any underwritten offering of the Company' securities, not
to sell, make any short sale of, pledge, grant any option for the purchase of or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for a period of up to 180 days following the
offering.
11. Indemnification. In the event any Registrable Securities are included
in a registration statement under this Agreement:
(a) To the full extent permitted by law, the Company will indemnify and
hold harmless each Holder requesting or joining in a registration, each
director, officer, partner, employee, or agent for such Holder, any underwriter
(as defined in the Act) for such Holder, and each person, if any, who controls
such Holder or underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities, joint or several, to which they may become
subject under the Act and applicable state securities laws insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based on any untrue or alleged untrue statement of any material fact
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein or any amendments or supplements thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the statements
therein not misleading or arise out of any violation by the Company of any rule
or regulation promulgated under the Act applicable to the
<PAGE> 7
Company and relating to action or inaction required of the Company in connection
with any such registration; and will reimburse each such person or entity for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 11(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld) nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in connection with
such registration statement, preliminary prospectus, final prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by or on behalf of any such Holder, underwriter or controlling
person.
(b) To the full extent permitted by law, each Holder requesting or joining
in a registration under this Agreement will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
registration statement, each person, if any, who controls the Company within the
meaning of the Act, and any underwriter for the Company (within the meaning of
the Act), each other selling Holder and each person, if any, who controls such
other selling Holder within the meaning of Section 15 of the Act against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer, controlling person or underwriter may become
subject, under the Act and applicable state securities laws, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances, in each case to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in such registration
statement, preliminary or final prospectus, or amendments or supplements
thereto, in reliance upon and in conformity with written information furnished
by such Holder expressly for use in connection with such registration; and each
such Holder will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer, controlling person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 11(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder (which consent shall not be unreasonably withheld).
(c) In no event shall the liability of the Company or any selling Holder of
Registrable Securities hereunder be greater than the dollar amount of the
proceeds received by such Holder, or, in the case of the Company, the proceeds
received by all Holders, upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
<PAGE> 8
(d) Promptly after receipt by an indemnified party under this Section 11 of
notice of the commencement of any action or knowledge of a claim that would, if
asserted, give rise to a claim for indemnity hereunder, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying party
under this Section 11, notify the indemnifying party in writing of the
commencement thereof or knowledge thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties. The
failure to notify an indemnifying party promptly of the commencement of any such
action or of the knowledge of any such claim, if prejudicial to his ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 11, but the omission so to notify the
indemnifying party will not relieve him of any liability that he may have to any
indemnified party otherwise than under this Section 11.
12. Put Right.
(a) Holders of Registrable Shares other than Lori R. Frank and Jerry L.
Bucher shall have the right, for the seven (7) days immediately following the
first anniversary of the Closing Date (the "ANNIVERSARY DATE"), to put their
Registrable Shares to the Company if the average closing price per share of the
Parent Common Stock as reported on the Nasdaq National Market ("NASDAQ") for the
ten (10) consecutive trading days ending on the Anniversary Date (the
"ANNIVERSARY VALUE") is less than $9.50 per share of the Parent Common Stock. In
such a case, each Holder shall have the right to cause the Company to repurchase
the total number of Registrable Securities held by such Holder at a price of
$9.50 per share.
(b) Each Holder desiring to exercise the put right in paragraph (a) shall
deliver to the Company, in accordance with Section 15, an Exercise Notice in the
form attached hereto as Exhibit A within seven (7) days following the
Anniversary Date. Such Exercise Notice shall state the number of Registrable
Securities to be repurchased by the Company from the Holder (the "REPURCHASE
SHARES"). Upon receipt of such notice, the Company will notify the transfer
agent for the Parent Common Stock that the number of Repurchase Shares shall be
removed from the aggregate holdings of such Holder in the stock records of the
Company and transferred to the treasury of the Company. The Company shall also
pay the Holder, by wire transfer or check mailed to the most current address
given by such Holder in accordance with the provisions of Section 15, an amount
equal to (i) $9.50 multiplied by (ii) the number of Repurchase Shares.
(c) In no event shall the rights provided to Holders pursuant to this
Section 12 be exercisable if the exercise of such rights would adversely affect
any transaction being contemplated by the Company that is intended to be
accounted for as a pooling of interests at the time such rights become
exercisable; provided, however, that any exercise rights so affected by a
pooling transaction shall become exercisable in accordance with this Section 12
upon the cessation of the restrictions imposed by such pooling transaction.
<PAGE> 9
13. Remedies. In addition to being entitled to exercise all rights provided
in this Agreement and the Merger Agreement as well as all rights granted by law,
including recovery of damages, the Company and each Holder of Registrable
Securities will be entitled to specific performance of its rights under this
Agreement.
14. Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained the written consent of Holders of at least a
majority of the outstanding Registrable Securities, voting together as a single
class.
15. Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by personal delivery, by internationally
recognized overnight courier (with charges prepaid) or by telecopy (with
telephone confirmation) as follows:
(a) if to a Holder of Registrable Securities, at the most current address
given by such Holder to the Company in accordance with the provisions of this
Section 15, which address initially is, with respect to the Shareholders, the
address set forth in the Merger Agreement, with a copy (which shall not
constitute notice) to the Shareholders' respective counsel as identified
therein; and
(b) if to the Company, initially at its address set forth in the Merger
Agreement and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 15, with a copy (which shall not
constitute notice) to the Company's counsel as identified in the Merger
Agreement.
(c) All such notices and communications shall be deemed to have been duly
given or made when personally delivered, the day of guaranteed delivery by such
overnight courier service or when transmitted to the specified telecopy number
and confirmed by telephone, in each case addressed to the respective parties as
set forth above.
16. Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
17. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF
GEORGIA, EXCLUDING CHOICE OF LAW PRINCIPLES.
The Company and the Shareholders irrevocably consent to the exclusive
jurisdiction and venue of the courts of any county in the State of Georgia and
the United States Federal District Court of Georgia, in any judicial proceeding
brought to enforce this Agreement. The parties agree that any forum other than
the State of Georgia is an inconvenient forum and that a
<PAGE> 10
lawsuit (or non-compulsory counterclaim) brought by one party against another
party, in a court of any jurisdiction other than the State of Georgia should be
forthwith dismissed or transferred to a court located in the State of Georgia.
19. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
20. Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the Company Stock. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
21. No Assignment; Parties Benefited. The rights provided the Holders under
this Agreement are not transferable. If any Registrable Securities are sold,
exchanged, encumbered or otherwise transferred in any manner, the rights
provided the Holder of such Registrable Securities pursuant to this Agreement
shall immediately terminate as to all such transferred shares. Neither party may
assign their rights, duties or obligations under this Agreement without the
express written consent of the other party. Any attempted assignment without
such written consent shall be null and void. Nothing in this Agreement, express
or implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities.
<PAGE> 11
The parties have executed this Registration Rights Agreement as of the date
first above written.
TOWNE SERVICES, INC.
By: /s/ Bruce F. Lowthers
----------------------------
Name: Bruce F. Lowthers
Title: Secretary and CFO
SHAREHOLDERS
/s/ Lori R. Frank
--------------------------------
Name: Lori R. Frank
/s/ Jerry L. Bucher
--------------------------------
Name: Jerry L. Bucher
/s/ Russell L. Bengston
--------------------------------
Name: Russell L. Bengston
/s/ Mark J. Mollers
--------------------------------
Name: Mark J. Mollers
/s/ Ron Randall
--------------------------------
Name: Ron Randall
/s/ Paul Frank
--------------------------------
Name: Paul Frank
/s/ Edna Frank
--------------------------------
Name: Edna Frank
/s/ Pierce A. McNally
--------------------------------
Name: Pierce A. McNally
/s/ Judson Bemis, Jr.
--------------------------------
Name: Judson Bemis, Jr.
/s/ Stephen L. Becher
--------------------------------
Name: Stephen L. Becher
/s/ Steve Schewe
--------------------------------
Name: Steve Schewe
<PAGE> 12
Dakota County Capital, LLC
By: /s/ Steven C. King
-----------------------------
Name: Steven C. King
Title: President
Kenneth E. Dawkins Trust
By: /s/ Kenneth E. Dawkins
----------------------------
Name: Kenneth E. Dawkins
Title: Trustee
Cardinal Capital, LLC
By: /s/ Terry Adams
----------------------------
Name: Terry Adams
Title: Managing Director
<PAGE> 13
EXERCISE NOTICE
Pursuant to that certain Registration Rights Agreement, dated as of July
__, 1999, by and among Towne Services, Inc. (the "Company") and the shareholders
listed on the signature pages thereto (the "Agreement"), the undersigned hereby
causes this Exercise Notice to be delivered to the Company in accordance with
Section 12 of such Agreement and certifies that the information contained herein
is true and correct to the knowledge of the undersigned.
Shareholder Name: ___________________
Aggregate Number of Registrable Securities Owned: _____________
Amount of Repurchase Shares Requested: ______________
Dollar Value for such Repurchase Shares:__________________
Duly executed this ____ day of _____, 2000.
--------------------------------
Name:
--------------------------------
Date
<PAGE> 1
Exhibit 10.27
PRIVATE LABEL INTERNET SERVICE PROVIDER AGREEMENT
This Agreement is entered into on December 14, 1999, by and between Towne
Services, Inc., a Georgia corporation, located at 3950 Johns Creek Court,
Suite 100, Suwanee, Georgia, 30024 ("Licensee"), and Lynxus, Inc., a Delaware
corporation located at 99 Krog Street, Atlanta, Georgia 30307 ("Licensor").
BACKGROUND
A. Licensor is an Internet Service Provider with facilities to provide
access to an internet server network, and with all rights to certain internet
access software that enables subscribers to access information and services on
the "world wide web."
B. Licensee wishes to engage Licensor to provide a facility for the
delivery and maintenance of internet access, to deliver and maintain such
Internet access, and to license to Licensee the right to market and sell
internet subscriptions to its customers as the internet access provider under
its exclusive "private label brand."
C. Licensor and Licensee desire to enter into an Agreement by which
Licensor will provide the above-referenced services and by which Licensee will
be authorized to distribute Licensor's internet Access Software, specifically
customized by Licensor for distribution by Licensee to its customers according
to the terms and conditions of this Agreement.
NOW THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS.
a. Access Software means the Licensor's Internet installation
software product either embodied on CD-ROM or available on-line, including all
subsequent versions thereof provided to Licensee and its End Users pursuant to
this Agreement.
b. Documentation means a digital version of the collateral
materials normally provided by Licensor to End Users for use of the Access
Software (such as instruction/users manuals, data sheets, and registration
forms).
c. Intellectual Property Rights means patent, copyright, trade
secret, and any other intellectual property rights related to Access Software
and Documentation.
d. End User means a customer who acquires or downloads a copy of
the Access Software and Documentation as part of a Product and solely for the
End User's internal purposes and not for resale or redistribution.
<PAGE> 2
e. End-User Agreement means a digital version of the license
agreement attached hereto as Exhibit "A" that governs the use of the Access
Software by End Users and which must be accepted online by an End User before
such End User is permitted to download the Access Software and Documentation.
f. Product means a CD-ROM or electronically transmitted file
containing a copy of the Access Software and Documentation, digitally signed by
Licensor.
g. License Terms means the terms in Section 2 below.
h. Territory means all areas within the United States that are
subject to the Lynxus Network.
2. SERVICE AND LICENSE TERMS
a. Licensor will provide services for the interconnection of End
Users with the Internet ("Internet Services"). Licensor agrees that the Internet
Services provided to End Users will (i) be on a "private label" basis and (ii)
be of a quality usual and customary in the industry for similarly situated
companies; any failure by Licensor to meet this standard shall constitute a
material breach of this Agreement.
b. Access Software License. Subject to the terms and conditions of
this Agreement, Licensor hereby grants to Licensee a non-exclusive,
nontransferable, license to distribute the Access Software to End Users within
the Territory, provided that Licensee
(i) Only distributes and sublicenses the Access Software as
supplied by Licensor,
(ii) Does not distribute Access Software to any End User who has
not entered into an End User Agreement.
c. Restrictions On Use. The foregoing license grant shall be
subject to the following restrictions:
Licensee will not:
(i) Reverse engineer, reverse compile, or disassemble the
Access Software, except as permitted by law;
(ii) Copy or otherwise reproduce the Access Software in whole or
in part; or
(iii) Modify the Access Software in any manner.
d. Licensing Relationship. The Access Software is licensed, not sold, by
Licensor to Licensee, and nothing in this Agreement will be interpreted or
construed
<PAGE> 3
as a sale or purchase of the Access Software. Further, any distribution or
delivery of the Access Software by Licensee to any End User will be by license,
and not by sale.
e. Rights Reserved to Licensor. Licensee acknowledges that the Access
Software and Documentation are the property of Licensor and the Licensee has no
rights in the foregoing except those expressly granted by this Agreement.
Nothing herein shall be construed as restricting Licensor's rights to sell,
lease, license, modify, publish, or otherwise distribute the Access Software or
Documentation, in whole or in part, to any other person.
3. LICENSE RIGHTS.
a. Licensee acknowledges and agrees that Lynxus, Inc. is the owner and
developer of both the internet server network and the intellectual property
that Licensor has the right and authority to license to Licensee hereunder and
that Lynxus, Inc. has the right to seek legal recourse directly against
Licensee for violation or breach of the terms of the license granted in this
Agreement.
4. ON-LINE DISTRIBUTION BY LICENSEE
a. Licensing. Prior to any online transmission or distribution of the
Product to a potential End User, and as a precondition to any transmission or
distribution of the Product, Licensee must provide an online display of the
End-User Agreement to such person in a manner (a) that notifies the potential
End User of the terms of the End-User Agreement, and (b) that requires an
affirmative act by such person to clearly indicate acceptance of, and agreement
to be bound by, the terms of the End-User Agreement.
b. Versions. Licensee agrees to distribute only the most recent versions
of the Product as supplied by the Licensor.
5. LICENSEE MARKETING OBLIGATIONS
a. Making Efforts. Licensee will use reasonable efforts to market,
promote, and distribute the Access Software and Documentation to its customers.
Licensee agrees to accurately advise potential End Users on the specifications,
selection, use, and functionality of the Access Software in accordance with the
Documentation.
b. Statements Regarding Access Software. Licensee will not make any
statement about the technical features or capabilities of the Access Software in
any advertisement or other marketing materials beyond information provided to
Licensee by Licensor. Licensee will first obtain the written approval of
Licensor prior to publishing such an advertisement or material.
<PAGE> 4
c. Cost of Distribution. All costs relating to the promotion,
marketing, and distribution of the Product shall be borne by Licensee.
d. Prices. Subject to minimum subscription charges established by
Licensor, as set out in Section 11, below, Licensee shall have sole discretion
to set the license fee charged to End Users for the Product.
6. LICENSEE'S DELIVERY OBLIGATIONS
By no later than 30 days after the execution of this Agreement,
Licensee shall deliver to Licensor the following:
(i) A domain name which Licensee has established through
INTERNIC;
(ii) Such proprietary marks of Licensee to be integrated into
Access Software to provide brand identification with the Licensee, including
Trademarks, logos and derivations, names, slogans, commercial symbols, and other
Intellectual Property, including copyrights, and all artwork to be placed on the
shipping labels and diskette containing the Product, which Vendor may employ in
connection with the custom designed Access Software;
(iii) The Licensee's IP addressing and applicable RADIUS
information identified by Licensee for inclusion in the Product.
7. LICENSOR'S DELIVERY OBLIGATIONS.
a. Initial Deliverables. Licensor will deliver the current
version of the Access Software as customized and Documentation to Licensee
within 10 days after receipt of materials specified in Section 6. Upon such
delivery, Licensee shall have the right to deliver the Access Software to End
Users, and Licensor shall have the obligation to provide the Internet Services
to End Users as provided hereunder.
b. Each Product installation package will afford End Users the
choice of unfiltered Internet access with total accessibility to the World Wide
Web or filtered Internet access that provides an internet "filter" to block
users access to a comprehensive array of violent, pornographic, and other
unsuitable websites to the fullest extent practicable.
c. New Versions. Licensor shall provide Licensee with copies of
all new releases, updates, or revisions of the Access Software and Documentation
within a reasonable time after each such release is made generally available by
Licensor. Licensor will notify Licensee of its plans for each new release,
update, or revision of the Access Software or Documentation within a reasonable
time prior to such release.
<PAGE> 5
8. LICENSOR'S SUPPORT OBLIGATIONS
a. Support for End Users. Licensor will provide support to End
Users of the Access Software to be distributed hereunder, according to its then
current published Access Software support policy.
b. Support for Licensees. Licensor will give Licensee, without
charge, technical information, current maintenance documentation, and telephone
assistance to enable Licensee to effectively distribute the Access Software.
Licensee is not entitled to source code for the Access Software. In addition,
Licensor will:
(i) Maintain the entire network and provide technical upgrades
in a timely manner.
(ii) At additional cost, Licensor will provide technical support
to End Users on a separate toll free number dedicated to Licensee.
(a) Licensor will integrate the Licensee toll free number
into Licensor's switch to facilitate personalized call handling at no charge to
Licensee.
(b) No monthly minimum usage charges will be assessed.
(c) All calls will be tracked and billed to Licensee 12
cents/minute. THIS COST IS WAIVED.
(d) Licensor will provide detailed monthly billing reports
and analysis of calls.
9. LICENSOR WARRANTIES
a. Authority. Licensor represents that it has the right and
authority to enter into this Agreement and to grant to Licensee the rights to
the Access Software and Documentation granted in this Agreement.
b. Non-infringement. Licensor warrants to Licensee that the
installation, transmission, and distribution of the Access Software and
Documentation by Licensee according to this Agreement and that promotion and
marketing thereof will not infringe or misappropriate the proprietary rights of
any third party.
c. End-User Warranties. Warranties for the End Users of the Access
Software, if any, will be specified in the End-User Agreement. Licensee is not
authorized to make any other warranties on Licensor's behalf.
d. DISCLAIMER. EXCEPT AS OTHERWISE SET FORTH HEREIN, THE FOREGOING
ARE THE ONLY WARRANTIES MADE BY LICENSOR. LICENSOR SPECIFICALLY DISCLAIMS ALL
OTHER WARRANTIES, EXPRESS OR
<PAGE> 6
IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
10. LICENSEE WARRANTIES
a. AUTHORITY. Licensee represents that it has the right and
authority to enter into this Agreement.
b. NON-INFRINGEMENT. Licensee warrants to Licensor that it owns or
has the right to use print, publish, display and perform all such proprietary
marks of Licensee to be integrated into Access Software to provide brand
identification with the Licensee, including trademarks, logos and derivations,
names, slogans, commercial symbols, and other Intellectual Property, including
copyrights, and all artwork to be placed on the shipping labels and diskette
containing the Product, which Licensor may employ in connection with the custom
designed Access Software and that the publication, use, promotion, and
marketing thereof will not infringe or misappropriate the proprietary rights of
any third party.
11. FEES AND PAYMENTS
a. SET-UP, LICENSING AND INSTALLATION COSTS
(i) Initial Buildout. License Fee for OEM sublicense:
$3,500.00.
(ii) Lynxus will create the master disc at an initial quantity
of 20 discs to be installed by Towne Services on a pre-loaded basis.
The total sum of $3,500 is due and payable upon execution of
this agreement.
(iii) Installation disks required for end-user installation will
be replicated from the master disc at a cost of $0.80 per disc with a minimum
of 5,000 per order.
b. END USER SUBSCRIPTION COSTS
(i) Setup and installation fee per each new pre-loaded
subscriber by Towne Services: $0.00
(ii) Total Monthly Recurring Cost (MRC)
<PAGE> 7
(a) Monthly Recurring Costs (MRCs) as indicated below will apply for
all new Licensee Accounts.
1) Per user per month per subscribing End User for monthly paid
accounts.
1 - 1,000 subscribers $13.00
1,001 - 2,500 subscribers $12.50
2,501 - 5,000 subscribers $12.00
5,001 + subscribers $11.50
(b) Remote Access to the network is provided to subscribers when
outside of the Lynxus network local dial area via 8XX (800/888/877) numbers at a
cost of $0.07 per minute. Detailed billing is provided which includes date, time
of day, and call duration.
(c) Licensor will submit invoice(s) to Licensee for MRCs due on a
monthly basis, including information detail sufficient for Licensee to allocate
MRC fees according to End User, provided in an electronic format mutually
agreeable to Licensor and Licensee. Licensee agrees to remit payment for monthly
invoices within 30 days of receipt of invoice.
c. End User Technical Support
(i) End User technical support: billed at 0.00 cents per minute for all
support calls.
d.
f. Books and Records. Licensee agrees to maintain adequate books and
records relating to End-Users' account status utilizing the itemized statement
of End-User subscribers referred to in the preceding Paragraph. Such books and
records shall be available at their place of keeping for Licensor or its
representative for the purpose of determining whether the correct Commissions
have been paid to Licensee according to the terms of this Agreement and whether
Licensee has otherwise complied with the terms of this Agreement.
12. CONFIDENTIALITY
Each party acknowledges that it may be exposed to certain information that
is the confidential and proprietary information of the other party ("Owner") and
that is not generally known to the public ("Confidential Information").
Recipient agrees that it will take appropriate steps to protect such
Confidential Information form unauthorized disclosure, that it will not disclose
such information to any third party, and that it will not use any Confidential
Information (other than as authorized by this Agreement) without prior written
consent of Owner. Recipient's obligations with respect to Confidential
Information shall continue for the shorter of three (3) years from the date of
termination
<PAGE> 8
of this Agreement or until such information becomes publicly known other than
by breach of this Agreement by Recipient.
13. Licensee Trademarks
a. Use. Licensor shall include copies of the Licensee's trademarks
and other proprietary rights legends ("Licensee Trademarks") on its internet
Website, in the manner specified by Licensee form time to time in writing.
Licensor acknowledges that the Licensee Trademarks are owned solely and
exclusively by Licensee and agrees to use the Licensee Trademarks only in the
form and manner (with appropriate legends) prescribed by Licensee. Licensor
agrees to mark all advertising and other uses of the Licensee Trademarks with a
legend indicating that the Licensee Trademarks are the property of the Licensee.
b. Licensor Review. From time to time as Licensor shall reasonably
request, Licensee shall furnish to Licensor for its examination a copy of all
advertising, brochures, and other materials, in electronic or written form, used
to market or distribute the Product.
14. INDEMNIFICATION
a. By Licensor. Licensor will defend, indemnify, and hold Licensee
harmless from and against any and all liabilities, losses, damages, costs, and
expenses (including legal fees and expenses) associated with any claim or action
brought against Licensee for actual or alleged infringement of any U.S. patent,
copyright, trademark, service mark, trade secret, or other property right based
on the distribution, license, or use of the Access Software or Documentation
according to this Agreement, provided that Licensee promptly notifies Licensor
in writing of the claim and allows Licensor to control, and fully cooperates
with Licensor in, the defense and all related settlement negotiations. Licensor
shall have no liability for any settlement or compromise made without its
consent. Upon notice of an alleged infringement, or upon Licensor's conclusion
that such a claim is likely, Licensor shall have the right, at its option, to
obtain the right for Licensee to continue to exercise the rights granted under
this Agreement, substitute other computer Access Software with similar operating
capabilities, or modify the Access Software so that it is no longer infringing.
b. By Licensee. Licensee shall indemnify and hold Licensor harmless
from and against any and all liabilities, losses, damages, costs, and expenses
(including legal fees and expenses) associated with any claim or action brought
against Licensor that may arise from Licensee's improper or unauthorized
marketing, or distribution, including claims based on representations,
warranties, or misrepresentations made by Licensee; provided that Licensor
promptly notifies Licensee in writing of the claim and allows Licensee to
control, and fully cooperates with Licensee in, the defense and all related
settlement negotiations. Licensee shall have no liability for any settlement or
compromise without its consent.
15. LIMITATION OF LIABILITY
<PAGE> 9
EACH PARTY'S LIABILITY HEREUNDER SHALL BE LIMITED TO DIRECT DAMAGES. IN NO
EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR INCIDENTAL, INDIRECT,
SPECIAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) SUFFERED BY THE
OTHER PARTY, EVEN IF SUCH PARTY HAS PREVIOUSLY BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES.
16. TERM AND TERMINATION.
a. Term. This Agreement will continue in effect for three (3)
years from the date hereof ("Initial Term"). Upon expiration of the Initial Term
and each Renewal Term thereafter, this Agreement will be automatically renewed
for an additional one (1) year term ("Renewal Term") unless terminated by either
party upon thirty (30) days notice prior to the expiration of the Initial Term
or any Renewal Term.
b. Termination. Licensee may terminate this Agreement at any time
prior to the end of Term upon thirty (30) days written notice.
c. Effect on End Users. Termination by either party will not
affect the rights of any End User under the terms of the End-User Agreement.
17. GENERAL PROVISIONS
a. Assignment. This Agreement may not be assigned by either party
by operation of law to any other person, firm or corporation without the
express written approval of Licensor.
b. Notices. All notices and demands hereunder shall be in writing
and shall be served by personal service or by mail at the address of the
receiving party set forth in this Agreement (or at such different address as may
be designated by such party by written notice to the other party). All notices
or demands by mail shall be by certified or registered mail, return receipt
requested, or by nationally recognized private express courier and shall be
deemed complete upon receipt.
c. Governing Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of Georgia.
d. Relationship of the Parties. Each party is acting as an
independent contractor and not as an agent, partner, or joint venturer with the
other party for any purpose. Except as provided in this Agreement, neither party
shall have any right, power, or authority to act or to create any obligation,
express, or implied, on behalf of the other.
e. Force Majeure. Neither party shall be responsible for delays or
failure of performance resulting from acts beyond the reasonable control of such
party. Such acts shall include, but not be limited to, acts of God, strikes,
walkouts, riots, acts of
<PAGE> 10
war, epidemics, failure of suppliers to perform, governmental regulations,
power failures, earthquakes, or other disasters.
f. Survival Of Certain Provisions. The indemnification and confidentiality
obligations specified in the Agreement shall survive the termination of the
Agreement by either party for any reason.
g. Headings. The titles and headings of the various sections and paragraphs
in this Agreement are intended solely for reference and are not intended for any
other purpose whatsoever or to explain modify, or place any construction on any
of the provisions of this Agreement.
h. All Amendments In Writing. No provisions in either party's purchase
orders, or in any other business form employed by either party, will supercede
the terms and conditions of this Agreement, and no supplement, modification, or
amendment of this Agreement shall be binding, unless executed in writing by a
duly authorized representative of each party to this Agreement.
i. Entire Agreement. The parties have read this Agreement and agree to be
bound by its terms, and further agree that it constitutes the complete and
entire agreement of the parties and supercedes all previous communications, oral
and written, between them relating to the license and to the subject matter
hereof. No representations or statements of any kind made by either party that
are not expressly stated herein shall be binding on such party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
specified above.
LICENSOR: LICENSEE:
Lynxus, Inc. Towne Services, Inc.
By: /s/ J. Ebij By: /s/ Bruce F. Lowthers
---------------------- ---------------------
Title: CEO Lynxus, Inc. Title: Bruce F. Lowthers, CFO
------------------- ----------------------
<PAGE> 11
INTERNET SERVICE AGREEMENT
1. PROVISION OF SERVICES. I understand and agree that, subject to the terms
and conditions of this Agreement, [PROVIDER] shall provide me with certain
Internet access and web site hosting services. I understand and agree that I
am fully responsible for the use of such services by me or anyone whom I
permit to use my account, and that [PROVIDER] reserves the right to
terminate my account at any time, for any reason.
2. MY OBLIGATIONS. I understand that I am responsible for determining whether
a [PROVIDER] telephone number is within my local calling area, and that I am
responsible for any long distance charges I may incur in connecting to
[PROVIDER]. If I am using one of [PROVIDER's] unlimited plans, I agree not
to provide any public information service over this connection, not to use
any automatic method to avoid inactivity disconnect, and to keep the
connection active only when I am actively using it. I understand that I may
cancel my account at any time effective the end of that billing cycle. If I
am not satisfied and wish to cancel my account within thirty days of the day
[PROVIDER] activates my account, I may do so and receive a full refund of
all money paid. I understand that [PROVIDER] may change its prices from time
to time, and that I will be provided with 15 days written or electronic mail
notice of any such changes.
4. APPROPRIATE USE OF SERVICES. I agree to maintain my password as private and
confidential information. I agree to use my [PROVIDER] account in a way that
conforms with all applicable laws and regulations. I specifically agree not
to make any attempt to gain unauthorized access to any systems or networks.
I agree that I will not use the [PROVIDER] services (including any web site
I establish on [PROVIDER's] server) or the [PROVIDER] web site to publish,
post, distribute, or disseminate another's proprietary information,
including trademarks or copyrighted information, without express
authorization of the rights holder. I understand and agree that [PROVIDER]
reserves the right to immediately remove (with or without terminating my
account) from my account or any web sites I establish on [PROVIDER's]]
server any material or information which infringes another's property
rights.
5. Security. I understand that the information available through [Provider] or
interconnecting networks may not be accurate, including the content
displayed on the [PROVIDER] Desktop. I understand that internetworking
communications are not secure, and may be subject to interception or loss.
[PROVIDER] makes no warranties of any kind, whether expresses, implied or
statutory concerning the data or information available through the
[PROVIDER] network.
6. WARRANTY DISCLAIMER. I understand the use of my [PROVIDER] account, and any
data of information accessed using that account, will be completely at my
own risk. I understand that the cumulative liability of [PROVIDER] for any
and all claims relating to the service provided by [PROVIDER], in contract,
tort, or otherwise, shall not
<PAGE> 12
exceed that total amount of the basic service fees paid to [PROVIDER] for
services within the prior year. I agree that [PROVIDER] shall have no liability
for any consequential, indirect special or incidental damages regardless of the
success or effectiveness of other remedies.
7. INDEMNIFICATION. I agree to defend, indemnify and hold [PROVIDER] harmless
and its affiliates harmless from any and all liabilities, costs, and expenses,
including reasonable attorney's fees, related to or arising from, any violation
of this agreement by me or those who access the services through my account, or
the use of the services or the internet and the placement or transmission of
any message, information, software, audio files or other materials on the
Internet by me or by those who have access to the services through my account.
8. TERMINATION. I understand that [PROVIDER] reserves the right to terminate my
account at any time for any reason, including, but not limited to, my failure
to abide by the terms of this agreement or my failure to pay any fees or
charges when due. If my account is inactivated, I may be required to pay
reconnect charges and a prepaid deposit in order to re-active my account. If
my account includes space on [PROVIDER's] server, anything stored in this space
will be deleted upon inactivation. I understand that violation of certain
generally accepted guidelines on Internet usage, such as restrictions on mass
e-mailings and mass advertising, or posting to inappropriate newsgroups, may
cause severe operating difficulties for [PROVIDER], and would be a likely
cause for termination of my account. More detail of violations can be found in
the [PROVIDER] Policy on Appropriate Use as may be available via a link on the
[PROVIDER] home page at http://www.[PROVIDER].net/ and by any other policies
posted on the [PROVIDER] web site.
9. LAW AND JURISDICTION. I understand and agree the laws of the State of
Georgia govern these Terms of Service and my [PROVIDER] account. I expressly
agree that exclusive jurisdiction for any claim or dispute with [PROVIDER] or
relating in any way to my account or my use of [PROVIDER] resides in the courts
of Georgia. I further agree and expressly consent to the exercise of personal
jurisdiction in the courts of Georgia in connection with any such dispute,
including any claim involving [PROVIDER] or its affiliates, subsidiaries,
employees, contractors, officers, or directors.
10. COMPLETE AGREEMENT: AMENDMENTS. This agreement represents the complete
agreement between [PROVIDER] and myself with respect to the subject matter of
this Agreement, and supersedes any other written or oral agreement. I
understand and agree that [PROVIDER] may amend or modify this agreement or
impose new conditions at any time. Any use of [PROVIDER's] services shall be
deemed to constitute acceptance by me of the then-current service agreement
(including any amendments, modification, or new conditions) as published and
made available via a link on the [PROVIDER] home page at
http://www.[PROVIDER].net/.
<PAGE> 1
Exhibit 10.28
CONTRACT FOR PAYROLL SERVICES
This Contract for Payroll Services is dated December 15, 1999, by and between
Pay Systems of America, Incorporated ("Provider") with offices located at 1321
Murfreesboro Road, Suite 100, Nashville, Tennessee 37217 and Towne Services,
Incorporated ("Towne") with offices located at 3950 Johns Creek Court, Suite
100, Suwanee, GA 30024.
MARKETING
Towne will be responsible for marketing the Provider payroll program to
existing and potential new customers. Once a customer of Towne decides to use
Provider's payroll program, Towne will be responsible for collecting the
pertinent information required by Provider before starting on our service. Once
received, Provider will set-up the new company on Provider's system; balance
the all-important earnings, deductions, and taxes; and contact the client to
schedule the first payroll production run. Provider requires 2 days to review
and set-up each company on our system.
TRAINING
Towne will make available all sales representatives who will be responsible for
marketing payroll services for 2 consecutive days of training and instruction
in marketing Providers payroll service. Such training shall be given at a site
determined by Provider between 9:00 a.m., and 5:00 p.m., Central Standard Time,
on mutually agreeable dates following the signature of this document by both
parties. Towne shall bear its own costs and expenses incurred in attending such
training, including without limitation any travel, housing or food expenses. As
an alternative, Towne may have its training coordinator(s) attend the training
session. The Towne training coordinators will then be responsible for training
the Towne sales representatives.
Towne may obtain additional training on mutually agreeable dates at a location
determined by Provider. Towne shall bear its own costs and expenses incurred in
attending any such training, including without limitation any travel, housing
or food expenses.
SERVICES TO BE PROVIDED
Provider agrees to provide payroll processing and other payroll related
services, including customer service and support to Towne customers and/or
Towne customer service representatives, as required by the customer and
provided for in this Agreement. Any services required but not provided for in
this Agreement should be agreed to in writing by both parties in an instrument
similar to this document and attached hereto as addendum.
Besides electronic submission of customer billing information, Provider will
submit to Towne electronic copies of all Customer Reports (or an electronic
file of the data used to generate the reports) normally included in Provider's
payroll services to customers, in a format mutually agreeable to both Towne and
Provider.
PAYROLL PROCESSING FEES
Towne agrees to pay Provider such charges identified below under the title
Pricing as and when such services are performed or provided to each Towne's
Individual Customer. All such charges shall be due upon receipt of the invoice
thereof. The invoice(s) will be delivered monthly to Towne in an electronic
data file and paper invoice. Any fees or charges required
<PAGE> 2
to be made under this Agreement and not received by Provider within 30 days of
the date when due shall be subject to interest charges at the lesser of one and
one-half percent (1.5%) per month or the maximum interest rate permitted by
applicable law.
<TABLE>
<CAPTION>
Pricing
<S> <C>
Base Fee (per merchant) $4.00
Fee Per Pay (1 thru 25) $1.10
Fee Per Pay (26 thru 50) $0.95
P$ATax Service $4.50
Check Signature Creation No Charge
Check Insertion (Base) $2.00
Check Insertion Per Check $0.07
Direct Deposit (ACH) - Base $3.00
Direct Deposit (Per ACH Credit) $0.08
InstaPay No Charge to Customer
Delivery (Next Day) $6.50
New Hire Reporting $1.50
P$A PayTimer $38.00 per month
Year-End Processing (Base) $10.00
W-2s (Per W-2) $1.50
</TABLE>
TERMS AND TERMINATION:
The term of this Agreement shall begin on the date of this Agreement hereof and
continue for a period of three (3) years, unless terminated earlier by either
party as provided in this Agreement.
This Agreement may be terminated by Provider if: (a) Towne fails to pay Provider
any amount due hereunder within ten days of Provider's written notice to Towne
of such failure; or (b) Towne makes an assignment of its assets for the benefit
of its creditors; (c) Towne becomes insolvent; (d) Towne institutes proceedings
for its full or partial liquidation or dissolution; (e) a trustee or receiver is
appointed for Towne or any substantial part of its assets; (f) a voluntary or
involuntary petition under the United States Bankruptcy Code or other similar
law, whether state or federal, for the relief of debtors is filed and not
discharged within 30 days.
This Agreement may be terminated by Towne if Provider fails to provide those
services specified in this Agreement.
<PAGE> 3
Upon termination of this Agreement, all charges will be billed directly to
Towne's Individual Customers at the then current standard processing fees.
TERM OF THE INDIVIDUAL CUSTOMER AGREEMENT:
The Agreement between Provider and Towne's Individual Customers will be in full
force and in effect until written notification from the Individual Customer.
PAY SYSTEMS OF AMERICA TOWNE SERVICES, INC.
MICHAEL DOBBS BRUCE F. LOWTHERS
- ------------------------------------ --------------------------------------
/s/ Michael Dobbs /s/ Bruce F. Lowthers
- ------------------------------------ --------------------------------------
Signature Signature
- ------------------------------------ --------------------------------------
President
- ------------------------------------ --------------------------------------
Title Title
CFO
- ------------------------------------ --------------------------------------
- ------------------------------------ --------------------------------------
Date Date
December 15, 1999
- ------------------------------------ --------------------------------------
<PAGE> 1
Exhibit 10.29
REFERRAL AGREEMENT
This REFERRAL AGREEMENT ("Agreement") is made on this 13th day of December,
1999 ("Effective Date") by and between NOVA Information Systems, Inc. ("NOVA"),
and Towne Services, Inc. ("Company").
RECITALS
NOVA is engaged in the business of providing credit and debit card transaction
processing services to merchants ("Program"). Company desires to refer its'
customers to NOVA for such services. Therefore, the parties agree as follows:
TERMS AND CONDITIONS
1. COMPANY RESPONSIBILITIES. Company will:
A. MARKETING. Use its best efforts to market NOVA's Program to its
customers and make information provided by NOVA concerning the
Program readily available to its customers. Company will maintain
promotional material, provided by NOVA, to be distributed to its
customers.
B. REFERRAL. Refer customers inquiring of Company about credit and/or
debit card processing services to NOVA. Company will forward the
name, address and telephone number of each such customer to NOVA.
Company acknowledges and agrees that NOVA may, within its sole
discretion, refer customers engaged in certain types of businesses to
an alternative provider of processing services.
2. NOVA RESPONSIBILITIES. During the term of this Agreement, NOVA will:
A. FOLLOW LEADS. NOVA will follow all leads with a phone call to the
prospective merchant within 72 hours of receipt of the referral.
B. APPLICATION. Assist prospective merchants in completing required
merchant application materials.
C. REVIEW. NOVA, in its' sole discretion, may accept or reject a
prospective merchant based on criteria NOVA deems prudent as part of
the Program, and approval and review of merchants will be solely
controlled by NOVA. Company understands and agrees that prospective
merchants will be permitted to participate in the Program only after:
(A) NOVA's approval of the merchant application, and (B) merchant's
execution of a Merchant Processing Agreement by and among the
merchant, NOVA, and a financial institution selected by NOVA to
provide settling and clearing of transactions.
D. FEES. Pay Company .24% of net monthly processed Visa/MasterCard sales
volume + $.05/item for core services merchants referred to NOVA and
.54% of net monthly processed Visa/MasterCard Sales volume plus
$.05/item for non-core services merchants that Company refers to NOVA
and NOVA approves as a Program merchant ("Referral Fee"). Such
Referral Fees will be paid monthly. Referral Fee amount is
predicated upon pricing described in Schedule A.
<PAGE> 2
3. TERM AND TERMINATION.
A. Term. This Agreement will become effective on the Effective Date, will
remain in effect for three (3) years ("Initial Term") and will
automatically renew for successive one (1) year periods ("Renewal
Term") until terminated pursuant to this Section.
B. Automatic Termination. This Agreement will terminate automatically and
immediately if any of the credit card associations (i.e., Visa U.S.A.
Inc. or MasterCard International Incorporated) prohibits NOVA from
providing credit and debit card processing services.
C. Termination Without Cause. Either party may terminate this Agreement
effective at the end of the Initial or any Renewal Term upon written
notice given at least ninety (90) days before the end of the term.
D. Termination With Cause. Either party may terminate this Agreement by
written notice upon the occurrence of an Event of Default.
E. Event of Default. Each of the following occurrences will constitute an
Event of Default under this Agreement:
i) Financial Instability. Either party: (i) files for bankruptcy,
receivership, insolvency, reorganization, dissolution,
liquidation or any similar proceeding; (ii) has a proceeding
instituted against it and such proceeding is not dismissed within
sixty (60) days; (iii) makes an assignment for the benefit of its
creditors or an offer of settlement, extension or composition to
its creditors generally; or (iv) a trustee, conservator, receiver
or similar fiduciary is appointed for that party or substantially
all of such party's assets.
ii) False Representation. Any representation or warranty made by
Company or any of its employees, officers, or directors proves to
have been false or misleading in any material respect as of the
date made, or becomes false or misleading at any time.
iii) Breach. Either party fails to observe any material obligation
specified in this Agreement, and such failure is not cured within
thirty (30) days of receipt of written notice thereof from the
non-breaching party. Notwithstanding the previous sentence, the
fourth such breach automatically will be deemed an Event of
Default without the opportunity to cure.
iv) Company Action. Company: (i) operates in an unsound, unsafe
manner; or (iii) engages in activities which may impose financial
risk to NOVA, or which result in undue economic hardship and/or
damage to the goodwill of NOVA.
v) Company Business. The occurrence of any material adverse change
in the nature or conduct of Company's business as it exists on
the Effective Date.
F. Certain Post-Termination Rights. No termination of this Agreement will
affect any right of NOVA under any Merchant Processing Agreement. All
Referral Fee payments will cease upon termination of this Agreement.
2
<PAGE> 3
4. CONFIDENTIALITY AND USE OF NAMES.
A. Confidentiality. Company and NOVA each agree that it will not use for
its own purposes, will not disclose to any third party, and will
retain in strictest confidence all information and data belonging to
or relating to the business of the other (including without limitation
the terms of this Agreement and information related to the Program or
merchants), and that each party will safeguard such information and
data by using the same degree of care that it uses to protect its own
confidential information. No party will be obligated to maintain the
confidentiality of information it is required to reveal in performing
its obligations under this Agreement.
B. Remedy. In the event of a breach of this Article IV, the parties
agree that the non-breaching party will suffer irreparable harm, and
that the amount of monetary damages would be impossible to calculate.
Thus, the non-breaching party will be entitled to injunctive relief in
addition to any other rights to which the non-breaching party may be
entitled, without the necessity of proof of actual damages.
C. Other Agreements. Any non-disclosure or confidentiality agreement
separately entered into between Company and NOVA will not be
superseded by this Article IV, and will remain in full force and
effect.
D. Use of Names. Company will not use NOVA's name or trademarks in any
promotional or marketing materials, nor will Company promote any of
NOVA's programs or services in any way, without NOVA's prior written
consent. Company will obtain NOVA's written consent before Company
produces or distributes any materials relating to the Program. Company
acknowledges and agrees that it has no rights to use NOVA's trademarks
and service marks without NOVA's prior written consent.
5. INDEMNIFICATION AND LIMITATION OF LIABILITY.
A. Indemnification. Company will indemnify and hold NOVA harmless from
and against any and all claims, losses (financial or otherwise),
damages, liabilities, costs, fees, increased taxes or expenses
(including without limitation, court costs and reasonable attorneys'
fees), which may be incurred or which may be claimed by any person or
as a result of acts or omissions of Company, its directors, officers,
employees or agents relating to the exercise of, or the failure to
exercise, Company's obligations under this Agreement. NOVA will
indemnify and hold Company harmless from and against any and all
claims, losses (financial or otherwise), damages, liabilities, costs,
fees, increased taxes or expenses (including without limitation, court
costs and reasonable attorneys' fees), which may be incurred or which
may be claimed by any person or as a result of acts or omissions of
NOVA, its directors, officers, employees or agents relating to the
exercise of, or the failure to exercise, NOVA's obligations under this
Agreement.
B. Limitation of Liability. The liability, if any, of NOVA under this
Agreement for any claims, costs, damages, losses and expenses for
which they are or may be legally liable, whether arising in negligence
or other tort, contract, or otherwise, will not exceed in the
aggregate the amount of referral fees paid to Company during the
preceding twelve (12) month period. In no event will NOVA or its
agents, servants, representatives or employees be liable for indirect,
special, consequential, punitive, or exemplary damages. Neither party
will be liable to the other for any failure or delay in its
performance of this Agreement in accordance with its terms if such
failure or delay arises out of causes beyond the control and without
the fault or negligence of such party
3
<PAGE> 4
6. MISCELLANEOUS.
A. General. Company may not assign this Agreement without the prior
written consent of NOVA and any unauthorized attempted assignment will
be null and void. This Agreement (other than any separate agreement
concerning confidentiality or non-disclosure) sets forth the entire
understanding of the parties relating to its subject matter,and all
other understandings, written or oral, are superseded. Except as
otherwise provided in this Agreement, this Agreement may not be
amended except in a writing executed by all parties. If any provision
of this Agreement is illegal,the invalidity of that provision will not
affect any of the remaining provisions, and this Agreement will be
construed as if the illegal provision is not contained in the
Agreement. This Agreement will be deemed modified to the extent
necessary to render enforceable the terms hereunder. No failure or
delay on the part of any party in exercising any right under this
Agreement will operate as a waiver of that right, nor will any single
or partial exercise of any right precede any further exercise of that
right. This Agreement is made in Georgia, and will be construed in
accordance with the laws of Georgia without regard to the principles
of conflicts of law.
B. Notices. All communications under this Agreement will be in writing
and will be delivered in person or by mail courier, return receipt
requested, addressed as follows: if to Company: Bauer F. Lowthers,
CFO. If to NOVA: NOVA Information Systems, Inc., One Concourse
Parkway, Suite 300, Atlanta,Georgia 30328, Attn: Barbara L. Kuhn, with
a copy to General Counsel at the same address. The parties may, from
time to time, designate different persons or addresses to which
subsequent communications will be sent by sending a notice of such
designations in accordance with this Section.
C. Survival. All agreements that by their context are intended to survive
the termination of this Agreement, including, but not limited to, the
confidentiality provisions of Article IV, the post-termination rights
of Article III, the liability and indemnification provisions of
Article VI, the attorney's fee provision and the dispute resolution
provisions of Article VI, will survive termination of this Agreement.
D. Dispute Resolution. Any dispute or claim arising out of, or in
connection with this Agreement will be settled by final and binding
arbitration to be held in Atlanta, Georgia in accordance with the
relevant rules of the American Arbitration Association ("AAA").
Judgment upon award rendered by the arbitrators may be entered in any
court having jurisdiction over: the award, the party against whom
enforcement is sought, or that party's assets. The procedures and law
applicable during the arbitration will be both the AAA rules and
internal substantive laws of Georgia (excluding any rules regarding
conflicts of the law). In such arbitration, the award of decision will
be rendered by at least a majority of the members of an arbitration
panel consisting of three (3) members, one (1) of whom will be
appointed by each of the parties hereto and the third appointed by the
other two (2) so-appointed arbitrators. All arbitrators will be
persons who are not employees, agents or former employees or agents of
any party. In the event that any party fails to appoint an arbitrator
within 30 days after submission of the dispute to arbitration, such
arbitrator will be appointed by the AAA.
4
<PAGE> 5
E. Attorney's Fees. Each party shall bear its own costs and expenses,
including attorney's fees, incurred in enforcing the provisions of
this Agreement.
NOVA INFORMATION SYSTEMS, INC. TOWNE SERVICES, INC.
By: /s/ Karen A. Murphy By: /s/ Bruce F. Lowther
- ----------------------------- -------------------------------
Name: Karen A. Murphy Name: Bruce F. Lowther
Title: Director - Alliance Sales Title: CFO
5
<PAGE> 1
Exhibit 10.30
TRANS UNION LLC
BUSINESS INFORMATION GROUP
MASTER LICENSE AGREEMENT
This AGREEMENT (the "Agreement") is made and entered into as of 12-15-99,
1999 ("Effective Date"), by and between TRANS UNION LLC ("TU") with its
principal place of business at 555 West Adams, Chicago, Illinois 60661, and
TOWNE SERVICES, INC, a GEORGIA corporation ("Customer") with its principal place
of business at 3950 JOHNS CREEK CT, #100, SUWANEE, GA 30024.
WHEREAS, the Business Information Group of TU ("BIG") maintains a database
with certain business and executive records that possess certain characteristics
and qualities; and
WHEREAS, TU offers licenses for products derived from such database
("Products"); and
WHEREAS, Customer desires to order and utilize certain Products.
NOW, THEREFORE, in consideration of the foregoing and the promises and
mutual covenants hereinafter set forth, the parties hereto agree as follows:
1. RECITALS. The recitals set forth above are an integral part of this
Agreement and are hereby incorporated into this Agreement.
2. PRODUCTS. From time to time, BIG shall provide Products to Customer. Such
Products shall be those among those Products described in the listing,
attached hereto and incorporated herein, entitled "Schedule 1, Product
List," (the "Schedule") and pursuant to, and in accordance with, the terms
and conditions of this Agreement. Customer may not receive any product,
data or other information from TU under this Agreement other than described
in the Schedule.
3. ORDERS AND DELIVERY.
3.1 When Customer desires to order Products, Customer, and/or TU, at the
request of, Customer, shall prepare order specifications (the
"Specifications") identifying such Products. The Specifications shall
include all information necessary for TU and its agent or processor to
deliver the Products to Customer. The Specifications shall be deemed
accepted when signed by TU and Customer. All such Specifications shall be
governed by the terms and conditions of this Agreement and are hereby
automatically incorporated herein by reference. Customer may not change or
cancel any Specifications after TU has accepted such Specifications, unless
TU consents in writing to such change or cancellation, which consent may be
withheld in TU's sole discretion. Moreover, in the event TU consents to a
Specifications change, such change shall not, however, alter the payment
terms of such Specifications unless explicitly agreed to in writing by TU.
3.2 TU shall provide the Products to Customer or Customer's third party
processor ("Processor") using the media specified in the Specifications;
provided such Processor has been approved by Trans Union and has executed
an agreement for processing with TU. Customer shall so notify TU in writing
in conjunction with each Specification as to whether Customer intends to so
utilize Processor. Any specific dates for performance by TU are contingent
upon TU's receipt of any materials Customer is to provide in the form and
on the dates identified in the Specifications.
4. LICENSE AND USE RESTRICTIONS.
4.1 Subject to the terms and conditions of this Agreement, for each such
Product provided to Customer by TU, TU hereby grants to Customer a limited,
non-exclusive, non-transferable license, to use such Product as set forth
in the applicable specifications in the United States, its territories and
possessions.
4.2 Unless the Specifications explicitly authorize multiple uses, Customer may
use Products only once and exclusively in connection with a specific
marketing application or single instance verification of information.
Customer shall not resell, disclose, duplicate, transfer or otherwise
reproduce any Products (or any list, compilation or other information
derived from the Products) in whole or in part for any other purpose
whatsoever. Without limiting the foregoing, Customer shall not use any
Products supplied hereunder for list rental fulfillment or to select out
names from the Products or other TU database(s) for Customer's own database
or for resale.
4.2.1 In the event a Specification explicitly authorizes multiple uses,
then upon completion of the last use, or twelve (12) months from
Customer's or Processor's receipt of the associated Product(s),
whichever occurs first, Customer and Processor shall cease all use
of such Products and shall return to TU all copies and updates
thereto, as well as any computer files or output listings that
contain any or all such Products or information derived from
Products. The foregoing
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<PAGE> 2
notwithstanding, at TU's sole option, Customer may provide written
certification signed by an officer of Customer that all such Products have
been destroyed.
4.3 Under no circumstances shall Customer use the Products for the modeling of,
or determination of, consumer credit worthiness or consumer credit
approval. If Customer desires to perform consumer prescreens it shall first
enter into another agreement between TU and Customer which expressly allows
such use. Moreover, Customer shall not use the Products for the modeling
of, or determination of, a consumer's eligibility for neither employment
nor insurance. Customer shall not divulge the credit or demographic
criteria used for any Product to any person, except employees of Customer
who have a need to know such criteria. In the event Customer, breaches this
clause, without limiting any other remedies available to TU, Customer
recognizes the damages TU would suffer would be impossible to calculate,
and that breach of this clause shall result in financial penalties of One
Million Dollars ($1,000,000) payable by Customer to TU.
4.4 Customer warrants that it will use the Products in compliance with all
applicable federal, state and local laws and regulations.
4.5 Customer shall not copy the Products, or any portion thereof, without TU's
prior written consent, nor grant any other person or entity the right to do
so. Moreover, Customer is not granted any ownership rights or title to the
Product nor to any information contained in any and all such Products. TU
reserves all rights not explicitly granted to Customer under this
Agreement. Customer shall not attempt, directly or indirectly, to discover,
reverse engineer, decompile, or disassemble the Products nor any
confidential or proprietary criteria developed or used by TU relating to
the Products.
4.6 Notwithstanding that Customer may receive, from TU, one or more Products
via electronic technology now known or hereafter developed including, but
not limited to, the Internet, in no event shall Customer, advertise,
promote or distribute any Product or derivative of a Product via electronic
technology, (regardless of whether such transmission vehicle is secured,
non-secured, encrypted, or non-encrypted) now known or hereafter developed
including, but not limited to, the Internet, without the prior written
consent to TU.
4.7 In the event Customer uses a Processor, Customer shall ensure that it has a
written agreement with each such Processor which is consistent with this
Agreement including, but not limited to, incorporation, and applicability
to each such Processor of the limited license and use rights granted to
Customer herein and the protection of TU's confidential information. Such
agreement shall also provide that TU is a third party beneficiary thereof,
and is entitled to enforce such agreement directly against Processor. Such
written agreement shall also require Processor to return the Products to TU
and to purge the Products from all of such Processor's databases upon
completion of the use of the Products.
4.8 Customer warrants that each of its employees and each of Processor's
employees, selected by Customer or Processor, as applicable, to use
Products, is or will be (prior to such use of Products) bound by an
appropriate written agreement sufficient to ensure compliance with the
provisions of this Agreement, including without limitation, the license
grants set forth in this Agreement and the protection of TU's confidential
information.
4.9 During the term of this Agreement and for a period of three (3) years
thereafter, TU may audit Customer's and Processor's records which pertain
to this Agreement, to ensure compliance with this Agreement, upon
reasonable notice and during normal business hours, and may monitor the use
of the Products by control means such as seeding. Upon TU's written
request, Customer or Processor, as applicable, shall add a reasonable
number of TU seed names to the Products.
5. Term, Termination & Survival.
5.1 Term. This Agreement shall commence upon the Effective Date and shall be in
effect until terminated as provided for below.
5.2 Termination.
5.2.1 Either party may terminate this Agreement by providing the other
party with thirty (30) days' prior written notice.
5.2.2 Either party may terminate this Agreement for the other party's
breach of any material provision of this Agreement; provided the
nonbreaching party has provided the party in breach with written
notice specifying such breach and the party in breach has failed
to cure such breach thirty (30) days of receipt of such notice.
The foregoing notwithstanding, without limiting any other
remedies to which TU may be entitled. TU reserves the right to
immediately terminate this Agreement if TU, in good faith,
determines that (1) Customer, or any Processor violated any
portion of Section 4 of this Agreement or that the requirements
of any law have not been met;
page 2 of 6
<PAGE> 3
(2) as a result of changes in laws, regulations or regulatory or
judicial action, TU, in good faith believes that the
requirements of any law or regulation will not be met; and (3)
such termination is reasonable under the particular
circumstances. TU shall promptly provide written notification to
Customer of such action.
5.2.3 Either party may terminate the Agreement, upon sixty (60) days'
prior written notice to the other party, if (1) proceedings
under bankruptcy or insolvency laws are commenced by, or
against, the other party and such proceedings are not dismissed
within sixty (60) days of such commencement; (2) if the other
party is ordered or adjudged bankrupt, is placed in the hands of
a receiver (or similar officer) and such receiver is not
discharged within sixty (60) days; (3) the other party makes an
assignment for the benefit of creditors, or otherwise enters
into any scheme or composition with its creditors; (4)
substantially all of the other party's assets are seized or
attached in conjunction with any action against it by any third
party; (5) the other party is dissolved or seeks to terminate or
otherwise cease its business operations and affairs.
5.3 No later than fifteen (15) days following termination of this Agreement,
Customer and Processor shall cease all use of the Products and shall return
to TU all copies and updates thereto, as well as any computer files or
output listings that contain any or all Products or information derived from
Products. The foregoing notwithstanding, at TU's sole option, Customer may
provide written certification signed by an officer of Customer that all such
Products have been destroyed.
5.4 Survival. With the exception Sections 2 and 3 all other provisions of this
Agreement shall survive any such termination of this Agreement. Moreover,
any such termination shall not relieve Customer of any fees or other
payments due to TU through the date of any such termination nor affect any
rights, duties or obligations of either party that accrue prior to the
effective date of any such termination.
6. PAYMENT.
6.1 In consideration of the rights granted to Customer under this Agreement, for
each such Product ordered by Customer, Customer shall pay TU in accordance
with the payment terms set forth in the Specifications and this Agreement
(and, in the case of Online Reports according to the then-available
published pricing at the time such Online Reports are ordered).
6.2 TU shall provide monthly invoices to Customer and Customer shall pay such
invoices within thirty (30) days of receipt. Without limiting any of TU's
remedies for non-payment or late payment of invoices, it is agreed that
invoices which are not paid within sixty (60) days of the due date will be
subject to a charge of one and one-half percent (1.5%) per month (18% per
year) or the maximum allowed by law if lower than 18% per year, to cover
administrative costs.
6.3 Insurance, Shipping and Taxes. Upon receipt of an invoice from TU, Customer
shall pay the cost of all media used per the Specifications as well as for
the reasonable cost of insuring such media or other materials during transit
to and from Customer and while in the possession of Customer or Processor.
Upon receipt of an invoice from TU, Customer shall also pay all shipping
costs as well as all taxes, duties or charges of any kind imposed by any
federal, state, or local governmental entity for products and services
provided under this Agreement. However, Customer shall not be responsible
for taxes imposed upon TU by any federal, state or local authority against
the net income of TU.
6.4 Right to Audit. During the term of this Agreement and for three (3) years
thereafter, Customer shall maintain current, accurate and complete books and
records relating to its use of the Products, and all payments due TU.
Moreover, at the request and expense of TU, Customer shall also allow TU, or
an independent auditor designated by TU, to examine, inspect, audit, review
and copy or make extracts from all such books and records and any source
documents used in preparation thereof, at any time during Customer's normal
business hours, provided TU gives written notice to Customer at least three
(3) business days prior to any such examination, inspection, review or
audit. The foregoing notwithstanding, in the event any such audit discloses
an underpayment in excess of five percent (5%) for any six (6) month period,
then Customer shall reimburse Trans Union for its actual and reasonable
expenses associated with such audit.
7. PROPRIETARY INFORMATION.
7.1 The parties contemplate that, during the term of this Agreement, either
party may furnish the other confidential and/or proprietary information
belonging to, or licensed to, the disclosing party and which is related to
the subject matter of this Agreement. Such information will be held in
confidence by the receiving party and, except as explicitly authorized by
this Agreement, will not be published in any form,
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<PAGE> 4
will not be used, and will not be discussed with nor disseminated to any
individual or organization other than the parties; provided, however, that
such information may be disclosed to Processor solely to the extent
necessary for purposes of this Agreement. For each such disclosure of
confidential/proprietary information, these terms will apply for a period
of ten (10) years from the receipt of such information and will not apply
to information:
i) Which is not in writing and clearly marked "Proprietary" or
"Confidential". Information transmitted orally or visually may be
classified as information pursuant to this provision by so designating
at the time of disclosure, followed by a subsequent reduction to
writing or other tangible form and submission to the receiving party
within thirty (30) days from the date of initial disclosure. The
foregoing notwithstanding, the Products consists of confidential and
proprietary information, data and technology, and is the trade secret
and sole exclusive property of TU and therefore will be deemed to be
TU confidential/proprietary information notwithstanding any failure to
mark it so;
ii) Which is already in the possession of the receiving party or its
employees at the time of disclosure as evidenced by prior written
documentation;
iii) Which now or hereinafter comes into the public domain without breach
of this Agreement;
iv) Which the receiving party rightfully receives from third parties
without an obligation of confidentiality;
v) Which is approved by the disclosing party's written authorization for
use or release by the receiving party;
vi) Which is independently developed by the receiving party without breach
of this Agreement;
vii) Which is required by law (e.g., an order of a court or data request
from an administrative or governmental agency with competent
jurisdiction) to be disclosed; provided, however, that the receiving
party will provide the disclosing party ten (10) days prior written
notice before the disclosure of such information pursuant to this
Subparagraph vii.
7.2 In the event of a breach of the obligations of confidentiality, the
non-breaching party will be entitled to seek equitable relief to protect
its interests, including but not limited to preliminary and permanent
injunctive relief, as well as money damages. Nothing stated herein will be
construed to limit any other remedies available to the parties.
7.4 The parties agree that the terms and conditions of this Agreement
including, without limitation, all Specifications and pricing, are
confidential, notwithstanding any failure to mark it so, and that neither
party shall disclose the contents of this Agreement without the prior
written consent of the other party; provided, however, that the general
existence of this Agreement shall not be treated as confidential
information. The foregoing notwithstanding, TU may disclose the terms and
conditions of this Agreement including, without limitation all
Specifications, to TU's agent(s) and/or processor(s) (aforementioned above
in Section 3.1) solely to the extent necessary to fulfill its obligations
under this Agreement.
7.5 Customer will not remove any trademark, copyright or other proprietary
notices from any part of the product.
8. WARRANTY.
8.1 PRODUCT WARRANTY
8.1.1 TU warrants that the media in which a Product is embodied and
delivered to Customer will be free from material defects for a period
of ninety (90) days from the date such Product is delivered to
Customer. TU's entire liability and Customer's exclusive remedy under
this Section 8.1 will be to replace any defective media which has
failed because of accident, abuse or misapplication caused by
Customer or Processor.
8.1.2 For all Specifications accepted by TU, TU warrants that the
associated Product shall substantially conform to such
Specifications. If any such Product fails to substantially conform to
the applicable Specifications, TU shall act in good faith to correct
the failure promptly.
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<PAGE> 5
8.2 NO OTHER WARRANTIES. TU shall use good faith in attempting to obtain
information, embodied in the Products, from sources deemed reliable, but
does not guarantee the accuracy of any such information and THE WARRANTIES
SET FORTH ABOVE IN SECTION 8.1 ARE IN LIEU OF ALL OTHER WARRANTIES WITH
RESPECT TO THE PRODUCTS, WHETHER EXPRESSED OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. THE FOREGOING CONSTITUTES CUSTOMER'S SOLE RIGHTS AND REMEDIES
UNDER THIS AGREEMENT WITH RESPECT TO DEFECTS IN THE PRODUCTS.
9. INDEMNIFICATION. Customer shall indemnify, defend, and hold TU harmless
from and against any and all liabilities, damages, losses, claims, costs,
and expenses (including but not limited to attorney's fees) arising out of
or resulting from (i) the obtaining or furnishing of Products under this
Agreement; (ii) Customer's or any Processor's improper use of the Products
or failure to observe the use restrictions set forth in this Agreement;
(iii) any claim alleging that Customer and/or Processor violated the legal
rights of another person or entity; (iv) any claim by a third party
alleging that TU failed to provide adequate Products or the proper
Products; (v) any misrepresentation or breach of warranty by Customer;
and/or (vi) Customer's and/or Processor's nonperformance of any obligation
imposed on it by this Agreement.
10. LIMITATION OF LIABILITY.
10.1 IN NO EVENT SHALL TU BE LIABLE FOR, AND CUSTOMER HEREBY WAIVES AS TO
TU, ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, OR PUNITIVE
DAMAGES INCURRED BY CUSTOMER AND ARISING OUT OF THE PERFORMANCE OF
THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOSS OF GOOD WILL AND
LOST PROFITS OR REVENUE, WHETHER OR NOT SUCH LOSS OR DAMAGE IS BASED
IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT LIABILITY, INDEMNITY,
OR OTHERWISE, EVEN IF TU HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
10.2 ADDITIONALLY, TU SHALL NOT BE LIABLE FOR ANY AND ALL CLAIMS ARISING
OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT MORE THAN ONE (1)
YEAR AFTER THE CAUSE OF ACTION HAS ACCRUED. TU'S TOTAL LIABILITY
UNDER THIS AGREEMENT SHALL NOT EXCEED THE AGGREGATE AMOUNT PAID,
UNDER THIS AGREEMENT, BY CUSTOMER FOR THE PRODUCT(S), WHICH ARE THE
SUBJECT OF SUCH CLAIM, DURING THE TWELVE MONTH (12) MONTH PERIOD
IMMEDIATELY PRECEEDING SUCH CLAIM.
11. GENERAL PROVISIONS.
11.1 ASSIGNMENT. This Agreement and the rights and the obligations
thereunder with respect to Customer may not be assigned by any act of
Customer without the prior written consent of TU. TU shall have the
unrestricted right to assign this Agreement to a successor in
interest to TU or to the purchaser of a substantially all of the
assets of TU.
11.2 NOTICES. Any required notice or communication, pursuant to this
Agreement, from one party to the other must be in writing and sent to
the respective party's address set forth in this Agreement. Either
party may change their respective address by written notice to the
other, and any such change will take effect immediately upon receipt
of such notice.
11.2.1 Unless otherwise set forth in this Agreement, any such notice
or other communication shall be sufficiently given if: (1)
delivered personally to the designated address of the party
to whom notice is to be given; or (2) sent by certified mail,
registered mail or by nationally-recognized private express
courier, to the designated address of the party to whom
notice is to be given.
11.2.2 Trans Union LLC, Towne Services, Inc
Business Information Group 3950 Johns Creek Ct #100
555 W. Adams Suwanee, GA 30024
Chicago, Illinois 60661
Attn: Vice President/ Attn: Bruce Lowthers, CFO
General Manager
11.3 FORCE MAJEURE. Neither party shall be liable to the other for failure
to perform or delay in performance under this Agreement if, and to
the extent, such failure or delay is caused by conditions beyond its
reasonable control, including, but not limited to, acts of God;
failure of utilities; strikes, boycotts or other
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<PAGE> 6
concerted acts of workmen; laws, regulations or other orders of public
authorities; military action, state of war or other national emergency;
fire or flood which, by the exercise of reasonable diligence, the
delayed party is unable to prevent or provide against. The party
affected by any Force Majeure event or occurrence shall give the other
party written notice of said event or occurrence within five (5)
business days of such event or occurrence.
11.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois regardless of the
laws that might otherwise govern under applicable Illinois principles
of conflicts of law. Any and all actions brought under this Agreement
will be brought in the state or federal courts in Cook County,
Illinois. The prevailing party will be entitled to recover reasonable
attorneys' fees and other actual and reasonable costs incurred in
enforcing this Agreement.
11.5 TRADEMARKS. Neither party shall use the names, trademarks, service
marks, or logos of the other party, or its respective affiliates and/or
subsidiaries, in any advertising, promotional material, or otherwise
without the prior written consent of the other party.
11.6 CONSTRUCTION AND SEVERABILITY.
11.6.1 The parties acknowledge that this Agreement has been prepared
and drafted through the efforts of both parties and agree that in the
interpretation, construction, and enforcement of the terms and
conditions of this Agreement, there shall not be applied against either
party the normal rule of construction that vague and ambiguous terms
are to be construed against the drafting party.
11.6.2 All references in this Agreement to the singular shall include
the plural where applicable. Titles and headings to sections or
paragraphs in this Agreement are inserted for convenience of reference
only and are not intended to affect the interpretation or construction
of this Agreement.
11.6.3 If any term or provision of this Agreement is held by a court
of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the provisions shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
11.7 NO WAIVER. No failure or successive failures on the part of either
party, its respective successors or permitted assigns, to enforce any
covenant or agreement, and no waiver or successive waivers on its or
their part of any condition of this Agreement shall operate as a
discharge of such covenant, agreement, or condition, or render the same
invalid, or impair the right of either party, its respective successors
and permitted assigns, to enforce the same in the event of any
subsequent breach or breaches by the other party, its successors or
permitted assigns.
11.8 RELATIONSHIP OF THE PARTIES. This Agreement is not intended to create
or evidence any employer-employee arrangement, agency, partnership,
joint venture, or similar relationship of any kind whatsoever, between
TU and Customer.
11.9 THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES
HERETO AND SUPERSEDES ALL PREVIOUS AGREEMENTS AND UNDERSTANDINGS,
WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PRODUCTS WHICH ARE THE SUBJECT MATTER OF THIS AGREEMENT, EXCEPT AS SET
FORTH ABOVE IN SECTION 5, THIS AGREEMENT MAY NOT BE ALTERED, AMENDED,
OR MODIFIED EXCEPT BY WRITTEN INSTRUMENT SIGNED BY THE DULY AUTHORIZED
REPRESENTATIVES OF BOTH PARTIES.
IN WITNESS WHEREOF, the parties, intending to be legally bound, have
caused this Agreement to be executed by their duly authorized representatives
as of the last date and year set forth below. The parties hereto agree that a
facsimile transmission of this fully executed Agreement shall constitute an
original and legally binding document.
TRANS UNION LLC Towne Service, Inc.
--------------------------------
By:----------------------------- By: /s/ Bruce F. Lowthers
--------------------------------
----------------------------- Bruce F. Lowthers, CFO
Name and Title of Signer --------------------------------
Name and Title of Signer
12-15-99
----------------------------- --------------------------------
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08/27/99
<PAGE> 7
TRANS UNION LLC
BUSINESS INFORMATION GROUP
MASTER LICENSE AGREEMENT
SCHEDULE 1
PRODUCTS
1. Business Lists: TU returns to Customer names of businesses and/or
executives with certain data elements from BIG's Business Information
Database. A Customer targets these businesses and/or executives using
demographic, geographic, and other marketing related data elements, as set
forth on the applicable Specifications.
2. Business Data Overlays ("Business Overlays"): TU matches a Customer file or
set of names to its Business Information Database to append certain
demographic, geographic, and other marketing related data elements, as set
forth on the applicable Specifications.
3. Business Verification Reports ("Online Reports"): Online Internet access to
BIG's Business Information Database for verification and background
purposes. This information consists of information which TU in its sole
discretion makes available from time to time, which may include, for
example, names, addresses, phone numbers, type of business, and sales
volume.
4. Business Executive Link: The linkage of data on a business to data on the
executives within the business. TU returns to Customer names of businesses
or business executives with certain data elements from BIG's Business
Information Database, which in most cases will include the home address of
the business executives or the business address of the individuals.
5. Analysis Services: Customer desires to have TU or its agent or processor
analyze Customer files in order to determine potential data variables that
may serve as future modeling and/or analysis efforts. The Customer files
provided to TU by Customer may include business and executive information.
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08/27/99
<PAGE> 8
LIST SERVICE AGREEMENT FOR BROKERS
Agreement, effective as of this day of December, 1999 ("Effective Date") by
and between Trans Union LLC ("TU") having principal offices at 555 West Adams,
Chicago, Illinois, 60661 and TOWNE SERVICES, INC. ("Broker") having principal
offices at 3950 JOHNS CREEK COURT, #100, SUWANEE, GEORGIA, 30024.
WHEREAS, Broker is in the business of soliciting users of target marketing
lists ("List Users"); and
WHEREAS, TU licenses lists of business and/or executive names and addresses
for target marketing purposes ("Lists"); and
WHEREAS, such Lists are derived from TU's data base using solely non credit
criteria; and
WHEREAS, Broker desires to provide such Lists to List Users.
NOW, THEREFORE, in consideration of the foregoing and the promises and mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. The recitals set forth above are an integral part of this Agreement and are
hereby incorporated into this Agreement.
2. ORDERING AND USE OF LISTS.
2.1 Upon identification of a List User (hereinafter referred to as Broker's
Customer), Broker shall order from TU, on an order by order basis, Lists of
based on criteria agreed to by the parties. In no event shall such Lists
communicate or be selected based upon any credit information. The List
shall be provided on computer tape, or on another mutually agreed upon
medium. TU shall not be liable to Broker should it be unable or fail to
make any requested update of the List. The terms and conditions of this
Agreement shall supersede any and all terms and conditions on any and all
such orders issued by Broker for Lists.
2.2 Subject to the terms and conditions of this Agreement, for each such List
provided to Broker by TU, TU hereby grants to Broker a limited,
non-exclusive, non-transferable license, to use such List in the United
States, its territories and possessions. Such license shall include the
right to sublicense solely the use of such List to solely such Broker's
Customers and not to any other third party. Such sublicense to Broker's
Customers shall not include the right to further sublicense the List to any
third party. Use by either Broker or Broker's Customers, as applicable,
shall be solely for either a one-time use or, if agreed to by TU in writing
in advance, for multiple uses.
2.2.1 The foregoing notwithstanding, the aforestated license does
include the right to sublicense such Lists to the following kinds
of businesses without prior written approval from TU: a)
re-sellers; b) brokers; c) detective agencies; d) private
investigative agencies; e) security services; f) nor law firms.
2.2.2 All such uses permitted under this license shall be for the sole
purpose of soliciting the names thereon, or sending them an
offer, or making a telemarketing solicitation. Moreover, Broker
and Broker's Customers are expressly prohibited from using Lists,
in whole or in part, for the purpose of enhancing, verifying,
supplementing, appending, or adding to, any list or database
disclosed or otherwise made available to Customer by any third
party, or in the preparation, publication, distribution,
correction, or maintenance of any prospect database or any
directory of any nature, without TU's prior written
authorization.
2.3 Broker shall provide to TU copies of all telemarketing solicitation scripts
or mail-pieces which will be sent to consumers, to be solicited by Broker
or Broker's customers, which have been identified based on a List. Any
changes to the script or mail-piece must be pre-approved by TU. All offers
or solicitations made to individuals included on any and all Lists shall
conform to all federal, state and locals laws and regulations. Neither
Broker nor its customer may use the List to advertise, sell, or exchange
any products or services that involves: a) sexual paraphernalia; b) drug
paraphernalia; c) adult films, recording or magazines; d) weapons; e) other
illicit activities; or f) credit repair services.
2.4 Under no circumstances shall Broker, nor Broker customers, use Lists, or
any subset of Lists, for the modeling of, or determination of, individual
credit worthiness or credit approval. In the event Broker, or any Broker
customer, breaches this clause, without limiting any other remedies
available to TU, Broker recognizes the damages TU would suffer would be
impossible to calculate, and that breach of this clause shall result in
financial penalties of One Million Dollars ($1,000,000) payable by Broker
to TU.
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<PAGE> 9
2.5 Broker may not copy (except for archival purposes) the List without TU's
prior written consent, nor grant any other person or entity the right to do
so. Moreover, Broker is not granted any ownership rights or title to the
List or to any information contained in any and all such Lists. Moreover,
TU reserves all rights not explicitly granted to Broker under this
Agreement.
2.6 In no event shall Broker, nor Broker's Customers, advertise, promote, or
distribute any Lists via electronic technology, (regardless of whether such
transmission vehicle is secured, non-secured, encrypted, or non-encrypted)
now known or hereafter developed including, but not limited to, the
Internet, without the prior written consent of TU.
2.7 Broker shall ensure that it has a written agreement with each such Broker
customer which is consistent with this Agreement including, but not limited
to, incorporation, and applicability to each such Broker customer of the
limited license rights granted to Broker herein and the protection of TU's
confidential information. Such agreement shall also provide that TU is a
third party beneficiary thereof, and is entitled to enforce such agreement
directly against Broker's customer.
2.8 For each Broker Customer, prior to providing such entity with such List(s),
Broker shall take all reasonable actions necessary to verify: a) the stated
purpose for Broker's Customer obtaining such Lists is compatible with the
type of business conducted by Broker's Customer, b) that Broker's Customer
is a legitimate business and c) that Broker's Customer is does not fall
within the categories of businesses listed in Paragraph 2.2.1 above.
2.9 During the term of this Agreement and for a period of three (3) years
thereafter, TU may audit Broker's and Broker's customer's records
including, but not limited to, all of Broker's agreements with Broker's
Customers which pertain to this Agreement, to ensure compliance with this
Agreement, upon reasonable notice and during normal business hours, and may
monitor the use of the Lists by control means such as seeding.
3. TERM, TERMINATION & SURVIVAL.
3.1 Term. This Agreement shall commence upon the Effective Date and shall be
in effect until terminated as provided for below.
3.2 Termination.
3.2.1 Either party may terminate this Agreement by providing the other
party with thirty (30) days' prior written notice.
3.2.2 Either party may terminate this Agreement for the other party's
breach of any material provision of this Agreement; provided the
nonbreaching party has provided the party in breach with written
notice specifying such breach and the party in breach has failed
to cure such breach thirty (30) days of receipt of such notice.
The foregoing notwithstanding, without limiting any other
remedies to which TU may be entitled, TU reserves the right
immediately terminate this Agreement if TU, in good faith,
determines that (1) Broker, or any Broker customers violated any
portion of Section 2 of this Agreement or that the requirements
of any law have not been met; (2) as a result of changes in laws,
regulations or regulatory or judicial action, TU, in good faith
believes that the requirements of any law or regulation will not
be met; and (3) such termination is reasonable under the
particular circumstances. TU shall promptly provide written
notification to Broker of such action.
3.2.3 Either party may terminate the Agreement, upon sixty (60) days'
prior written notice to the other party, if (1) proceedings
under bankruptcy or insolvency laws are commenced by, or against,
the other party and such proceedings are not dismissed within
sixty (60) days of such commencement; (2) if the other party is
ordered or adjudged bankrupt, is placed in the hands of a
receiver (or similar officer) and such receiver is not discharged
within sixty (60) days; (3) the other party makes an assignment
for the benefit of creditors, or otherwise enters into any scheme
or composition with its creditors; (4) substantially all of the
other party's assets are seized or attached in conjunction with
any action against it by any third party; (5) the other party is
dissolved or seeks to terminate or otherwise cease its business
operations and affairs.
3.2.4 No later than fifteen (15) days following termination of this
Agreement, Broker shall terminate all sublicenses granted to
Broker's Customers. Moreover, Broker and Broker's Customers shall
cease all use of the Lists and shall return to TU all copies and
updates thereto, as well as any computer files or output listings
that contain any or all Lists. The foregoing notwithstanding, at
TU's sole option, Broker may provide written certification by an
officer of Broker that all such Lists have been destroyed.
Page 2 of 11
<PAGE> 10
3.3 Survival. With the exception Sections 2.1, 2.2, and 4.1, all other
provisions of this Agreement shall survive any such termination of this
Agreement. Moreover, any such termination shall not relieve Broker of any
fees or other payments due to TU through the date of any such termination
nor affect any rights, duties or obligations of either party that accrue
prior to the effective date of any such termination.
PAYMENT.
4.1 In consideration of the rights granted to Broker under this Agreement,
Broker shall pay to TU the fees set forth in the TU rate schedule for
each such Broker List order submitted to TU.
4.2 TU shall provide monthly invoices to Broker and Broker shall pay such
invoices within thirty (30) days of receipt. Without limiting any of TU's
remedies for non-payment or late payment of invoices, it is agreed that
invoices which are not paid within sixty (60) days of the due date will
be subject to a charge of one and one-half percent (1.5%) per month (18%
per year) or the maximum allowed by law if lower than 18% per year, to
cover administrative costs.
4.2.1 Moreover, Broker shall submit, with its payment of such TU invoices,
documentation in form and content acceptable to TU, which lists each
Broker Customer to which a List has been sublicensed during the
period covered by such invoice. Such documentation shall include a
full address, phone number, Internet Universal Resource Locator
(website address), if applicable, for each such Broker Customer as
well as any other information that TU may reasonably request from
time to time.
4.2.2 Taxes. Broker shall pay all taxes, duties or charges of any kind imposed
by any federal, state; or local governmental entity for products and
services provided under this Agreement. Broker shall promptly reimburse
TU for such taxes upon receipt of an invoice therefor. However, Broker
shall not be responsible for taxes imposed upon TU by any federal, state
or local authority against the net income of TU.
4.2.3 Right to Audit. During the term of this Agreement and for three (3)
years thereafter Broker shall maintain current, accurate and complete
books and records relating to its use of the Lists, and all payments due
TU, and shall, at the request of TU but at Broker's expense, and no more
than once every six (6) months, have the independent public accounting
firm that regularly audits its books and records furnish TU with an
auditor's certificate as to the accuracy of payments made hereunder.
Moreover, at the request and expense of TU, Broker shall also allow TU,
or an independent auditor designated by TU, to examine, inspect, audit,
review and copy or make extracts from all such books and records and any
source documents used in preparation thereof, at any time during Broker's
normal business hours, provided TU gives written notice to Broker at
least three (3) business days prior to any such examination, inspection,
review or audit.
5. PROPRIETARY INFORMATION.
5.1 The parties contemplate that, during the term of this Agreement, either
party may furnish the other confidential and/or proprietary information
belonging to, or licensed to, the disclosing party and which is related
to the subject matter of this Agreement. Such information will be held in
confidence by the receiving party and, except as explicitly authorized
by this Agreement, will not be published in any form, will not be used,
and will not be discussed with nor disseminated to any individual or
organization other than the parties. For each such disclosure of
confidential/proprietary information, these terms will apply for a
period of ten (10) years from the receipt of such information and will
not apply to information;
i Which is not in writing and clearly marked "Proprietary" or
"Confidential". Information transmitted orally or visually may be
classified as information pursuant to this provision by so
designating at the time of disclosure, followed by a subsequent
reduction to writing or other tangible form and submission to the
receiving party within thirty (30) days from the date of initial
disclosure;
ii Which is already in possession of the receiving party or its
employees at the time of disclosure as evidenced by prior written
documentation;
iii Which now or hereinafter comes into the public domain without breach
of this Agreement;
iv Which the receiving party rightfully receives from third parties
without an obligation of confidentiality;
v Which is approved by the disclosing party's written authorization
for use or release by the receiving party;
vi Which is independently developed by the receiving party without
breach of this Agreement;
Page 3 of 11
<PAGE> 11
vii Which is required by law (e.g., an order of a court or data request
from an administrative or governmental agency with competent
jurisdiction) to be disclosed; provided however, that the receiving
party will provide the disclosing party ten (10) days prior written
notice before the disclosure of such information pursuant to this
Subparagraph vii.
5.2 In the event of a breach of the obligations of confidentiality, the
non-breaching party will be entitled to seek equitable relief to protect its
interests, including but not limited to preliminary and permanent injunctive
relief, as well as money damages. Nothing stated herein will be construed to
limit any other remedies available to the parties.
5.3 The Lists consists of confidential and proprietary information, data and
technology, and is the trade secret and sole exclusive property of TU and
therefore will be deemed to be confidential/proprietary information
notwithstanding any failure to mark it so. Notwithstanding anything above to
the contrary, but subject to the exceptions set forth above in subparagraphs ii
through vii of Section 5.1, the above obligations of confidentiality with
respect to the Lists are perpetual and will survive the expiration or any
termination of this Agreement.
5.4 Broker will not remove any trademark, copyright or other proprietary
notices from any part of the Lists, and will reproduce these notices on any
copies of documentation made by Broker. Copies of documentation will be made
solely for backup and archival purposes.
6. WARRANTY.
6.1 Lists Media Warranty. TU warrants that the media in which the Lists is
embodied and delivered to Broker will be free from material defects for the
term of this Agreement. TU's entire liability and Brokers' exclusive remedy
under this Section 6.1 will be to replace the media on which such Lists was
delivered. TU shall have no obligation to replace any defective media which has
failed because of accident, abuse or misapplication caused by Broker or
Broker's Customer(s).
6.2 No Other Warranties. TU shall use good faith in obtaining and assembling
such data and other information contained within the Lists from sources deemed
reliable, but does not guarantee the accuracy of any such data nor other
information and THE WARRANTY SET FORTH ABOVE IN SECTION 6.1 IS IN LIEU OF ALL
OTHER WARRANTIES WITH RESPECT TO THE LICENSED MATERIAL, WHETHER EXPRESSED OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE. THE FOREGOING CONSTITUTES BROKER'S SOLE
RIGHTS AND REMEDIES UNDER THIS AGREEMENT WITH RESPECT TO DEFECTS IN THE LICENSED
MATERIAL.
7. INDEMNIFICATION. Broker agrees to indemnify and hold TU harmless from any
and all claims, losses and damages, liability, and costs, including attorney's
fees, that results directly or indirectly from any claim or demand against TU
by a third party that arises under or relates to the performance of Broker and
Broker's Customers under this Agreement including, but not limited to, any use
of the Lists by Broker or Broker's customers.
8. LIMITATION OF LIABILITY.
8.1 IN NO EVENT SHALL TU BE LIABLE FOR, AND BROKER HEREBY WAIVES AS TO TU, ANY
CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, OR PUNITIVE DAMAGES INCURRED BY
BROKER AND ARISING OUT OF THE PERFORMANCE OF THIS AGREEMENT, INCLUDING BUT NOT
LIMITED TO LOSS OF GOOD WILL AND LOST PROFITS OR REVENUE, WHETHER OR NOT SUCH
LOSS OR DAMAGE IS BASED IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT
LIABILITY, INDEMNITY, OR OTHERWISE, EVEN IF TU HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY
FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
8.2 ADDITIONALLY, TU SHALL NOT BE LIABLE, FOR ANY CLAIM ARISING OUR OF OR IN
CONNECTION WITH THIS AGREEMENT BROUGHT MORE THAN ONE (1) YEAR AFTER THE CAUSE
OF ACTION HAS ACCRUED. TU'S TOTAL LIABILITY UNDER THIS AGREEMENT SHALL NOT
EXCEED THE AGGREGATE AMOUNT PAID BY BROKER HEREUNDER DURING THE TWELVE MONTH
(12) MONTH PERIOD IMMEDIATELY PRECEEDING THE FIRST CLAIM.
9. GENERAL PROVISIONS.
9.1 Assignment. This Agreement and the rights and the obligations thereunder
with respect to Broker may not be assigned by any act of Broker or by operation
of law without the prior written consent of TU. TU shall have the unrestricted
right to assign this Agreement to a successor in interest to TU or to the
purchaser of a substantially all of the assets of TU.
Page 4 of 11
<PAGE> 12
9.2 Broker warrants that each of its employees and each of Broker's Customer's
employees, selected by Broker or Broker's Customers, as applicable, to use
Lists is or will be bound by an appropriate written agreement sufficient to
ensure compliance with the provisions of this Agreement, including without
limitation, the license grants set forth in this Agreement and the
protection of TU's confidential information.
9.3 Notices. Any notice or other communication from one party to the other must
be in writing and sent to the respective party's address set forth in this
Agreement. Either party may change their respective address by written
notice to the other, and any such damage will take effect immediately upon
receipt of such notice.
9.4 Unless otherwise set forth in this Agreement, any such notice or other
communication shall be sufficiently given if: (1) delivered personally to
the designated address of the party to whom notice is to be given; or (2)
sent by certified mail, registered mail or by nationally-recognized private
express courier, to the designated address of the party to whom notice is
to be given.
9.5 Trans Union LLC, Towne Services, Inc.
Business Information Group 3950 Johns Creek Court #100
555 W. Adams Suwanee, GA 30024
Chicago, Illinois 60661
Attn: Vice President/General Manager Attn: CFO
9.6 Force Majeure. Neither party shall be liable to the other for failure to
perform or delay in performance under this Agreement if, and to the extent,
such failure or delay is caused by conditions beyond its reasonable
control, including acts of God; strikes, boycotts or other concerted acts
of workmen; laws, regulations or other orders of public authorities;
military action, state of war or other national emergency; fire or flood
which, by the exercise of reasonable diligence, the delayed party is unable
to prevent or provide against. The party affected by any Force Majeure
event or occurrence shall give the other party written notice of said event
or occurrence within five (5) business days of such event or occurrence.
9.7 Publicity. The parties agree that the terms and conditions of this
Agreement are confidential, and that neither party shall disclose the
contents of this Agreement without the prior written consent of the other
party; provided, however, that the general existence of this Agreement
shall not be treated as confidential information. Neither party shall use
the names, trademarks, or logos of the other party in any advertising or
promotional material without the prior written consent of the other party.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois regardless of the laws
that might otherwise govern under applicable Illinois principles of
conflicts of law. Any and all actions brought under this Agreement will be
brought in the state or federal courts in Cook County, Illinois. The
prevailing party will be entitled to recover reasonable attorneys' fees and
other actual and reasonable costs incurred in enforcing this Agreement.
9.9 Construction and Severability.
9.9.1 The parties acknowledge that this Agreement has been prepared and
drafted through the efforts of both parties and agree that in the
interpretation, construction, an enforcement of the terms and
conditions of this Agreement, there shall not be applied against
either party the normal rule of construction that vague and
ambiguous terms are to be constructed against the drafting party.
9.9.2 All references in this Agreement to the singular shall include the
plural where applicable. Titles and headings to sections or
paragraphs in this Agreement are inserted for convenience of
reference only and are not intended to affect the interpretation or
construction of this Agreement.
9.9.3 If any term or provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the provisions shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
9.10 No Waiver. No failure or successive failures on the part of either party,
its respective successors or permitted assigns, to enforce any covenant or
agreement, and no waiver or successive waivers on its or their part of any
condition of this Agreement shall operate as a discharge of such covenant,
agreement, or condition, or render the same invalid, or impair the right of
either party, its respective successors and permitted assigns, to enforce
the same in the event of any subsequent breach or breaches by the other
party, its successors or permitted assigns.
9.11 Relationship of the Parties. This Agreement is not intended to create or
evidence any employer-employee arrangement, agency, partnership, joint
venture, or similar relationship of any kind whatsoever, between TU and
Broker.
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<PAGE> 13
9.12 Whereas customer desires to resell Business Report products available from
TU, execution of this document in addition to the Master License agreement
will serve as license to resell Business Report products.
9.13 THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO
AND SUPERSEDES ALL PREVIOUS AGREEMENTS AND UNDERSTANDINGS, WHETHER ORAL OR
WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE SUBJECT MATTER OF THIS
AGREEMENT, EXCEPT AS SET FORTH ABOVE IN SECTION 3, THIS AGREEMENT MAY NOT
BE ALTERED, AMENDED, OR MODIFIED EXCEPT BY WRITTEN INSTRUMENT SIGNED BY
THE DULY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the
date first written above. The parties hereto agree that a facsimile transmission
of this fully executed Agreement shall constitute an original and legally
binding document.
TRANS UNION LLC TOWNE SERVICES, INC.
By: By: /s/ Bruce F. Lowthers
------------------------------- ----------------------------
------------------------------- Bruce F. Lowthers, CFO
Name and Title of Signer ----------------------------
Name and Title of Signer
-------------------------------
Date Signed December 13, 1999
----------------------------
Date Signed
Page 6 of 11
<PAGE> 14
EMPIRICA
ON-LINE AGREEMENT
THIS AGREEMENT is made this 13th day of December, 1999, by and between
Trans Union LLC (hereinafter referred to as "Trans Union") Fair, Isaac and Co.,
Inc. (hereinafter referred to as "Fair, Isaac"), and Towne Services, Inc.
(hereinafter referred to as ("Subscriber").
1. Trans Union is in the business of providing consumer credit
information to subscribers who are members, and who have a permissable purpose
for receiving such information.
2. Fair, Isaac is in the decision support business with expertise in
developing predictive models of credit performance by consumers from historical
credit data.
3. Subscriber is a credit grantor who purchases consumer credit reports
from Trans Union in connection with consumer credit applications.
4. Trans Union and Fair, Isaac have developed a unique and proprietary
statistical credit scoring system ("EMPIRICA") which evaluates certain
information in the credit report on an individual consumer from Trans Union's
database and provides a score which rank orders the consumer with respect to
likely credit performance (the "EMPIRICA Score"). The EMPIRICA Score is
available in industry-specific versions, as well as a general version.
5. Subscriber hereby requests that Trans Union process credit reports it
purchases against EMPIRICA and provide an EMPIRICA Score. Trans Union agrees to
perform such processing.
6. Fair, Isaac, the developer of EMPIRICA, warrants that the scoring
algorithms used in the computation of the EMPIRICA Score are empirically
derived from Trans Union's credit data and are a demonstrably and statistically
sound method of rank-ordering candidate records with respect to credit risk,
and that no scoring algorithm used by EMPIRICA uses a "prohibited basis" as
that term is defined in the Equal Credit Opportunity Act and Regulation B
("Reg. B") promulgated thereunder.
7. Subscriber recognizes that factors other than the EMPIRICA Score must
be considered in making a credit decision, including the credit report, the
individual credit application, and economic factors. The factors that are
provided by Trans Union as significantly contributing to the Score may be
disclosed to consumers as the reasons for taking adverse action, as required by
Reg. B. However, the Score itself is proprietary, may not be used as the reason
for adverse action under Reg. B and, accordingly, shall not be disclosed to
credit applicants.
8. Subscriber agrees to pay to Trans Union the annual subscriber fees
for the use of EMPIRICA, stated in Exhibit A, at the time stated therein. In
addition, Subscriber agrees to pay the added surcharge stated in Exhibit A for
each credit report purchased that uses EMPIRICA. All fees stated in Exhibit A
are due in the same manner and subject to the same terms and conditions as the
fees in the Subscriber Agreement in effect between the parties. All fees may be
modified by Trans Union at any time upon a prior thirty (30) day notice.
9. Trans Union and Fair, Isaac shall use their best efforts to perform
their obligations hereunder, but make no guarantees other than as described in
Paragraph 6, and shall not be liable for any loss, cost or expense of
Subscriber resulting from the use of EMPIRICA. In no event shall either party
<PAGE> 15
be liable to Subscriber for any loss, costs, damages or expenses in excess of
the fees charged Subscriber hereunder for the previous twelve (12) month
period.
10. Each party hereto shall be responsible for compliance with all laws
and regulations to which it is subject.
11. This Agreement states the entire understanding of the parties as to
the subject matter hereof, supersedes all prior correspondence, documentation
or representations, and may not be amended except by written agreement signed
by both. However, this Agreement does not supersede any other agreement in
effect between the parties relating to credit reporting.
12. This Agreement shall be in effect for one year from the date hereof,
and thereafter shall be automatically renewed, except that either party may
terminate this Agreement at any time upon a prior thirty (30) day notice to the
other.
13. No party may assign its rights or obligations hereunder except with
the prior written consent of the other party.
14. Nothing contained in this Agreement is intended to create a joint
venture or partnership between the parties. Each party shall be fully
independent in its business operations.
15. Trans Union is authorized to sign this Agreement on behalf of Flair,
Isaac.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
TRANS UNION LLC /s/ Towne Services, Inc.
________________________
Subscriber Name
By: /s/ Michael J. Jones By: /s/ Bruce F. Lowthers
____________________________ ______________________________
Print Name: Michael J. Jones Print Name: Bruce F. Lowthers
____________________________ ______________________________
Title: Group VP Title: CFO
____________________________ ______________________________
Trans Union for FAIR, ISAAC AND CO., INC.
By: /s/ Michael J. Jones
____________________________
Print Name: Michael J. Jones
____________________________
Title: Group VP
____________________________
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<PAGE> 16
EXHIBIT A
Annual Subscriber Fee $ N/A
--------------------------
Payable on the date hereof
The processing charge shall be based on units of credit reports scored and
shall be added to the credit report price as follows:
Monthly EMPIRICA Surcharge Per
Transaction Volume Transaction
------------------ -------------
SEE ATTACHED PRICING $
--------------------- -------------
<PAGE> 17
RESELLER
SERVICE AGREEMENT
This Agreement is made by and between Towne Services, Inc. (hereinafter
referred to as "Reseller") and Trans Union LLC (hereinafter referred to as
"Trans Union") to provide for credit reporting services.
WHEREAS, Reseller is in the business of obtaining consumer reports from
third party sources and providing credit reporting services to its customers
("Reselling"); and
WHEREAS, Trans Union owns and maintains a national database of consumer
credit information; and
WHEREAS, Reseller desires to resell Trans Union consumer credit reports,
or information therefrom, to users of reports who have a permissible purpose.
NOW THEREFORE, in consideration of the premises and the mutual benefits
expressed herein, the parties agree as follows:
I. Reseller Responsibilities
A. Reseller may sell Trans Union reports to the industries and for the
purposes outlined in the Reseller's Letter of Intent, a copy of which
is attached hereto and incorporated herein by reference. In the event
that Reseller wishes to expand its resale business beyond the scope set
forth in the Letter of Intent, it may do so only with the prior written
consent of Trans Union.
B. Reseller shall request from Trans Union consumer reports or
information from Trans Union consumer reports only on behalf of users
who have a permissible purpose for obtaining consumer reports, as
defined by Section 604 of the Federal Fair Credit Reporting Act (15 USC
1681b) as amended by the Consumer Credit Reporting Reform Act of 1996,
hereinafter called "FCRA." Such users shall be provided access to the
Trans Union credit reporting system or data only if all requirements
stated herein are met.
C. At the time it requests each consumer report, Reseller shall identify
the end user of the report (or information derived from the report),
certify each purpose for which the report (or information) will be
used, and certify that the report (or information) will be used for no
other purpose, as defined by Section 607 of the FCRA, via the method
indicated by the Reseller in Section IV of this Agreement.
<PAGE> 18
D. The Trans Union reports or data therefrom may be transferred without
change, may be reformatted by Reseller, or may be merged with those
obtained from other consumer reporting agencies (Merged Reports). Each
report obtained by Reseller shall be used only one time, and only by or on
behalf of the user for whom it was requested. Reseller may not archive or
otherwise retain or use any report for any other purpose, except to the
extent that Reseller is required by law to maintain the report for purposes
of performing a consumer-initiated investigation and providing, at the
consumer's request, a modified version of the same report to the user for
whom it was originally requested. In the event that Reseller has archived a
report for such purpose, and receives a court order or federal grand jury
subpoena for that report, such report may be produced. In no event,
however, should a new report be requested from Trans Union in response to
any subpoena; rather, Reseller should direct requesting party to Trans
Union.
E. Reseller shall obtain Subscriber Agreements that contain the language set
forth in Exhibit A (or Exhibit B if for employment purposes) from such
users, wherein each user will state the nature of its business, certify the
specific purpose for which consumer reports will be obtained, and agree
that reports will be obtained for no other purpose, all as required by the
FCRA. The permissible purpose specified shall be one or more of the
following:
1. In connection with a credit transaction involving the consumer on whom
the information is to be furnished and involving the extension of
credit to, or review or collection of an account of the consumer; or
2. For employment purposes, in which case the Reseller must resell Trans
Union's PEER product and Reseller and its Subscriber must execute an
agreement containing the same language as set forth in Exhibit B
hereto; or
3. In connection with the underwriting of insurance involving the
consumer or review of existing policy holders for insurance
underwriting purposes, or in connection with an insurance claim where
WRITTEN PERMISSION OF THE CONSUMER HAS BEEN OBTAINED (and a copy of
such written permission must be retained for 3 years from the date of
inquiry); or
4. In connection with a tenant screening application involving the
consumer; or
5. In accordance with the written instructions of the consumer (and a
copy of such written permission must be retained for 3 years from the
date of inquiry); or
6. For a legitimate business need in connection with a business
transaction that is initiated by the consumer; or
7. As a potential investor, servicer or current insurer in connection
with a valuation of, or assessment of, the credit or prepayment risks.
F. Reseller is prohibited from selling reports directly to consumers under
this Agreement. Reseller may make disclosures to consumers only to the
extent required by Section 609 of the FCRA.
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<PAGE> 19
G. Reseller may advertise its services on the Internet or another public
computer network. However, reports may not be sold and delivered over a
public computer network. Reseller may receive requests for consumer reports
over the Internet, but the reports must be delivered to the user by means
other than the Internet. In the event Reseller believes that adequate
security has been established to permit on-line public network or Internet
access, with no risk of any party other than the appropriate party
obtaining an individual's consumer report, Reseller shall apply to Trans
Union for approval of its security procedures. Approval must then be
obtained from Trans Union's computer access Security Department, in
writing, before any such deliveries of consumer reports can occur. Failure
to obtain such prior approval shall result in immediate termination of this
Agreement.
H. Reseller may sell consumer reports for employment purposes (PEER) to the
customers who are Members of the Media, Law Enforcement Agencies, Private
Investigative Agencies, Detective Agencies, Law Firms, Security Services,
Investigators, and Lawyers or Attorneys at Law, provided such customers
shall be issued individual code numbers as set forth in Section IV of this
Agreement and subject to the requirements in Section E (2) above. However,
for reports for any purpose other than employment, or any other products,
the prohibition in Section I below shall apply.
I. Except as other expressly permitted herein, Reseller shall not sell Trans
Union consumer reports to customers who are:
1. Private Investigative Agencies
2. Detective Agencies
3. Law Firms
4. Security Services
5. Investigators
6. Lawyers or Attorneys at Law
7. Law Enforcement
8. Credit Repair Clinics or any similar entity who offers to improve a
consumer's credit report
9. Members of the Media
10. Other Resellers
11. Or such other category of customer as Trans Union may identify from
time to time by written notice to Reseller.
The foregoing categories are hereinafter referred to as "Unauthorized
Users."
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<PAGE> 20
J. Reseller shall take the steps identified on Exhibit C to verify the
identity of its customers who will obtain Trans Union credit reports
or information therefrom to make certain that such users are
legitimate businesses, have a permissible purpose for obtaining
credit reports, and are not Unauthorized Users. Trans Union may amend
Exhibit C at any time by providing 30 days written notice to Reseller.
K. If, as a result of the verifications outlined on Exhibit C, the
prospective customer is found to be an Unauthorized User, or is found
to have no permissible purpose to obtain credit reports, no agreement
will be signed and no subscriber number will be issued.
L. Trans Union reserves the right to terminate any customer of Reseller
at any time with or without notice.
II. Merged Report Guidelines
Reseller agrees to adhere to the following guidelines when it sells
Merged Consumer Reports:
A. Reseller shall comply with the requirements of FCRA dealing with
consumer disclosure, interviews and reinvestigation procedures.
B. Reseller shall retain each Merged Report so that it can provide
a consumer disclosure as required by FCRA.
C. Reseller shall be able to easily identify the source(s) of each
element of data in the Merged Report. Consumer disclosures must
clearly show this data as it was originally reported by each of
the sources when providing the consumer disclosure.
D. When a customer of the Reseller requests and reviews a Merged
Report and the consumer is denied credit based on information in
that Report, the consumer must be referred to the Reseller for a
complete disclosure.
E. In making a consumer disclosure, the Reseller will provide the
names, addresses and telephone numbers of the consumer reporting
agency that was used to provide information for the report.
F. In making a disclosure, in addition to all other obligations
Reseller has under Section 609 of the FCRA, the Reseller also
must advise the consumer about her/his FCRA rights to dispute
information with the appropriate source credit bureau, to
request reinvestigation, and to have corrected reports reissued
to previous recipients, all as required by the FCRA and in the
format established by the Federal Trade Commission.
G. Reseller must obtain information from sources other than the
applicant in preparing the merged report. The Reseller must
obtain information from a minimum of two national consumer
reporting agencies. Separate inquiries are necessary when the
co-borrowers have individually applied for credit.
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<PAGE> 21
H. The Merged Report must contain the date the report was created,
the Reseller's name, address, and phone number as the consumer
reporting agency which prepared the Merged Report. The Merged
Report must show the names of the repository(ies) from which the
information was obtained and must identify the organization that
ordered the Merged Report.
I. Once the merge logic is applied, the Merged Report must
accurately reflect all elements of tradeline or credit grantor
information for each tradeline if it was furnished by one or
more of the credit reporting agencies.
III. Trans Union Responsibilities
A. Trans Union shall maintain credit information on individuals as
furnished by its subscribers or obtained from other available sources.
B. Trans Union shall use good faith in obtaining and assembling such
information from sources deemed reliable, but does not guarantee the
accuracy of any information reported, and TRANS UNION MAKES NO
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, RESPECTING THE ACCURACY OF ANY TRANS UNION CREDIT
INFORMATION FURNISHED BY TRANS UNION TO RESELLER OR TO ANY SUBSCRIBERS
OF RESELLER. IN NO EVENT SHALL TRANS UNION BE LIABLE TO RESELLER IN
ANY MANNER WHATSOEVER FOR ANY LOSS OR INJURY TO RESELLER RESULTING
FROM THE OBTAINING OR FURNISHING OF CREDIT REPORTS AND, FURTHER,
RESELLER AGREES TO HOLD TRANS UNION HARMLESS AND INDEMNIFY IT FROM
ANY AND ALL CLAIMS, LOSSES AND DAMAGES ARISING OUT OF THE ISSUANCE
OF SUCH REPORTS OR THE FAILURE OF RESELLER TO KEEP AND PERFORM ANY
OF ITS OBLIGATIONS DESCRIBED HEREIN.
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<PAGE> 22
IV. Identify End User
A. Reseller shall provide to Trans Union, for each customer for whom
Reseller will procure Trans Union credit reports or information
therefrom, the end user's identity by subscriber number, name,
address and telephone number, and the permissible purpose for which
each report is sought, so that such information may be noted on the
report for the consumer who is the subject of the report accessed.
Such end user identification shall be made as mutually agreed between
Trans Union and Subscriber.
1. Individual Code for Each End User
Each customer signed up by Reseller may access the Trans Union
system after appropriate identification procedures have been
established, and a separate customer code shall be issued for
each customer. When such code is established, Reseller shall
provide Trans Union with the customer's name, address, and
telephone number. The permissible purpose shall be identified on
each inquiry.
2. Reseller Code Used for All Inquiries
No individual customer code will be issued, nor will access to
the Trans Union system be established, for any customer by Trans
Union. Rather, the code used will be the Reseller's code. The
customer name and permissible purpose for the inquiry shall be
identified by Reseller on each consumer report accessed. Pursuant
to Section 609 of the FCRA, the customer's name must be the trade
name under which the customer conducts business, written in full.
Reseller agrees to establish and provide Trans Union a toll free
number, which will be answered between the hours of 9 a.m. to 5
p.m. Monday through Friday, exclusive of federal holidays, that
Trans Union can call to obtain the customer's address and
telephone number.
Failure of Reseller to comply with the requirements of this
Section IV shall result in termination of this Agreement.
B. If any current customers of Reseller have been assigned a Trans Union
access code, they shall be identified, and Reseller shall determine
that the certifications required herein and all other obligations
stated herein are complied with by such customers. All Unauthorized
Users who have an access code for the Trans Union system, shall be
terminated and access to the Trans Union system by them shall be
canceled, except as otherwise permitted by Section I(H) above.
6
<PAGE> 23
C. Reseller is also required to:
1. Internally identify all of End-User Customers engaged in the
underwriting of insurance including, but not limited to, auto
insurance, casualty insurance, property insurance, surety bond
companies, bail bondsmen, and insurance agents (hereinafter
referred to as "Insurance Company Customers").
2. Ensure that all of Insurance Company Customers are identified by
means of a separate Trans Union subscriber code.
3. Ensure that all Insurance Company Customers have a Trans Union
subscriber code with an "I" KOB.
4. Ensure that all inquiries made by all Insurance Company Customers
include the appropriate permissible purpose code, as identified
by Trans Union.
V. Fees & Charges
A. Reseller shall pay to Trans Union for each access by it or one of its
customers the price then in effect for the type of credit report
ordered. Trans Union shall have no obligation to collect any account
owing from Reseller's customers.
B. Trans Union shall provide monthly invoices to Reseller for all access
by it or Reseller's customers, and such invoices shall be paid by
Reseller within thirty (30) days of receipt. Past due amounts shall
accrue interest at the rate of 1.5% per month. If collection efforts
are required, Reseller shall be liable for all cost of collection,
including reasonable attorney's fees.
VI. Miscellaneous
A. This Agreement shall remain in force and effect for one (1) year from
the date hereof, and thereafter, from year to year, on the same basis
as set forth herein except that either party may cancel this Agreement
at any time upon at least thirty (30) days notice, and Trans Union may
cancel this Agreement or any customer solicited by Reseller
immediately if it determines that the requirements of this Agreement
or any law have not been met. Trans Union may also terminate this
Agreement immediately without notice if invoices hereunder are not
paid as of the due date.
B. The parties hereto agree that this instrument is the full and complete
Agreement between them regarding the furnishing of credit information
for resale, supersedes all prior agreements or discussions, and is not
to be altered, varied, or enlarged upon by any verbal promises,
statements, or representations not expressed herein.
C. Trans Union may make available ancillary products for resale by
Reseller, subject to such conditions as Trans Union may impose from
time to time. If Reseller refuses to agree to or fails to comply with
such conditions, Trans Union shall have no obligation to make such
ancillary product available to Reseller.
7
<PAGE> 24
D. The parties acknowledge the special and unique purposes of this Agreement
and, therefore, agree that, notwithstanding any other provisions to the
contrary contained in this Agreement, neither this Agreement nor any of the
rights or obligations hereunder may be assigned by Reseller without the
prior written consent of Trans Union. Any attempt by Reseller to assign
this Agreement without Trans Union's written consent is grounds for
immediate termination.
E. Each of the parties to this Agreement are independent contractors and
nothing contained in this Agreement shall be construed as creating a joint
venture, partnership, licensor-licensee, principal-agent or mutual agency
relationship between or among the parties hereto and no party shall, by
virtue of this Agreement, have any right or power to create any obligation,
express or implied, on behalf of any other party. No party, nor any
employee of a party, shall be deemed to be an employee of the other party
by virtue of this Agreement.
F. Trans Union may audit Reseller's compliance with the requirements of this
Agreement, upon reasonable notice and during normal business hours. Trans
Union may also audit Reseller to ensure that Reseller accurately outputs
Trans Union data on any report sold by Reseller, including merged reports.
The parties recognize that Trans Union will suffer irreparable harm, and
that monetary damages may be incalculable and/or inadequate in the event
that Reseller retains Trans Union data in breach of Paragraph I(B) or I(D)
of this Agreement,and therefore, such breach shall be entitled to remedy by
injunctive relief, in addition to any and all other relief which may be
available at law or at equity.
G. Reseller may use the Trans Union name and trademarked product names in its
efforts to market Trans Union products; provided, however, that Trans Union
may require that such use indicate that the mark is the trademark,
servicemark, or registered servicemark of Trans Union LLC. Trans Union may
prohibit the use of such mark if, in Trans Union's sole discretion,
Reseller's use of the mark is detrimental to Trans Union in any way.
Agreed to on the date indicated below:
Reseller Name: Towne Services, Inc. Trans Union LLC
-----------------------
Signature: /s/ Bruce F. Lowthers Signature: /s/ Michael J. Jones
--------------------------- ---------------------------
Print: Bruce Lowthers Print: Michael J. Jones
------------------------------- -------------------------------
Title: CFO Title: Group VP
------------------------------- -------------------------------
Date: 12-8-99 Date: 12-20-99
-------------------------------- --------------------------------
Address: 3950 Johns Creek Ct. #100
-----------------------------
Suwanee, GA 30024
-----------------------------
8
<PAGE> 25
EXHIBIT A TO RESELLER AGREEMENT
(REQUIRED TERMS FOR RESELLER AGREEMENT
FOR CONSUMER REPORTS BETWEEN RESELLER AND ITS CUSTOMER)
1. Reseller has access to consumer reports from one or more consumer credit
reporting agencies.
2. Subscriber is a and has a permissible purpose for obtaining
consumer reports, as defined by Section 604 of the Federal Fair Credit
Reporting Act (15 USC 1681b) as amended by the Consumer Credit Reporting
Reform Act of 1996, hereinafter called "FCRA." The subscriber certifies
their permissible purpose as:
- In connection with a credit transaction involving the consumer on
whom the information is to be furnished and involving the extension
of credit to, or review or collection of an account of the consumer;
or
- In connection with the underwriting of insurance involving the
consumer or review of existing policy holders for insurance
underwriting purposes, or in connection with an insurance claim
where written permission of the consumer has been obtained; or
- In connection with a tenant screen application involving the
consumer; or
- In accordance with the written instructions of the consumer; or
- For a legitimate business need in connection with a business
transaction that is initiated by the consumer; or
- As a potential investor, servicer or current insurer in connection
with a valuation of, or assessment of, the credit or prepayment risks.
3. Subscriber certifies that it will request consumer reports pursuant to
procedures prescribed by Reseller from time to time only for the
permissible purpose certified above, and will use the reports obtained for
no other purpose.
4. Subscriber will maintain copies of all written authorizations for a minimum
of three (3) years from the date of inquiry.
5. THE FCRA PROVIDES THAT ANY PERSON WHO KNOWINGLY AND WILLFULLY OBTAINS
INFORMATION ON A CONSUMER FROM A CONSUMER REPORTING AGENCY UNDER FALSE
PRETENSES SHALL BE FINED UNDER TITLE 18, OR IMPRISONED NOT MORE THAN
TWO YEARS, OR BOTH.
6. Subscriber agrees that it shall use Consumer Report only for a one-time
use, and to hold the report in strict confidence, and not to disclose it
to any third parties; provided, however, that Subscriber may, but is not
required to, disclose the report to the subject of the report only in
connection with an adverse action based on the report.
7. With just cause, such as delinquency or violation of the terms of this
contract or a legal requirement, Reseller may, upon its election,
discontinue serving the Subscriber and cancel this Agreement immediately.
<PAGE> 26
EXHIBIT B TO RESELLER AGREEMENT
(REQUIRED TERMS FOR RESELLER AGREEMENT
FOR CONSUMER REPORTS FOR EMPLOYMENT PURPOSES (PEER)
BETWEEN RESELLER AND ITS CUSTOMER)
1. Reseller has access to consumer reports from one or more consumer credit
reporting agencies.
2. Subscriber is a and has a need for consumer credit information
in connection with the evaluation of individuals for employment, promotion,
reassignment or retention as an employee ("Consumer Report for Employment
Purposes").
3. Subscriber shall request Consumer Report for Employment Purposes pursuant
to procedures prescribed by Reseller from time to time only when it is
considering the individual inquired upon for employment, promotion,
reassignment or retention as an employee, and for no other purpose.
4. Subscriber certifies that it will not request a Consumer Report for
Employment Purposes unless:
A. A clear and conspicuous disclosure is first made in writing to the
consumer before the report is obtained, in a document that consists
solely of the disclosure, that a consumer report may be obtained for
employment purposes;
B. The consumer has authorized in writing the procurement of the report;
and
C. Information from the Consumer Report for Employment Purposes will
not be used in violation of any applicable federal or state equal
employment opportunity law or regulation.
5. Subscriber further certifies that before taking adverse action in whole or
in part based on the Consumer Report for Employment Purposes, it will
provide the consumer:
A. A copy of the Consumer Report for Employment Purposes; and
B. A copy of the consumer's rights, in the format approval by the FTC,
which notice shall be supplied to Subscriber by Reseller.
6. Subscriber agrees that it shall use Consumer Report for Employment Purposes
only for a one-time use, and to hold the report in strict confidence, and
not to disclose it to any third parties not involved in the current
employment decision.
7. Subscriber will maintain copies of all written authorizations for a
minimum of three (3) years from the date of inquiry.
8. With just cause, such as delinquency or violation of the terms of this
contract or a legal requirement, Reseller may, upon its election,
discontinue serving the Subscriber and cancel this Agreement immediately.
<PAGE> 27
EXHIBIT C TO RESELLER AGREEMENT
(REQUIRED STEPS FOR
RESELLER TO VERIFY THE IDENTITY OF ITS CUSTOMERS)
1. The actions taken to verify the type of customer will be notated on either
the Subscriber Agreement or separate documentation within the membership
file that will be maintained with the Subscriber Agreement. Records which
document the investigation, and the Subscriber Agreement, must be retained
as long as the customer continues to maintain access and for three (3)
years thereafter. Those records (or copies thereof) must be made available
to appropriate Trans Union personnel on request.
2. Confirm that the stated permissible purpose for obtaining consumer reports
is compatible with the type of business conducted by the potential
customer.
3. Conduct a physical inspection of the company's premises to assure that it
is a legitimate business facility (not a residence) and that the
furnishings, etc. are commensurate with the size and purported type of
business, and in order to determine if it is an Unauthorized User.
Documentation must be maintained demonstrating when and by whom the
physical inspection was conducted and describing the company's premises.
This is a material requirement of this Agreement.
4. Confirm that advertisements or signs are compatible with purported
business.
5. Verify that the company has a business checking account and that the
account balance is compatible with the size and nature of the company.
6. Verify business references to ensure that the potential customer has
clientele which would support the stated business.
7. Verify business phone numbers by checking the phone directory or other
phone records.
8. Check the yellow pages listings for the area where the customer is located
to see if the prospective customer is listed under any of the categories
identified previously as Unauthorized Users. If Reseller does not have
access to the yellow pages listings for that area, Reseller may, instead,
use an Internet Yellow Pages listing.
9. Check the Internet to determine if the prospective customer has a web page.
If the prospective customer does have a web page, view the page to verify
that the information on the web page is compatible with purported business,
that the prospective customer is not an Unauthorized User, and that the
prospective customer is a legitimate business.
<PAGE> 1
Exhibit 10.31
AGREEMENT
-----------
THIS AGREEMENT, made the 24th day of June 1998, by and between Towne
Services, Inc. ("Towne Services") a corporation in the state of Georgia, with
its address at 3295 River Exchange Drive, Suite 350, Norcross, Georgia 30092
and Wallace & de Mayo, P.C. ("W&D"), a professional corporation of the State of
Georgia, with its principal office at 6356 Corley Road, Norcross, Georgia,
30071.
WHEREAS, Towne Services wishes to place with W&D Accounts that it has
received from its Customers, and
WHEREAS, Customers of Towne Services have requested W&D to represent the
Customers by entering into the Agreement attached hereto and marked Exhibit A,
and
WHEREAS, W&D has agreed to take such Accounts and to service them either
directly and/or through the National Attorney Network ("NAN").
NOW, THEREFORE, in consideration of ten dollars ($10.00) and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
---------------
1.1 ACCOUNT(S) - Account(s) means a claim against a debtor which resulted
from the extension of credit from a credit grantor, or their assignor or
seller.
1.2 ACCOUNT DEBTOR - An individual or business that has an Account with a
Customer.
1.3 CUSTOMER(S) - A Customer(s) is a credit grantor that is on Towne
Services' system and wishes to use W&D for its legal collection work.
1.4 FIRM - A Firm is a law firm which has one or more members licensed to
practice law in the state where their principal office is located. A Firm
can be a professional corporation, partnership or other entity allowed to
practice law, and shall include all attorneys in the firm licensed to
practice law whether designated partner, associate, of counsel, or any
other designation, and shall further include all personnel and employees of
the law firm.
1.5 GROSS PROCEEDS - Gross Proceeds means the aggregate Proceeds collected
by W&D or a Firm on Accounts placed to W&D or to the Firm through the
Network.
1
<PAGE> 2
1.6 NET PROCEEDS - Net Proceeds means Gross Proceeds less court costs
recovered from an Account Debtor. Expenses such as postage, copying and other
expenses shall not be passed on to the Customer by W&D or Firms without written
approval of the Customer.
1.7 NETWORK - Network is the network of Firms linked together by NAN.
1.8 NETWORK CHARGE - The Network Charge is a charge by NAN to its Firms.
1.9 PROCEEDS - Proceeds means items of payment, including without
limitation, cash or its equivalent paid by or for an Account Debtor.
1.10 RECEIVING FIRM - Receiving Firm is a Firm which receives Accounts
through the Network.
ARTICLE II
DUTIES OF W&D
The following shall be the duties of W&D:
2.1 W&D shall undertake to collect those Accounts for Customers of Towne
Services which are placed with it by Towne Services' system. In the event the
Account cannot be collected by W&D, it shall either close and return the Account
to Towne Services or send the Account to a Firm on the Network system. W&D will
report to the Customers through the Towne Services system. All communications
shall remain confidential as between W&D and the Customers.
2.2 All Proceeds received by W&D on behalf of Towne Services' Customers
shall be held by W&D in trust and shall be segregated from W&D's operating
accounts. Said Proceeds, less the percentage owed to W&D and to Towne Services,
will be forwarded to Customers on a monthly basis. W&D shall also forward to
Towne Services its charges to its Customers for processing their accounts.
ARTICLE III
RELATIONSHIP
3.1 The Relationship between W&D and Towne Services shall be that of
independent contractor. Under no circumstances is the relationship among the
aforementioned parties or NAN to be construed as that of principal/agent,
master/servant, employer/employee, joint venturer, partner, or any other similar
relationship.
2
<PAGE> 3
ARTICLE IV
CONFIDENTIALITY
W&D understands and agrees that all Accounts, records, documents and
account information provided to it are proprietary and highly confidential
information. W&D agrees not to directly disclose to, publish, cause to be
disclosed or published, or use such information for the benefit of any third
party or itself. The Customers that use W&D to collect their debts shall be
considered clients of W&D and the attorney-client privilege shall be in effect.
ARTICLE V
ACCOUNTS
At no time will W&D have any claim or right to any Account. The Accounts
belong to the Customers who can recall any Account at any time.
ARTICLE VI
MISCELLANEOUS
6.1 WAIVER. The failure of either party to enforce any rights granted
hereunder or to take action against the other party in the event of any breach
hereunder shall not be deemed a waiver by that party as to subsequent
enforcement of rights or subsequent actions in the event of future breaches.
6.2 AUTHORITY. The undersigned Firm is organized as a legal
corporation or law partnership, and the undersigned Firm has the corporate
power or partnership power to execute, deliver and carry out this Agreement and
its Board of Directors or Partners have duly authorized and approved the terms
and conditions of this Agreement, and this Agreement constitutes the valid and
binding obligations of the undersigned, enforceable in accordance with their
terms.
6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between W&D and Towne Services as to Accounts placed on the Network by Towne
Services after the date hereof. No representations, promises or conditions that
are not incorporated herein shall be binding upon either party. This Agreement
supersedes all prior understandings, agreements or arrangements between the
undersigned parties.
6.4 MODIFICATIONS. No modifications or amendment to this Agreement shall
be binding unless made in writing and signed by each party.
6.5 NOTICES. Any notices required under this Agreement required or
permitted under this Agreement shall be sufficiently given if sent by registered
or certified mail, postage prepaid, addressed as follows:
3
<PAGE> 4
If to Towne Services: Henry M. Baroco
3295 River Exchange Drive
Suite 350
Norcross, Georgia 30092
If to W&D to: 6356 Corley Road
Norcross, GA 30071
Attention: Douglas W. Wallace, Esq.
With a copy to: Richard T. de Mayo, Esq.
6356 Corley Road
Norcross, GA 30071
or such other address as shall be furnished in writing by any of the parties and
any such notice or communication shall be deemed to have been given as of the
date so mailed.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
WALLACE & de MAYO, P.C.
By: /s/
------------------------
Title: President
------------------------
TOWNE SERVICES, INC.
By: /s/ Henry M. Baroco
------------------------
Title: President
------------------------
4
<PAGE> 1
EXHIBIT 10.32
Agreement for 1-800-Pay Bill(R)
AGREEMENT made this 22 day of December, 1998 by and between Princeton
TeleCom Corporation ("PTC") with its principal place of business at 165 Wall
Street, Princeton, New Jersey 08540 and Town Services Inc. ("BILLER") with its
principal place of business at 3295 River Exchange Dr., Suite 350, Norcross
Georgia 30092.
WHEREAS, PTC, a developer and manufacturer of financial services
technologies, is engaged in the business of capturing and concentrating
electronic bill payment originations on behalf of financial services companies
who offer an electronic consumer bill payment service; and
WHEREAS, BILLER desires the services performed by PTC for the collection
of remittances made by BILLER's customers who make use of such bill payment
services;
NOW, THEREFORE, in consideration of the good and valuable benefits and
mutual promises hereinafter contained, the parties hereby agree to the
following terms, conditions and agreements.
1. SERVICES TO BE PERFORMED
PTC Agrees to operate an automatic bill payment service wherein customers of
BILLER shall enroll for the automatic bill payment service by signing an
enrollment card provided by BILLER and mailing the enrollment card to an
address determined by PTC that may be the same as BILLER's lockbox address, at
PTC's discretion, together with a remittance stub or coupon that can be read
optically provided by BILLER and a personal check provided by the customer of
BILLER; and PTC shall cause payments to be made from the checking account of
each enrolled customer of BILLER at each billing interval as determined by
BILLER; and these payments shall be in the amount due to BILLER from the
customer, as determined by BILLER; subject to the availability of timely,
accurate, and complete billing information from BILLER delivered to PTC. PTC
further agrees to capture, combine and reformat BILLER's customer payment
remittances ("ORIGINATIONS") which originate through consumer bill payment
services. Such ORIGINATIONS shall be obtained by and entirely at PTC's sole
discretion including but not limited to ORIGINATIONS obtained through PTC's
financial services clients and ORIGINATIONS purchased through third party
remittance processing services. PTC further agrees to provide electronic bill
presentment for BILLER customers who are able to access the web site provided
by PTC. PTC at PTC's sole discretion, shall offer BILLER presentment data to
parties selected by PTC. The form and substance of said biller presentment data
shall be at the sole discretion of BILLER. PTC shall disclose any revenues or
expenses derived from parties selected to receive presentment data, for
presentment data, and shall negotiate with BILLER in good faith to modify
prices in Exhibit A where appropriate.
2. TRANSMISSION OF DATA
BILLER agrees to transmit, and PTC agrees to receive, on each business day
during which bills are processed by BILLER the customer remittance account
numbers and amounts shown as due to BILLER for each bill generated, to the
PTC's designated facility, according to mutually agreed upon methods and
standards, a digitally formatted computer file, according to the standards and
requirements determined by BILLER PTC agrees to transmit, and BILLER agrees to
receive, on each business day during which fully processed BILLER remittances
are available to PTC, to the BILLER's designated facility, according to
mutually agreed upon methods and standards, a digitally formatted computer
file, according to the standards and requirements of Paragraph 3.
3. SPECIFICATIONS OF DATA TRANSMITTED
Each digitally transmitted computer file shall contain a group of ORIGINATIONS,
preceded by a file header record, and followed by a file trailer record. In
addition, if required by BILLER, PTC agrees to prefix or append each file with
Job Control Language code (JCL) according to the specifications or requirements
of the BILLER. Each ORIGINATION shall include the payor's name (as and if
available to PTC from data provided by the originating institution, or the
billing file transmitted to PTC from BILLER, the amount of the remittance, and
the BILLER'S edited account number. An edited account number is an ORIGINATION
account number which has been verified and edited according to mutually agreed
upon specifications. In addition, each ORIGINATION may include a PTC generated
trace number which PTC may use to identify the source and transmission of each
ORIGINATION. Finally, each file shall contain, within the file trailer record,
the total number of ORIGINATIONS contained within the file and the total
aggregate dollar amount contained within the file.
4. CREDIT OF REMITTANCES
BILLER agrees that each ORIGINATION which it receives by transmission from PTC
which contains a valid BILLER customer account number will post to such account
as a credit on the same day as such transmission by an amount equal to that
contained in the ORIGINATION. Each credit so posted is subject only to receipt
by BILLER of good funds according to Paragraph 6.
5. INVALID ACCOUNT NUMBERS
BILLER agrees that it shall inform PTC by telephone or by facsimile message of
any ORIGINATION included in a transmission which contains an invalid
(non-postable) account number within two (2) business days of such occurrence.
PTC agrees that it will attempt in good effort and faith to determine the
correct remittance account number for such ORIGINATION and to inform BILLER of
the corrected information within five (5) business days. BILLER agrees to
cooperate in good effort an faith with representatives of PTC in resolving such
occurrences. BILLER further agrees that it will issue a check made payable to
PTC for the amount of all invalid remittances which fail to be resolved
according to the provisions of this paragraph. BILLER agrees to mail such check
item to Princeton Telecom within ten (10) business days of notification, by
PTC, in writing, of its failure to resolve the invalid remittance account
number.
6. SETTLEMENT
PTC agrees to initiated (originate) a wire transfer credit through the
Automated Clearing House (ACH) to the BILLER's designated bank ABA Transit No.
545420242, account number 60866668 an aggregate amount of each transmission
completed according to Paragraph 2. PTC agrees to initiated (originate) such
ACH credit on the next business day following each transmission.
7. TERM
This Agreement shall be for a term commencing upon the data hereof, and
terminating on December 22, 1999. BILLER, at its sole option, upon at least 45
days' written notice, may terminate this Agreement at any time during which this
Agreement is in full force. BILLER agrees that during the term of this
Agreement it will not engage similar services from any third party processor of
consumer initiated electronic payments, provided, however, that such payments
are available through the services provided herein.
8. UNCOLLECTED ACCOUNTS
PTC agrees that it shall notify BILLER by telephone or by facsimile message, or
by transmitted file, of any ORIGINATION included in a transmission for which
PTC has been unable, for any reason, to collect the corresponding funds from
the Originator of such ORIGINATION, or any ORIGINATION that is returned by the
ACH for any reason, within two (2) business days of such occurrence. BILLER
<PAGE> 2
agrees that it shall accept net settlement for the amount of all uncollected
remittances which fail to be collected according to the provisions of this
paragraph. BILLER agrees that such net settlement may occur on the next
business day following notification, by PTC, of its failure to collect funds
for each such ORIGINATION.
9. REMUNERATION
BILLER agrees to pay PTC for each and every individual ORIGINATION delivered to
PTC under the terms of this Agreement the sum of ten ($0.10) Cents. In
addition, BILLER agrees to pay to PTC fees for additional services as outlined
in EXHIBIT A. All payments to PTC shall be made within ten (10) days of receipt
of PTC's monthly invoice for services performed during the previous month, plus
two (2%) percent per month, prorated, for payments received from BILLER by PTC
after the fifteenth (15th) day following the invoice date for which such
payments are applicable.
10. WARRANTY
PTC hereby warrants that the services furnished hereunder shall be performed in
a fully workmanlike manner and shall conform to the standards and
specifications set forth in this Agreement.
11. DUTY OF CARE
PTC shall not be liable for damage, loss of data, delays and errors occurring
by reason of circumstances beyond its reasonable control. PTC shall keep in a
separate and safe place additional copies of all records required to be
maintained and of additional tapes or disks necessary to reproduce all such
records. PTC shall provide "backup facilities" for its use in creating the
electronic remittance items and records in the event circumstances beyond PTC's
control prevent it from being able to perform under this Agreement at one of
its computer facilities. PTC shall use reasonable care to minimize the
likelihood of all damage, loss of data, delays, and errors resulting from an
uncontrollable event, and should damage, loss of data, delays, or errors occur,
PTC shall use its best efforts to mitigate the effects of such occurrence.
12. INDEMNIFICATION OF PTC
BILLER shall indemnify and hold PTC, its officers, employees, and agents
harmless against any losses, claims, damages, judgments, liabilities or
expense (including reasonable counsel fees and expenses) resulting from action
taken or permitted by PTC in good faith with due care and without negligence in
reliance upon instructions or orders received from BILLER as to anything
arising in connection with its performance under this Agreement. PTC shall be
without liability to BILLER with respect to anything done or omitted to be
done, in accordance with the terms of this Agreement or instructions properly
received pursuant hereto, if done in good faith and without negligence or
willful or wanton misconduct.
13. INDEMNIFICATION OF BILLER
PTC shall defend, indemnify and save harmless, BILLER from and against all
losses, costs, damages, expenses (including reasonable counsel fees and
expenses), claims or demands arising out of or caused to have been caused in any
manner by performing the services herein provided, including all suits or
actions of every kind or description brought against BILLER, either individually
or jointly with PTC for or on account of any damage or injury to any person or
persons or property, caused or occasioned or alleged to have been caused by or
on account of the performance of any work pursuant to or in connection with this
Agreement or through any act, omission of fault or alleged act, omission or
fault of PTC, its employees, or agents, or others under PTC's control.
14. CONFIDENTIALITY AND PROMOTION MATERIAL
PTC on behalf of itself and its employees agrees to keep confidential all
records and other information with respect to BILLER and its customers;
provided, however, that it PTC is required to product any such information by
order of any court, government agency or other regulatory body it may release
the information required after making a reasonable effort to give the BILLER
not less than five (5) days advance written notice prior to the release of the
required information. However, BILLER agrees that PTC may use BILLER's name in
promotional material.
15. NOTICE REQUESTS
All notices and requests in connection with this Agreement shall be given or
made upon the respective parties in writing and shall be deemed as given as of
the day it is deposited in the U.S. mails, postage pre-paid, certified or
registered, return receipt requested, and addressed as follows:
BILLER Mr. Robert E. Witherington
Towne Services, Inc.
3295 River Exchange Dr, Ste. 350
Norcross, Ga 30092
PTC: Ms. Tracy Robinson
Princeton TeleCom Corporation
165 Wall Street
Princeton, New Jersey 08540
16. ENTIRE AGREEMENT
Each party acknowledges that it has read this Agreement, understands it, and
agrees to be bound by its terms and further agrees that it is the complete and
exclusive statement of the Agreement between the parties, which supersedes and
merges all prior proposals, understandings and all other agreements, oral and
written between the parties relating to the subject matter of this Agreement
The Agreement may not be modified or altered except by written instrument duly
executed by both parties.
17. NEW JERSEY LAW
This Agreement and performance hereunder shall be governed by and construed in
accordance with the laws of the state of New Jersey.
18. ENFORCEABILITY
If any provision of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall in no way be affected or impaired thereby.
19. ASSIGNMENT
This Agreement and the rights and duties hereunder shall not be assignable by
the parties hereto except upon written consent of the other, with the exception
that this Agreement can be assigned by PTC to a wholly-owned subsidiary of PTC,
and with the exception that this Agreement can be assigned by BILLER to a
wholly-owned subsidiary of BILLER.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement the date
and year first written above by their duly authorized representative.
TOWNE SERVICES, INC.
By: /s/ Bruce F. Lowthers, Jr.
----------------------------
PRINCETON TELECOM CORPORATION
By: /s/ D [illegible], President
----------------------------
<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."
TSI Acquisition One, Inc., a Georgia corporation and wholly-owned
subsidiary of Towne Services, doing business under the name "Forseon."
Forseon Corporation, a California corporation and wholly-owned
subsidiary of TSI Acquisition One, Inc., doing business under the name
"Forseon."
TSI Acquisition Two, Inc., a Georgia corporation and wholly-owned
subsidiary of Towne Services, doing business under the name "Imaging
Institute."
Imaging Institute, Inc., a Minnesota corporation and wholly-owned
subsidiary of TSI Acquisition Two, Inc., doing business as "Imaging Institute."
<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. 333-76859.
/s/ Arthur Andersen LLP
- ------------------------------
Arthur Andersen LLP
Atlanta, Georgia
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOWNE SERVICES FOR THE YEAR ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,981,000
<SECURITIES> 1,350,000
<RECEIVABLES> 5,821,000
<ALLOWANCES> (532,000)
<INVENTORY> 0
<CURRENT-ASSETS> 28,729,000
<PP&E> 14,491,000
<DEPRECIATION> (3,371,000)
<TOTAL-ASSETS> 57,737,000
<CURRENT-LIABILITIES> 7,037,000
<BONDS> 0
0
1,880,000
<COMMON> 87,460,000
<OTHER-SE> (39,668,000)
<TOTAL-LIABILITY-AND-EQUITY> 57,737,000
<SALES> 29,774,000
<TOTAL-REVENUES> 29,774,000
<CGS> 7,338,000
<TOTAL-COSTS> 42,643,000
<OTHER-EXPENSES> 4,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (711,000)
<INCOME-PRETAX> (12,162,000)
<INCOME-TAX> 222,000
<INCOME-CONTINUING> (12,384,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,183,000
<NET-INCOME> (15,567,000)
<EPS-BASIC> (.64)
<EPS-DILUTED> (.64)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,060,000
<SECURITIES> 0
<RECEIVABLES> 4,782,000
<ALLOWANCES> (398,000)
<INVENTORY> 0
<CURRENT-ASSETS> 19,022,000
<PP&E> 5,477,000
<DEPRECIATION> (2,024,000)
<TOTAL-ASSETS> 38,747,000
<CURRENT-LIABILITIES> 8,764,000
<BONDS> 0
0
0
<COMMON> 53,520,000
<OTHER-SE> (24,126,000)
<TOTAL-LIABILITY-AND-EQUITY> 38,747,000
<SALES> 18,149,000
<TOTAL-REVENUES> 18,149,000
<CGS> 4,302,000
<TOTAL-COSTS> 32,860,000
<OTHER-EXPENSES> 317,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (226,000)
<INCOME-PRETAX> (14,802,000)
<INCOME-TAX> (11,000)
<INCOME-CONTINUING> (14,791,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 476,000
<CHANGES> 0
<NET-INCOME> (15,267,000)
<EPS-BASIC> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,643,000
<SECURITIES> 0
<RECEIVABLES> 1,035,000
<ALLOWANCES> (36,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,894,825
<PP&E> 2,399,000
<DEPRECIATION> (474,710)
<TOTAL-ASSETS> 7,200,000
<CURRENT-LIABILITIES> 2,257,000
<BONDS> 0
0
0
<COMMON> 5,700,000
<OTHER-SE> (2,978,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,200,000
<SALES> 12,897,000
<TOTAL-REVENUES> 12,897,000
<CGS> 3,389,000
<TOTAL-COSTS> 15,025,000
<OTHER-EXPENSES> (1,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,000
<INCOME-PRETAX> (2,282,000)
<INCOME-TAX> 104,000
<INCOME-CONTINUING> (2,386,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,386,000)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
