<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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)
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)
(Registrant's telephone number, including area code): (678) 475-5200
Indicate by check mark whether the registrant: (1) has 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 27,435,919 shares outstanding
at November 9, 2000.
1
<PAGE> 2
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 3
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months ended September 30, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Change in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOWNE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------------------------------
AUDITED UNAUDITED
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,981,000 $ 13,835,000
Investments 1,350,000 580,000
Accounts receivable, net of allowance
for uncollectible accounts of $531,000 and $544,000
at December 31, 1999 and September 30, 2000, respectively 5,289,000 2,911,000
Notes receivable from employees 509,000 147,000
Other 600,000 594,000
-------------------------------
Total current assets 28,729,000 18,067,000
-------------------------------
PROPERTY AND EQUIPMENT, net 10,540,000 10,290,000
NOTES RECEIVABLE FROM EMPLOYEES 804,000 854,000
GOODWILL, net 15,905,000 14,927,000
OTHER INTANGIBLES, net 1,034,000 911,000
OTHER ASSETS, net 725,000 849,000
-------------------------------
$ 57,737,000 $ 45,898,000
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,516,000 $ 321,000
Accrued liabilities 1,808,000 1,207,000
Accrued compensation 950,000 1,103,000
Accrued termination costs 230,000 259,000
Dividends payable 95,000 215,000
Deferred revenue 2,207,000 714,000
Current portion of long-term debt 231,000 251,000
-------------------------------
Total current liabilities 7,037,000 4,070,000
-------------------------------
LONG TERM DEBT 1,028,000 838,000
REDEEMABLE COMMON SHARES 770,000 --
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value; 20,000,000
shares authorized, 20,000 shares
issued and outstanding at December
31, 1999 and September 30, 2000, respectively 1,880,000 1,880,000
Common stock, no par value; 50,000,000
shares authorized, 27,197,722 Shares and
27,489,319 shares issued and outstanding December
31, 1999 and September 30, 2000, respectively 86,690,000 86,917,000
Warrants outstanding 161,000 161,000
Accumulated deficit (39,829,000) (47,968,000)
-------------------------------
Total shareholders' equity 48,902,000 40,990,000
-------------------------------
$ 57,737,000 $ 45,898,000
===============================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
<PAGE> 4
TOWNE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------------------------- -------------------------------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C>
REVENUES $ 7,251,000 $ 6,320,000 $ 22,678,000 $19,800,000
COSTS AND EXPENSES:
Costs of processing, servicing and support 2,095,000 1,801,000 5,211,000 5,742,000
Research and development 80,000 - 536,000 -
Sales and marketing 5,159,000 3,581,000 15,407,000 13,004,000
Employee termination expense 1,325,000 184,000 1,325,000 844,000
Acquisition expense - - 2,343,000 75,000
General and administrative 3,310,000 2,781,000 8,081,000 9,052,000
------------------------------ ------------------------------
Total costs and expenses 11,969,000 8,347,000 32,903,000 28,717,000
------------------------------ ------------------------------
OPERATING LOSS (4,718,000) (2,027,000) (10,225,000) (8,917,000)
------------------------------ ------------------------------
OTHER EXPENSES:
Interest income, net (319,000) (281,000) (431,000) (912,000)
------------------------------ ------------------------------
Total other expenses (319,000) (281,000) (431,000) (912,000)
------------------------------ ------------------------------
Loss before income tax (benefit) provision (4,399,000) (1,746,000) (9,794,000) (8,005,000)
Income tax expense (benefit) provision - 29,000 (354,000) 14,000
------------------------------ ------------------------------
Loss before extraordinary item and cumulative
effect of accounting change (4,399,000) (1,775,000) (9,440,000) (8,019,000)
Cumulative effect of an accounting change - - 3,183,000 -
------------------------------ ------------------------------
NET LOSS $ (4,399,000) $(1,775,000) $ (12,623,000) $(8,019,000)
============================== ==============================
PREFERRED STOCK DIVIDENDS - (40,000) - (120,000)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ (4,399,000) $(1,815,000) $ (9,440,000) $(8,139,000)
============================== ==============================
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE:
Basic $ (0.16) $ (0.07) $ (0.40) $ (0.30)
============================== ==============================
Diluted $ (0.16) $ (0.07) $ (0.40) $ (0.30)
============================== ==============================
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (4,399,000) $(1,815,000) $ (12,623,000) $(8,139,000)
============================== ==============================
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE:
Basic $ (0.16) $ (0.07) $ (0.53) $ (0.30)
============================== ==============================
Diluted $ (0.16) $ (0.07) $ (0.53) $ (0.30)
============================== ==============================
Weighted Average Common Shares Outstanding 27,015,545 27,488,180 23,635,577 27,383,385
============================== ==============================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statement of operations.
4
<PAGE> 5
TOWNE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1999 2000
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,623,000) $ (8,019,000)
-------------------------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of an accounting change 3,183,000 --
Compensation expense recognized for stock option grants 378,000 (3,000)
Depreciation 938,000 1,892,000
Amortization of intangibles and goodwill 1,305,000 1,588,000
Provision for doubtful accounts 565,000 544,000
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable (2,582,000) 1,834,000
Prepaid & other assets (798,000) (117,000)
Deferred revenue -- (1,494,000)
Accounts payable 1,080,000 (1,194,000)
Accrued liabilities 350,000 (601,000)
Accrued compensation 220,000 153,000
Accrued termination costs (144,000) 29,000
-------------------------------
Total adjustments 4,495,000 2,631,000
-------------------------------
Net cash used in operating activities (8,128,000) (5,388,000)
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in notes receivable from employees (767,000) 312,000
Purchase of short-term investments (850,000) (2,121,000)
Proceeds from sale of short-term investments -- 2,886,000
Other assets -- (37,000)
Acquisitions, net of cash acquired (2,281,000) (398,000)
Purchase of property and equipment, net (6,002,000) (1,676,000)
-------------------------------
Net cash used in investing activities (9,900,000) (1,034,000)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 66,000 243,000
Repayment of debt (5,373,000) (184,000)
Proceeds from issuance of preferred stock 2,000,000 --
Proceeds from issuance of common stock 33,435,000 9,000
Redemption of common stock -- (770,000)
Repurchase of common stock -- (22,000)
-------------------------------
Net cash provided by (used in) financing activities 30,128,000 (724,000)
-------------------------------
NET (DECREASE) INCREASE IN CASH 12,100,000 (7,146,000)
CASH AND CASH EQUIVALENTS, beginning of period 14,060,000 20,981,000
-------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 26,160,000 $ 13,835,000
===============================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes -- 47,000
===============================
Cash paid for interest $ 29,000 $ 88,000
===============================
Acquisitions of property and equipment through capital leases $ 1,360,000 $ --
===============================
</TABLE>
The accompanying notes are an integral part of these
statements.
5
<PAGE> 6
TOWNE SERVICES, INC.
NOTES TO CONDENSED 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 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 "virtual credit card system" processes the in-house
credit transactions of businesses and includes an automated receivables
management system that allows banks to quickly finance the working capital needs
of their 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-sized retail
merchants, TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which process
business-to-business credit transactions for commercial businesses, and RMSA
Forecast, which processes sales and inventory transactions and provides
merchandising information for specialty retail stores.
As discussed below in Note 6, the Company acquired Forseon Corporation
("Forseon") in 1999 in a transaction accounted for as a pooling-of-interests
and, accordingly, the Company's historical consolidated financial statements
have been restated as if the acquisition occurred as of the earliest period
presented.
2. BASIS OF PRESENTATION
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements for the
three and nine months ended September 30, 2000 are unaudited. The historical
financial information has been restated for the effects of the Forseon
acquisition, which was accounted for as a pooling of interests. In the opinion
of the management of the Company, these financial statements reflect all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial statements. Certain information and footnote
disclosures usually found in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's most recent Form 10-K report filed with the Security and Exchange
Commission on March 29, 2000. The results of operations for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000 or for any other
future periods.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Towne
Services, Inc. and its wholly owned subsidiaries. All significant intercompany
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
6
<PAGE> 7
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, discount
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 recognizes 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, 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 and Agent Agreements for the re-sale of 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 banks under month-to-month operating leases. Such
operating lease revenues are recognized on a monthly basis as earned.
4. RECENT ACCOUNTING PRONOUNCEMENTS
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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 delays the effective date of SFAS
No. 133 to the beginning of the first quarter of the fiscal year beginning after
June 15, 2000. In June 2000, SFAS 133 was amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133," to be adopted concurrently with SFAS 133. The Company
is currently evaluating potential derivative instruments and does not anticipate
the adoption of this statement to have a material effect on the Company's
financial statements.
As noted above in Note 3, the Company adopted SAB No. 101 at the
beginning of the fourth quarter ended December 31, 1999. In accordance with SFAS
No. 3, the Company's financial statements were restated, effective January 1,
1999, to reflect the cumulative effective of the change in accounting principle.
5. PUBLIC OFFERING
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, the Company sold 675,000 shares of common stock
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.
6. ACQUISITIONS
In June 1999, the Company acquired Forseon Corporation, a company based
in Riverside, California that provides products and services for retail
businesses. These products and services process inventory, accounts receivable
and point-of-sale transaction information and generate merchandise forecasts and
management reports. Towne Services 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. The Company
incurred approximately $2.3 million in expenses related to the acquisition of
Forseon.
7
<PAGE> 8
On July 20, 1999, the Company 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 81,016 shares
of the Company's common stock. Imaging Institute'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 the Company entered into in
connection with the Imaging Institute acquisition, the Company was 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. The Company purchased all of these shares in
August 2000 for the aggregate amount of $769,652. In connection with the
purchase of Imaging Institute, the Company recorded goodwill in the amount of
$1.9 million, which is being amortized over a five-year period.
7. LONG-TERM DEBT
In June 1999, the Company 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 approximately $633,000
includes interest expense of approximately $122,000, or 8.75%, of the principal.
The amount of the minimum monthly lease obligation, consisting of principal and
interest, is approximately $11,000.
In June 1999, the Company 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 approximately
$546,000 includes interest expense of approximately $104,000, or 8.61%, of the
principal. The amount of the minimum monthly lease obligation, consisting of
principal and interest, is approximately $9,000.
In August 1999, the Company entered into a five-year capital lease
obligation with Synovus Leasing Company to finance the purchase of a generator.
The capital lease obligation of approximately $510,000 includes interest expense
of approximately $98,000, or 8.75%, of the principal. The amount of the minimum
monthly lease obligation, consisting of principal and interest, is approximately
$8,500.
In November 1999, the Company 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 approximately
$21,000 includes interest expense of approximately $6,700, or 10.5%, of the
principal. The amount of the minimum monthly lease obligation, consisting of
principal and interest, is approximately $388.
8. SHAREHOLDERS' EQUITY
COMMON STOCK
On June 27, 2000, the Company announced that its Board of Directors
approved a plan under which the Company may spend up to $3.0 million to
repurchase shares of its common stock at the current market price. As of
November 9, 2000, the Company has repurchased 79,000 shares at a cost of
$70,758. In accordance with Georgia corporate law, the shares were retired
rather than carried as treasury stock.
PREFERRED STOCK
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 part, on at least 10 business days
but not more than 90 calendar days' notice. The Company allocated $1.88 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 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
8
<PAGE> 9
accumulation of dividends on the Series B Preferred Stock does not bear
interest. The accrued balance of Series B Preferred Stock dividends is $214,505
at September 30, 2000.
WARRANTS
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, which 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. RELATED-PARTY TRANSACTIONS
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 April 2000, the promissory note in which the Company loaned its
President $30,000 was amended and restated. The full recourse loan bears
interest at 9.00% per annum, and the aggregate principal sum of $33,900.58 is
due in full in April 2002.
In April 2000, the promissory note in which the Company loaned its
President $78,990 was amended and restated. The full recourse loan bears
interest at 9.00% per annum, and the aggregate principal sum of $96,418.80 is
due in full in April 2002.
In April 2000, the promissory note in which the Company loaned its
former Executive Vice President $50,000 was amended and restated. The full
recourse loan bears interest at 8.00% per annum, and the aggregate principal sum
of $50,000 is due in full in July 2002.
In April 2000, the promissory note in which the Company loaned its
former Chief Financial Officer $86,484.47 was amended and restated. The full
recourse loan bears interest at 8.00% per annum, and the aggregate principal sum
of $86,484.47 is due in full in December 2000.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This interim 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 these forward-looking statements. Actual results may differ materially
from those expressed or implied by these forward-looking statements. See
"Disclosures Regarding Forward-Looking Statements" at the end of this Item for a
description of some of the important factors that may affect actual outcomes.
OVERVIEW
Towne Services, Inc. provides services and products that process sales
and payment information and related financing transactions for 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 four
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
commercial businesses; RMSA Forecast, which processes sales and inventory
transactions and provides merchandising information for 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
values of the related services provided. As previously indicated in Item 1,
Notes 3 and 4, Towne recognizes bank set-up fees over the estimated life of the
contract in accordance with SAB 101.
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 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, the 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 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 consisted of salary and related
personnel costs, including costs for employee benefits, computer equipment and
support services, used in product and technology development. Research and
development expenditures are expensed as incurred; however, we capitalize
certain software development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86 when products reach technological feasibility. For the
nine months ended September 30, 2000, we did not incur any research and
development expenses.
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 June 1999, we 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 in
July 1999, we sold 675,000 shares of common stock pursuant to an underwriters'
over-
10
<PAGE> 11
allotment provision in connection with this public offering. The total proceeds
to us 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 that provides products and services for retail businesses.
These products and services 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. We 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 of Imaging Institute, Inc., a Bloomington, Minnesota-based
company, for approximately $1.2 million cash and the issuance of 81,016 shares
of the Company's common stock. Imaging Institute'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 were 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. All of these shares were purchased in August 2000 for the
aggregate amount of $769,652. In connection with the purchase of Imaging
Institute, the Company recorded goodwill in the amount of $1.9 million, which is
being amortized over a five-year period.
For the three months ended September 30, 1999 and 2000, we had net
losses attributable to common shareholders of approximately $4.4 million and
$1.8 million, respectively. For the nine months ended September 30, 1999 and
2000, we had net losses attributable to common shareholders of approximately
$12.6 million and $8.1 million, respectively. 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 the 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 the loss on a sublease agreement and a non-cash charge of $595,000
related to a deferred tax asset from Forseon. As of September 30, 2000, our
accumulated deficit was $48.0 million, which included $1.4 million of one-time
charges relating to a $120,000 accrual for preferred dividends, approximately
$879,000 resulting from employee severance payments, a charge of $365,000
related to early termination of a sales agreement and a $75,000 charge related
to a liability associated with the acquisition of Forseon.
Our total revenues were approximately $22.7 million and $19.8 million
for the nine months ended September 30, 1999 and 2000, respectively. We have
experienced net losses in each of these periods and expect to continue to incur
losses for the foreseeable future. The number of our employees at September 30,
1999 was 344 compared to 256 employees at September 30, 2000. The majority of
this reduction in our workforce occurred in our sales department, which is
reported under sales and marketing, and in our customer service department,
which is reported under cost of processing, servicing and support. We anticipate
that our overall operating expenses will temporarily decrease as a result of our
reduction in labor force and will begin to increase again as our customer base
expands, and that some components of our operating expenses may be more
significantly affected than other components.
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
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Revenues. Our revenues decreased from $7.3 million for the three months
ended September 30, 1999 to $6.3 million for the three months ended September
30, 2000. Recurring revenues decreased from $5.7 million for the three months
ended September 30, 1999 to $5.3 million for the three months ended September
30, 2000. During these two periods, recurring revenue accounted for
approximately 78% and 84% of total revenues, respectively. Set-up fees accounted
for approximately 14% and 10% of total revenues, respectively. Other revenues
accounted for approximately 8% and 6% of
11
<PAGE> 12
total revenues, respectively. The decrease in revenues during these periods is
attributed primarily to a decrease in deferred bank revenues recognized and a
decrease in software license fee revenues.
Costs of Processing, Servicing and Support. Costs of processing,
servicing and support decreased from $2.1 million in 1999 to $1.8 million in
2000. These costs were approximately 29% of total revenues for these two
periods. Costs of processing, servicing and support decreased as a result of our
efforts to pro-actively reduce costs in light of reduced revenues. We anticipate
that these costs will begin to increase as our customer base expands.
Research and Development. Research and development expenses decreased
from $80,000 in 1999 to $0 in 2000. Research and development expenses
represented approximately 1% and 0% of total revenues, respectively, during
these two periods. Research and development expenses decreased compared to the
same period in 1999 due to our reduced efforts towards the development of new
products. We did not incur significant costs to make our products year 2000
compliant because our products were designed to properly function through and
beyond the year 2000.
Sales and Marketing. Sales and marketing expenses decreased from $5.2
million in 1999 to $3.6 million in 2000. Sales and marketing expenses were
approximately 71% and 57% of total revenues, respectively, during these two
periods. The decrease in sales and marketing expenses is primarily the result of
the decrease in the number of sales personnel, related business travel expenses,
and recruiting expenses to attract new sales employees. We anticipate that sales
and marketing expenses will increase as we expand our sales and marketing
efforts.
Employee Termination Expense. We recorded $1.3 million relating to
termination benefits for two former employees during the three months ended
September 30, 1999, compared to $184,000 for two additional employees during the
three months ended September 30, 2000. These expenses represented approximately
18% and 3% of revenues for those periods, respectively.
General and Administrative. General and administrative expenses
decreased from $3.3 million in 1999 to $2.8 million in 2000. These costs
represented approximately 45% and 44% of total revenues, respectively, for these
two periods.
Interest Income, Net. We reported net interest income of $319,000 in 1999
and $281,000 in 2000. Net interest income on cash proceeds received from our
public offering in June 1999 decreased as we used those proceeds to finance
operations rather than for investment.
Income Taxes. As of December 31, 1999, we 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 our ownership
structure, our use of approximately $2.5 million of NOLs as of October 1, 1997
will be limited to approximately $550,000 in any given year to offset future
taxes. In addition, due to our 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 we do not generate taxable income in
excess of the limitation in future years, certain NOLs will be unrealizable.
Once these NOLs are utilized or expire, our projected effective tax rate will
increase, which will adversely affect our operating results and financial
condition. We incurred state income tax expense in the amount of $29,000 for the
quarter ended September 30, 2000.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Revenues. Our revenues decreased from $22.7 million for the nine months
ended September 30, 1999 to $19.8 million for the nine months ended September
30, 2000. Recurring revenues increased from $16.3 million for the nine months
ended September 30, 1999 to $16.5 million for the nine months ended September
30, 2000. During these two periods, recurring revenue accounted for
approximately 72% and 83% of total revenues, respectively. Set-up fees accounted
for approximately 15% and 12% of total revenues, respectively. Other revenues
accounted for approximately 13% and 5% of total revenues, respectively. The
decrease in revenues during these periods is attributed primarily to a decrease
in deferred bank revenues recognized and a decrease in software license fee
revenues.
Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $5.2 million in 1999 to $5.7 million in
2000. These costs were approximately 23% and 29% 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 the acquisition of new customers and the acquisition of complementary
businesses. We anticipate that these costs will continue to increase as its
customer base expands.
12
<PAGE> 13
Research and Development. Research and development expenses decreased
from $536,000 in 1999 to $0 in 2000. Research and development expenses
represented approximately 2% and 0% of total revenues, respectively, during
these two periods. Research and development costs have decreased compared to
1999 as a result of certain software development efforts related to new products
reaching technological feasibility and our capitalizing those costs 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.
Sales and Marketing. Sales and marketing expenses decreased from $15.4
million in 1999 to $13.0 million in 2000. Sales and marketing expenses were
approximately 68% and 66% of total revenues, respectively, during these two
periods. The decrease in sales and marketing expenses is primarily the result of
the decrease in the number of sales personnel, related business travel expenses,
and recruiting expenses to attract new sales employees. We anticipate that sales
and marketing expenses will begin to increase as we expand our sales and
marketing efforts.
Employee Termination Expense. We recorded $1.3 million relating to
termination benefits for two former employees during the nine months ended
September 30, 1999 compared to $844,000 during the nine months ended September
30, 2000. These expenses represented approximately 6% and 4% of revenues for
those periods, respectively.
Acquisition Expense. We incurred approximately $2.3 million in 1999 and
$75,000 in 2000 of expenses related to the Forseon acquisition.
General and Administrative. General and administrative expenses
increased from $8.1 million in 1999 to $9.1 million in 2000. These costs
represented approximately 36% and 46% of total revenues, respectively, for these
two periods. The increase in these expenses was primarily the result of
increases in the amortization expenses relating to acquisitions.
Interest Income, Net. We reported net interest income of $431,000 in
1999 and $912,000 in 2000. Net interest income increased as a result of earnings
on investments of cash proceeds received from our public offering in June 1999.
Income Taxes. As of December 31, 1999, we 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 our ownership
structure, our use of approximately $2.5 million of NOLs as of October 1, 1997
will be limited to approximately $550,000 in any given year to offset future
taxes. In addition, due to our 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 we do not generate taxable income in
excess of the limitation in future years, certain NOLs will be unrealizable.
Once these NOLs are utilized or expire, our projected effective tax rate will
increase, which will adversely affect our operating results and financial
condition. We recorded income tax benefits in the amount of $354,000 for the
nine months ended September 30, 1999. We incurred state income tax expense in
the amount of $14,000 for the nine months ended September 30, 2000.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements appear in a number of places in this
report and include all statements that are not historical facts. Some of the
forward-looking statements relate to our intent, belief or expectations
regarding our strategies and plans for operations and growth. Other
forward-looking statements relate to trends affecting our financial condition
and results of operations, and our anticipated capital needs and expenditures.
These forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those that are anticipated in the forward-looking statements. During our short
history, our operating results have varied significantly and are likely to
fluctuate in the future as a result of a combination of factors. These factors
include:
whether we can successfully complete transitions in our management and
operations and whether our management team can attain our goals and
improve our financial condition;
whether our key initiatives with respect to training and compensation
within our sales organization prove to be effective and lead to revenue
growth;
13
<PAGE> 14
the possible negative impact of lawsuits on our stock price and ability
to meet our sales and other business objectives;
the distraction of management's time and attention, increased legal and
other costs, and other possible adverse effects on our business and
operations as a result of potential delisting from the Nasdaq National
Market for failure to maintain minimum bid price requirements;
market acceptance of new products and services;
whether we can successfully complete the integration of acquired
businesses and products without incurring significant costs or charges;
our limited operating history and whether we will be able to achieve or
maintain profitability or other desired results of operations; and
other factors discussed in this report and in our filings with
Securities and Exchange Commission, including our 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 in those registration
statements, and in our annual quarterly and periodic reports on Forms
10-K, 10-Q and 8-K.
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. 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 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.
In November 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 approximately $21,000 includes
interest expense of approximately $6,700, or 10.5%, of the principal. The amount
of the minimum monthly lease obligation, consisting of principal and interest,
is approximately $388.
Net cash used in operating activities was approximately $8.1 million
and $5.4 million for the nine months ended September 30, 1999 and 2000,
respectively. Net cash used in operating activities for the nine months ended
September 30, 1999 primarily represents a $12.6 million net loss, partially
offset (a) by a $3.2 million cumulative effect of an accounting change, (b) $1.5
million increase in accounts payable and accrued expenses, (c) $2.6 million
increase in accounts receivable, and (d) an $798,000 increase in prepaid
expenses and other assets. Net cash used in operating
14
<PAGE> 15
activities for the nine months ended September 30, 2000 primarily represents a
$8.0 million net loss, partially offset by (a) a $1.8 million decrease in
accounts receivable, (b) $3.5 million of depreciation and amortization expenses
and (c) a $544,000 provision for doubtful accounts. Net cash used in operating
activities for that period also represents a $117,000 increase in prepaid and
other assets, a $1.6 million decrease in accounts payable and accrued expenses
and a $1.5 million decrease in deferred revenue.
Net cash used in investing activities was approximately $9.9 million
and $1.0 million for the nine months ended September 30, 1999 and 2000,
respectively. Net cash used in investing activities for the nine months ended
September 30, 1999 primarily represents (a) an increase of $2.3 million of
expenses related to acquisitions and (b) $6.0 million of expenses for the
purchase of computer equipment and other capital equipment used in conducting
our business. Net cash used in investing activities for the nine months ended
September 30, 2000 primarily represents (a) $1.7 million of expenses for the
purchase of computer equipment and other capital equipment used in conducting
our business and (b) $2.1 million in investment purchases, offset by $2.9
million in investment proceeds.
Net cash provided by financing activities was approximately $30.1
million for the nine months ended September 30, 1999, as compared to net cash
used in financing activities of $724,000 for the nine months ended September 30,
2000. Net cash provided by financing activities for the nine months ended
September 30, 1999 consisted primarily of $35.4 million of proceeds from the
issuance of securities offset by $5.4 million for the repayment of outstanding
short term obligations. Net cash used in financing activities for the nine
months ended September 30, 2000 consisted primarily of $243,000 of proceeds
received from stock option exercises offset by $770,000 for the repurchase of
shares from the Imaging acquisition.
By letter dated October 9, 2000 the Nasdaq Stock Market notified us
that we had failed to maintain a minimum bid price of $1.00 over the previous 30
consecutive trading days as required for continued listing on the Nasdaq
National Market. If we are unable to meet this requirement for a ten consecutive
trading day period before January 8, 2001, Nasdaq has indicated that it will
delist our common stock from trading on the Nasdaq National Market at the
opening of business on January 9, 2001. Nasdaq also indicated that it may delist
us during this 90-day period if we fail to maintain compliance with any other
listing requirements. Any delisting instituted by Nasdaq would likely have an
adverse and material effect on the price of our common stock and on the ability
of our shareholders to sell their shares. Such delisting could also adversely
affect our ability to obtain additional debt and/or equity financing and may
result in a reduction in the amount and quality of security analysts' and the
news media's coverage of the Company. We are considering various alternatives to
address this situation, including seeking Nasdaq verification that we have been
brought back into compliance (if applicable during the period) and the
possibility of appealing any Nasdaq decision to delist our common stock. There
can be no assurance, however, that our actions will be successful to maintain
our common stock's listing on the Nasdaq National Market.
EFFECTS OF THE YEAR 2000
We did not experience any difficulties related to the Year 2000 problem
on December 31, 1999, and we are not aware of any such difficulties since that
date. Our operations have not, to date, been adversely affected by any
difficulties experienced by our third party software suppliers, customers or
other entities with which we have business relationships, in connection with the
Year 2000 problem.
RECENT ACCOUNTING STANDARDS
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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 delays the effective date of SFAS
No. 133 to the beginning of the first quarter of the fiscal year beginning after
June 15, 2000. In
15
<PAGE> 16
June 2000, SFAS 133 was amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133," to be adopted concurrently with SFAS 133.
In response to the issuance of the Securities and Exchange Commission
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," we 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 first quarter of 1999.
ITEM 3. 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 that are 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, our outstanding debt obligations, Note 7, have a fixed rate of
interest and, therefore, we do not have a significant risk due to potential
fluctuations in interest rates for loans at this time.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. 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.
These two suits are purported securities class actions brought by the
named individual shareholders against Towne Services and one of its current
officers and two former officers. 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. Towne Services believes that the
allegations in the complaint are without merit and intends to defend the lawsuit
vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The holders of Series B Preferred Stock are entitled to receive
cumulative cash dividends at the rate of $2.00 per share of
Series B Preferred Stock payable quarterly on March 31, June 30,
September 30 and December 31 in each year. The accrued balance of
Series B Preferred Stock dividends is $214,505 at September 30,
2000.
17
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
27.1 Financial Data Schedule for the period ending September 30, 2000 (for
SEC use only).
</TABLE>
------------------
(b) Reports on Form 8-K
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWNE SERVICES, INC.
November 9, 2000 /s/ G. Lynn Boggs
------------------ -----------------------------------------------------
Date G. Lynn Boggs
Chairman of the Board and Chief Executive Officer
(principal and executive officer)
November 9, 2000 /s/ Randall S. Vosler
------------------ -----------------------------------------------------
Date Randall S. Vosler
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
27.1 Financial Data Schedule for the period ending September 30, 2000 (for
SEC use only).
</TABLE>
20
