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EXHIBIT 99.2
BANKING SOLUTIONS, INC.
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1995, 1996, AND 1997
AND SEPTEMBER 30, 1998
TOGETHER WITH
AUDITORS' REPORT
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Banking Solutions, Inc.:
We have audited the accompanying balance sheets of BANKING SOLUTIONS, INC. (a
Texas corporation) as of December 31, 1996 and 1997 and the related statements
of operations, shareholders' deficit, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Banking Solutions, Inc. as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 15, 1999
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BANKING SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1996, 1997 AND SEPTEMBER 30, 1998
ASSETS
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 0 $ 0 $ 0
Trade accounts receivable, net of allowance for
uncollectible accounts of $20,000 in 1996, $50,000
in 1997, and $100,000 in 1998 386,217 384,540 484,061
----------- ----------- -----------
Total current assets 386,217 384,540 484,061
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 116,995 214,332 190,873
----------- ----------- -----------
OTHER ASSETS 10,756 9,506 9,506
----------- ----------- -----------
Total assets $ 513,968 $ 608,378 $ 684,440
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 192,019 $ 235,483 $ 268,373
Accrued liabilities 296,387 287,942 302,533
Current portion of long-term debt 26,422 163,956 100,993
Deferred revenue 1,439,867 1,518,223 1,453,069
----------- ----------- -----------
Total current liabilities 1,954,695 2,205,604 2,124,968
----------- ----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 6,071 29,110 221,526
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' DEFICIT:
Common stock, no par value; 1,000,000 shares
authorized, issued, and outstanding in 1996, 1997,
and 1998 1,000 1,000 1,000
Accumulated deficit (1,447,798) (1,627,336) (1,663,054)
----------- ----------- -----------
Total shareholders' deficit (1,446,798) (1,626,336) (1,662,054)
----------- ----------- -----------
Total liabilities and shareholders' deficit $ 513,968 $ 608,378 $ 684,440
=========== =========== ===========
The accompanying notes are an integral part of these balance sheets.
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BANKING SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1995 1996 1997 1998
----------- ----------- ----------- ------------
(UNAUDITED)
REVENUES $ 2,894,857 $ 5,791,265 $ 8,085,813 $ 6,638,031
----------- ----------- ----------- ------------
COSTS AND EXPENSES:
Costs of processing, servicing, and support 2,224,211 2,994,431 3,867,946 3,225,843
Research and development 123,104 228,122 266,322 351,538
Sales and marketing 236,275 282,501 459,774 844,068
General and administrative 920,722 2,429,837 3,665,590 2,239,434
----------- ----------- ----------- ------------
Total costs and expenses 3,504,312 5,934,891 8,259,632 6,660,883
----------- ----------- ----------- ------------
OPERATING LOSS (609,455) (143,626) (173,819) (22,852)
----------- ----------- ----------- ------------
INTEREST EXPENSE, NET 3,130 3,268 5,719 12,866
----------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES (612,585) (146,894) (179,538) (35,718)
----------- ----------- ----------- ------------
PROVISION FOR INCOME TAXES (NOTE 4) 0 0 0 0
----------- ----------- ----------- ------------
NET LOSS $ (612,585) $ (146,894) $ (179,538) $ (35,718)
=========== =========== =========== ============
The accompanying notes are an integral part of these statements.
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BANKING SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1994 1,000,000 $1,000 $ (688,319) $ (687,319)
Net loss 0 0 (612,585) (612,585)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1995 1,000,000 1,000 (1,300,904) (1,299,904)
Net loss 0 0 (146,894) (146,894)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1996 1,000,000 1,000 (1,447,798) (1,446,798)
Net loss 0 0 (179,538) (179,538)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1997 1,000,000 1,000 (1,627,336) (1,626,336)
Net loss 0 0 (35,718) (35,718)
--------- ------ ----------- -----------
BALANCE, SEPTEMBER 30, 1998
(UNAUDITED) 1,000,000 $1,000 $(1,663,054) $(1,662,054)
========= ====== =========== ===========
The accompanying notes are an integral part of these statements.
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BANKING SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1995 1996 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(612,585) $(146,894) $(179,538) $ (35,718)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 21,830 32,906 35,415 51,302
Changes in operating assets and liabilities:
Accounts receivable (31,007) (163,310) 1,677 (99,521)
Other assets 2,280 (10,756) 1,250 0
Accounts payable 15,917 31,325 43,464 32,890
Accrued liabilities 98,244 43,547 (8,445) 14,591
Deferred revenue 503,909 267,738 78,356 (65,154)
--------- --------- --------- ---------
Net cash (used in) provided by
operating activities (1,412) 54,556 (27,821) (101,610)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, net (29,309) (54,876) (132,752) (27,843)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (5,428) (11,911) (79,427) (185,758)
Proceeds from long-term borrowings 20,590 0 240,000 315,211
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities 15,162 (11,911) 160,573 129,453
--------- --------- --------- ---------
NET DECREASE IN CASH (15,559) (12,231) 0 0
CASH, BEGINNING OF PERIOD 27,790 12,231 0 0
--------- --------- --------- ---------
CASH, END OF PERIOD $ 12,231 $ 0 $ 0 $ 0
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
========= ========= ========= =========
Cash paid for interest $ 3,130 $ 3,268 $ 9,586 $ 16,434
========= ========= ========= =========
Cash paid for taxes $ 506 $ 159,855 $ 0 $ 0
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
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BANKING SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
AND SEPTEMBER 30, 1998
1. ORGANIZATION AND BACKGROUND
Banking Solutions, Inc., (the "Company") is a Texas corporation
incorporated on July 1, 1993. The Company designs, develops, and
markets products to community banks that enable the banks to generate
interest-bearing revolving credit accounts by financing the accounts
receivable of small and medium-size retail merchants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements and footnote data as of September
30, 1998 and for the nine-month period ended September 30, 1998 are
unaudited. In the opinion of the management of the Company, these
financial statements reflect all adjustments, consisting only of normal
and recurring adjustments, necessary for a fair presentation of the
financial statements. The results of operations for the nine-month
period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the full year.
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 license
fees and recurring monthly transaction processing fees. The Company
recognizes recurring transaction fees as the related services are
provided. Initial license fees are deferred.
DEFERRED REVENUE
Deferred revenue on the accompanying balance sheets represents deferred
initial license fees. Because support and upgrades are free with the
initial license fee, the Company recognizes the
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license fee ratably over the life of the contract (usually five years).
For contracts with a refund period, the license fee is recognized
ratably over the remaining life of the contract once this refund period
has expired.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and
repairs which do not extend the useful lives of these assets are
expensed as incurred. Depreciation is provided using the straight-line
method for financial reporting. The detail of property and equipment at
December 31, 1996 and 1997 is as follows:
Useful
1996 1997 Lives
--------- -------- -------------------
Furniture and fixtures $ 31,502 $112,046 Five years
Computers and equipment 83,974 125,690 Three to five years
Vehicles 67,226 77,718 Five years
-------- --------
182,702 315,454
Less accumulated depreciation (65,707) (101,122)
-------- --------
$116,995 $214,332
======== ========
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived
assets, such as property and equipment, to determine whether any
impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately
valued.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs consist principally of compensation and
benefits paid to the Company's employees. All research and development
costs are expensed as incurred.
The Company's policy is to capitalize software development costs once a
working model is achieved, subject to a periodic assessment of
recoverability based upon expected future revenues. The Company has not
capitalized any software development costs in the accompanying
financial statements, as all costs incurred subsequent to the
achievement of a working model were immaterial.
INCOME TAXES
The Company is a C corporation for income tax reporting purposes and
accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires the use of an asset and liability method of
accounting for deferred income taxes. Under SFAS No. 109, deferred tax
assets or liabilities at the
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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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts
payable, and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.
The fair value of the Company's long-term debt is estimated based on
the current rates offered to the Company for debt of similar terms and
maturities.
ACCOUNTS PAYABLE
Accounts payable includes book overdrafts created by outstanding
checks. At December 31, 1996 and 1997, book overdrafts totaled $41,305
and $3,747, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit
risk consist principally of cash and accounts receivable. The Company's
trade accounts receivable are mainly with customers in the banking
industry, dispersed across a wide geographic area within the United
States. The Company extends credit to customers in the ordinary course
of business and periodically reviews the credit levels extended to
customers.
3. NOTES PAYABLE
At December 31, 1996 and 1997, notes payable consisted of the
following:
1996 1997
--------- ---------
Note payable to City National Bank, interest at
6.72%, due in monthly installments of $12,977
including interest, maturing June 1998 $ 0 $ 50,836
Line of credit to City National Bank, interest
at the prime rate (8.5% at December 31, 1997)
due in full March 1998, guaranteed by a shareholder 0 100,000
Note payable to City National Bank, interest at
10.75%, due in monthly installments of $652
including interest, paid in full June 1997 19,353 0
Note payable to City National Bank, interest at
8.75%, due in monthly installments of $652
including interest, maturing September 1998,
secured by a vehicle 13,140 6,072
Note payable to City National Bank, interest at
8.50%, due in monthly installments of $821
including interest, maturing May 2002, secured by
a vehicle 0 36,158
-------- ---------
32,493 193,066
Less current portion (26,422) (163,956)
-------- ---------
$ 6,071 $ 29,110
======== =========
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At December 31, 1997, aggregate maturities of long-term debt are as
follows:
1998 $163,956
1999 7,671
2000 8,349
2001 9,087
2002 4,003
--------
$193,066
========
4. INCOME TAXES
The following is a reconciliation of income taxes at the federal
statutory rate with income taxes recorded by the Company for the years
ended December 31, 1995, 1996, and 1997:
1995 1996 1997
--------- --------- --------
Income tax benefit computed at the federal statutory
rate $(208,279) $ (49,944) $(61,043)
Other, net 3,768 5,795 3,465
Change in valuation allowance 204,511 44,149 57,578
--------- --------- --------
$ 0 $ 0 $ 0
========= ========= ========
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The tax effects of significant temporary differences representing deferred
tax assets (liabilities) at December 31, 1996 and 1997 are as follows:
1996 1997
--------- ---------
Deferred tax assets:
Accounts payable $ 65,286 $ 80,064
Accrued liabilities 100,772 97,900
Deferred revenue 489,555 516,196
Net operating loss carryforwards 0 18,460
--------- ---------
655,613 712,620
Deferred tax liabilities (131,314) (130,743)
--------- ---------
Net deferred tax asset 524,299 581,877
Valuation allowance (524,299) (581,877)
--------- ---------
$ 0 $ 0
========= =========
The Company has recorded a valuation allowance to offset the Company's
net deferred tax asset due to the uncertainty of the realizability. At
December 31, 1997, the Company has net operating loss carryforwards of
approximately $54,000 which will expire if not utilized by 2012.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under operating lease
agreements expiring on various dates through 2002. At December 31,
1997, future minimum rental payments were as follows:
1998 $187,512
1999 186,228
2000 180,234
2001 172,874
2002 33,532
--------
$760,380
========
Total rent expense under operating leases was $50,981, $43,859, and
$126,707 for the years ended December 31, 1995, 1996, and 1997,
respectively.
INDEPENDENT CONTRACTORS
The Company sells its product through the use of independent
contractors who are not employees of the Company. The Company does not
pay or withhold federal or state employment taxes with respect to these
independent contractors. The use of independent contractors as salesmen
allows the Company to control costs. In the event the Company was
required to treat these salesmen as its employees, the Company could
become responsible for the taxes required to be withheld and could
incur additional costs associated with employee benefits and other
employee costs.
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6. SUBSEQUENT EVENT
On November 30, 1998, Towne Services, Inc. purchased all of the
outstanding common stock of the Company for $10.6 million in cash,
536,084 shares of Towne Services common stock, plus certain contingent
payment amounts based on future performance.