<PAGE> 1
As filed with the Securities and Exchange Commission on April 23, 1999.
Registration No. 333-76493
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
TOWNE SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
GEORGIA 62-1618121
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
3295 RIVER EXCHANGE DRIVE, SUITE 350, NORCROSS, GEORGIA 30092, (770) 734-2680
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
---------------------
DREW W. EDWARDS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TOWNE SERVICES, INC.
3295 RIVER EXCHANGE DRIVE, SUITE 350
NORCROSS, GEORGIA 30092
(770) 734-2680
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
GLENN W. STURM, ESQ. MARK W. SHURTLEFF, ESQ.
SUSAN L. SPENCER, ESQ. LESLIE R. OLSON, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. GIBSON, DUNN & CRUTCHER LLP
999 PEACHTREE STREET, SUITE 1400 4 PARK PLACE
ATLANTA, GEORGIA 30309 IRVINE, CALIFORNIA 92614
(404) 817-6000 (949) 451-3800
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement and the
satisfaction or waiver of conditions to closing under the Agreement and Plan of
Merger described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value per
share.............................. 2,075,345 $ (2) $2,451(2) $1.00(3)
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</TABLE>
(1) Represents the number of shares of the Registrant's common stock, no par
value, issuable in connection with the merger.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act. The proposed maximum
offering price is based upon the par value of Forseon's stock because
Forseon has an accumulated capital deficit.
(3) Previously paid.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
[PRELIMINARY COPY]
[LOGO OF FORSEON CORPORATION]
6600 Jurupa Avenue
Riverside, California 92504
May , 1999
Dear Stockholder:
We cordially invite you to attend a special meeting of our stockholders on
June , 1999 at 10:00 a.m. local time at the offices of Gibson, Dunn & Crutcher
LLP, Suite 1700, 4 Park Plaza, Irvine, CA 92614-8557. We have enclosed a notice
of the special meeting, proxy cards and a proxy statement/prospectus containing
information about the matters to be acted upon at the meeting.
At the meeting, you will vote on an Agreement and Plan of Merger dated as
of March 25, 1999, among Forseon, Towne Services, Inc. and TSI Acquisition One,
Inc., a subsidiary of Towne Services. This merger agreement provides that
Towne's subsidiary will merge with and into Forseon. If the merger agreement is
adopted and the merger becomes effective, each holder of Forseon common stock,
other than those demanding appraisal rights, will receive Towne common stock in
exchange for their Forseon stock. The number of shares of Towne common stock you
will receive will be based upon an exchange ratio, which currently equals 2.82
shares of Towne Services stock for each share of Forseon stock. Ten percent of
the shares of Towne Services common stock you are eligible to receive in the
merger will be held back in escrow to cover the indemnification obligations of
Forseon stockholders in the merger agreement.
THE BOARD OF DIRECTORS OF FORSEON HAS APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF ITS ADOPTION.
Whether or not you plan to attend the meeting, please complete the enclosed
proxy and ESOP voting instruction card, as appropriate, and return them in the
enclosed envelope(s) as soon as possible. Returning your proxy card will not
limit your right to vote in person if you later decide to attend the meeting.
Please do not send any Forseon stock certificates in your proxy envelope.
Sincerely,
Dan Paul
President and Chief Executive Officer
FORSEON CORPORATION
<PAGE> 3
FORSEON CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE , 1999
A special meeting of stockholders of Forseon Corporation will be held on
June , 1999 at 10:00 a.m. at the offices of Gibson, Dunn & Crutcher LLP,
Suite 1700, 4 Park Plaza, Irvine, CA 92614-8557 for the following purposes:
(1) To vote on an Agreement and Plan of Merger and related matters
pursuant to which a wholly-owned subsidiary of Towne Services, Inc., a
Georgia corporation, will merge with and into Forseon, as more particularly
described in the enclosed proxy statement/prospectus; and
(2) To transact such other business as may properly come before the
special meeting and any adjournment thereof.
Stockholders of record at the close of business on May , 1999 will be
entitled to receive notice of and to vote at the special meeting and any
adjournments thereof.
Stockholders may be entitled to appraisal rights pursuant to Section 262 of
Delaware corporate law, a copy of which is included as Appendix B of the
enclosed proxy statement/prospectus. For a discussion of appraisal rights, see
page 45 of the proxy statement/prospectus.
Your vote is very important to us. Whether or not you plan to attend the
special meeting and regardless of the number of shares you own, please complete,
date, sign and return the enclosed proxy card attached as Appendix C at your
earliest convenience in the enclosed self-addressed, stamped envelope. Executed
but unmarked proxy cards will be voted FOR approval of the merger agreement and
all related matters. If you are a participant in Forseon's Employee Stock
Ownership Plan, please complete, date and sign the enclosed ESOP voting
instruction card, which is the blue card included with this document and return
it in the enclosed envelope addressed to U.S. Trust Company, National
Association. Executed but unmarked voting instruction cards will be voted by the
trustee of the ESOP as directed by the special investment manager as to the
merger agreement and by the ESOP committee as to other matters. You are
cordially invited to attend the special meeting in person, and if you attend you
may withdraw your proxy and vote your non-ESOP shares personally.
BY ORDER OF THE BOARD OF DIRECTORS
Dan Paul,
President and Chief Executive Officer
Dated: May , 1999
<PAGE> 4
PRELIMINARY PROXY STATEMENT/PROSPECTUS
<TABLE>
<S> <C>
PROXY STATEMENT PROSPECTUS
OF OF
FORSEON CORPORATION [LOGO] TOWNE SERVICES, INC. [LOGO]
</TABLE>
Dated May , 1999
On March 25, 1999, the boards of directors of Forseon Corporation and Towne
Services, Inc. approved an agreement to merge Forseon with a subsidiary of Towne
Services. If the merger is completed, each Forseon stockholder will be entitled
to receive approximately 2.82 shares of Towne Services common stock for each
share of Forseon common stock they hold. Ten percent of the shares of Towne
Services common stock you are eligible to receive in the merger will be held
back in escrow to cover the indemnification obligations of Forseon stockholders
in the merger agreement.
Towne's common stock trades on the Nasdaq National Market under the symbol
"TWNE."
The Forseon board of directors has called a special meeting for its
stockholders to vote on:
(1) the merger agreement and matters relating to the merger; and
(2) any other business that may properly come before the special
meeting or any postponements or adjournments of the meeting.
The date, time and place of this special meeting are:
DATE: June , 1999
TIME: 10:00 A. M. local time
PLACE: Gibson, Dunn & Crutcher, LLP
4 Park Plaza, Suite 1700
Irvine, California 92614-8557
You may vote at the Forseon special meeting if you own shares of Forseon
common stock as of the close of business on May , 1999.
THIS PROXY STATEMENT/PROSPECTUS PROVIDES DETAILED INFORMATION ABOUT THE
PROPOSED MERGER. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS, INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8.
THE "RISK FACTORS" SECTION DESCRIBES MANY RISKS THAT YOU SHOULD CONSIDER IN
DETERMINING WHETHER TO APPROVE THE MERGER AGREEMENT AND RELATED MATTERS AT THE
FORSEON SPECIAL MEETING.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This proxy statement/prospectus is dated May , 1999 and is expected to be
first sent to Forseon stockholders on or about June , 1999.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY..................................................... 1
Who Are the Companies?................................. 1
What Are the Main Terms of the Merger?................. 2
What Will Forseon Stockholders Receive in the
Merger?.............................................. 2
What Voting Procedures Are Needed to Approve the
Merger?.............................................. 3
What Are the Reasons to Approve the Merger?............ 4
What Events May Delay or Prevent the Merger?........... 5
What Are the Tax Consequences and Accounting Treatment
of the Merger?....................................... 6
Who Can Help Answer Your Questions?.................... 6
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES............... 7
RISK FACTORS................................................ 8
Risk Related to the Merger............................. 8
Risks Related To Towne's and Forseon's Operations,
Before and After the Merger.......................... 10
WHERE YOU CAN FIND MORE INFORMATION......................... 16
SELECTED HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION.................. 17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 19
Towne Services, Inc.................................... 19
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 21
Forseon Corporation.................................... 21
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
DATA...................................................... 22
COMPARATIVE PER SHARE DATA.................................. 23
MARKET PRICE AND DIVIDEND INFORMATION....................... 24
Towne Services Market Price Data....................... 24
Forseon Market Price Data.............................. 24
Dividend Information................................... 24
Recent Closing Prices.................................. 24
THE FORSEON STOCKHOLDER MEETING............................. 25
Matters To Be Voted On................................. 25
Record Date............................................ 25
Required Vote.......................................... 25
Proxies and Voting Instruction Cards................... 25
Solicitation of Proxies................................ 26
THE MERGER.................................................. 27
General................................................ 27
Background of the Merger............................... 27
Reasons for the Merger................................. 29
Conversion of Shares................................... 35
Conversion of Options.................................. 36
Exchange of Certificates............................... 36
Operations Following the Merger........................ 37
The Agreement and Plan of Merger....................... 37
Covenants and Agreements............................... 38
Regulatory Matters..................................... 43
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Federal Income Tax Considerations.............. 44
Accounting Treatment................................... 45
OTHER RELATED MATTERS....................................... 46
Escrow Agreement....................................... 46
Indemnification........................................ 47
Interests of Certain Persons in the Merger............. 47
Federal Securities Law Consequences.................... 47
Affiliate Agreements................................... 48
APPRAISAL RIGHTS............................................ 48
Rights Of Dissenting Stockholders...................... 48
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 51
TOWNE SERVICES' BUSINESS.................................... 57
General................................................ 57
Towne Services' Market................................. 58
Towne Services' Strategies............................. 58
Products and Services.................................. 59
Supporting Services and New Products................... 62
Acquisitions of Complementary Companies and Products... 62
Sales and Marketing.................................... 63
Recruiting and Training................................ 63
Technology............................................. 64
Customers.............................................. 65
Customer Services...................................... 65
Competition............................................ 66
Trademarks and Other Proprietary Rights................ 66
Employees.............................................. 66
Seasonality............................................ 66
Property and Facilities................................ 67
Legal Proceedings...................................... 67
TOWNE SERVICES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 68
Overview............................................... 68
Results Of Operations.................................. 70
Comparison of Years Ended December 31, 1997 and 1998... 70
Comparison of Years Ended December 31, 1996 and 1997... 72
Liquidity and Capital Resources........................ 73
Effects Of The Year 2000............................... 74
Effects Of Accounting Standards........................ 75
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 76
TOWNE SERVICES' MANAGEMENT.................................. 77
Directors and Executive Officers....................... 77
Committees of the Board of Directors and Nominations by
Shareholders......................................... 80
Section 16(a) Beneficial Ownership Reporting
Compliance........................................... 80
TOWNE SERVICES' EXECUTIVE COMPENSATION...................... 81
Option Grants and Exercises During 1998................ 81
1998 Stock Option Plan................................. 82
1996 Stock Option Plan................................. 83
Management Bonus Plan.................................. 83
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Employment Agreements.................................. 83
Director Compensation.................................. 85
Compensation Committee Interlocks and Insider
Participation........................................ 85
Compensation/Stock Option Committee Report on Executive
Compensation......................................... 86
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 90
TOWNE SERVICES' CERTAIN TRANSACTIONS........................ 92
FORSEON'S BUSINESS.......................................... 93
General................................................ 93
Products and Services.................................. 93
Sales and Marketing.................................... 95
Competition............................................ 95
Employees.............................................. 95
Properties............................................. 95
Legal Proceedings...................................... 96
Proprietary Rights..................................... 96
FORSEON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 97
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 102
STOCK OWNED BY FORSEON MANAGEMENT AND PRINCIPAL
SHAREHOLDERS.............................................. 103
FORSEON EXECUTIVE COMPENSATION.............................. 105
Summary of Cash and Certain Other Compensation......... 105
Option Exercises and Holdings.......................... 105
Director Compensation.................................. 105
FORSEON'S CERTAIN TRANSACTIONS.............................. 106
COMPARISON OF CAPITAL STOCK................................. 107
Description of Towne Services Capital Stock............ 107
Description of Forseon Capital Stock................... 108
COMPARISON OF RIGHTS OF STOCKHOLDERS........................ 108
Nominations for Board of Directors and Advance Notice
of Stockholder....................................... 109
Amendment to Governing Documents....................... 109
Stockholder Consent in Lieu of Meeting................. 109
Anti-Takeover Provisions............................... 110
Special Meetings....................................... 110
Cumulative Voting...................................... 111
EXPERTS..................................................... 111
LEGAL MATTERS............................................... 111
INDEX TO TOWNE SERVICES CONSOLIDATED FINANCIAL STATEMENTS... F-1
INDEX TO BANKING SOLUTIONS, INC. FINANCIAL STATEMENTS....... F-23
INDEX TO FORSEON CORPORATION CONSOLIDATED FINANCIAL
STATEMENTS................................................ F-34
APPENDIX A -- AGREEMENT AND PLAN OF MERGER.................. A-1
APPENDIX B -- SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW........................................... B-1
APPENDIX C -- FORM OF PROXY CARD OF FORSEON STOCKHOLDERS.... C-1
</TABLE>
iii
<PAGE> 8
SUMMARY
This summary highlights information from this document and may not contain
all of the information that is important to you as you consider the proposed
merger and related matters. For a more complete description of the terms of the
proposed merger, you should carefully read the entire document and the documents
to which we have referred you. The Agreement and Plan of Merger, which is the
legal document that governs the proposed merger, is attached as Appendix A to
this document and is incorporated into this document. We strongly urge you to
read the merger agreement. See "Where you can find more information" on page 16.
WHO ARE THE COMPANIES?
Towne Services, Inc.
3295 River Exchange Drive, Suite 350
Norcross, GA 30092
Telephone: (770) 734-2680
Towne Services is a leading provider of transaction based online services
and products to small businesses and community banks in the United States. We
deliver these services and products via an electronic gateway that links our
business customers with us and with their banks. Our systems take sales
transaction and payment information, record and process it electronically and
communicate the results to our business customers and their banks, often the
same day. Our goal is to continue to develop and deliver the business and
management tools our customers need to succeed in an electronic commerce
marketplace. The primary business capabilities we offer our customers include:
- a "virtual credit card" system that processes the in-house credit
transactions of small businesses in much the same way as credit card
transactions are processed;
- an automated receivables management system that allows banks to quickly
finance the needs of these small business as well as offer many other
business management and banking products to their small business
customers; and
- related billing, payment and debt collection services.
Towne's business has grown rapidly, with its revenues increasing from
$722,000 in 1997 to $6.4 million in 1998. For more information about Towne
Services, please see the "Towne Services' Business" section beginning on page
57.
Forseon Corporation
6600 Jurupa Avenue
Riverside, CA 92504
Telephone: (909) 688-2256
Forseon provides 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. These products and services often improve our retail business customers'
ability to compete with larger chain retailers by providing automated processing
and business management capabilities similar to those used by these larger
competitors. Forseon's management reports assist these small business owners in
developing and implementing their merchandising strategies as well as
receivables management and marketing plans. Forseon's net revenues for the year
ended December 31, 1998 were $11.8 million. For
1
<PAGE> 9
\more information about Forseon, please see the "Forseon's Business" section
beginning on page 93.
WHAT ARE THE MAIN TERMS OF THE MERGER?
Towne and Forseon entered into an Agreement and Plan of Merger dated March
25, 1999, a copy of which is attached as Appendix A at the back of this
document. This merger agreement provides for the combination of Towne's and
Forseon's businesses through the merger of Forseon with a subsidiary of Towne.
Towne will issue a total of 2,075,345 shares of its common stock in exchange for
all outstanding stock and options to acquire stock in Forseon. Ten percent of
the Towne common stock will be held back in escrow to satisfy the
indemnification obligations of Forseon stockholders under the merger agreement.
Upon completion of the merger, you will become a shareholder of Towne and your
rights as a shareholder will be governed by Towne's articles of incorporation
and bylaws. For more information on the merger, please see "The Merger"
beginning on page 27. We encourage you to read the merger agreement, as it is
the legal document that governs the merger, as well as this proxy
statement/prospectus.
WHAT WILL FORSEON STOCKHOLDERS RECEIVE IN THE MERGER?
Shares of Forseon common stock will be exchanged for Towne common stock as
a result of the merger. At the time the merger is completed, each outstanding
share of Forseon common stock will be converted into the right to receive
approximately 2.82 shares of Towne common stock based on the number of
outstanding shares of stock and options to acquire stock of Forseon. The exact
share exchange ratio will be determined at the time the merger is completed and
not at the time you vote on the merger.
The following table shows possible values for the Towne shares that you
would receive upon completion of the merger for each Forseon share you own. This
table assumes a share exchange ratio of 2.82 shares of Towne common stock for
each Forseon share:
<TABLE>
<CAPTION>
TOWNE FORSEON
COMMON STOCK EQUIVALENT
PRICE PER SHARE PRICE PER SHARE
- --------------- ---------------
<S> <C>
$ 6.00 $16.94
7.00 19.76
8.00 22.58
9.00 25.40
10.00 28.23
11.00 31.05
</TABLE>
The shares of Towne common stock issued in connection with the merger will
be listed on the Nasdaq National Market. As of April , 1999, the market price
per share of Towne common stock was $ . The corresponding Forseon
equivalent price per share was $ . Towne's stock price is volatile and is
likely to change quickly and frequently. See "Risk Factors -- The number of
shares you will receive is fixed, even though the market for Towne shares is
volatile." We encourage you to obtain current market quotations for Towne common
stock.
Forseon stockholders will not receive fractional shares of Towne common
stock. Instead, they will receive a check in payment for any fractional shares
based upon the average of the closing prices for Towne's common stock for the
ten trading days ending three trading days prior to closing of the merger.
2
<PAGE> 10
Prior to closing of the merger, all outstanding options and other rights to
acquire Forseon stock will be converted into the right to acquire Towne common
stock upon completion of the merger. In addition, under the terms of the merger
agreement, Forseon does not have the right to "walk-away" based on the market
price per share of Towne Stock, and there are no other obligations of any party
conditioned on the market price per share of Towne Stock at any time. We
anticipate that the merger will become effective approximately one day after the
Forseon stockholders vote to approve the merger as required by the merger
agreement.
PLEASE DO NOT SEND IN YOUR FORSEON STOCK CERTIFICATES NOW. WHEN THE MERGER
IS COMPLETED, TOWNE WILL SEND YOU WRITTEN INSTRUCTIONS FOR EXCHANGING YOUR
FORSEON STOCK CERTIFICATES.
WHAT VOTING PROCEDURES ARE NEEDED TO APPROVE THE MERGER?
A. The Special Meeting of Forseon Stockholders
Forseon will hold a special meeting of its stockholders on June , 1999 at
10:00 a.m. local time at the offices of Gibson, Dunn & Crutcher, LLP, 4 Park
Plaza, Suite 1700, Irvine, California 92614-8557. At this meeting, Forseon
stockholders will be asked to approve the merger agreement and all related
matters. For more information, see "The Forseon Stockholder Meeting" section
beginning on page 25.
B. Record Date for Voting on the Merger Agreement
You are entitled to vote at the special meeting of stockholders if you
owned shares of Forseon common stock as of the close of business on the record
date, which has been set at May , 1999. On the record date, there were
shares of Forseon common stock outstanding. Forseon stockholders will
have one vote at the special meeting for each share of Forseon common stock they
owned on the record date.
C. Voting by Proxy or in Person
You may vote either by attending the special meeting or by delivering a
signed proxy card to us before the meeting. Even if you plan to attend the
meeting, we ask that you sign and return the proxy card attached to this
document as Appendix C-1 in advance. You may change your vote later by
delivering a new proxy card with a date after the first proxy card or by
attending the meeting and voting in person.
D. Procedure for Casting Your Vote if Your Shares are Held by the Forseon
Corporation Employee Stock Ownership Plan
Participants in the Forseon Corporation Employee Stock Ownership Plan,
referred to as the "ESOP" throughout this document, will be given the right to
direct the trustee of the ESOP to vote the Forseon shares held in their ESOP
account as of , 1999 as if the ESOP participants owned these shares
directly. The voting process will be administered by U.S. Trust Company,
National Association, acting as special investment manager under the ESOP. Each
participant is being furnished with a confidential voting instruction card
included with this document. The card is to be returned to U.S. Trust Company
and once received by U.S. Trust Company, is irrevocable. U.S. Trust Company
will, subject to its duties under the Employee Retirement Income Security Act of
1974, as amended, instruct the trustee of the ESOP to vote the shares in
accordance with participant directions in a manner which preserves the
confidentiality of the vote. If an ESOP participant fails to provide the
investment manager with
3
<PAGE> 11
directions with respect to shares allocated to his or her account, the
investment manager will direct the ESOP trustee on the voting of such shares in
its discretion. If a stockholder participates in the ESOP, he or she may receive
more than one set of proxy materials. To ensure that all shares of Forseon
common stock are voted, stockholders should sign and return each proxy card and
confidential voting instruction card received in the proper envelope.
E. Forseon Stockholder Vote Required to Approve the Merger Agreement
Under applicable law, the affirmative vote of the holders of a majority of
the outstanding shares of Forseon common stock is required to approve the merger
agreement. These votes may be cast in person or by signing and returning the
proxy card attached to this document as Appendix C. The closing of the merger
will not take place unless the holders of at least 90% of the outstanding shares
of Forseon common stock approve the merger agreement, unless Towne agrees to
waive or modify this condition. Except for your shares that are held by the
ESOP, your abstention or failure to vote will have the effect of a vote against
the merger agreement and the merger. Towne shareholders will not vote on the
merger agreement.
F. Appraisal Rights
Forseon is a Delaware corporation. Under Delaware law, Forseon stockholders
who do not vote for the merger have the right to an appraisal of the value of
their Forseon common stock if they follow proper procedures. These stockholders
would receive the appraised value of their shares rather than shares of Towne
common stock in connection with the merger. In addition to reading the
"Appraisal Rights" section of this document beginning on page 48, you should
carefully read the copy of Section 262 of the Delaware General Corporate Law
attached to this document as Appendix B. This is the law which governs your
appraisal rights with respect to the merger.
WHAT ARE THE REASONS TO APPROVE THE MERGER?
A. Reasons for the Merger and Recommendation to Forseon Stockholders
The Forseon board of directors believes that the terms of the merger
agreement are in the best interests of Forseon and its stockholders and
recommends that you approve the merger agreement for the following reasons:
- we believe that the combined company after the merger will be able to
offer a broader range of products and services and address a larger
number of customers' business needs;
- we believe that the combined company will have significantly greater
resources than Forseon;
- we anticipate that the combined operations of the two companies will
improve the performance capabilities of each enterprise beyond what it
could obtain independently;
- Forseon stockholders will receive publicly traded Towne stock, subject
to limited restrictions on affiliate shares, and would have the chance
to participate in the potential growth of the combined company after
the merger; and
- we expect there to be benefits of the merger to Forseon's
stockholders, employees and customers and the communities in which
Forseon operates.
4
<PAGE> 12
THE FORSEON BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN YOUR BEST
INTERESTS AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT
AND ALL RELATED MATTERS.
B. Risks of the Merger
In considering whether to approve the merger agreement and the related
matters, you should consider all of the risks of the merger, including the
volatile history and risk of fluctuations in the market price of Towne common
stock and the fact that we may be unable to successfully integrate Forseon's
business with Towne's business after the merger. We encourage you to read the
more detailed description of the risks set forth in the "Risk Factors" section
of this document beginning on page 8.
C. Other Interests of Forseon Officers and Directors in the Merger
In considering whether you should approve the merger agreement, you should
note that some of Forseon's officers and directors may have interests in the
merger that are different from, or in addition to, your interests. Specifically,
in connection with the merger:
- most of the current Forseon executive officers have signed, or before
closing will sign, new employment agreements with Forseon which become
effective upon completion of the merger;
- Louis A. Delmonico, a director of Forseon, will receive payments
totaling $115,200 as success and consulting fees related to the
merger; and
- many of the Forseon directors and officers will continue to be
indemnified against liabilities incurred as a result of their
positions with Forseon.
WHAT EVENTS MAY DELAY OR PREVENT THE MERGER?
A. Conditions to the Merger
The merger will not be completed unless the conditions contained in the
merger agreement are satisfied. These conditions include the adoption of the
merger agreement by the Forseon stockholders, approval of the merger and related
matters by regulatory authorities and other matters. Some of these conditions
may be waived or modified by the company entitled to benefit from the condition.
For a more detailed description of these conditions, see "The Merger -- The
Agreement and Plan of Merger -- Conditions to the Merger" beginning on page 40.
B. No Solicitation
As part of the merger agreement, Forseon has agreed not to initiate,
solicit, encourage or participate in negotiations or discussions with another
person regarding a business combination while the merger with Towne is pending.
Forseon may, under very limited circumstances, including the payment to Towne of
$1.0 million, terminate the merger agreement and consider alternative proposals
to the merger with Towne.
C. Termination of the Merger Agreement
The merger agreement may be terminated under several circumstances and for
many reasons at any time before completion of the merger. This may occur whether
or not Forseon stockholders have approved the merger agreement. For a
description of reasons why the merger
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may be terminated, see "The Merger -- The Agreement and Plan of
Merger -- Termination; Termination Fees and Expenses" beginning on page 42.
WHAT ARE THE TAX CONSEQUENCES AND ACCOUNTING TREATMENT OF THE MERGER?
D. Important Federal Income Tax Consequences
Forseon and Towne intend the exchange of Forseon common stock for Towne
common stock to be tax-free to Forseon stockholders for federal income tax
purposes. However, Forseon and Towne expect that cash paid to you and the other
Forseon stockholders for any fractional shares will be taxable. Please see "The
Merger -- Certain Federal Income Tax Considerations" beginning on page 44 for
more discussion of the tax impact of the merger.
Tax matters are very complicated and the tax consequences to you from the
merger will depend on the facts of your own personal financial situation and
circumstances. You should consult your tax advisors for a full understanding of
all of the tax consequences to you as a result of the merger. See "The
Merger -- Certain Federal Income Tax Considerations" beginning on page 44.
E. Accounting Treatment
Forseon and Towne intend the merger to be accounted for as a pooling of
interests. Under this method of accounting, the assets and liabilities of
Forseon will be carried forward at their recorded amounts and Towne will restate
its operating results to include Forseon's operating results as if the companies
had always been combined. See "The Merger -- Accounting Treatment" beginning on
page 45.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have questions about the merger you should contact:
Forseon Corporation
6600 Jurupa Avenue
Riverside, California 92504
Telephone: (909) 688-2256
Attention: Mr. Allen Merrill
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FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES
We have made forward-looking statements in this document and in documents
to which we have referred you. These statements are subject to risks and
uncertainties, and there can be no guarantees that such statements will prove to
be correct. Forward-looking statements include assumptions as to how we may
perform in the future. When we use words like "believe," "expect," "anticipate,"
"predict," "potential," "continue," "will," "may," "could," "intend," "plan" and
"estimate" or similar expressions, we are making forward-looking statements. For
those statements we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to those
discussed elsewhere in this document, could affect the future results of the
combined company after the merger and could cause those results to differ
materially from those expressed in our forward-looking statements. These factors
include:
- our inability to successfully integrate our businesses;
- adverse changes in economic conditions and in the markets we serve;
- regulatory, legal, economic and other changes in the electronic
commerce industry generally;
- changes in the law; and
- any significant delay in the expected completion of the merger.
Although Towne and Forseon believe that the expectations reflected in each
of their forward-looking statements are reasonable, neither can guarantee that
these expectations actually will be achieved. We are under no duty to update any
of the forward-looking statements after the date of this proxy
statement/prospectus to conform those statements to actual results. In
evaluating these statements, you should consider various factors, including the
risks outlined under the "Risk Factors" section below. You should also consider
the cautionary statements contained in the reports filed by Towne with the
Securities and Exchange Commission. These factors may cause the actual results
of Towne, Forseon and the combined company to differ materially from any
forward-looking statements.
In addition, neither Towne nor Forseon makes any express or implied
representation or warranty as to the pro forma financial information set forth
in this document or as to the accuracy or completeness of the assumptions from
which such pro forma information is derived. Projections or estimations of
Towne's and Forseon's future performance are necessarily subject to a high
degree of uncertainty and may vary materially from actual results. You should
read the particular discussions under "Risk Factors" beginning on page 8, "Towne
Services' Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 68 and "Forseon's Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 97.
All information in this document concerning Towne and its current
subsidiaries has been furnished by Towne. All information in this document
concerning Forseon and its subsidiary has been furnished by Forseon.
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RISK FACTORS
You should carefully consider the risks described below before voting on
the merger agreement and the related matters. The risks and uncertainties
described below are not the only ones that may impact Forseon, Towne or the
combined companies after the merger. Additional risks and uncertainties that we
do not know of at this time could seriously harm the business of Towne and
Forseon before and after the merger.
If any of the following risks actually occur, our business, financial
conditions or results of operations could be seriously harmed. In that case, the
trading price of Towne common stock, before and after completion of the merger,
would likely decline, and you may lose all or part of your investment in the
companies.
RISKS RELATED TO THE MERGER
IF WE DO NOT INTEGRATE OUR BUSINESSES SUCCESSFULLY, POTENTIAL BENEFITS OF THE
MERGER MAY NOT OCCUR.
In order to achieve the benefits of the merger, Towne and Forseon must
successfully combine their businesses and operations. If we do not integrate our
operations successfully and quickly, it could cause serious harm to our combined
business, financial condition and prospects. Prior to the merger, our companies
have operated independently, with different policies and practices. Integrating
our two businesses will entail significant diversion of management's time and
attention. We may not be able to integrate our technologies, personnel,
customers, operations and systems fast enough or well enough to meet our
performance objectives. In order to obtain the greatest benefits of the merger,
we must make Forseon's technologies, products, services and personnel operate
together with Towne's technologies, products, services and personnel. We may
need to replace or convert some of Forseon's computer systems in order to work
with Towne's computer systems. In addition, we may be required to spend
additional time or money on integration that would otherwise be spent on
developing our business and services or other matters.
WE MAY LOSE SOME CUSTOMERS AS A RESULT OF THE MERGER.
As a result of the merger, some of our customers may not continue to do
business with us. For example, Forseon's customers might cancel their agreements
with Forseon if they are uncertain about Towne's commitment to support Forseon
products after the merger. Or, Towne's customers might cancel agreements if
Towne experienced difficulties in integrating Forseon's business into its
operations. Some of our customers may decide to purchase products and services
from our competitors. Cancellations or failures to renew our customer contracts,
both before and after the merger, could seriously harm our business and
operating results.
THE NUMBER OF SHARES OF TOWNE STOCK YOU WILL RECEIVE IS FIXED, EVEN THOUGH THE
MARKET FOR TOWNE SHARES IS VOLATILE.
Towne will issue a total of 2,075,345 shares of its common stock for all of
Forseon's outstanding common stock and stock options. The exchange rate will not
increase or decrease if the market price of Towne common stock changes. The
final exchange rate of Forseon common stock into Towne common stock will be
determined at the time the merger is completed. The exchange rate is currently
2.82 shares of Towne common stock for each share of Forseon common stock.
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As the exchange rate will not increase or decrease based on market price
fluctuations, Forseon's stockholders will not be compensated if the market price
of Towne common stock decreases before completion of the merger. If the market
price of Towne common stock decreases before the merger, the market value of the
Towne common stock to be received by Forseon's stockholders would decrease. The
closing price for Towne common stock on March 25, 1999, the last trading day
prior to the public announcement of the merger, was $7.63. On ,
1999, the latest trading day before the printing of this proxy
statement/prospectus, the closing price for Towne common stock was $ .
The market price of Towne common stock may increase or decrease
significantly and often before and after completion of the merger. As a result,
your Towne shares received in the merger may not be worth as much as your shares
of Forseon common stock before the merger. You should obtain recent market
quotations for Towne common stock because it has historically been volatile.
IF WE CANNOT ATTRACT AND RETAIN QUALIFIED PERSONNEL, IT WILL HARM OUR BUSINESS.
The success of the combined company after the merger depends in part on the
continued service of key personnel. Despite our efforts to retain quality
employees, we might lose some of our key employees following the merger.
Similarly, the future performance of the combined company depends on our ability
to continue to attract qualified personnel following the merger. Competition for
qualified management, technical, sales and marketing employees in our industry
is intense. In addition, our personnel policies and practices may be less
compatible than we anticipate and many employees might leave the companies and
go to work for competitors. We cannot assure you that we will be able to
attract, retain and integrate employees to develop and continue our business and
strategies following the merger.
A PORTION OF YOUR TOWNE SHARES MAY BE FORFEITED BACK TO TOWNE.
Ten percent of the shares of Towne common stock that Forseon stockholders
will receive in the merger will be placed in escrow. The escrow will terminate
one year after the merger becomes effective if Towne has made no claims for
damages based upon breaches of representations and agreements by Forseon or
other events occurring prior to completion of the merger which remain unresolved
one year after the effective time of the merger. Towne may recover damages out
of this escrow resulting from breaches by Forseon or Forseon stockholders of
representations, warranties and covenants contained in the merger agreement and
upon certain contingencies and events described in the merger agreement.
Therefore, you may never receive up to ten percent of the merger consideration
placed into escrow.
BOTH COMPANIES WILL INCUR SIGNIFICANT COSTS FOR THE MERGER.
We estimate that the merger will result in transaction costs of
approximately $900,000 to Towne and $600,000 to Forseon. These are estimates and
the actual transaction costs may be much larger. Many of those costs have been
incurred already. In addition to these transaction costs, we expect that the
combined company will incur significant additional costs associated with
integrating the two companies after the merger is complete. At this time, we
cannot reasonably estimate the additional costs in completing the merger and
integrating the businesses. If the merger is not consummated, Towne and Forseon
will have incurred significant costs but will receive no benefits.
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THE MERGER MAY NOT CLOSE IF SEVERAL CONDITIONS ARE NOT SATISFIED.
The merger may not close unless several conditions are satisfied,
including:
- the merger agreement and related matters must be approved by holders
of a majority of the outstanding Forseon common stock;
- each representation and warranty made by Towne and Forseon must be
materially accurate;
- the events specified in the merger agreement must occur, or not occur,
prior to closing; and
- the other conditions set forth in the merger agreement must be
satisfied or waived.
We cannot assure you that the conditions to the merger will be satisfied or
waived in a timely manner or at all. In that case, the merger will be delayed or
may not occur at all, and some or all of the potential benefits of the merger
may be lost.
IF THE MERGER DOES NOT CLOSE OR IS DELAYED, OUR BUSINESSES WOULD BE HARMED.
If the merger does not close or is delayed, our businesses will be greatly
harmed because the announcement of the merger and our efforts to close the
merger will:
- deplete our cash;
- disrupt our sales and marketing efforts;
- likely increase employee turnover; and
- distract our management from our business plan and strategies.
If the merger does not occur, it may diminish Forseon's ability to locate
an alternative business partner or resources to achieve its goals. In addition,
Forseon or Towne may be required to reimburse the other for its out of pocket
expenses up to $100,000 relating to the merger, or Forseon may be required to
pay a break-up fee of $1.0 million to Towne, depending on the circumstances.
THERE ARE TAX RISKS ASSOCIATED WITH THE MERGER.
We intend the merger to constitute a tax-free reorganization. However, we
have not sought or obtained a ruling from the Internal Revenue Service.
Therefore, there is a risk that the merger may not constitute a tax-free
reorganization, in which case, any gain realized as a result of the merger may
be subject to tax.
RISKS RELATED TO TOWNE'S AND FORSEON'S OPERATIONS, BEFORE AND AFTER THE MERGER
WE HAVE A LIMITED OPERATING HISTORY AND HAVE HAD SIGNIFICANT LOSSES, AND WE
CANNOT GUARANTEE WE WILL BECOME PROFITABLE.
Towne has only a limited operating history. We released our flagship TOWNE
CREDIT(SM) product and related services in June 1997. We have incurred
significant losses since we began operations. We had net losses of $660,000 in
1996, $2.5 million in 1997 and $15.1 million in 1998. We will continue to incur
net losses until we are able to attain sufficient revenues to support our
business and outweigh our expenses, which may never occur.
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You should evaluate our company in light of the risks, expenses and
difficulties frequently encountered by companies in early stages of development
and in relatively new and changing markets. Our products and services are
relatively new. Businesses and banks may not accept these novel products and
services quickly or at all. Although we have increased our revenues in recent
periods, our costs and expenses have also grown substantially. We may not be
able to continue our revenue growth, control costs or become profitable. Our
ability to achieve and maintain profitability depends on a number of factors,
including:
- gaining market acceptance for our current and future products and
services;
- increasing revenues while reducing costs;
- implementing our business strategies; and
- many other factors outside our control.
We cannot guarantee that we will succeed in achieving these goals, and our
failure to do so would have a material adverse effect on our business,
prospects, financial condition and operating results.
FORSEON HAS HAD LIMITED REVENUE GROWTH.
Forseon's revenues did not grow in the last fiscal year, and have not grown
significantly in recent years. It is possible that Forseon's business will not
grow in the future, or that its costs and expenses will increase. Forseon cannot
guarantee that it will continue to be profitable. If it is not profitable, or if
it does not increase its revenues or control its expenses, it could become a
drain on Towne's financial performance, or on the performance of Towne's stock.
WE MAY NOT BE ABLE TO SUSTAIN OR MANAGE OUR GROWTH.
Towne has grown rapidly both internally and by acquisitions of other
businesses. We have had to recruit and hire more personnel, modify our
processing systems and otherwise expand our operations to accommodate our
growth. We may not be successful in continuing or managing our growth. Further,
our growth has placed, and will continue to place, significant demands on all
aspects of our business, including our systems, management and personnel. We
cannot guarantee that we will be able to fund our growth, manage costs, adapt
our operating systems, respond to changing business conditions or otherwise
achieve or manage our growth.
WE DEPEND ON INCREASING OUR SALES AND MARKETING FORCE AND FORMING NEW MARKETING
RELATIONSHIPS TO GROW OUR BUSINESS.
We must aggressively hire sales and marketing personnel and enter into new
marketing relationships to help gain access to large groups of potential bank
and business customers. Competition for experienced sales and marketing
personnel is intense, and we may not be able to retain existing personnel or
locate and attract additional qualified personnel in the future. In addition, we
have relationships with various companies and organizations for the marketing,
support and endorsement of our products and services. We rely on these entities
to market our processing systems to their existing and future customer base of
banks across the country. If we were to lose any of these key marketing
relationships or fail to enter into new marketing relationships, it could
prevent or delay our growth and could have a material adverse effect on our
business, financial condition and operating results.
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OUR OPERATING RESULTS AND STOCK PRICE MAY FLUCTUATE DUE TO FACTORS BEYOND OUR
CONTROL.
Our operating results have varied in the past and are likely to vary
significantly in the future, in large part because the market for our products
and services is emerging and because our processing volume differs substantially
from customer to customer. Our stock price has also fluctuated significantly and
is likely to remain relatively volatile in the future. Our future success
depends on a number of factors, many of which are unpredictable and beyond our
control. These factors include:
- whether or not the market accepts our current and future products and
services;
- whether new competitors emerge or existing competitors gain market
share faster than us;
- whether new technologies are developed which make our systems outdated
or obsolete;
- whether costs of doing business increase as a result of higher wages,
sales commissions, taxes, competitors' pricing and other factors;
- whether we can identify and locate good businesses to acquire and
integrate the businesses we acquire in a cost-effective manner;
- whether seasonal trends in consumer purchasing impact the volume of
transactions processed;
- general economic factors and market conditions that impact our
customers and industry; and
- the impact of future acquisitions to our operations.
Due to all of these factors, historical results cannot be relied upon to
indicate future results and it is likely that in some future period our results
of operations will fall below market expectations. This would likely cause the
price of our common stock to drop substantially.
BECAUSE IT IS NOT DIFFICULT TO ENTER OUR INDUSTRY, WE EXPECT INCREASED
COMPETITION WHICH COULD HARM OUR BUSINESS.
The electronic transaction processing industry and the merchandise
forecasting industry are very competitive. Increased competition is likely from
both existing competitors and new entrants into our existing or future markets.
We believe it is not very difficult to enter into business in our industries.
Towne's competitors have significant advantages, and Towne's and Forseon's
future competitors may also have advantages, including:
- established products and services;
- substantially greater resources and market presence;
- better customer service and technological expertise;
- additional personnel;
- the ability to adapt quickly to new technologies and changes in
customer demands;
- the ability to devote greater resources to marketing;
- longer operating histories; and
- larger and more established customer bases and operations.
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ACQUISITIONS AND STOCK SALES MAY SUBJECT US TO ADDITIONAL RISKS AND MAY DILUTE
YOUR OWNERSHIP.
An inability to identify, acquire and integrate businesses, products or
services that complement our business may negatively affect our financial
results and our ability to grow. We cannot guarantee that we will be able to
identify and acquire suitable candidates on acceptable terms. We also cannot
promise that we will be able to arrange adequate financing, complete any
transaction or successfully integrate the acquired business. We may issue more
shares of our stock in future acquisitions or in sales of our stock, which would
dilute the shares you own. For example, we recently filed a registration
statement with the Securities and Exchange Commission for the sale of up to
8,050,000 shares of our stock. Acquisitions and stock offerings may also
distract management and result in dilution to current shareholders, additional
debt, loss of key employees, integration costs, expenses related to goodwill and
other intangible assets and unforeseen liabilities, all of which could have a
material adverse effect on our business. In addition, we may not be able to
successfully compete with other companies for acquisition candidates.
WE RELY UPON SIGNIFICANT NEW CUSTOMERS TO GENERATE SET-UP FEES.
Both Towne and Forseon have relied upon and expect to continue to rely upon
fees from large new customers, or significant numbers of new customers, for a
substantial portion of our revenues. If we are unable to sell our products and
services to a significant number of new customers, it would have a material
adverse effect on our business, financial condition and results of operations.
The amount of revenues derived from any given customer during a given period of
time may vary significantly, and we expect that the identity of customers
accounting for large portions of revenues will change from quarter to quarter
and year to year.
WE MAY LOSE CUSTOMERS WITH LITTLE NOTICE AND BECAUSE OF THE FORSEON MERGER.
Customer attrition is a normal part of both the electronic processing
business and the merchandise forecasting business. Both Towne and Forseon have
experienced and will experience losses of customers due to attrition. Towne's
written agreements with its customers generally provide that either party may
terminate the agreement upon 30 to 60 days' notice for any reason. Consolidation
in the financial services industry or the specialty retail industry in the
United States may result in fewer potential customers for both of our companies.
In addition, either Towne or Forseon may elect not to process or continue
processing for customers that experience financial difficulties or other
problems.
NEW TECHNOLOGY COULD MAKE OUR PRODUCTS OBSOLETE.
Other companies may develop new technologies or introduce new products that
are more effective than our products and services. This may make the products
and services we offer obsolete or less attractive to potential customers.
MANY OF OUR CUSTOMERS OPERATE IN A REGULATED INDUSTRY WHICH COULD ADVERSELY
IMPACT OUR BUSINESS.
Although our business is not highly regulated, we offer our products and
services to banks. The banking industry is highly regulated and subject to
supervision by several federal and/or state governmental regulatory agencies. If
bank regulations change or if new regulations are adopted to regulate the
financing of small business accounts receivable, our business, financial
condition and results of operations could be materially adversely affected.
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WE MAY BE LIABLE FOR ANY PROBLEMS WITH OUR PRODUCT.
We may be liable if the use of any of our products causes damage to our
customers' businesses. We also may be required to recall certain of our products
if they become damaged or unable to perform their intended functions. We have
not experienced any product liability judgments or claims. However, a product
liability judgment or claim could negatively affect our business, financial
condition and results of operations.
FAILURE OF OUR NETWORK INFRASTRUCTURE AND EQUIPMENT WOULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
Our operations depend on our ability to protect our network infrastructure
and equipment. Damage to this equipment may be caused by human error, natural
disasters, power and telecommunications failures, intentional acts of vandalism
and similar events. Despite precautions we have taken, the occurrence of human
error, a natural disaster or other unanticipated problems could halt our
services, damage network equipment and result in substantial expense to repair
or replace damaged equipment. In addition, the failure of our telecommunications
providers to supply the necessary services could also interrupt our business.
The inability to supply services to our customers could negatively affect our
business, financial condition and results of operations and may also harm our
reputation.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS.
We believe that our technologies, trademarks and other proprietary rights
are important to our success. 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. However, 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 the patent, copyright or trademark rights of such
third parties. We cannot guarantee 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, financial condition and results of operations.
WE MAY NOT BE ABLE TO USE OUR OPERATING LOSSES TO OUR TAX BENEFIT AND MAY FACE
OTHER TAX ISSUES.
At December 31, 1998, our company had available net operating losses, or
NOLs, of approximately $17.6 million which will expire beginning in 2011 if not
used. If our taxable income in future years is less than the NOLs it is
permitted to use, some NOLs will not be realized. Once these NOLs are used or
expire, our projected effective tax rate will increase, which will adversely
affect our operating results and financial condition. In addition, we may become
subject to state taxation of fees charged for our transaction processing
products and services, which may decrease our profits, if any, and may have a
negative impact on our financial condition and results of operations.
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A FEW PEOPLE CONTROL A LARGE PORTION OF OUR STOCK.
Our executive officers and directors beneficially own 41.1% of the
outstanding common stock. After the merger, these people will continue to own
over % of our stock. Accordingly, they control Towne to a great extent and
have the power to influence the election a majority of the directors, the
appointment of management and the approval of actions requiring the approval of
a majority of our shareholders. They also have the ability to keep some
transactions from happening even if the transactions might be favorable to other
shareholders. The interests of senior management could conflict with the
interests of the other shareholders of Towne.
TOWNE'S CORPORATE ORGANIZATIONAL DOCUMENTS AND SOME OF OUR EMPLOYMENT AGREEMENTS
CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.
Some provisions of Towne's articles of incorporation and bylaws could make
it more difficult for a third party to acquire control of Towne, even if such
change in control would be beneficial to shareholders. Some of our executive
officers also have employment agreements that contain change in control
provisions. These provisions also may discourage or prevent a tender offer,
proxy contest or other attempted takeover.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS.
Each of Towne's and Forseon's business and customer relationships rely on
computer software programs, internal operating systems and telephone and other
network communications connections. If any of these programs, systems or network
connections are not programmed to recognize and properly process dates after
December 31, 1999, significant system failures or errors may result which could
have a material adverse effect on our and our customers' business, financial
condition, or results of operations. For our internal accounting and operating
systems and network communications, we use software and other products provided
by third parties. If these parties are affected by the Year 2000 problem, our
ability to provide services to our customers may be materially adversely
affected.
We supply point of sale terminals and other products needed to run our
processing systems to our customers and have not tested any other products or
systems used in our customers' businesses. If our customers do not successfully
address 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. We believe that many
financial institutions and small businesses, including our customers, are still
in the preliminary stages of analyzing their systems for Year 2000 issues. It is
impossible to estimate the potential expenses involved or delays which may
result from the failure of these institutions and third parties to resolve their
Year 2000 issues in a timely manner, and we cannot guarantee that such expenses,
failures or delays will not have a material adverse effect on our business,
financial condition or results of operations. In addition, we have no
contingency plan in place to address any large-scale problems our customers,
vendors or other persons with whom we conduct business may face related to Year
2000 issues.
BECAUSE OUR BUSINESS INVOLVES THE ELECTRONIC STORAGE AND TRANSMISSION OF DATA,
WE COULD BE ADVERSELY AFFECTED BY SECURITY BREACHES.
The difficulty of securely storing confidential information electronically
has been a significant barrier to conducting electronic commerce. We may be
required to spend significant capital and
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other resources to protect against the threat of security breaches or to
alleviate problems caused by breaches. To the extent that our activities or the
activities of our customers involve the storage and transmission of confidential
information, such as banking records or credit information, security breaches
could expose us to claims, litigation or other possible liabilities. Our
inability to prevent security breaches would have a material adverse effect on
our business, financial condition and operating results.
WHERE YOU CAN FIND MORE INFORMATION
Towne is subject to the information requirements of the Securities Exchange
Act of 1934, which means that Towne is required to file reports, proxy
statements and other information at the Public Reference Section of the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. You may also obtain copies
of the reports, proxy statements and other information from the Public Reference
Section of the Commission, Washington, D.C. 20549, at prescribed rates. The
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements, and registration
statements and other information regarding registrants that file electronically
with the Commission through the EDGAR system. Towne's common stock is traded on
the Nasdaq National Market under the symbol: TWNE, and reports, proxy statements
and other information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
Towne filed a registration statement on Form S-4 to register with the
Commission the Towne common stock to be issued to you and the other Forseon
stockholders in the merger. This proxy statement/prospectus is a part of that
registration statement and constitutes a prospectus of Towne in addition to
being a proxy statement of Forseon for a special meeting of Forseon stockholders
to be held on June , 1999, as described herein. As allowed by the Commission's
rules, this proxy statement/prospectus does not contain all of the information
you can find in the registration statement or the exhibits to the registration
statement. This proxy statement/prospectus summarizes some of the documents
that are exhibits to the registration statement, and you should refer to the
exhibits for a more complete description of the matters covered by those
documents.
16
<PAGE> 24
SELECTED HISTORICAL CONSOLIDATED AND UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following selected historical consolidated financial data is qualified
by reference to, and should be read in conjunction with, Towne's, Forseon's, and
Banking Solutions' consolidated financial statements and the related notes and
other financial information included elsewhere in this document, as well as both
companies' "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below. These results may not be indicative of future
results.
The selected consolidated financial data of Towne as of December 31, 1996,
1997 and 1998, for the inception period ended December 31, 1995 and for each of
the three years ended December 31, 1998 were derived from Towne's consolidated
financial statements, which have been audited by Arthur Andersen LLP, Towne's
independent public accountants. The selected consolidated balance sheet data for
Towne as of December 31, 1995 was derived from unaudited financial statements
which, in the opinion of Towne's management, include all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of Towne's
financial condition and results of operations.
The following table presents selected historical consolidated financial
data for Forseon for each of the five fiscal years ended June 30, 1998 and for
the six months ended December 31, 1997 and 1998. The data presented for the
fiscal years ended June 30 were derived from the financial statements of
Forseon, which have been audited by KPMG LLP, Forseon's independent public
accountants. The data presented as of and for the six months ended December 31,
1997 and 1998 were derived from unaudited financial statements. In the opinion
of Forseon's management, the interim unaudited consolidated financial
information includes all adjustments, consisting only of normal recurring
accruals, that are considered necessary for a fair presentation of the results
of operations for such periods. Results for the interim periods are not
necessarily indicative of results for the year.
The financial information of Banking Solutions for the 11 month period
prior to acquisition by Towne in December 1998 is unaudited. In the opinion of
Banking Solutions' management, the unaudited financial information includes all
adjustments, consisting only of normal recurring accruals, that are considered
necessary for a fair presentation of the results of operations for the period.
The selected unaudited pro forma combined financial information is derived
from the selected historical consolidated financial statements, appearing
elsewhere herein, which give effect to both the proposed merger between Towne
and Foreson, which will be accounted for on a pooling of interests basis, and
the purchase of Banking Solutions, and should be read in conjunction with such
pro forma financial statements and the notes. For the purpose of the pro forma
combined statements of operations data, Towne's results of operations for fiscal
years ended December 31, 1996, 1997 and 1998 have been combined with Forseon's
results of operations for the same periods. The pro forma combined condensed
statement of operations for the year ended December 31, 1998 assumes the
purchase of Banking Solutions occurred at the beginning of the year. For the
purpose of the pro forma balance sheet, Towne's consolidated balance sheet as of
December 31, 1998 has been combined with Forseon's consolidated balance sheet as
of December 31, 1998, giving effect to the merger as if it had occurred on
December 31, 1998.
The pro forma financial information does not purport to represent what
Towne's financial position or results of operations would actually have been had
the mergers occurred or to project
17
<PAGE> 25
Towne's financial position or results of operations for any future date or
period. We can make no guarantees about the assumptions reflected in the pro
forma information, as they are subject to great uncertainty and risk. You should
read the particular discussions under "Risk Factors" on page 8, "Towne Services'
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 68 and "Forseon's Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 97.
18
<PAGE> 26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
TOWNE SERVICES, INC.
<TABLE>
<CAPTION>
INCEPTION
PERIOD
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------
1995(1) 1996 1997 1998
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES.................................... $ 6,000 $ 105,285 $ 722,364 $ 6,397,628
COSTS AND EXPENSES:
Costs of processing, servicing and
support................................ 2,250 219,621 832,102 2,027,160
Research and development.................. 0 51,871 332,470 306,482
Sales and marketing....................... 3,739 118,163 839,323 6,251,564
Stock compensation expense(2)............. 0 10,020 0 6,267,497
Employee termination costs(3)............. 0 0 0 2,291,102
General and administrative................ 18,410 358,606 1,139,642 3,858,564
---------- ---------- ----------- ------------
Total costs and expenses.......... 24,399 758,281 3,143,537 21,002,369
---------- ---------- ----------- ------------
OPERATING LOSS.............................. (18,399) (652,996) (2,421,173) (14,604,741)
---------- ---------- ----------- ------------
OTHER EXPENSES:
Interest expense (income), net............ (131) 5,802 95,946 (263,503)
Other expense (income).................... 357 3,509 (1,018) (5,814)
Financing costs for stock issued to
nonemployees(2)........................ 0 0 0 323,000
---------- ---------- ----------- ------------
Total other expenses.............. 226 9,311 94,928 53,683
---------- ---------- ----------- ------------
Loss before extraordinary loss on early
extinguishment of debt................. (18,625) (662,307) (2,516,101) (14,658,424)
Extraordinary loss on early extinguishment
of debt................................ 0 0 0 476,239
---------- ---------- ----------- ------------
NET LOSS.................................... $ (18,625) $ (662,307) $(2,516,101) $(15,134,663)
========== ========== =========== ============
PREFERRED STOCK DIVIDENDS(4)................ 0 0 0 (5,108,000)
ACCRETION OF WARRANTS WITH REDEMPTION
FEATURE(4)................................ 0 0 0 (691,972)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
BEFORE EXTRAORDINARY LOSS................. $ (18,625) $ (662,307) $(2,516,101) $(20,458,396)
========== ========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE BEFORE EXTRAORDINARY LOSS
Basic..................................... $ (0.00) $ (0.10) $ (0.26) $ (1.32)
========== ========== =========== ============
Diluted................................... $ (0.00) $ (0.10) $ (0.26) $ (1.32)
========== ========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.............................. $ (18,625) $ (662,307) $(2,516,101) $(20,934,635)
========== ========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE
Basic..................................... $ (0.00) $ (0.10) $ (0.26) $ (1.35)
========== ========== =========== ============
Diluted................................... $ (0.00) $ (0.10) $ (0.26) $ (1.35)
========== ========== =========== ============
Weighted Average Common Shares
Outstanding(5)............................ 5,000,000 6,337,356 9,600,592 15,516,170(6)
========== ========== =========== ============
</TABLE>
19
<PAGE> 27
<TABLE>
<CAPTION>
INCEPTION
PERIOD
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------
1995(1) 1996 1997 1998
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
OTHER OPERATING DATA AT END OF PERIOD:
Number of sales people.................... 0 2 15 99(7)
Number of bank contracts(8)............... 0 17 74 641(7)
Number of business customers.............. 0 11 96 1,662(7)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998
----------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $17,517 $ 1,677 $1,946,175 $ 9,883,587
Total assets....................................... 28,226 366,806 3,586,432 35,419,628
Long-term debt, net of current portion............. 30,000 90,000 1,289,666 0
Shareholders' (deficit) equity(6).................. (2,875) 119,092 1,261,663 28,272,416
</TABLE>
- ---------------
(1) Towne Services was incorporated on October 23, 1995. The Inception Period is
from that date to December 31, 1995.
(2) During the year ended December 31, 1998, Towne sold shares of common stock
and issued options to acquire common stock to employees, officers, directors
and non-employees at what management believed to be the fair market value of
the common stock at that time. Towne retained an independent appraiser who
subsequently valued the common stock at a higher price. Based upon
third-party sales, the independent valuation and the anticipated offering
price, Towne recorded a one-time non-cash compensation charge or financing
cost, under the appropriate items shown above, for the additional value.
(3) Represents costs associated with severance payments made in connection with
the consolidation of business operations after we acquired Banking
Solutions, Inc. in December 1998.
(4) Dividends have been recorded with respect to convertible preferred stock
issued on March 13, 1998 for the difference between the estimated fair
market value of the common stock on that date and the conversion price of
the preferred stock. Accretion has been recorded with respect to warrants
with a redemption feature which were issued on December 18, 1997 based upon
the estimated fair market value of the common stock issuable upon exercise
of the warrants. See note (2) above and Note 7 of notes to Towne's
consolidated financial statements.
(5) See Note 2 and Note 8 of notes to Towne's consolidated financial statements
for a description of the method used to determine the share calculations.
(6) In July 1998, Towne completed an initial public offering of its common
stock. The total proceeds of the offering, net of underwriting discounts and
offering expenses, were approximately $27.0 million. Towne issued 3,850,000
shares at an offering price at $8.00 per share. Subsequent to the offering,
Towne converted all outstanding shares of Series A Preferred Stock to
1,217,903 shares of common stock and warrants for 308,982 shares of common
stock were exercised.
(7) The numbers presented reflect the effects of our acquisition of Banking
Solutions, Inc. in December 1998.
(8) Number of bank contracts includes each processing agreement executed with a
bank. In some cases, Towne enters into an agreement with a bank that has
several branches and the numbers presented above do not reflect the number
of branches operated by the bank. Towne also enters into contracts with bank
holding companies that are the parent of several different banks and may
count the contract as multiple contracts to represent the banks or
communities covered by the contract.
20
<PAGE> 28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
FORSEON CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- ---------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES......................... $10,648 $11,721 $11,670 $12,051 $12,004 $6,020 $5,768
------- ------- ------- ------- ------- ------ ------
COST AND EXPENSES:
Costs of processing............ 2,251 2,279 2,375 2,620 2,311 1,156 1,120
Research and development....... 115 223 783 620 801 436 370
Sales, servicing and
marketing................... 6,203 6,942 6,519 6,829 7,310 3,614 3,441
Employee stock ownership
plan(1)..................... 371 0 102 0 0 0 0
General and administrative..... 1,286 1,269 1,346 1,395 1,746 796 760
------- ------- ------- ------- ------- ------ ------
Total costs and expenses.... 10,226 10,713 11,125 11,464 12,168 6,002 5,691
OPERATING INCOME (LOSS).......... 422 1,008 545 587 (164) 18 77
Interest expense................. 146 121 67 44 48 27 16
------- ------- ------- ------- ------- ------ ------
Income (loss) before income tax
provision (benefit)............ 276 887 478 543 (212) (9) 61
Income tax provision (benefit)... 122 385 233 241 (34) 0 30
------- ------- ------- ------- ------- ------ ------
NET INCOME (LOSS)................ $ 154 $ 502 $ 245 $ 302 $ (178) $ (9) $ 31
======= ======= ======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
----------------------------------------------- ---------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................... $ 4,269 $ 4,282 $ 3,967 $ 3,795 $ 3,371 $3,614 $3,283
Total debt....................... 1,343 717 396 716 460 608 329
Redeemable common stock(2)....... 920 978 1,000 249 548 323 534
Shareholders' equity............. 781 1,022 1,319 1,544 1,133 1,461 1,120
</TABLE>
- ----------------
(1) Represents costs associated with discretionary contributions to the Forseon
Corporation ESOP.
(2) Represents common stock outstanding where the holder may require Forseon to
repurchase the shares at a stipulated price.
21
<PAGE> 29
SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Net revenues................................................ $11,932 $12,896 $ 26,263
Operating loss.............................................. (195) (2,128) (15,465)
Net loss attributable to common shareholders................ (433) (2,386) (21,838)
Net loss per share.......................................... $ (0.05) $ (0.20) $ (1.20)
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital............................................. $ 8,693
Total assets................................................ 38,703
Long-term debt, net of current portion...................... 55
Shareholders' equity........................................ 27,892
</TABLE>
22
<PAGE> 30
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
FISCAL YEAR(1) DECEMBER 31,
-------------------------- -----------------
1996 1997 1998 1997 1998
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
HISTORICAL TOWNE:
Net loss per share(2).......................... $(0.10) $(0.26) $(1.35)
Book value per share........................... $ 1.82
HISTORICAL -- FORSEON:
Net income (loss) per share -- basic........... $ 0.33 $ 0.43 $(0.28) $(0.01) $0.05
Net income (loss) per share -- diluted......... $ 0.31 $ 0.40 $(0.28) $(0.01) $0.05
Book value per share........................... $ 2.93 $2.95
PRO FORMA COMBINED -- PER TOWNE SHARE(3)
Net loss per share(2).......................... $(0.05) $(0.20) $(1.20)
Book value per share(4)........................ $ 1.59
PRO FORMA COMBINED -- PER FORSEON SHARE(5)
Net loss per share(2).......................... $(0.15) $(0.58) $(3.38)
Book value per share(4)........................ $ 4.47
</TABLE>
- ---------------
(1) Towne's fiscal year end is December 31; Forseon's fiscal year end is June
30.
(2) Basic and diluted loss per share are the same for all periods presented.
(3) Combined per share information assumes that each share of Forseon has been
converted into Towne shares at an estimated conversion ratio of 2.82 shares
of Towne stock per Forseon share.
(4) The pro forma combined book value per share is derived from the pro forma
combined balance sheet as of December 31, 1998 which includes an adjustment
for direct merger related costs. See "Notes to Unaudited Pro Forma Combined
Condensed Financial Statements."
(5) The equivalent pro forma combined per share amounts of Forseon are
calculated by multiplying the combined pro forma per share amounts by an
estimated conversion rate of 2.82 shares of Towne common stock for each
Forseon share.
23
<PAGE> 31
MARKET PRICE AND DIVIDEND INFORMATION
TOWNE SERVICES MARKET PRICE DATA
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
April 5, 1999, Towne had approximately 1,800 beneficial holders of its common
stock. Of this total, approximately 365 were shareholders of record.
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
</TABLE>
FORSEON MARKET PRICE DATA
No active trading or public market exists for Forseon common stock. The
shares are not listed on any exchange and are not traded in the over-the-counter
market. As of May , 1999, the record date, there were [110] stockholders of
record who held shares of Forseon common stock, although Forseon believes that
there are in excess of [240] beneficial owners, as shown on Forseon's records.
DIVIDEND INFORMATION
Neither Towne nor, in the last eight years, Forseon has ever paid any cash
dividends on its common stock, and both anticipate that for the foreseeable
future they will continue to retain any earnings for use in the operation of
their respective businesses.
RECENT CLOSING PRICES
The following table sets forth the closing price per share of Towne common
stock on the Nasdaq National Market on March 25, 1999, the last trading day
before announcement of the proposed merger, and on , 1999, the latest
practicable trading day before the printing of this proxy statement/prospectus,
and the equivalent per share prices for Forseon common stock based on the Towne
common stock prices and an assumed exchange rate of 2.82 shares of Towne common
stock for each share of Forseon common stock:
<TABLE>
<CAPTION>
FORSEON
TOWNE EQUIVALENT
COMMON STOCK PER SHARE
PRICE PRICE
------------ ----------
<S> <C> <C>
March 25, 1999.............................................. $7.63 $21.54
, 1999............................................
</TABLE>
The actual exchange rate in the merger cannot be calculated until the
closing of the merger. The share exchange ratio will be calculated at the time
the merger is completed based on the amount of then-outstanding shares and
options to acquire shares of Forseon common stock. The exchange rate is
currently 2.82 shares of Towne common stock for each share of Forseon common
stock. Since the market price of Towne common stock is subject to fluctuation,
the
24
<PAGE> 32
market value of the shares of Towne common stock that holders of Forseon common
stock will receive in the merger may increase or decrease prior to and after the
merger. See "The Merger -- Conversion of Shares" on page 35 for the calculation
of the share exchange ratio.
WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS FOR TOWNE COMMON STOCK.
TOWNE AND FORSEON CANNOT GIVE YOU ANY ASSURANCES AS TO THE FUTURE PRICES OR
MARKETS FOR TOWNE COMMON STOCK OR FORSEON COMMON STOCK.
THE FORSEON STOCKHOLDER MEETING
The Forseon special meeting will be held on June , 1999 at 10:00 a.m.,
California time, at the offices of Gibson, Dunn & Crutcher LLP, Suite 1700, 4
Park Plaza, Irvine, CA 92614-8557. The Forseon proxy being sent to you is being
solicited on behalf of the Forseon board of directors for use at the special
meeting and any adjournment of that meeting.
MATTERS TO BE VOTED ON
At the special meeting you will be asked to approve the merger agreement
and related matters. In addition, any other business that may properly come
before the special meeting will be considered and the persons named in the
proxies will vote in accordance with their judgment on that business. The board
of directors does not know of any other business that will be brought before the
special meeting as of the date of this proxy statement/prospectus.
RECORD DATE
Forseon has fixed the close of business on May , 1999 as the record date
for the determination of stockholders entitled to receive notice of and to vote
at the special meeting. At the record date, shares of the
Forseon common stock were outstanding and entitled to vote at the special
meeting. As of the record date, shares, or %, of the
outstanding Forseon common stock were owned by the ESOP and shares,
or %, were owned by directors and executive officers of Forseon.
REQUIRED VOTE
A majority of the Forseon common stock outstanding on the record date will
constitute a quorum for the transaction of business at the special meeting. Each
share of Forseon common stock outstanding on the record date is entitled to one
vote. The affirmative vote of a majority of the outstanding shares of Forseon
common stock will be required to adopt the merger agreement. These votes may be
cast in person or by signing and returning the proxy card attached to this
document as Appendix C. The closing of the merger will not take place unless the
holders of at least 90% of the outstanding shares of Forseon common stock
approve the merger agreement, unless Towne agrees to waive or modify this
condition. Abstentions and broker non-votes are counted for the purpose of
determining the presence or absence of a quorum for the transaction of business.
Except for your shares that are held by the ESOP, your abstention or failure to
vote will have the effect of a vote against the merger agreement and the merger.
Towne shareholders will not vote on the merger agreement.
PROXIES AND VOTING INSTRUCTION CARDS
Included with this document are two cards. The first card, which is the
white proxy card attached as Appendix C, is for use by all stockholders of
Forseon. The second card, which is the
25
<PAGE> 33
blue confidential voting instruction card included with this document as
delivered to ESOP participants, is for participants in the ESOP to use. If you
are both a Forseon stockholder and a participant in the ESOP, you should
complete and return both cards in their proper envelopes.
Your shares, if represented by a properly executed proxy, will be voted at
the special meeting as you direct in your proxy. If you do not give instructions
on how to vote your shares, they will be voted FOR adoption of the merger
agreement. You may revoke your proxy at any time before it is exercised by
delivering a written notice of the revocation to the Secretary of Forseon, by
executing a subsequent proxy and presenting it before or at the special meeting
or by attending the special meeting and voting in person.
ESOP participants are to instruct U.S. Trust Company, the investment
manager of the ESOP, as to whether to vote their allocated shares of Forseon
common stock in favor of or against the adoption of the merger agreement.
Subject to applicable laws, U.S. Trust Company will then instruct the ESOP
trustee how to vote the shares of Forseon stock held by the ESOP. To instruct
the ESOP investment manager, an ESOP participant should complete the blue ESOP
confidential voting instruction card that accompanies this proxy
statement/prospectus and return it to U.S. Trust Company, in the envelope
provided all in accordance with the instructions set forth below.
If an ESOP participant fails to sign or timely return an ESOP voting
instruction card, or if an ESOP participant properly signs and timely returns an
ESOP voting instruction card but does not specifically mark a box on the ESOP
proxy card, the ESOP investment manager will direct the trustee on the voting of
the shares allocated to such participant in its discretion. Therefore, if an
ESOP participant wants to direct the voting of shares allocated to his or her
account, the ESOP participant must specifically mark a box on the ESOP voting
instruction card, sign the ESOP voting instruction card, and return it to the
ESOP trustee so that U.S. Trust Company receives it prior to 5:00 p.m., Pacific
time, on , 1999.
SOLICITATION OF PROXIES
The cost of the soliciting the proxies will be borne by Forseon. In
addition to solicitation by mail, some of Forseon's directors, officers and
regular employees, without extra compensation, may conduct additional
solicitation by facsimile, telephone and personal interview.
26
<PAGE> 34
THE MERGER
GENERAL
The merger agreement provides for the merger of a wholly-owned subsidiary
of Towne with and into Forseon. After the merger, Forseon will be the surviving
corporation and will be a wholly-owned subsidiary of Towne. The descriptions in
this proxy statement/prospectus of the merger and the merger agreement are only
summaries. The merger agreement, a copy of which is attached to this document as
Appendix A and is incorporated in this proxy statement/ prospectus by reference,
governs the terms and conditions of the merger. We urge you to read the merger
agreement in its entirety.
BACKGROUND OF THE MERGER
Messrs. Mark Gill and Richard Rogers from Rodgers Capital Group, L.P.,
investment advisors to Towne Services, acted as Towne's principal negotiators.
Mr. Louis A. Delmonico, a Forseon director, and Mr. Allen Merrill, Forseon's
Chief Financial Officer, acted as Forseon's principal negotiators.
In late 1998, Dan Paul, President, Chief Executive Officer and Chairman of
Forseon, met Drew Edwards, Chairman and Chief Executive Officer of Towne, at an
industry trade show. They discussed their respective businesses, and believed
that, due to similarities of business focus and customer base, Forseon and Towne
might be able to work together in some kind of a cross-marketing relationship to
benefit their respective customers. Forseon and Towne had discussions in late
1998 regarding the possible cross-marketing agreement, but no agreement was ever
reached. No business combination was discussed at this time.
On January 11, 1999, Messrs. Gill and Rodgers from Rodgers Capital Group,
L.P., met with Messrs. Delmonico and Merrill of Forseon to begin formal business
discussions regarding the complementary nature of Towne's and Forseon's
respective products and customers and potential benefits that might be realized
by a business combination of the two companies. These discussions led to several
telephone conversations in the next two weeks among Messrs. Merrill, Gill and
Rogers to discuss in preliminary terms operating issues and potential
opportunities that might result from a business combination.
At its regularly scheduled meeting on January 29, 1999, the Forseon board
of directors discussed the potential synergies involved in a business
combination with Towne. At the conclusion of discussions, the Forseon board of
directors provided support for continued discussions with Towne, and instructed
Messrs. Merrill and Delmonico to continue to work with Messrs. Gill and Rogers.
On February 8, 1999, Messrs. Edwards, Gill, Rodgers and Henry M. Baroco,
President, Chief Operating Officer and a director of Towne, and Bruce F.
Lowthers, Jr., Chief Financial Officer of Towne, met with Messrs. Merrill and
Delmonico in Nashville, Tennessee to continue the discussions. The meeting
continued on February 9, 1999, at which time Mr. Paul joined the meeting. During
this meeting, the parties discussed whether Forseon, in light of the then-recent
stock market volatility and significant strategic benefits that might result
from such a business combination, should consider discussions with Towne to
explore a business combination on mutually acceptable terms. Having explored
issues of strategic fit, potential opportunities, financial leverage and
pricing, the representatives of Towne and Forseon agreed that there was a
possibility that a business combination could be negotiated on terms that were
satisfactory to
27
<PAGE> 35
shareholders of each company, and that efforts should be commenced to outline
terms of the deal.
At several times during late February and early March 1999, representatives
of Forseon met and spoke with representatives of Towne. The Forseon
representatives included Messrs. Delmonico and Merrill. The Towne
representatives included Messrs. Edwards, Lowthers, Gill and Rodgers. The
meetings and conversations continued to cover issues of strategic fit, potential
opportunities, financial leverage and pricing for a business combination between
Towne and Forseon.
On February 11, 1999, the Towne board of directors held a telephone
conference to review the status of negotiations, receive reports as to the
status of the due diligence investigation of Forseon's business and receive a
preliminary presentation by Rodgers Capital Group, L.P.
On February 11 and 12, 1999, Mr. Edwards met with Mr. Merrill at Forseon's
corporate headquarters in Riverside, California.
At a meeting of the Forseon board of directors on February 15, 1999, Mr.
Merrill restated the status of these discussions and meetings, and presented a
draft of the term sheet. The Forseon board approved the term sheet and
instructed Mr. Merrill to proceed to attempt to negotiate a definitive
agreement.
The parties entered into a non-binding term sheet dated as of March 8,
1999, which was subject to completion of investigations of the parties'
business, the negotiation and preparation of a definitive merger agreement and
approval of each company's board of directors of the merger agreement following
presentations concerning each party's due diligence investigation of the other
party. Due to the highly confidential nature of the discussions, Towne agreed to
conduct an abbreviated due diligence with only limited access to the information
that it was seeking. Forseon agreed that Towne should conduct further due
diligence after the definitive agreement has been signed, and following
announcement of the transaction to Forseon's employees.
On March 9, 1999, Towne's outside law firm, Nelson Mullins Riley &
Scarborough, L.L.P., delivered drafts of the merger agreement to Forseon and its
outside legal counsel, Gibson, Dunn & Crutcher, LLP.
During the week of March 15, 1999 and on each of March 19 and 23, 1999,
counsel for Towne delivered revised drafts of the merger agreement and drafts of
other documents and agreements referenced in the merger agreement to the parties
and their legal, accounting and financial advisors.
On March 22, 1999, the Forseon board of directors met by telephone
conference call, joined by lawyers from Gibson, Dunn & Crutcher, LLP. During
this meeting, counsel reviewed with the Forseon board of directors the terms and
conditions of the proposed documentation and the status of negotiations and the
status of its legal due diligence investigation of Towne's business.
From March 23, 1999 to March 25, 1999, representatives of the two companies
and their respective legal, accounting and financial advisors met to conduct due
diligence and negotiate the definitive documentation for the merger.
On March 25, 1999, the independent accountants for Towne and Forseon
delivered drafts of letters regarding the proper accounting of the merger as a
pooling of interests based upon certain assumptions and their review of the
merger agreement. Later on March 25, 1999, the Forseon board of directors met
together with representatives of Gibson, Dunn & Crutcher, LLP, to review the
proposed transaction terms and documentation, which had been delivered to each
of
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them, and to discuss the strategic rationale and other considerations related to
the proposed merger. Following these events, the Forseon board of directors
unanimously approved the merger agreement and the merger.
On March 25, 1999, the Towne board of directors held a special meeting to
approve the proposed merger agreement. The Towne board of directors discussed
the terms of the merger agreement with Towne's management. Rodgers Capital
delivered its oral opinion that the share exchange ratio proposed for the merger
is fair to the holders of Towne common stock from a financial point of view.
Following that discussion, the Towne board of directors determined that the
proposed merger was in the best interests of Towne and its stockholders,
approved the merger agreement and the merger and authorized the officers of
Towne to enter into the merger agreement and related transactions.
On March 25, 1999, representatives of Towne and Forseon executed the merger
agreement and on that date or shortly afterwards some parties executed
employment agreements and affiliated agreements.
Prior to the opening of the market on March 26, 1999, Towne issued a news
release announcing that the merger agreement had been signed.
REASONS FOR THE MERGER
Several statements made in the following paragraphs regarding the potential
benefits that could result from the merger are forward-looking statements based
on current expectations and beliefs of management. These statements involve
various risks and uncertainties that could cause actual results to differ
materially from those expressed in such forward-looking statements. The
anticipated potential benefits of the merger may not be realized. Such risks and
uncertainties are set forth under "Risk Factors" beginning on page 8 and
elsewhere in this proxy statement/prospectus.
Joint Reasons for the Merger
In reaching their decisions to approve the merger agreement and the
transactions contemplated by the merger agreement, each of the Towne board of
directors and the Forseon board of directors consulted with their respective
senior management teams and legal, accounting and financial advisors. Based on
their respective reviews of the proposed transaction and the business and
operations of the other party, each board of directors approved the merger
agreement and the related matters on the belief that:
- the goals and philosophies of the companies are compatible;
- the products and customers of the companies are complementary;
- the combined company has the potential to offer customers a more
comprehensive package of business solutions than either company could
offer independently;
- the companies' respective customers, employees and stockholders would
benefit by the enhanced ability of the combined company to compete in
the rapidly evolving electronic commerce industry; and
- the companies' respective stockholders could participate in the
potential for growth of the combined company following the merger.
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Forseon's Board of Directors Recommendation and Reasons for the Merger
The Forseon board of directors has unanimously approved the merger
agreement and the related matters, has determined that the merger is fair to and
in the best interests of Forseon and its stockholders, and recommends that
holders of shares of Forseon common stock vote FOR approval and adoption of the
merger agreement and the related matters.
The Forseon board of director's decision to approve the merger agreement
and the merger was based in significant part upon its assessment of the
strategic benefits of the merger and the potentially significant premium to be
received by Forseon's stockholders in the transaction. The Forseon board of
directors viewed Towne as a well-managed company with high quality products. The
Forseon board of directors also viewed Towne and Forseon as having similar
corporate cultures, customers, competitors and business objectives. Strategic
benefits of the merger that Forseon believes will contribute to the success of
the combined entity include:
- the ability to offer a broader range of products and services,
combining Forseon's forecast and planning services and POS software
products and Towne's electronic commerce and accounts receivable
processing solutions;
- the opportunity to increase the target customer base for Forseon's
products and services;
- the opportunity for improved revenue prospects with the addition of
new customers and the ability to obtain greater revenue from existing
customers by offering them Towne's products in conjunction with
Forseon's products; and
- the opportunity to maintain and enhance strategic relations with
business organizations that service or represent a large number of
potential customers.
In the course of its deliberations, the Forseon board of directors reviewed
with Forseon's management a number of other factors relevant to the merger
including:
- the likelihood of realizing greater benefits through alternative
business strategies or acquisition proposals, including remaining an
independent company and continuing to execute on Forseon's strategic
plan;
- historical information concerning Towne's business, prospects,
financial performance and condition, operations, technology,
management and competitive position, including public reports
concerning results of operations during the most recent fiscal year
filed with the Securities and Exchange Commission;
- Forseon management's view of the financial condition, results of
operations and business of Towne before and after giving effect to the
merger;
- the opportunity to benefit from Towne's public company status and
greater liquidity;
- current market conditions and historical market prices, volatility and
trading information with respect to Towne's common stock;
- the share exchange ratio of Towne common stock for Forseon common
stock and the relationship between the market value of Towne common
stock to be issued in exchange for each share of Forseon common stock
and a comparison of comparable merger transactions;
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- the belief that the terms of the merger agreement, including the
parties' representations, warranties and covenants, and the conditions
to their respective obligations, are reasonable;
- the impact of the merger on Forseon's customers, employees and
communities in which it operates; and
- the results of due diligence investigations of Towne's business.
The Forseon board of directors also considered risks arising in connection
with the merger, including:
- the possibility that the merger might not be consummated;
- the effects of the public announcement of the merger on Forseon's
business, operating results and prospects, Forseon's ability to
attract and retain key customers management, marketing and technical
personnel and the progress of certain of its development projects;
- the potential disruption of Forseon's business that might result from
anticipated employee and customer departures and performance following
announcement of the merger and in connection with integrating the
operations of Forseon and Towne;
- the risk that Towne might fail to meet projected growth rates and
analyst expectations and that Towne's stock price might decline
substantially prior to the closing, thus reducing the value per share
to be received by Forseon's stockholders in the merger;
- the risk associated with attempting to integrate Towne's products and
operations with Forseon's products and operations;
- the risk that the other benefits sought to be achieved by the merger
will not be achieved;
- the risks associated with agreeing to a break-up fee of $1.0 million
payable to Towne if the merger is terminated because Forseon elects to
pursue an alternative proposal; and
- other risks described in the "Risk Factors" section, beginning on page
8.
The Forseon board of directors decided that these considerations were not
sufficient, either individually or in the aggregate, to outweigh the advantages
of the proposed merger. In view of the wide variety of factors, both positive
and negative, considered by the Forseon board of directors, the Forseon board of
directors did not find it practical to quantify or otherwise assign relative
weights to the specific factors considered or necessarily reach a conclusion as
to these factors. Based on the totality of the information and factors
considered, the Forseon board of directors believed and continues to believe
that the merger is in the best interests of Forseon and its stockholders and
continues to recommend approval and adoption of the merger agreement and the
merger.
In addition, in the view of the Forseon board of directors, the inclusion
of the non-solicitation agreement and break-up fee, together with the limited
circumstances under which Forseon could consider and negotiate other acquisition
proposals, was consistent with the exercise of their fiduciary obligations under
applicable law. These provisions were a condition to Towne's agreeing to enter
into the proposed transaction.
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Towne's Board of Directors Recommendation and Reasons for the Merger
The Towne board of directors has unanimously approved the merger agreement
and the related matters and has identified several potential benefits of the
merger to Towne. In addition to the anticipated joint benefits described above,
the Towne board of directors believes that additional benefits of the merger to
Towne include:
- the expanded ability to deliver electronic commerce solutions through
the addition of Forseon customers, products and sales and marketing
forces;
- the increase in our customer base and geographic presence to almost
3,100 customers located in 48 states and Canada, as of December 31,
1998;
- the increase in recurring revenues generated by Forseon's operations;
and
- the matters referenced in the fairness opinions to be delivered to
Towne in connection with the merger, as described below.
Fairness Opinion
Two investment banking firms have acted as financial advisors to Towne in
connection with the merger. The financial advisors are regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, private placements and valuations for corporate and other
purposes. In connection with the financial advisors' engagements, Towne
requested that they evaluate the fairness to Towne and its shareholders of the
consideration to be paid by Towne in the merger from a financial point of view.
The financial advisors have determined that, as of April 15, 1999 and based upon
and subject to the matters described in draft opinions, copies of which have
been delivered to Towne, the consideration to be paid by Towne in the merger is
fair to Towne and its shareholders from a financial point of view. It is a
condition to closing of the merger that Towne receive an executed written
opinion to the same effect.
The following discussions set forth the procedures followed, assumptions
made, matters considered and limitations on review undertaken by the financial
advisors in the performance of their services. The financial advisors' opinions
are directed to the Towne board and relate only to the fairness of the merger
transaction from a financial point of view to Towne and its shareholders, and do
not address any other aspect of the merger or any related transaction. The
following summary description of the opinions of the financial advisors are
qualified in their entirety by the full texts of such opinions.
In developing their opinions, the financial advisors reviewed the merger
agreement and publicly available business and financial information relating to
Towne. They also reviewed information related to Towne and Forseon, including
historical financial statements and financial forecasts, provided to or
otherwise discussed with the financial advisors by Towne and Forseon, and met
with the management of Towne and Forseon to discuss the businesses and prospects
of Towne and Forseon. The financial advisors considered financial data of Towne
and Forseon and compared those data with similar data for publicly held
companies in businesses similar to Towne and Forseon, and considered, to the
extent publicly available, the financial terms of certain other business
combinations and other transactions recently effected. In addition, they
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that they deemed
relevant.
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In connection with this review, the financial advisors did not assume any
responsibility for independent verification of any of the foregoing information
and relied on such information being complete and accurate in all material
respects. The financial advisors were not requested to make, and did not make,
an independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of Towne or Forseon, nor were the financial advisors furnished
with any such evaluations or appraisals. Although they evaluated the share
exchange ratio from a financial point of view to Towne, the financial advisors
were not requested to, and will not, recommend the specific consideration
payable in the merger, which consideration was determined through negotiation
between Towne and Forseon. No other limitations were imposed by Towne on the
financial advisors with respect to the investigations made or procedures
followed by them in developing their opinions.
The financial advisors performed a variety of financial and comparative
analyses, including those described below. This summary describes the material
analyses performed but is not a complete description of the analyses that will
underlie the opinions of the financial advisors. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances. Therefore, such an opinion is
not readily susceptible to partial analysis or summary description. The
financial advisors have also made qualitative judgments as to the significance
and relevance of each analysis and factor considered. Accordingly, the financial
advisors believe that their analyses must be considered as a whole and that
selecting portions of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and opinions.
In their analyses, the financial advisors relied on management assumptions
with respect to Towne, Forseon, industry performance, regulatory matters and
competitive conditions, many of which are beyond the control of Towne and
Forseon. No company, transaction or business used in such analyses as a
comparison is identical to Towne, Forseon, or the merger, nor is an evaluation
of the results of such analyses capable of mathematical certainty. Rather, such
analyses involve complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the companies, business segments or
transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or reflect the prices at which businesses or securities
actually may be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty. The opinions and financial analyses of the
financial advisors were only one of many factors considered by Towne's board in
its evaluation of the merger and should not be viewed as determinative of the
views of Towne's board or management with respect to the share exchange ratio or
the merger.
Stock Price & Trading Volume Analysis. The financial advisors reviewed the
historical trading prices and volumes for Towne's common stock since its initial
public offering became effective on July 30, 1998. This included the trading
prices prior and subsequent to the announcement of the merger. The closing price
per share as of March 25, 1999, the date immediately prior to the merger
announcement, was $7.63, which equates to a total merger consideration of
approximately $15,825,000. The price per share as of April 14, 1999, the date on
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which the financial advisors' analyses is based for purposes of this document,
was $10.25 which equates to a total merger consideration of approximately
$21,858,000.
Analysis of Comparable Public Companies. The financial advisors compared
certain financial information for Forseon with the corresponding available
financial information of selected public companies deemed comparable. The
financial advisors compared Forseon with the following eight publicly traded
companies ("Selected Companies"): American Software, Inc., Automatic Data
Processing, Inc., BA Merchant Services, Inc., JDA Software Group, Inc., Micros
Systems, Inc., NOVA Corporation, Paychex, Inc., and Radiant Systems, Inc. The
primary criteria for screening comparable entities were that they offer
inventory management and point of sale software and services and small merchant
transaction and data processing services. For each of the companies, the
financial advisors reviewed the closing stock price and volume data for the
preceding 12 months, publicly reported financial data and calculated valuation
multiples and data as of April 13, 1999. The valuation measures that the
financial advisors calculated and reviewed for each of the comparable public
companies included:
- unlevered market capitalization ("UMC"), defined as equity market
capitalization plus long term debt minus cash, to revenue;
- UMC to earnings before interest, taxes depreciation and amortization
("EBITDA"); and
- Price to Earnings ("P/E") ratios.
For the Selected Companies:
- the ratio of UMC to revenue ranged from 6.9x to .5x with a median of
1.7x, as compared to the implied multiple paid in the merger of 1.8x
Forseon's revenue for the year ended December 31, 1998;
- the ratio of UMC to EBITDA ranged from 40.6x to 10.5x with a median
of 16.8x for the Selected Companies, as compared to the implied the
multiple paid in the merger of 12x Forseon's adjusted EBITDA for the
year ended December 31, 1998; and
- the P/E ratio for the most recently reported four quarters ranged
from 61.7x to 20.7x with a median of 25.8x and the projected P/E
ratio for the current fiscal year ranged from 58.7x to 19.6x with a
median of 33.3x for the Selected Companies, as compared to the
implied multiple paid in the merger of 13.3x Forseon's adjusted net
income for the year ended December 31, 1998 and 10.0x Forseon's
projected net income for the year ended December 31, 1999.
Discounted Cash Flow Analysis for Forseon. The financial advisors
calculated a range of implied equity values for Forseon by discounting a
projected stream of cash flows. The projections are based upon the historical
performance of Forseon's operations, current market conditions and other
assumptions management deemed reasonable and appropriate at that time. The
financial advisors (i) calculated the present value of free cash flow of Forseon
over a three year period from 1999 to 2001 and added to this amount (ii) the
present value of its terminal value at the end of 2001. The discount rates used
by the financial advisors ranged from 20% to 32%. The terminal values were
calculated by applying a multiple to 2001 revenue, which ranged from .5x to 3x.
Based on a discount rate of 20% and a revenue multiple of 1.5x, the equity
valuation of Forseon was approximately $22 million.
Pro Forma Merger Analysis. The financial advisors analyzed the potential
pro forma effects of the merger on Towne's projected earnings per share for
fiscal years 1999 through 2001, as
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presented by consensus reports of Towne's market analysts. This analysis
indicated that the merger would be accretive to Towne's earnings per share in
fiscal years 1999 through 2001 under the Towne management forecasts. The actual
results achieved by the combined company may vary from projected results and the
variations may be material.
Comparable Transaction Analysis. The financial advisors reviewed the
financial terms of selected merger and acquisition transactions in the software
and data processing services industry which were completed in the past two
years. The financial advisors calculated acquisition multiples based on
transaction value to revenue, EBITDA and net income. This allowed us to analyze
and compare the pricing of Company's acquisition of Forseon versus recent,
completed, comparable industry transactions. For the selected transactions, the
ratio of UMC to revenue ranged from 4.3x to .4x with a median of 1.5x, as
compared to the multiple of 1.8x 1998 Forseon revenue implied by the total
consideration paid in the merger; the ratio of UMC to EBITDA ranged from 123.3x
to 4.4x with a median of 16.7x, as compared to 12x adjusted EBITDA paid in the
merger; and the P/E ratio ranged from 138.7x to 10.8x with a median of 41.0x, as
compared to an adjusted P/E multiple of 13.3x paid in the merger.
Contribution Analysis. The financial advisors analyzed the relative
contribution of Forseon and Towne to revenue, EBITDA, operating income, net
income, EPS, and total shares outstanding based on proforma consolidated
financial statements for the years ending 1999, 2000 and 2001.
Miscellaneous. Towne has agreed to pay a total of $350,000 for its
financial advisory services in connection with the merger, including fees for
the financial advisors' opinions. Towne also has agreed to reimburse the
financial advisors for reasonable out-of-pocket expenses they incur in
performing their services, including the fees and expenses of legal counsel and
any other advisor retained by them, and to indemnify the financial advisors and
related persons against certain liabilities, including liabilities under the
U.S. federal securities laws, arising out the engagement of the financial
advisors' services in connection with the merger.
The foregoing discussion of the information and factors considered by the
companies' boards of directors is not intended to be exhaustive, but is believed
to include all material factors considered by each board of directors.
CONVERSION OF SHARES
At the time the merger is completed, each share of Forseon common stock
then outstanding, including as a result of the exercise or conversion of all
outstanding options to acquire Forseon common stock, will automatically be
converted into the right to receive that number of shares of Towne common stock
equal to the share exchange ratio.
The "share exchange ratio" equals X divided by (Y+Z) where:
X = 2,075,345 shares of Towne common stock;
Y = the number of shares of Forseon common stock outstanding at the
time of the merger, which is expected to be 642,069 shares; and
Z = the number of options to acquire shares of Forseon common stock
outstanding at the time of the merger, which is expected to be
93,225 options.
No fractional shares of Towne common stock will be issued in the merger.
Instead, Forseon stockholders entitled to receive a fraction of a share of Towne
common stock will receive from Towne an amount of cash, rounded to the nearest
whole cent, equal to the per share market value of Towne common stock multiplied
by the fraction of a share of Towne common stock to
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which the stockholder would otherwise be entitled. For the purposes of that
calculation, the market value per share of Towne common stock will be based on
the average closing price of a share of Towne common stock as reported on the
Nasdaq National Market for the ten most recent days that Towne common stock was
traded ending on the third trading day immediately prior to the closing date of
the merger.
Based upon the capitalization of Forseon and Towne as of December 31, 1998,
the stockholders and optionholders of Forseon will own, or have rights to own,
approximately % of the Towne common stock outstanding immediately after the
merger is completed, assuming the exercise of all outstanding Towne stock
options and warrants.
CONVERSION OF OPTIONS
At the time the merger is completed, Forseon will not have any outstanding
options. Forseon's stock option plans provide that all options outstanding under
the plans automatically vest and become exercisable upon a transaction like the
proposed merger. In addition, all outstanding options expire if not exercised
upon completion of a transaction like the proposed merger. Both Forseon stock
option plans permit holders of options to exercise those options by canceling
enough options the value of which equals the exercise price of the options
exercised. We expect all Forseon options to be exercised rather than cancelled.
Forseon also has obligations to provide for payment of the withholding taxes due
upon exercise of these options.
Prior to completion of the merger, Forseon will issue to each person who
immediately prior to completion of the merger was a holder of an outstanding
Forseon option shares of Forseon common stock to which such optionholders are
entitled, less any amounts required to be withheld to pay withholding taxes with
respect to such shares.
As of May , 1999, the record date, 93,225 shares of Forseon common stock
were subject to outstanding Forseon options.
EXCHANGE OF CERTIFICATES
Promptly after completion of the merger, the exchange agent will send you a
letter of transmittal and instructions for use in exchanging your Forseon common
stock certificate(s) for Towne common stock certificate(s). First Union National
Bank or another agent or agents as may be appointed by Towne will serve as the
exchange agent. Once you deliver to the exchange agent your Forseon common stock
certificate(s) for cancellation and the letter of transmittal completed and
executed in accordance with its instructions, you will receive a certificate or
certificates representing the number of whole shares of Towne common stock, less
any shares held back in escrow under the merger agreement, plus a cash payment
in lieu of fractional shares that you have the right to receive pursuant to the
merger agreement. The Forseon stock certificate(s) you surrender will then be
canceled.
Upon completion of the merger, each outstanding Forseon common stock
certificate will be deemed for all corporate purposes, other than the payment of
dividends, to evidence only:
- the ownership of the number of full shares of Towne common stock into
which the shares of Forseon common stock shall have been converted as
a result of the merger; and
- the right to receive an amount in cash in lieu of fractional shares of
Towne common stock.
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No dividends or other distributions paid to holders of Towne common stock
will be paid to you until you surrender your Forseon stock certificate(s) by
following the procedures described above. Subject to applicable law, following
your surrender of any Forseon stock certificate, you will be paid without
interest the amount of any dividends or other distributions owed with respect to
the Towne common stock you are entitled to receive. Dividends and other
distributions payable with respect to the Towne common stock placed in escrow
under the merger agreement will be delivered to the escrow agent to be held and
disbursed in accordance with the merger agreement and escrow agreement
referenced in the merger agreement. See "Other Related Matters -- Escrow
Agreement" beginning on page .
If you want any certificate for shares of Towne common stock to be issued
in a name other than the one indicated on Forseon's records for the Forseon
common stock certificate you delivered, the certificate must be properly
endorsed and otherwise in proper form for transfer. You must demonstrate that
such transfer can be made in compliance with all applicable federal and state
securities laws. In addition, you must:
- pay Towne or any agent designated by it any transfer or other taxes
required because of the issuance of Towne common stock in any name
other than that of the registered holder of the Forseon common stock
surrendered; or
- establish to the satisfaction of Towne or any agent designated by it
that such tax has been paid or is not payable.
You should not submit your Forseon common stock certificate(s) for exchange
until you have received the letter of transmittal and instructions referred to
above.
OPERATIONS FOLLOWING THE MERGER
Following the merger, Forseon will continue its operations as a
wholly-owned subsidiary of Towne. Upon completion of the merger, the members of
Forseon's board of directors will be Drew W. Edwards and Henry M. Baroco. The
membership of the board of directors of Towne will remain unchanged as a result
of the merger. See "Comparison of Rights of Stockholders" on page
. The following executive officers of Forseon have signed new
employment agreements which are conditioned upon closing the merger and will
continue as executive officers of Forseon following the Merger: Messrs. Dan Paul
and Allen Merrill.
THE AGREEMENT AND PLAN OF MERGER
Representations and Warranties of Towne and Forseon
The merger agreement contains representations by both Towne and Forseon as
to many things, including:
- their organization, good standing, corporate power and capitalization;
- their authorization, execution, delivery and performance of the merger
agreement;
- the enforceability of the merger agreement;
- the accuracy of their financial statements;
- the absence of undisclosed material liabilities and changes in their
businesses;
- the absence of conflicts, violations and defaults under their
corporate organizational documents and material contracts;
- the absence of pending or threatened litigation;
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- their compliance with laws applicable to their businesses; and
- brokers' and finders' fees payable in connection with the merger.
Additional Representations and Warranties of Forseon
Forseon also made representations and warranties as to additional matters
regarding Forseon and its subsidiary, including:
- details of its financial condition;
- its employment, labor relations and employee benefits matters;
- its intellectual property rights;
- its customer, vendor and other business relationships;
- environmental matters;
- ownership and condition of its properties and assets;
- its licenses and permits;
- the absence of certain agreements, practices and circumstances;
- its solvency;
- year 2000 matters;
- the accuracy and completeness of information provided to Towne; and
- the absence of any fact or condition which may cause a material
adverse effect on the business, financial condition or operations of
Forseon and its subsidiary, considered as a whole.
Covenants and Agreements
Prior to completion of the merger, Forseon and Towne agree to provide each
other with information and to cooperate with each other to satisfy the
conditions necessary to complete the merger. This includes assisting each other
in obtaining all required approvals and consents for the merger as well as
preparing and delivering this proxy statement/prospectus and other government
filings. The companies also agree to use all commercially reasonable efforts to
cause the merger to be treated as a pooling of interests for accounting
purposes.
Forseon's Covenants and Agreements
From the date of the merger agreement to the effective time of the merger,
Forseon has agreed to conduct its business and its subsidiary's business in
substantially the same manner as conducted before signing the merger agreement.
Forseon and its subsidiary also agreed to use all commercially reasonable
efforts:
- preserve intact its present business organization;
- keep the services of its officers, consultants and key employees
available; and
- preserve its relationships with customers, suppliers and others having
business dealings with it.
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The merger agreement restricts Forseon's and its subsidiary's ability,
without Towne's prior written consent, to among other things:
- change its certificate of incorporation or bylaws;
- declare or pay any dividends or other distributions on its capital
stock;
- issue, grant options or warrants with respect to, split, combine,
reclassify or repurchase its capital stock;
- enter into, fail to perform under or amend the terms of any material
contract, agreement or commitment;
- change the terms of its outstanding stock options and other
securities;
- sell, dispose of or encumber any of its material assets;
- incur, pay, discharge or satisfy claims, liabilities and obligations
outside of the ordinary course of business;
- declare, file or permit to be filed against an insolvency proceeding;
- increase or modify compensation or severance arrangements;
- take any action likely to cause a material adverse effect on Forseon;
- permit affiliates to transfer stock;
- materially revalue its assets or change its accounting methods; or
- take or agree to take any of the actions described above.
No Solicitation of Transactions
While the Merger is pending, Forseon has agreed not to directly or
indirectly:
- solicit, initiate or encourage any inquiries, offers or proposals for
an acquisition proposal; or
- except as explained below, engage in negotiations or discussions for,
or provide any confidential information to any third party relating
to, an acquisition proposal.
For purposes of the merger agreement, an "acquisition proposal" includes a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets or transfer of liabilities, sale or other issuance of shares
of capital stock or debt or other securities, including by way of a tender offer
or similar transaction.
However, Forseon may furnish confidential information to, or enter into
discussions or negotiations with respect to a written unsolicited acquisition
proposal, so long as:
- legal counsel to the board of directors of Forseon has delivered a
written opinion to the effect that their fiduciary duties under
applicable law require them to take those actions or be subject to
personal liability; and
- those discussions or negotiations are reasonably likely to result in a
deal that is significantly more favorable to Forseon and its
stockholders from a financial point of view than the merger with
Towne, after Towne has had an opportunity to propose revisions to the
merger.
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In these circumstances, Forseon may then terminate this Agreement if
Forseon pays Towne $1.0 million and delivers agreements to Towne signed by
Forseon and the person with whom Forseon is negotiating which waive their rights
to object to this payment to Towne.
Forseon must advise Towne of the party who has made an acquisition proposal
and to whom Forseon may make the disclosure or hold discussions or negotiations.
Forseon cannot accept any such proposal or deliver any confidential information
until Towne has had ten business days to propose changes to the merger to make
it more favorable to Forseon stockholders in light of the third party
acquisition proposal.
Towne's Covenants and Agreements
The merger agreement restricts the ability of Towne and its subsidiaries,
without Forseon's prior written consent, to among other things:
- declare or pay any dividends or other distributions of cash or other
property on its capital stock, with some exceptions;
- materially change its accounting methods;
- take any action that would likely cause a material adverse effect on
Towne;
- take or agree to take any of the actions referred to above.
The merger agreement provides that, with respect to Towne, a "material
adverse effect" does not include any decline in the market price for Towne stock
for any reason.
Conditions to the Merger
Forseon's and Towne's respective obligations to consummate the merger are
subject to the satisfaction or waiver by them of the following conditions, among
other matters, before completion of the merger:
- no temporary restraining order, preliminary or permanent injunction
or other court order or proceeding preventing or restraining the
merger can be in effect or pending;
- Towne's registration statement on Form S-4 must be effective and no
stop order suspending the effectiveness of the registration
statement or any part thereof can be issued, initiated or threatened
in writing by the Securities and Exchange Commission;
- all necessary governmental approvals, waivers and consents in
connection with the merger and the transactions contemplated by the
merger agreement must be timely obtained;
- the other parties must have executed, delivered, performed or
complied in all material respects with all agreements and covenants
required by the merger agreement to be executed, delivered performed
or complied with by them on or prior to the completion of the
merger;
- Towne and Forseon must receive a letter from KPMG LLP, dated as of
the closing date and addressed to Towne, Forseon and Arthur Andersen
LLP, to the effect that, after reasonable investigation, KPMG LLP is
not aware of any fact concerning Forseon or any of Forseon's
stockholders or affiliates that could preclude Towne from accounting
for the merger as a pooling of interests in accordance with
generally
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accepted accounting principles, Accounting Principles Board Opinion
No. 16 and all published rules, regulations and policies of the
Commission; and
- Towne and Forseon must receive a letter from Arthur Andersen LLP to
the effect that Towne may account for the merger as a pooling of
interests in accordance with generally accepted accounting
principles, Accounting Principles Board Opinion No. 16 and all
published rules, regulations and policies of the Securities and
Exchange Commission.
Forseon's obligations to consummate the merger are subject, among other
matters, to the satisfaction or waiver by it of the following conditions before
completion of the merger:
- Towne must deliver to the exchange agent and escrow agent the merger
consideration;
- Forseon must receive a written opinion from Towne's counsel to the
effect that the merger will constitute a merger within the meaning
of Section 368 of the Internal Revenue Code;
- no material adverse change in Towne has occurred since the date of
the merger agreement; and
- Towne, or the surviving corporation in the merger, must have
executed employment agreements required by the merger agreement with
specific employees of Forseon.
Towne's obligations to consummate the merger are subject to the
satisfaction or waiver of the following additional conditions before completion
of the merger:
- Towne shall have received a written opinion from Rodgers Capital
Group, L.P. to the effect that the merger consideration to be paid
by Towne is fair from a financial standpoint to Towne's
shareholders;
- Towne shall have completed its investigations of Forseon and the
results of this review shall not have revealed any significant
breach by Forseon of the merger agreement;
- the holders of at least 90% Forseon's common stock shall have
approved the merger;
- Mr. Paul and Mr. Merrill must have entered into new employment
agreements with Forseon which continue in full force and effect as
of the closing;
- Forseon shall have delivered signed employment, severance,
non-solicitation and other agreements required by Towne;
- Forseon must have instituted remediation proceedings for the ESOP
and other employee benefit plans; and
- no material adverse change with respect to Forseon has occurred
since the date of the merger agreement.
For purposes of the merger agreement a "material adverse change" with
respect to a company means:
- the discontinuation of all or a material portion of its combined
business;
- the institution of insolvency proceedings by or against such
company;
- the filing of certain kinds of lawsuits;
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- the creation of liabilities or liens, or the loss of revenues in
excess of $1.0 million; or
- the material restatement of its financial condition.
Closing
As soon as practicable after the satisfaction or waiver of each of the
conditions set forth in the merger agreement, or at another time as we agree, we
will cause the merger to be consummated by filing the certificate of merger,
together with the required officers' certificates, with the Secretaries of State
of the State of Delaware and the State of Georgia. It is anticipated that,
assuming all conditions are met, the merger will be effective on or about June
30, 1999.
Amendments and Waivers
The merger agreement may be amended, to the extent permitted by law, at any
time in writing signed by the parties.
At any time prior to the completion of the merger any party to the merger
agreement may, to the extent permitted by law:
- extend the time for the performance of any of the obligations or
other acts of the other parties to the merger agreement;
- waive any inaccuracies in the representations and warranties made to
such party contained in the merger agreement or in any document
delivered pursuant hereto; and
- waive compliance with any of the agreements or conditions for its
benefit contained in the merger agreement.
Termination; Termination Fees and Expenses
The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after approval of the merger by the Forseon
stockholders, in the following ways:
- by the written agreement of Towne and Forseon;
- by Forseon or Towne if the merger has not been completed by July 31,
1999;
- by Forseon or Towne, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the
other party set forth in the merger agreement, which breach is
material and is not cured within 20 calendar days following notice
of the breach;
- by Towne if the conditions to closing which are to be satisfied by
Forseon are not met or are no longer capable of being met on or
before July 31, 1999;
- by Forseon if the conditions to closing which are to be satisfied by
Towne are not met or are no longer capable of being met on or before
July 31, 1999; or
- by Forseon pursuant to the termination provisions discussed below
and provided Forseon pays Towne $1.0 million.
If either Towne or Forseon terminates the merger agreement, the merger
agreement will become void and there will be no liability or obligation, except
as described below, on the part of Towne, Forseon or their respective officers,
directors, shareholders, subsidiaries or affiliates,
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except for expense reimbursements and termination fees described below. However,
the preceding limit on liability does not apply to a party if it causes a
willful, knowing or bad faith breach of its obligations under the merger
agreement.
Whether or not the merger is consummated, all fees, costs and expenses
incurred in connection with the merger agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses.
However, in the event that one party breaches the agreement and the other party
terminates, then the breaching party shall pay to the other party up to $100,000
as reimbursement for transaction expenses relating to the merger.
In addition, Forseon will pay Towne a termination fee of $1.0 million if it
terminates the merger agreement as a result of Forseon's board of directors
entering into any agreement with another person for a materially superior
acquisition proposal relative to Forseon.
REGULATORY MATTERS
Regulatory Approvals
Based on information available to us, we believe that the merger can be
effected without regard to regulatory matters, other than compliance with
applicable securities and general corporate laws. In particular, we believe that
the consummation of the merger will not violate state or federal antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
merger on antitrust grounds will not be made or that, if such a challenge were
made, we would prevail or would not be required to accept certain conditions in
order to consummate the merger. Such conditions might include the divestitures
of product lines or other assets.
Nasdaq National Market Quotation
We anticipate that the shares of Towne common stock to be issued pursuant
to the merger agreement will be approved for quotation on the Nasdaq National
Market, subject to notice of issuance. Towne filed a listing application for
these shares on , 1999.
Creation of Escrow
By approving the merger, the Forseon stockholders will have authorized the
creation of the escrow and the appointment of Messrs. Dan Paul and Allen Merrill
as their representatives to act on behalf of the Forseon stockholders with
respect to all matters related to amending or waiving terms of the merger
agreement and resolving matters under the escrow agreement. See "Other Related
Matters -- Escrow Agreement."
Indemnification of Towne by Forseon Stockholders
The merger agreement provides that the Forseon stockholders and option
holders will indemnify Towne, the surviving corporation and their affiliates for
any and all damages they may suffer as a result of any of the following:
- a breach of any representation, warranty or covenant of Forseon or
its management contained in the merger agreement;
- failure of any Forseon stockholder to have valid and marketable
title to their shares of Forseon stock;
- remediation connected with the ESOP and other employee benefit plans
that is started before the closing;
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- any claim made by a Forseon stockholder or former Forseon
stockholder based upon ownership or other stockholder rights; or
- any claim made against Forseon or any subsidiary relating to the
failure to pay employment-related taxes for any employee or
independent contractor.
To secure the indemnification obligations of the Forseon stockholders and
optionholders, ten percent of the Towne stock that would otherwise be payable to
the Forseon stockholders and optionholders at the closing will be held in
escrow. Pursuant to the merger agreement, Dan Paul and Allen Merrill have been
designated as the representatives of the Forseon stockholders and optionholders
with respect to indemnification matters.
For purposes of any claim which could be made against Forseon or its
subsidiaries relating to any failure to remedy problems with the ESOP and other
employee benefit plans, some shares of Towne common stock may remain in escrow
until the final resolution of such claims, even if later than one year from
closing of the merger.
The total liability of the Forseon stockholders for their indemnification
obligations shall not exceed the fair market value of amounts held in escrow,
and the Forseon stockholders and optionholders shall not be liable until the
aggregate claim for damages exceeds $100,000, at which time the Forseon
stockholders shall be liable for all damages. No Forseon stockholder shall have
a right of contribution against Forseon or its affiliates with respect to any
breach by Forseon of any representation, warranty, covenant or agreement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion addresses what we believe are the material federal
income tax considerations relevant to the merger that may apply to you. As a
condition to the merger, Nelson Mullins Riley & Scarborough, L.L.P., counsel to
Towne Services, will deliver to Forseon an opinion to the effect that the merger
will constitute a "reorganization" for United States federal income tax purposes
within the meaning of Section 368(a) of the Internal Revenue Code and that Towne
Services, its acquisition subsidiary and Forseon will all be parties to the
reorganization within the meaning of Code Section 368(b). The opinion is based
on many assumptions and representations and is subject to the limitations and
qualifications noted therein.
Forseon stockholders should be aware that this discussion does not deal
with all of the United States federal income tax considerations that may be
relevant to particular Forseon stockholders in light of their particular
circumstances, such as stockholders who are dealers in securities or foreign
persons or who acquired their Forseon common stock through an exercise of stock
options or other compensatory transactions. In addition, the following
discussion does not address the tax consequences of any transactions effectuated
prior to or after the merger, whether or not such transactions were effectuated
in connection with the merger, including, without limitation, the exercise of
options or rights to purchase Forseon common stock in anticipation of the
merger. Finally, no foreign, state or local tax considerations are addressed
herein. ACCORDINGLY, FORSEON STOCKHOLDERS AND OPTIONHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE MERGER THAT MAY BE APPLICABLE TO THEM.
The following discussion is based on the interpretation of the Internal
Revenue Code, applicable Treasury Regulations, judicial authority and
administrative rulings and practice, all as of the date of this proxy
statement/prospectus. The IRS is not bound by such discussions and is
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not precluded from adopting a contrary position. In addition, there can be no
assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger to
Towne Services, Forseon and Forseon stockholders.
Subject to the limitations and qualifications referred to herein, and as a
result of the merger's qualifying as a reorganization under tax law, counsel of
Towne Services is of the opinion that, for United States federal income tax
purposes:
- No gain or loss will be recognized by Forseon stockholders who
exchange their Forseon common stock solely for shares of Towne
Services common stock pursuant to the merger;
- The aggregate tax basis of the Towne Services common stock received by
a Forseon stockholder in the merger will be the same as the aggregate
tax basis of the Forseon common stock surrendered in exchange
therefor;
- The holding period of the Towne Services common stock received by a
Forseon stockholder in the merger will include the holding period for
the Forseon common stock surrendered in exchange therefor, provided
that the Forseon common stock so surrendered is held as a capital
asset by such Forseon stockholder at the effective time of the merger;
- No gain or loss will be recognized by Towne Services, its acquisition
subsidiary or Forseon solely as a result of the merger; and
- The merger will not have any tax consequences for the Towne Services
shareholders.
ACCOUNTING TREATMENT
The merger is intended to qualify as a pooling of interests for financial
reporting purposes. Under this method of accounting, the recorded assets and
liabilities of Forseon will be carried forward to Towne at their recorded
amounts. The operating results of Towne will include the operating results of
Forseon for the entire year in which the combination occurs. The operating
results of the separate companies for period prior to the year in which the
combination occurs will be combined and restated as the operating results of
Towne. A condition to the merger is that Forseon and Towne must receive letters
from Arthur Andersen LLP and KPMG LLP regarding their concurrence with the
conclusions of our management as to the appropriateness of pooling of interests
accounting for the merger under the Accounting Principles Board Opinion No. 16
and related interpretations. See "Unaudited Pro Forma Combined Condensed
Financial Statements."
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OTHER RELATED MATTERS
ESCROW AGREEMENT
Pursuant to the merger agreement, Towne will deposit in escrow a
certificate representing ten percent of the total number of shares of Towne
common stock to be issued in connection with the merger for the purpose of
securing the indemnification obligations of the Forseon stockholders under the
merger agreement. The shares of Towne stock placed in escrow will be issued in
the name of First Union National Bank, as the escrow agent or its nominee.
During the term of the escrow agreement, the Forseon stockholders will be
entitled to vote the Towne shares held in escrow by giving the escrow agent
written instructions on how to vote. In the absence of such instructions, the
escrow agent will not vote such shares.
The escrow will terminate one year after the closing date of the merger if
Towne makes no claims for indemnification against the escrow. Claims made
against the escrow will be resolved on behalf of the Forseon stockholders by
their authorized stockholders' representatives. Otherwise, the escrow will
terminate when a decision is rendered by an arbitrator about the disposition of
the shares and other amounts, if any, in the escrow fund.
By approving the merger agreement, the Forseon stockholders appoint Dan
Paul and Allen Merrill as the initial Forseon stockholders' representatives.
These stockholders' representatives will be fully authorized and empowered to
act for each Forseon stockholder and optionholder with respect to all matters
relating to the merger, including:
- matters arising before and after the closing of the merger;
- negotiations, disputes and resolutions of any dispute under the merger
agreement;
- agreeing to distribute shares of Towne stock held in the escrow to
Towne to satisfy any damages under the merger agreement;
- releasing any claims or waiving any rights on behalf of Forseon
stockholders and optionholders;
- amending the terms and conditions of the merger agreement; and
- taking all action, or refraining from action, as the stockholders'
representatives consider as needed or appropriate to carry out the
merger.
Each Forseon stockholder who does not vote against the merger shall be
deemed to authorize the stockholders' representatives to perform any action
described above or in the merger agreement for the stockholders benefit. The
actions so taken will bind each Forseon stockholder as if he or she took the
actions himself or herself.
Promptly following the termination of the escrow, the escrow agent will
deliver to Towne's stock transfer agent the number of shares remaining in escrow
after satisfying all obligations to deliver any shares to Towne pursuant to the
merger agreement. The transfer agent will then deliver the shares to the Forseon
shareholders entitled to receive them.
The Escrow Agent will hold any dividends paid on the shares and any other
property distributed with respect to the shares, for subsequent delivery to
Towne or the Forseon stockholders, on a pro rata basis, with their respective
portions of the escrow shares distributed out of the escrow fund.
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Except in limited cases, Towne will be responsible for the fees and
expenses of the escrow agent.
INDEMNIFICATION
The merger agreement provides that Towne will, from and after the
completion of the merger, defend and hold harmless each person who is an officer
or director of or trustee for the benefit of Forseon or any of its subsidiaries
in respect of acts or omissions occurring on or prior to the completion of the
merger to the extent provided under Forseon's certificate of incorporation, its
bylaws in effect on the date of the merger agreement and indemnification
agreements in effect as of the date of the merger agreement. This
indemnification is subject to any limitation imposed from time to time under the
applicable law.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the merger by Forseon's board of
directors, you should be aware that certain Forseon officers and directors have
interests in the merger, including those referred to below, that presented them
with potential conflicts of interests. The Forseon board of directors was aware
of these potential conflicts and considered them along with the other matters
described in "The Forseon Stockholder Meeting" on page 25 and "The
Merger -- Reasons for the Merger" on page 29.
As of December 31, 1998, directors and executive officers of Forseon and
their affiliates beneficially owned an aggregate of shares of
Forseon common stock, including shares of Forseon common stock subject to
outstanding stock options exercisable within 60 days of December 31, 1998 and
Forseon stock held by the ESOP. Based on the last reported sales price for Towne
common stock on , 1999 of $ per share, the aggregate dollar
value of the shares of Towne common stock to be received in the merger by
Forseon's executive officers and directors and their affiliates is approximately
$ million.
Most of the executive officers of Forseon will have entered into employment
agreements with Forseon as of the closing of the merger. See "Forseon's Certain
Transactions" on page .
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Towne common stock received by Forseon stockholders in the
merger will be freely transferable, except that persons who are deemed to be
affiliates of Forseon prior to the merger have restrictions on their ability to
sell the Towne shares. These affiliates may resell their shares of Towne common
stock only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act or otherwise in compliance with the registration requirements
of the Securities Act, or pursuant to an exemption from such requirements. An
individual or entity is deemed to be an affiliate of Towne or Forseon if he, she
or it controls, is controlled by, or is under common control with, Towne or
Forseon as the case may be. Executive officers, directors and certain principal
shareholders of a company are generally considered to be affiliates. The merger
agreement requires each company to cause each of its affiliates to execute a
written agreement to the effect that they will offer or sell or otherwise
dispose of any of the shares of Forseon or Towne common stock issued to such
person in or pursuant to the merger only in compliance with the Securities Act
and applicable rules and regulations, including the rules
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related to pooling of interests accounting. This proxy statement/prospectus does
not cover any resales of Towne common stock received by affiliates of Forseon in
the merger.
AFFILIATE AGREEMENTS
Before Forseon and Towne can effect the merger as a pooling of interests
transactions, each affiliate of Forseon and Towne, as defined in Rule 145 of the
Securities Act, must execute and deliver an agreement that the affiliate will
not sell or otherwise dispose of Towne common stock or Forseon common stock
during:
- the thirty (30) day period prior to the completion of the merger; or
- after the completion of the merger until financial results covering at
least thirty (30) days of the combined operations of Towne and Forseon
have been published.
Thereafter, it is expected that affiliates of Forseon and Towne will be
able to sell shares of Towne common stock without registration, subject to the
limitations of the Securities Act and the rules and regulations of the
Commission discussed above. These sales restrictions are set forth in the
Forseon affiliate letter agreement and a separate affiliate letter agreement
executed by Towne's affiliates. Accordingly, Towne will be entitled to place
appropriate legends on the certificates evidencing any Towne common stock to be
received by a Forseon affiliate pursuant to the terms of the merger agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the Towne common stock, consistent with the terms of the Forseon affiliate
letter agreement.
APPRAISAL RIGHTS
RIGHTS OF DISSENTING STOCKHOLDERS
HOLDERS OF FORSEON STOCK ARE ENTITLED TO APPRAISAL RIGHTS WITH RESPECT TO
THE MERGER IF THEY OBJECT AND FOLLOW PROPER PROCEDURES. If the merger is
consummated, a holder of record of Forseon common stock on the date of making a
demand for appraisal, as described below, will be entitled to have those shares
appraised by the Delaware Court of Chancery under Section 262 of the Delaware
General Corporation Law ("DGCL") and to receive payment for the "fair value" of
these shares instead of the consideration provided for in the merger agreement.
You may preserve your rights to an appraisal only if you (1) continue to hold
your shares of Forseon stock through the completion of the merger; (2) strictly
comply with the procedures set forth under Section 262 of the DGCL; and (3) do
not vote in favor of the merger. This proxy statement/prospectus is being sent
to all holders of record of Forseon common stock on the record date for the
Forseon special meeting and constitutes notice of the appraisal rights available
to those holders under Section 262.
THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT
COMPLIANCE WITH THE PROCEDURES SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY
OF SUCH PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS' RIGHTS
UNDER SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF
SECTION 262. The following summary is not a complete statement of Section 262 of
the DGCL, and is qualified in its entirety by reference to Section 262 which is
incorporated into this document by reference, together with any amendments to
the laws that may be adopted after the date of this
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proxy statement/prospectus. A copy of Section 262 is attached as Annex B to this
proxy statement/prospectus.
If you elect to exercise appraisal rights under Section 262, you must
deliver a written demand for appraisal of your shares of Forseon prior to the
vote on the merger. The written demand must identify you as stockholder of
record and state your intention to demand appraisal of your shares. All demands
should be delivered to Forseon Corporation, Attention: Allen Merrill, 6600
Jurupa Avenue, Riverside, California 92504, telephone: (909) 688-2256.
Only a holder of shares of Forseon common stock on the date of making a
written demand for appraisal who continues to hold those shares through the
completion of the merger is entitled to seek appraisal. A demand for appraisal
must be executed by or for you as holder of record, fully and correctly, as your
name appears on your stock certificates representing shares of Forseon common
stock. If Forseon common stock is owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, the demand should be made in that
capacity. If Forseon common stock is owned of record by more than one person, as
in a joint tenancy or tenancy in common, the demand should be made by or for all
owners of record. An authorized agent, including one or more joint owners, may
execute the demand for appraisal for a holder of record; that agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of the shares.
A record holder such as a broker who holds shares of Forseon common stock
as a nominee for beneficial owners, some of whom desire to demand appraisal,
must exercise appraisal rights on behalf of those beneficial owners with respect
to the shares of Forseon common stock held for those beneficial owners. In that
case, the written demand for appraisal should set forth the number of shares of
Forseon common stock covered by it. Unless a demand for appraisal specifies a
number of shares, the demand will be presumed to cover all shares of Forseon
common stock held in the name of the record owner making the demand.
BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS BEFORE THE DATE OF
THE FORSEON SPECIAL MEETING.
Within 10 days after the completion of the merger, the surviving
corporation is required to send notice of the effectiveness of the merger to
each shareholder who prior to completion of the merger complies with the
requirements of Section 262.
Within 120 days after completion of the merger, the surviving corporation
or any stockholder who has complied with the requirements of Section 262 may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares of Forseon common stock held by all stockholders
seeking appraisal. A dissenting stockholder must serve a copy of the petition on
the surviving corporation. If no petition is filed by either the surviving
corporation or any dissenting stockholder within the 120-day period, the rights
of all dissenting stockholders to appraisal will cease. If you are seeking to
exercise appraisal rights, you should not assume that the surviving corporation
will file a petition with respect to the appraisal of the fair value of their
shares or that the surviving corporation will initiate any negotiations with
respect to the fair value of those shares. The surviving corporation is under no
obligation to and has no present intention to take any action in this regard.
Accordingly, if you wish to seek appraisal of your shares, you should initiate
all necessary action with respect to your appraisal rights within the time
periods and in the manner described in Section 262. FAILURE TO FILE
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THE PETITION ON A TIMELY BASIS WILL CAUSE YOU TO FORFEIT YOUR RIGHT TO AN
APPRAISAL.
Within 120 days after completion of the merger, any stockholder who has
complied with subsections (a) and (d) of Section 262 is entitled, upon written
request, to receive from the surviving corporation a statement setting forth the
aggregate number of shares of Forseon common stock not voted in favor of the
merger with respect to which demands for appraisal have been received by Forseon
and the number of holders of those shares. The statement must be mailed within
10 days after the written request has been received by Forseon or within 10 days
after expiration of the time for delivery of demands for appraisal under
subsection (d) of Section 262, whichever is later.
If a petition for an appraisal is filed in a timely manner, at the hearing
on the petition, the Delaware Court of Chancery will determine which
shareholders are entitled to appraisal rights and will appraise the shares of
Forseon common stock owned by those stockholders, determining the fair value of
those shares, exclusive of any element of value arising from the accomplishment
or expectation of the merger, together with a fair rate of interest, to be paid,
if any, upon the amount determined to be the fair value.
If you are considering seeking appraisal, you should consider that the fair
value of your shares determined under Section 262 could be more than, the same
as, or less than, the value of the consideration provided for in the merger
agreement without the exercise of appraisal rights. The cost of the appraisal
proceeding may be determined by the Court of Chancery and assessed against the
parties as the Court deems equitable in the circumstances. Upon application of a
dissenting stockholder, the Court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding (including, without limitation, reasonable attorney's fees and the
fees and expenses of experts) to be charged pro rata against the value of all
shares of Forseon common stock entitled to appraisal. In the absence of such a
determination or assessment, each party bears its own expenses.
Any stockholder who has demanded appraisal in compliance with Section 262
will not, after completion of the merger, be entitled to vote such stock for any
purpose or receive payment of dividends or other distributions, if any, on the
Forseon common stock, except for dividends or distributions, if any, payable to
shareholders of record at a date prior to completion of the merger.
You may withdraw a demand for appraisal and accept the Forseon common stock
at any time within 60 days after completion of the merger, or thereafter may
withdraw such a demand with the written approval of the surviving corporation.
If an appraisal proceeding is properly instituted, such proceeding may not be
dismissed as to any stockholder without the approval of the Delaware Court of
Chancery, and any such approval may be conditioned on the Court of Chancery's
deeming the terms to be just. If, after completion of the merger, a holder of
Forseon common stock who had demanded appraisal for the holder's shares fails to
perfect or loses his right to appraisal, those shares will be treated under the
merger agreement as if they had been converted as of the completion of the
merger into Towne Services common stock.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF DELAWARE LAW, WE URGE ANY
FORSEON STOCKHOLDER WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS TO CONSULT A
LEGAL ADVISOR.
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UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to both the proposed merger between Towne Services, Inc. and Forseon
Corporation, which will be accounted for on a pooling of interests basis, and
the purchase of Banking Solutions, Inc. by Towne Services in December 1998. The
information is based on each company's respective historical consolidated
financial statements and notes thereto. The pro forma combined condensed balance
sheet assumes the Forseon transaction occurred on December 31, 1998. Banking
Solutions, Inc. is included in the historical consolidated balance sheet of
Towne Services as of December 31, 1998.
The pro forma combined condensed statements of operations assume the
Forseon transaction occurred at the beginning of the earliest year presented.
The pro forma combined condensed statement of operations for the year ended
December 31, 1998 has been prepared to reflect adjustments to Towne Services'
historical results of operations to give effect to the purchase of Banking
Solutions, Inc. as if it had occurred at the beginning of the year. The pro
forma financial statements should be read in conjunction with the accompanying
notes and with each companies' historical financial statements and related
notes.
The results of operations of Towne for the years ended December 31, 1996,
1997 and 1998 and the financial position as of December 31, 1998 have been
derived from its historical consolidated financial statements which have been
audited by Arthur Andersen LLP. Forseon has historically reported its operating
results on the basis of a fiscal year ended June 30. The results of operations
of Forseon for the 12 months ended December 31, 1996, 1997 and 1998 and the
financial position as of December 31, 1998 are unaudited. The results of
operations of Forseon for the periods presented have been derived from Forseon's
historical consolidated financial statements. In the opinion of Forseon's
management, this financial information includes all adjustments, consisting only
of normal recurring accruals, that are considered necessary for a fair
presentation of the results of operations for such periods. The results of
operations for Banking Solutions, Inc. for the 11-month period before the
acquisition are unaudited. In the opinion of Banking Solutions' management, the
unaudited financial information includes all adjustments consisting only of
normal recurring accruals, that are considered necessary for a fair presentation
of the results of operations for such periods.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the earliest period presented, nor is it necessarily indicative of future
operating results or financial position.
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<PAGE> 59
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
TOWNE SERVICES FORSEON ADJUSTMENTS PRO FORMA
----------------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 13,081 $ 979 $ 0 $ 14,060
Accounts receivable, net.............. 3,553 786 0 4,339
Note receivable....................... 167 0 0 167
Other................................. 230 119 0 349
-------- ------ ------- --------
Total current assets.......... 17,031 1,884 0 18,915
PROPERTY AND EQUIPMENT, net............. 2,117 1,336 0 3,453
NOTES RECEIVABLE........................ 82 0 0 82
GOODWILL, net........................... 14,955 0 0 14,955
OTHER INTANGIBLES, net.................. 1,135 0 0 1,135
OTHER ASSETS, net....................... 100 63 0 163
-------- ------ ------- --------
$ 35,420 $3,283 $ 0 $ 38,703
======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 126 $ 96 $ 0 $ 222
Accrued liabilities................... 1,273 110 1,500(1) 2,883
Accrued compensation.................. 251 948 0 1,199
Deferred revenue...................... 0 146 0 146
Accrued termination costs............. 498 0 0 498
Current portion of long-term debt..... 5,000 274 0 5,274
-------- ------ ------- --------
Total current liabilities..... 7,148 1,574 1,500 10,222
-------- ------ ------- --------
LONG-TERM DEBT.......................... 0 55 0 55
-------- ------ ------- --------
REDEEMABLE COMMON STOCK................. 0 534 0 534
-------- ------ ------- --------
SHAREHOLDERS' EQUITY:
Common stock............................ 52,363 1,157 0 53,520
Warrants outstanding.................... 41 0 0 41
Accumulated deficit..................... (24,132) (37) (1,500)(1) (25,669)
-------- ------ ------- --------
Total shareholders' equity.... 28,272 1,120 (1,500) 27,892
-------- ------ ------- --------
$ 35,420 $3,283 $ 0 $ 38,703
======== ====== ======= ========
</TABLE>
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<PAGE> 60
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL HISTORICAL BANKING PRO FORMA
TOWNE SERVICES FORSEON SOLUTIONS, INC. ADJUSTMENTS PRO FORMA
-------------- ---------- --------------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES......................... $ 6,398 $11,752 $8,113 $ 0 $ 26,263
COST AND EXPENSES:
Costs of processing, servicing
and support................. 2,027 2,275 3,943 0 8,245
Research & development......... 306 735 430 0 1,471
Sales and marketing............ 6,252 7,137 1,031 0 14,420
Stock compensation expense..... 6,268 0 0 0 6,268
Employee termination costs..... 2,291 0 0 0 2,291
General and administrative..... 3,859 1,710 2,737 727(2) 9,033
---------- ------- ------ ----- ----------
Total costs and
expenses............. 21,003 11,857 8,141 727 41,728
---------- ------- ------ ----- ----------
OPERATING LOSS................... (14,605) (105) (28) (727) (15,465)
OTHER (INCOME) EXPENSES:
Interest (income) expense,
net......................... (263) 38 16 0 (209)
Other income................... (6) 0 0 0 (6)
Financing costs for stock
issued to nonemployees...... 323 0 0 0 323
---------- ------- ------ ----- ----------
Total other (income)
expenses............. 54 38 16 0 108
Loss before extraordinary loss
and benefit from income
taxes.......................... (14,659) (143) (44) (727) (15,573)
Extraordinary loss on early
extinguishment of debt......... 476 0 0 0 476
---------- ------- ------ ----- ----------
Benefit from income taxes........ 0 (11) 0 0 (11)
---------- ------- ------ ----- ----------
NET LOSS......................... (15,135) (132) (44) (727) (16,038)
PREFERRED STOCK DIVIDENDS........ (5,108) 0 0 0 (5,108)
ACCRETION OF WARRANTS WITH
REDEMPTION FEATURE............. (692) 0 0 0 (692)
---------- ------- ------ ----- ----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS................... $ (20,935) $ (132) $ (44) $(727) $ (21,838)
========== ======= ====== ===== ==========
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE--
BASIC AND DILUTED.............. $ (1.35) $ (1.20)(3)
========== ==========
Weighted Average Common Shares
Outstanding -- basic and
diluted........................ 15,516,170 18,127,599(3)
========== ==========
</TABLE>
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<PAGE> 61
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
HISTORICAL
TOWNE HISTORICAL
SERVICES FORSEON PRO FORMA
---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES............................................... $ 722 $12,174 $ 12,896
COST AND EXPENSES
Costs of processing, servicing, and support.......... 832 2,557 3,389
Research and development............................. 332 635 967
Sales and marketing.................................. 839 7,150 7,989
Stock compensation expense........................... 0 0 0
Employee termination costs........................... 0 0 0
General and administrative........................... 1,140 1,539 2,679
---------- ------- -----------
Total costs and expenses.......................... 3,143 11,881 15,024
---------- ------- -----------
OPERATING (LOSS) INCOME................................ (2,421) 293 (2,128)
OTHER (INCOME) EXPENSES:
Interest expense, net................................ 96 59 155
Other income......................................... (1) 0 (1)
---------- ------- -----------
Total other (income) expenses..................... 95 59 154
---------- ------- -----------
(Loss) income before income taxes...................... (2,516) 234 (2,282)
Provision for income taxes............................. 0 104 104
---------- ------- -----------
NET (LOSS) INCOME...................................... $ (2,516) $ 130 $ (2,386)
========== ======= ===========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED....... $ (0.26) $ (0.20)(2)
========== ===========
Weighted Average Common Shares Outstanding -- basic
and diluted....................................... 9,600,592 11,675,937(2)
========== ===========
</TABLE>
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<PAGE> 62
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
HISTORICAL HISTORICAL
TOWNE SERVICES FORSEON PRO FORMA
-------------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES............................................... $ 105 $11,827 $ 11,932
COST AND EXPENSES:
Costs of processing, servicing, and support.......... 220 2,472 2,692
Research and development............................. 52 805 857
Sales and marketing.................................. 118 6,673 6,791
Stock compensation expense........................... 10 102 112
Employee termination costs........................... 0 0 0
General and administrative........................... 358 1,317 1,675
---------- ------- ----------
Total costs and expenses.......................... 758 11,369 12,127
---------- ------- ----------
OPERATING (LOSS) INCOME................................ (653) 458 (195)
OTHER EXPENSES:
Interest expense, net................................ 6 47 53
Other expense........................................ 3 0 3
---------- ------- ----------
Total other expenses.............................. 9 47 56
---------- ------- ----------
(Loss) income before income taxes...................... (662) 411 (251)
Provision for income taxes............................. 0 182 182
---------- ------- ----------
NET (LOSS) INCOME...................................... $ (662) $ 229 $ (433)
========== ======= ==========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED....... $ (0.10) $ (0.05)(2)
========== ==========
Weighted Average Common Shares Outstanding -- basic
and diluted....................................... 6,337,356 8,412,701(2)
========== ==========
</TABLE>
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<PAGE> 63
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. TRANSACTION COSTS AND MERGER RELATED EXPENSES
Towne and Forseon estimate that they will incur direct transaction costs of
approximately $1.5 million associated with the merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon completion of the merger.
Towne and Forseon also expect that following the merger, the combined
company will incur an additional significant charge to operations, which is not
currently reasonably estimable, to reflect costs associated with integrating the
two companies. This additional significant charge has not been reflected in the
pro forma combined condensed balance sheet or the pro forma combined condensed
statements of operations. There can be no assurance that the combined company
will not incur additional charges to reflect costs associated with the merger or
that management will be successful in its efforts to integrate the operations of
the two companies.
The unaudited pro forma combined condensed balance sheet gives effect to
the estimated direct transaction costs as if such costs and expenses had been
incurred as of December 31, 1998. These costs and expenses are assumed to be
nondeductible for income tax purposes. These costs and expenses are not
reflected in the unaudited pro forma combined condensed statements of
operations.
2. AMORTIZATION OF GOODWILL AND INTANGIBLES
Represents amortization of goodwill associated with the purchase of Banking
Solutions, Inc. which is being amortized over a period of 25 years and the
amortization of intangible assets associated with Banking Solutions, Inc.'s
customer list which is being amortized over a period of 5 years.
3. UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE
The unaudited pro forma combined net loss per share -- basic and diluted is
based on the weighted average common shares outstanding of Towne, and the
issuance of 2,075,345 shares of Towne common stock in exchange for Forseon's
outstanding common stock as part of the merger. The net loss attributable to
common shareholders per common share -- basic and diluted for the year ended
December 31, 1998 assumes the issuance of 536,084 shares associated with the
acquisition of Banking Solutions, Inc. as of January 1, 1998.
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<PAGE> 64
TOWNE SERVICES' BUSINESS
GENERAL
Towne Services provides transaction based online services and products to
small businesses and community banks in the United States. We deliver these
services and products via an electronic gateway that links our business and bank
customers with us and other providers of products and services that can benefit
these customers. We use this gateway to deliver a variety of business and
management solutions using internet and telecommunications connections. Our
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 businesses customers.
Traditionally, the in-house credit transactions of small businesses are
completed without a credit card or cash, are recorded and processed manually and
then billed to the customer at a later date. Because of the paperwork and delays
involved with this manual process, banks have been reluctant to finance these
business credit transactions. To automate, expedite and support funding for this
process, Towne offers three main processing systems, TOWNE CREDIT(R), TOWNE
FINANCE(R) and CASHFLOW(SM) MANAGER. These systems take sales transactions and
payment information, record and process it electronically and communicate the
results to our business customers and their banks, often the same day.
Through the use of our online services and products, our business customers
are able to:
- automate their records and reduce paperwork;
- accelerate cash flow;
- improve customer services;
- shift other administrative burdens to Towne; and
- utilize the internet to conduct business electronically.
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
- 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.
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<PAGE> 65
TOWNE SERVICES' MARKET
We provide our products and services to retail merchants and small
commercial businesses that extend in-house credit to their customers and to the
banks these businesses use. We believe there are more than 5 million small and
medium size retail merchants and 12 million small commercial businesses in the
United States. The electronic payments processing industry generally has not
offered these businesses a way to process their in-house credit transactions
electronically, focusing instead on credit and debit card transactions.
Towne believes many of these merchants process more than half of their
sales using in-house credit, and use manual labor-intensive processes and
products to run their businesses. These credit receivables are generally
collected by the merchant manually through a month-end billing process. Towne
believes that the manual billing and collections process utilized by many small
merchants is highly inefficient causing these merchants to carry excess
receivables and bad debts. Towne's processing systems allow small merchants to
automate many of their manual business tasks including the processing of
in-house accounts, payment processing and bad debt collections. 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.
A variety of small and medium size retail merchants use the TOWNE CREDIT
system, including hardware stores, clothing stores, florists, auto parts stores,
pharmacies and private clubs. 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.
TOWNE SERVICES' STRATEGIES
Our goal is to continue to develop and deliver the business and management
tools our customers need to succeed in an electronic commerce marketplace 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 with Towne and with the business' bank. We
intend to maximize this distribution channel by developing, acquiring and
implementing multiple products and services that the customer can access through
its connection to Towne to help automate its operations, run its business more
efficiently and provide better service for its customers. We plan to use this
electronic connection to cross-market both existing and new products and
services to our customers, which should allow us to develop and maintain
long-term customer relationships.
Enter New Relationships For Marketing and Product Enhancements
We have established marketing and other business relationships that enhance
our products and services and its channels of distribution. We have agreements
with several companies, which provide complementary services to the TOWNE
CREDIT, TOWNE FINANCE and CASHFLOW MANAGER systems. We also have agreements with
entities that have banks as their customers, under which these other companies
and organizations encourage their bank customers to use our systems. We intend
to enter more relationships with companies that can expand the number of its
products and services, complement our existing and future systems and provide
access to large groups of banks and small businesses.
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Expand Direct Sales and Marketing Efforts Nationwide
During 1998, we expanded our direct sales and marketing force from 15
persons in 7 states to 99 persons in 35 states. Of this total, 34 persons are
dedicated to developing bank customer relationships and 65 persons are focused
on developing small business customers. We intend to continue aggressively
hiring sales and marketing personnel nationwide and increase our participation
seminars and trade programs to strengthen our direct marketing efforts, increase
our customer base and expand into new markets.
Continue to Leverage Bank Relationships
The executive officers and directors of Towne have an average of over 15
years experience in the electronic processing and financial services industries,
and all 12 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 business customers that would be difficult to reach
through traditional marketing methods. In addition, we intend to provide new
products and services that may allow banks to attract new customers for both the
banks and Towne, as well as sign additional agreements with existing bank
customers.
Acquire Complementary Companies and Products
We intend to acquire providers of complementary products and services that
may enhance and expand our operations, product and service offerings, market
share or geographic presence. For more information on our acquisitions, please
see "-- Acquisitions of Complementary Companies and Products."
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.
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. No money changes hands and no credit cards are used.
Step 2: The business enters sales information at the point of sale
into an electronic cash register or computer terminal loaded with 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,
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including dollar amount and customer information, for use in billing,
tracking inventory and generating sales and tax reports.
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 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 with the bank's current loan
processing systems and creates the general ledger account entries necessary
for the bank to account for the line of credit loans to the business. 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
business 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 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 receive accelerated funding for in-house
charge accounts and eliminate costly and inefficient manual processing. Sales
also may be enhanced by the business' ability to offer finance options, such as
sales on account, to its customers. The bank that serves the business generates
fee income in the form of transaction discounts and may profit
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from interest-bearing consumer credit accounts. If the bank elects not to fund
the business' accounts receivable, the system still functions as an automated
billing and collection system, and the bank generates fee income. In both cases,
the TOWNE CREDIT processing system provides 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 FINANCE, businesses have the ability to convert
the invoices to needed cash to finance its ongoing operations.
Using TOWNE FINANCE, banks can assign percentage values to specific assets
of its small business customers, such as accounts receivable, inventory, real
estate, furniture, fixtures and equipment. By assigning these values, banks can
develop a risk-based formula for lending to their business customers. TOWNE
FINANCE tracks the accounts receivable, maintains a parallel aging of the
accounts and allows the bank to control advances and pay downs based on daily
activity of new sales and account payments. The system supports discretionary
lines of credit as well as automatic daily funding of eligible assets. TOWNE
FINANCE works with the banks' current loan processing systems and creates the
general ledger account entries necessary for community banks to account for
these asset-based accounts receivable loans.
Once a bank customer agrees to use TOWNE FINANCE, the bank must approve a
credit line for the customer. After credit is established, 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 profitable and cost effective accounts receivable financing program
for its small commercial customers. Community banks using TOWNE FINANCE gain
interest-bearing loans on funds, net of all processing expenses, and strengthen
relationships with business customers that experienced cash flow problems or
that might have otherwise turned to non-traditional lenders.
CashFlow Manager
The CASHFLOW MANAGER system is an asset management system that addresses
business-to-business credit transactions in a manner similar to TOWNE FINANCE.
The program enables the 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.
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The CASHFLOW MANAGER system uses special deposit tickets to batch process
invoices turned into the bank. The CASHFLOW MANAGER system provides general
ledger reports that help the bank manually interface with the bank general
ledger system. At the end of the month, statements are sent out to the business'
customer directing payments to the bank's lock box. The bank typically purchases
all of the business' accounts receivable and adjusts the reserve percentage
after the month-end close period. Receivables that become over 90 days old
generally are reassigned against the restricted funds after a 30-day grace
period. Any excess reserves are deposited into the business' operating account
after the month-end reconciliation.
With CASHFLOW MANAGER, banks generate income from 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.
SUPPORTING SERVICES AND NEW PRODUCTS
We provide an array of value-added services in connection with its TOWNE
CREDIT, TOWNE FINANCE and CASHFLOW MANAGER processing systems, including
marketing programs and materials and collection services. We plan to design and
develop new and improved products and services to help its customers automate
their businesses and provide better service to their clients.
Collection Services. Our processing systems help our customers identify
delinquent accounts. We maintain an agreement with Wallace and de Mayo 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
Wallace and de Mayo so account information is readily delivered to assist in
collecting past due amounts.
Internet Bill Payments. To provide small business customers the ease and
convenience of receiving bills and making their payments via the internet, we
have an agreement with Princeton Telecom Corporation for Internet bill payment
services.
Marketing Programs and Materials. Our primary marketing tool is its direct
sales force. However, we also offer a number of services designed to allow
community banks to target businesses in their communities. We provide
advertising, marketing brochures and inserts and direct mail to increase market
penetration for our bank customers.
New Product Development. We plan to design and develop new and improved
products and services that small business customers can access through their
electronic connection to us to help automate their businesses and provide better
service to their clients.
ACQUISITIONS OF COMPLEMENTARY COMPANIES AND PRODUCTS
We intend to pursue acquisitions of providers of complementary products and
services that may enhance and expand our operations, product and service
offerings, marketing and sales forces, market share and geographic presence. For
example, in December 1998 we acquired Banking Solutions, Inc., a Texas-based
provider of accounts receivable financing products to banks and their commercial
customers under the name CASHFLOW MANAGER. Historically, our sales force
specialized in smaller merchants and primarily retail receivables. With the
addition of
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Banking Solutions' sales force, we have added to our sales and marketing forces
over 20 people who specialize primarily in larger merchants and commercial
receivables. We purchased Banking Solutions, Inc. for approximately $14.9
million in cash and stock. In connection with the acquisition of Banking
Solutions, we issued 744,431 shares of our common stock at $6.73 per share. The
remainder of the purchase price was paid in cash. We also agreed to pay former
officers of Banking Solutions amounts of money which are contingent upon future
performance criteria. Through this acquisition, we more than doubled our
merchant customer base, added more than 200 bank relationships, gained a sales
team with an average of five years experience in selling commercial financing
products and increased our market presence into seven new states.
In addition, in June 1998, we acquired some of the assets and liabilities
of Credit Collection Solutions, Inc. Credit Collection has developed computer
software for processing payments and tracking collections including COLLECTION
WORKS(SM), an operating system developed to address the debt collection needs of
banks and collection agencies. Pursuant to this acquisition, we paid $510,000
and agreed to issue up to 100,000 shares of our common stock if certain
financial results are achieved from the acquired assets including COLLECTION
WORKS. Our management believes its 1998 acquisitions continue to advance its
growth strategies by adding a complementary technology solution and greatly
increasing its customer base.
SALES AND MARKETING
We employ two 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 have leveraged our board members' and senior managers' expertise and
contacts to develop relationships with community banks and banking
organizations. We believe that endorsements by local community bankers are the
most effective sales tools to reach small businesses. Banks often have long
standing relationships with the small business owners and provide immediate
credibility and access for our products and services. We believe that our
relationships with the community banks enable us to attract small business
customers that would be difficult and expensive to reach when employing
traditional marketing methods.
In addition to direct sales, we also market TOWNE CREDIT, TOWNE FINANCE and
CASHFLOW MANAGER through several companies that have merchants and community
banks across the United States as their customers or members. In addition, we
have agreements with Datamatx Inc., Wallace and de Mayo P.C., Cash Management
Services, Inc. and Princeton Telecom Corporation to incorporate their products
into our systems. These alliances enable us to reach and provide services to
large groups of community 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.
RECRUITING AND TRAINING
We hire sales personnel who are experienced in marketing products and
services to community 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
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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.
TECHNOLOGY
Our automated electronic processing systems, TOWNE CREDIT and TOWNE
FINANCE, involve communicating 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. CASHFLOW MANAGER processing is a decentralized system in
which the small business manually transmits its sales activity to its community
bank for processing. Our systems can use telephone lines, internet connections,
satellite linkages and bank automated teller machine communication lines 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.
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
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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, 1998, we provided processing services to a diverse
customer base of 1,662 small and medium size retail merchants and small
commercial businesses located in 33 states. A variety of small and medium size
retail merchants use the TOWNE CREDIT system, including hardware stores,
clothing stores, florists, auto parts stores, pharmacies and private clubs.
TOWNE CREDIT merchant customers typically have $1 million or less in annual
revenues. TOWNE FINANCE and CASHFLOW MANAGER products and services are marketed
to small commercial businesses with $5 million or less in revenues, such as
furniture manufacturers, equipment distributors, plumbing suppliers and
agricultural supply stores.
As of December 31, 1998, we had executed 641 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. There are over 10,000 financial institutions in the United
States that we consider to be potential bank customers.
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.
No single small business customer accounted for more than .5% of our total
revenues in 1998. No single bank customer accounted for more than 3.5% of our
total revenues in 1998. We anticipate that one or more new customers will
continue to account for large portions of the revenues generated for the
particular quarter in which the underlying bank contract is signed. We believe
that the identity of bank customers accounting for large portions of revenues
will change from quarter to quarter and year to year.
CUSTOMER SERVICES
Our products are supported by two 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, emergency 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.
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.
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COMPETITION
We are aware of other companies who have successfully marketed
business-to-business software and marketing support to banks that allows the
banks to track and finance the in-house charge accounts of its customers similar
to a factoring operation. Most of these competitors do not offer a point of sale
system, but rather require merchants to forward paper invoices to the banks
where bank personnel input the invoices onto the software purchased by the
banks. One such company has a system similar to TOWNE FINANCE but does not
market the system to banks, acting as the lender itself instead.
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 its 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.
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. However, 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 the patent, copyright or trademark rights of such third parties. 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, 1998, we had 169 full-time employees, of which 109 were in
sales and marketing, 44 were in operations and 16 were corporate and general
administrative employees. Of these employees, 67 were based in Norcross,
Georgia, and 102 were based in 34 other states. Management believes that our
relationship with our employees is satisfactory.
SEASONALITY
The electronic transaction processing industry is prone to seasonal
fluctuations in purchase 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.
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PROPERTY AND FACILITIES
Our principal executive offices are located at 3295 River Exchange Drive,
Suite 350, Norcross, Georgia 30092, and our telephone number is (770) 734-2680.
We lease our principal executive offices in Norcross, Georgia and maintain an
office in McKinney, Texas. We believe that our current facilities will be
adequate to support our operations at least until the mid-year of 1999 and
recently signed a lease to relocate our headquarters to a 41,000 square foot
facility in Suwanee, Georgia.
LEGAL PROCEEDINGS
We may be involved from time to time in legal proceedings arising in the
normal course of our business and otherwise. We are not a party to any pending
legal proceedings which we believe are material.
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TOWNE SERVICES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Towne's revenues currently are generated through initial set-up fees,
discount fees and monthly transaction processing fees. Management believes the
prices charged for both the initial set-up fees and the recurring transaction
fees are based upon the relative fair value of the related services provided.
Accordingly, Towne recognizes these fees as the related services are provided.
Set-up fees include charges for installation, implementation and training of
Towne's bank and business customers. Towne Services recognizes revenues related
to its set-up fees upon execution of the related contract or, if appropriate,
upon settlement of any contract contingencies. Set-up fees charged to each bank
vary depending on the asset size of the bank and the number of communities
served. Towne also charges set-up fees to its business customers based either
upon a flat rate or upon the expected transaction volume. Revenues are deferred
for contracts that contain certain cancellation clauses and/or return guarantees
until the cancellation or guarantee period has expired.
As with credit card transactions, Towne's business customer pays a discount
fee to its bank equal to a percentage of the value of each transaction
processed. In addition, the business' customer pays to the bank interest and
fees for amounts owed on account. Towne Services generates recurring revenue by
collecting a portion of the discount fee and, on occasion, interest paid on
these accounts, as well as by charging monthly transaction processing fees.
Monthly transaction processing fees include charges for electronic processing,
statement rendering and mailing, settling payments, recording account changes
and new accounts, leasing and selling point of sale terminals and collecting
debts.
Costs of processing, servicing and support include installation costs for
Towne's products and costs related to customer service, information systems
personnel and installation services.
Research and development expenses consist of salary and related personnel
costs, including costs for employee benefits, computer equipment and support
services, used in product and technology development. Towne believes that its
research and development expenditures, which aid in the design of new products
and product enhancements to respond to changes in customer demand, are essential
for obtaining and retaining a leadership position in its marketplace. Most
research and development expenditures are expensed as incurred; however, Towne
has capitalized certain development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86 when the products reached technological
feasibility.
Sales and marketing expenses consist primarily of salaries and commissions,
travel expenses, advertising, trade show expenses and costs of marketing
materials. These expenses also include the costs incurred to develop Towne's
indirect marketing channels.
For the years ended December 31, 1997 and 1998, Towne had net losses of
approximately $2.5 million and $15.1 million, respectively. As of December 31,
1997, Towne had an accumulated deficit of $3.2 million. As of December 31, 1998,
this accumulated deficit was $24.1 million. Approximately $12.9 million of this
accumulated deficit resulted from one-time non-cash charges, and $2.3 million of
this accumulated deficit resulted from a one-time charge relating to employee
termination agreements subsequent to the purchase of Banking Solutions, Inc. in
December 1998.
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On July 30, 1998 Towne's initial public offering was declared effective by
the Securities and Exchange Commission. In this offering, Towne sold 3,850,000
shares of common stock at $8.00 per share. Towne received proceeds of $27.0
million (net), after deducting underwriting discounts and other expenses related
to the offering.
Towne's business has grown rapidly with total revenues increasing from
$722,000 for 1997 to $6.4 million in 1998. However, Towne has experienced net
losses in each of these periods and expects to continue to incur losses for the
foreseeable future. The number of Towne Services employees increased from 25 at
December 31, 1997 to 169 at December 31, 1998. Towne currently intends to expand
its sales and marketing operations, to invest more in product research and
development, to pursue strategic acquisitions and to improve its internal
operating and financial infrastructure, all of which will increase its operating
expenses.
Because of Towne's limited operating history, management believes that
period to period comparisons of its operating results are not meaningful.
Although Towne has experienced significant revenue growth recently, there can be
no assurance that such growth rates are sustainable, and they should not be
relied upon as indicators of future performance. Towne's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development and relatively new
and changing markets. There can be no assurance that Towne will be successful in
addressing such risks and difficulties or that it will achieve profitability in
the future.
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RESULTS OF OPERATIONS
The following tables set forth certain historical operating information for
Towne Services, in dollars and as a percentage of total revenues, for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Revenues.................................... $ 105,285 $ 722,364 $ 6,397,628
Costs of processing, servicing and
support................................... 219,621 832,102 2,027,160
Research and development.................... 51,871 332,470 306,482
Sales and marketing......................... 118,163 839,323 6,251,564
Stock compensation expense.................. 10,020 0 6,267,497
Employee termination costs.................. 0 0 2,291,102
General and administrative.................. 358,606 1,139,642 3,858,564
Total costs and expenses.................... 758,281 3,143,537 21,002,369
Operating loss.............................. (652,996) (2,421,173) (14,604,741)
Interest expense (income), net.............. 5,802 95,946 (263,503)
Other expense (income)...................... 3,509 (1,018) (5,814)
Financing costs for stock issued to
nonemployees.............................. 0 0 323,000
Total other expenses........................ 9,311 94,928 53,683
Net loss before extraordinary loss on early
extinguishment of debt.................... $(662,307) $(2,516,101) $(14,658,424)
========= =========== ============
Net loss.................................... $(662,307) $(2,516,101) $(15,134,663)
========= =========== ============
Net loss attributable to common
shareholders.............................. $(662,307) $(2,516,101) $(20,934,635)
========= =========== ============
Revenues.................................... 100% 100% 100%
Costs of processing, servicing and
support................................... 209 115 32
Research and development.................... 49 46 5
Sales and marketing......................... 112 116 98
Stock compensation expense.................. 10 0 98
Employee termination costs.................. 0 0 36
General and administrative.................. 340 158 60
Total costs and expenses.................... 720 435 328
Operating loss.............................. (620) (335) (228)
Interest (income) expense, net.............. 6 13 (4)
Other expense (income)...................... 3 0 0
Financing costs for stock issued to
nonemployees.............................. 0 0 5
Total other expenses........................ 9 13 1
Net loss before extraordinary loss on early
extinguishment of debt.................... (629)% (348)% (229)%
========= =========== ============
Net loss.................................... (629)% (348)% (237)%
========= =========== ============
Net loss attributable to common
shareholders.............................. (629)% (348)% (327)%
========= =========== ============
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Towne's revenues increased from $722,000 in 1997 to $6.4 million
in 1998. During these two periods, set-up fees accounted for approximately 53%
and 51% of total revenues, respectively. Recurring revenues accounted for
approximately 18% and 35% of total revenues, respectively. The increase in
revenues during these periods resulted primarily from an increase in the number
of customers (including as a result of the acquisition of Banking Solutions in
December 1998) and higher set-up fees and transaction processing fees charged to
new customers. The increase in set-up fee revenues resulted primarily from an
increase in the number of customers and higher set-up fees charged to new
customers.
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Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $832,000 in 1997 to $2.0 million for 1998. These
costs were approximately 115% and 32% of total revenues, respectively, for these
two periods. The dollar amount of costs of processing, servicing and support
increased as a result of the addition of new customers and additional services
and support functions necessary to support Towne's growth, including as a result
of its acquisitions. Towne anticipates that these costs will continue to
increase as new customers are added. Costs of processing, servicing and support
decreased as a percentage of revenue as a result of substantially increased
revenues and improved operating efficiencies.
Research and Development. Towne research and development expenses
decreased from $332,000 in 1997 to $306,000 in 1998. Research and development
expenses represented approximately 46% and 5% of total revenues, respectively,
during these two periods. We expect that the dollar amount of research and
development expenses will increase as Towne recruits and hires additional
experienced programmers and develops new products and services. We do not expect
to incur significant costs to make our products year 2000 compliant because we
believe our products are currently designed to properly function through and
beyond the year 2000. See "-- Effects of the Year 2000."
Sales and Marketing. Sales and marketing expenses increased from $839,000
in 1997 to $6.3 million in 1998. Sales and marketing expenses were approximately
116% and 98% of total revenues, respectively, during these two periods. The
increase in these expenses is primarily the result of significant increases in
the number of sales personnel in remote locations, related travel expenses and
costs for marketing materials used to recruit potential bank and business
customers. Towne anticipates that sales and marketing expenses will continue to
increase as it continues to expand its direct sales and marketing force and
hires additional personnel to promote its indirect sales channels.
Stock Compensation Expense. Stock compensation expense was $6.3 million
for the year ended December 31, 1998. In the first quarter of 1998, Towne sold
shares of common stock and issued options to acquire common stock at what
management believed to be the fair market value of the common stock at that
time. Towne retained an independent appraiser who subsequently valued the common
stock at a higher price. Based upon outside sales to third parties, the
independent valuation and the anticipated initial public offering price at the
time, Towne recorded a one time non-cash charge for the additional value.
Purchase of Banking Solutions, Inc. In December 1998, Towne acquired the
outstanding capital stock of Banking Solutions, Inc., for approximately $14.9
million in cash and stock. In connection with the acquisition of Banking
Solutions, Towne issued 744,431 shares of Towne common stock at $6.73 per share.
The remainder of the purchase price was paid in cash. Towne also agreed to pay
former officers of Banking Solutions amounts of money which are contingent upon
future performance criteria. Banking Solutions is a developer and provider of a
transaction processing system, CASHFLOW MANAGER, an accounts receivable
financing program similar to the TOWNE FINANCE product. Towne recorded this
transaction using the purchase method of accounting. Towne has recorded goodwill
in the amount of $14.6 million, which is being amortized over a period of 25
years. Towne has recorded a $1.1 million intangible asset for the purchase of
BSI's customer list, which is being amortized over a period of 5 years. Towne
also recognized a one time charge in the amount of $2.3 million in December
1998, related to employee terminations which were not identified at the date of
purchase.
General and Administrative. General and administrative expenses increased
from $1.1 million in 1997 to $3.9 million in 1998. These costs represented
approximately 158% and 60% of
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total revenues, respectively, for these two periods. The increase in the dollar
amount of these expenses was primarily the result of increases in the number of
executive and administrative employees and the costs associated with executive
and administrative expenses related to our growth. Also, Towne incurred
additional costs related to being a public company, including annual and other
public reporting costs, directors' and officers' liability insurance, investor
relations programs and professional services fees. We anticipate that these
expenses will continue to increase in the near future as Towne upgrades internal
and financial reporting systems to enhance management's ability to obtain and
analyze information about its operations.
Interest (Income) Expense, Net. Towne reported net interest expense of
$96,000 in 1997 and net interest income of $264,000 in 1998. Interest expense
decreased as a result of the repayment of debt obligations and interest income
increased as a result of earnings on investments of cash proceeds received from
the initial public offering.
Extraordinary Loss. Towne reported an extraordinary loss during 1998
resulting from the early extinguishment of debt in the amount of $476,000. The
extraordinary loss was comprised of $218,000 unamortized discount on a
promissory note and $258,000 deferred debt issuance costs. See Note 5 of Notes
to Towne's Financial Statements.
Income Taxes. As of December 31, 1998, Towne Services had net operating
losses ("NOLs") of approximately $17.6 million for federal tax purposes which
will expire if not utilized beginning in 2011. Towne has not recognized any
benefit from the future use of such NOLs because management's assumptions of
future profitable operations contain risks that do not provide sufficient
assurance to recognize such tax benefits currently.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Towne's revenues increased from $105,000 in 1996 to $722,000 in
1997. Set-up fees accounted for approximately 44% and 53% of total revenues in
1996 and 1997, respectively. Recurring revenues accounted for approximately 5%
and 18% of total revenues in 1996 and 1997, respectively. The increases in the
dollar amount of revenues during this period resulted primarily from an increase
in the number of customers and higher set-up and transaction processing fees
charged to new customers. The increase in recurring revenues as a percentage of
revenues resulted primarily from an increase in the monthly transaction
processing revenues that generate recurring revenues.
Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $220,000 in 1996 to $832,000 in 1997. The costs were
approximately 209% and 115% of total revenues, respectively, for these two
periods. The dollar amount of costs of processing, servicing and support
increased as a result of the addition of new customers, additional servicing and
increased support functions required to support our growth.
Research and Development. Towne increased its research and development
expenses from $52,000 in 1996 to $332,000 in 1997. Research and development
expenses represented approximately 49% and 46% of total revenues, respectively,
during these two periods. The increase in dollar amounts was due primarily to
the continued development of TOWNE CREDIT and TOWNE FINANCE.
Sales and Marketing. Sales and marketing expenses increased from $118,000
in 1996 to $839,000 in 1997. Sales and marketing expenses were approximately
112% and 116% of total revenues, respectively, during these two periods. The
increase in dollar amount was primarily the result of a significant increase in
the number of sales personnel in remote locations, related travel
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expenses and increased costs for marketing materials used to recruit potential
bank and business customers.
General and Administrative. General and administrative expenses increased
from $359,000 in 1996 to $1.1 million in 1997. These costs were approximately
340% and 158% of total revenues, respectively, for these two periods. The
increase in dollar amounts was primarily the result of increases in the number
of administrative and operational employees, and the costs associated with
administrative expenses and building infrastructure to support our growth.
Interest (Income) Expense, net. Interest expense increased from $6,000 in
1996 to $96,000 in 1997, primarily as a result of a loan facility obtained in
late 1997.
Income Taxes. As of December 31, 1997, Towne had NOLs of approximately
$3.0 million for federal tax purposes which will expire if not utilized by 2011
and 2012. Towne has not recognized any benefit from the future use of such NOLs
because management's assumptions of future profitable operations contain risks
that do not provide sufficient assurance to recognize such tax benefits
currently.
During Towne's short history, its operating results have varied
significantly and are likely to fluctuate significantly in the future as a
result of a combination of factors. These factors include: whether or not the
market accepts current and future products and services; whether new competitors
emerge or existing competitors gain market share faster than Towne Services;
whether new technologies are developed which make Towne's systems outdated or
obsolete; whether costs of doing business increase as a result of higher wages,
sales commissions, taxes and other operating costs; whether seasonal trends in
consumer purchasing impact the volume of transactions processed; general
economic factors and the impact of potential acquisitions to Towne's operations.
In addition, the amount of revenues associated with particular set-up fees can
vary significantly based upon the number of products used by customers for any
particular period. Towne Services establishes its expenditure levels for product
development, sales and marketing and other operating expenses based, in large
part, on its anticipated revenues. As a result, if revenues fall below
expectations, operating results and net income are likely to be adversely and
disproportionately affected because only a portion of Towne's expenses vary with
its revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Towne has financed its operations primarily through
sales of its equity securities in private placements, its initial public
offering and through credit facilities. Through December 1997, Towne received
aggregate net proceeds of $4.3 million from the sale of its common stock. In
March 1998, Towne received net proceeds of $1.5 million from the sale of its
Series A Preferred Stock in a private placement. In July 1998, Towne received
net proceeds of $27.0 million from the initial public offering of its common
stock.
In August 1998, Towne paid off all then existing current and long term debt
obligations, which consisted of a $1.5 million term note and several lines of
credit, with proceeds received from its initial public offering. The early
extinguishment of some of these debt obligations resulted in an extraordinary
loss of $476,000, which is comprised of $218,000 unamortized discount on the
$1.5 million term note and $258,000 in deferred debt issuance costs.
In December 1998, Towne borrowed $5.0 million on a short-term line of
credit from First Union National Bank. The line of credit has a term of one year
with an interest rate of LIBOR plus 2.0% (7.1% at December 31, 1998). It is
secured by a deposit account Towne maintains
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with the lender. The line of credit was paid in full in January 1999. Towne will
continue to negotiate with certain other financial institutions to establish a
credit facility for future working capital and acquisition financing, but there
can be no assurance that such negotiations will be successful. We also
anticipate that we will sell additional common stock to raise the money needed
for our general working capital and acquisition purposes, which will dilute our
existing shareholders.
Net cash used in operating activities was approximately $2.1 million for
1997 and $10.2 million for 1998. Net cash used in operating activities during
1997 represents a $2.5 million net loss partially offset by a $599,000 increase
in accounts payable and accrued expenses, a $120,000 increase in accounts
receivable and a $260,000 increase in prepaid expenses and other assets. Net
cash used in operating activities during 1998 represents a $15.1 million net
loss partially offset by a $622,000 increase in accounts payable and accrued
expenses, a $3.0 million increase in accounts receivable and a $265,000 increase
in prepaid expenses and other assets.
Net cash used in investing activities was approximately $531,000 for 1997
and $12.9 million for 1998. Net cash used in investing activities during 1997
represents an increase of $452,000 for the purchase of computer equipment used
in conducting Towne's business and an increase of $79,000 of notes receivable
due from a shareholder. Net cash used in investing activities during 1998
represents an increase of $10.4 million to acquire Banking Solutions, Inc., $1.9
million for the purchase of computer equipment and other capital equipment used
in conducting Towne's business, $510,000 to acquire some of the assets and
liabilities of Credit Collection Solutions, Inc. and $170,000 in notes due from
shareholders.
Net cash provided by financing activities was $5.0 million for 1997 and
$33.7 million for 1998, which consisted primarily of $27.0 million of net
proceeds received from Towne's initial public offering, $1.5 million from the
issuance of preferred stock, $584,000 from the exercise of stock options and
$4.6 million of net proceeds from the issuance of other securities and payment
of all outstanding debt obligations.
EFFECTS OF THE YEAR 2000
Towne's business and customer relationships rely on computer software
programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
connections are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), significant system failures or errors
may result which could have a material adverse effect on the business, financial
condition, or results of operations of both the affected customers and Towne.
Towne Services has conducted tests on its proprietary point of sale terminals,
network connections and transaction processing software and believes that its
TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER products and network
connections it maintains are able to process dates after December 31, 1999. For
its internal accounting and operating systems and network communications, Towne
uses software and other products provided by third parties and has received
warranties or other assurances that most of these products are programmed to
address the Year 2000 issue. Towne plans to conduct a limited review of its
internal systems and to continue to test its network connections to help ensure
that these programs and systems are adequately programmed to address the Year
2000 issue. Towne Services intends to modify or replace any products or systems
that are unable to properly function as a result of the Year 2000 issue and
currently believes it will be able to do so without incurring costs or delays
which would have a material adverse effect on its financial condition.
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<PAGE> 82
Towne supplies point of sale terminals and other products needed to run its
processing systems to its customers and Towne Services has not tested any other
products or systems used in its customers' businesses. If Towne's customers do
not successfully address Year 2000 issues in their operations and, as a result,
experience temporary or permanent interruptions in their businesses, Towne may
lose revenues from these customers, which could have a material adverse effect
on its business, financial condition and results of operations. Towne Services
believes that many financial institutions and small businesses, including
customers of Towne, are still in the preliminary stages of analyzing their
systems for Year 2000 issues. It is impossible to estimate the potential
expenses involved or delays which may result from the failure of these
institutions and third parties to resolve their Year 2000 issues in a timely
manner and there can be no assurance that such expenses, failures or delays will
not have a material adverse effect on Towne's business, financial condition or
results of operations. In addition, we have no contingency plan in place to
address any large-scale problems our customers, vendors or other persons with
whom we conduct business may face related to Year 2000 issues.
EFFECTS OF ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general purpose
financial statements. This statement is effective for periods beginning after
December 15, 1997. Towne adopted SFAS No. 130 on January 1, 1998. The adoption
of SFAS 130 did not have a material impact on Towne's financial statements as
comprehensive income did not differ from the reported net loss for all periods
presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 did not have an impact on Towne's financial
statements, as the Company operates in one business segment, electronic
transaction processing. Towne's operating business segments provide electronic
transaction processing for small business in-house accounts. The separate
businesses within Towne use Towne's central administrative offices for customer
support, centralized processing and sales support. In addition, Towne's sales
force markets all products within their assigned markets. Towne consequently
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 beginning June 16, 1988 and thereafter. SFAS
No. 133 cannot be
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applied retroactively; it must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997. The adoption of
SFAS No. 133 will not have a material impact on Towne's financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Towne does not use derivative financial instruments in its operations or
investments and does not have significant operations subject to fluctuations in
foreign currency exchange rates. Towne's $5.0 million credit facility has an
interest rate which is based, at the Company's election, upon the lender's prime
rate. As of March 31, 1999, no amounts were outstanding under this credit
facility and, therefore, Towne does not believe it has a significant risk due to
potential fluctuations in interest rates at this time. Changes in interest rates
which dramatically increase the interest rate on the credit facility would make
it more costly to borrow proceeds under that facility and may impede Towne's
acquisition and growth strategies if management determines that the costs
associated with borrowing funds are too high to implement these strategies.
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TOWNE SERVICES' MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their ages and terms of office as
of April 5, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
---- ---- ------------------------
<S> <C> <C>
Drew W. Edwards........................... 34 Chief Executive Officer and Chairman of
the Board of Directors
Henry M. Baroco........................... 55 President, Chief Operating Officer and
Director
Bruce F. Lowthers, Jr..................... 34 Senior Vice President and Chief Financial
Officer
Cleve B. Shultz........................... 31 Executive Vice President and Secretary
G. Lynn Boggs............................. 43 Director
Frank W. Brown............................ 45 Director
John W. Collins........................... 51 Director
J. Stanley Mackin......................... 66 Director
Joe M. Rodgers............................ 65 Director
John D. Schneider, Jr..................... 45 Director
J. Daniel Speight, Jr..................... 42 Director
Glenn W. Sturm............................ 45 Director
J. Stephen Turner......................... 52 Director
Bahram Yusefzadeh......................... 53 Director
</TABLE>
DREW W. EDWARDS is a co-founder and has been Chief Executive Officer and
Chairman of the Board of Directors of Towne since its formation. From 1990 until
forming Towne Services, Mr. Edwards served in various marketing and management
positions with The Bankers Bank which is headquartered in Atlanta, Georgia, most
recently as its Senior Vice President and Director of Sales and Marketing. The
Bankers Bank is a leading provider of correspondent banking services in the
southeastern United States. From 1987 to 1990, Mr. Edwards worked for the
Federal Reserve Bank of Atlanta. Mr. Edwards' term as a director expires in
2001.
HENRY M. BAROCO has been President, Chief Operating Officer and a director
of Towne since 1996. Mr. Baroco has over 30 years of experience with various
credit, leasing and lending organizations. Before joining Towne Services, Mr.
Baroco had been Senior Vice President and General Manager of the vendor finance
division of The CIT Group, Inc. since September 1995. From November 1993 to
September 1995, he served as Senior Vice President of Sales and Marketing for
Norwest Equipment Finance. From April 1991 to November 1993, Mr. Baroco was
Senior Vice President and General Manager of Sales and Marketing for LB Credit
Corporation. Mr. Baroco also worked in various capacities for GE
Capital -- Vendor Financial Services for over 18 years. Mr. Baroco's term as a
director expires in 2000.
BRUCE F. LOWTHERS, JR. has been Senior Vice President and Chief Financial
Officer of Towne since November 1997. Prior to joining Towne Services, Mr.
Lowthers had been Chief Financial Officer and Treasurer of Quest Group
International, Inc., a telecommunications company, since September 1994. From
June 1992 to September 1994, he was an audit manager with Ernst & Young, L.L.P.
Mr. Lowthers is a certified public accountant.
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CLEVE B. SHULTZ has been Executive Vice President of Towne since April
1998. He served as the Company's Senior Vice President from January 1996 to
April 1998. Prior to joining the Company, Mr. Shultz had been Vice
President -- Marketing at The Bankers Bank in Atlanta, Georgia since August
1993. Before joining The Bankers Bank, Mr. Shultz served as campaign director
for Representative John Linder's successful 1992 campaign for the U.S. House of
Representatives, 4th Congressional District of Georgia.
G. LYNN BOGGS is a co-founder and has been a director of Towne since its
formation. Mr. Boggs recently became a Senior Vice President of Investments for
The Bankers Bank which is headquartered in Atlanta, Georgia. Prior to this time,
he served as the Senior Vice President and branch manager of Vining-Sparks
Investment Banking Group, L.P., a fixed income broker-dealer to financial
institutions in Nashville, Tennessee, since June 1996. Mr. Boggs has been in the
securities industry for the past 15 years. From October 1994 to June 1996, he
was Senior Vice President-Investments at PaineWebber, Inc. in Nashville,
Tennessee. From March 1993 to October 1994, he was Senior Vice
President-Investments for Prudential Securities in Nashville. From 1989 to March
1993, he was Senior Vice President of Vining-Sparks. Mr. Boggs is on the
Advisory Board of Directors of The Bank of Green Hills in Nashville. Mr. Boggs'
term as a director expires in 2001.
FRANK W. BROWN has been a director of Towne since March 1998. Mr. Brown has
been a principal with Brown, Burke Capital Partners, Inc. since 1991. Brown,
Burke Capital Partners provides financial advisory services to
community-oriented financial institutions and middle market corporations in
connection with mergers and acquisitions and financing. He is also the Managing
Member of Capital Appreciation Management Company, L.L.C., which is the managing
general partner of Capital Appreciation Partners, L.P., an Atlanta-based
merchant banking fund, members of which are shareholders of Towne Services. From
1977 to 1991, Mr. Brown worked in various corporate finance and investment
banking positions with Bankers Trust Company, The First Boston Corporation and
The Robinson-Humphrey Company. Mr. Brown's term as a director expires in 1999.
JOHN W. COLLINS has been a director of Towne since its formation. Mr.
Collins is currently the Chairman of the Board of Directors and Chief Executive
Officer of The InterCept Group, Inc., a publicly-traded provider of
fully-integrated electronic commerce products and services for community
financial institutions. Mr. Collins has over 25 years of experience in multiple
areas of electronic commerce for community financial institutions. Prior to
co-founding The InterCept Group in 1996, he had served as a director and
executive officer of several of its predecessor companies and subsidiaries since
1986. Mr. Collins' term as a director expires in 2001.
J. STANLEY MACKIN has been a director of Towne since June 1998. Mr. Mackin
has been the Chairman of the Board of Directors of Regions Financial Corporation
since 1990 and served as its Chief Executive Officer from August 1990 to January
1998. Prior to joining Regions Financial as its President and Chief Operating
Officer in January 1990, Mr. Mackin had worked for Regions Bank since 1966. He
served as Chairman and Chief Executive Officer of Regions Bank from 1986 to
1990, as President and Chief Executive Officer from 1983 to 1986, and as head of
the commercial loan division from 1971 to 1983. Mr. Mackin's term as a director
expires in 1999.
JOE M. RODGERS has been a director of Towne since May 1998. He has been
Chairman of Rodgers Capital Group, a private investment company specializing in
merchant and investment banking, since February 1993. Mr. Rodgers served as
Chairman of the Board of Directors and Chief Executive Officer of Berlitz
International, Inc., a foreign language services company, from
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December 1991 to February 1993. From 1985 to 1989, Mr. Rodgers served as United
States Ambassador to France. Mr. Rodgers is also a director of AMR
Corporation/American Airlines, Inc.; American Constructors, Inc.; Gaylord
Entertainment Company; Gryphon Holdings, Inc.; Lafarge Corporation; SunTrust
Bank, Nashville, N.A.; Thomas Nelson, Inc.; Tractor Supply Company; and Willis
Corroon Group, PLC. Mr. Rodgers' term as a director expires in 2000.
JOHN D. SCHNEIDER, JR., has been a director of Towne since November 1998.
For the past 12 years, Mr. Schneider has served as a director, President and
Chief Executive Officer of Bankers Bancorp Inc., a bank holding company. He is a
director, President and Chief Executive Officer of Independent Bankers Bank and
Chairman of Bankers Bank Service Corporation, subsidiaries of Bankers Bancorp
Inc., in Springfield, Illinois. Mr. Schneider is also a director of Sullivan
Bancshares, Inc., First National Bank of Sullivan and Community Bank Mortgage
Corp. Mr. Schneider's term as a director expires in 1999.
J. DANIEL SPEIGHT, JR. has been a director of Towne since its formation.
Mr. Speight is the President, Chief Executive Officer and a director of FLAG
Financial Corporation, a bank holding company. He served as Chief Executive
Officer and a director of Middle Georgia Bankshares, Inc. from 1989 until its
merger with FLAG Financial in March 1998. He has been President, Chief Executive
Officer and a director of Citizens Bank, a subsidiary of FLAG Financial in
Vienna, Georgia, since 1984. Mr. Speight is currently vice-chairman of The
Bankers Bank and a member of the State Bar of Georgia. He is past Chairman of
the Georgia Bankers Association Community Banking Committee, past President of
The Community Bankers Association of Georgia and past director of the
Independent Bankers Association of America. Mr. Speight's term as a director
expires in 1999.
GLENN W. STURM has been a director of Towne since 1996. Mr. Sturm has been
a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P. since
1992, where he serves as Corporate Chairman and as a member of the executive
committee. Since 1996, Mr. Sturm has been a director of Phoenix International
Ltd., Inc., a publicly-held provider of client/server retail banking software to
financial institutions in the United States and abroad. He also has been a
director of The InterCept Group since 1997. Mr. Sturm's term as a director
expires in 2000.
J. STEPHEN TURNER has been a director of Towne since 1997. He has been the
Chairman of the Board of Directors and Chief Executive Officer of FNB Financial
Corp., a bank holding company, since 1990. Mr. Turner is also a director of
Farmers National Bank in Scottsville, Kentucky. He has also been the President
and Chief Executive Officer of Allen Realty Corporation in Nashville, Tennessee
since 1988. Mr. Turner's term as a director expires in 2000.
BAHRAM YUSEFZADEH has been a director of Towne since 1997. Mr. Yusefzadeh
has been Chairman of the Board of Directors and Chief Executive Officer of
Phoenix International Ltd., Inc. since its formation in 1993. Mr. Yusefzadeh has
over 28 years of experience in the banking software industry. He was a
co-founder of Nu-Comp Systems, Inc., where he developed the Liberty Banking
System and served as Nu-Comp's President and Chief Executive Officer from 1969
to 1986. Mr. Yusefzadeh also served as Chairman of the Board of Directors of
Broadway & Seymour, Inc. during 1986 and in various executive capacities for The
Kirchman Corporation from 1986 to 1992. Mr. Yusefzadeh's term as a director
expires in 1999.
Executive officers are appointed by the board of directors and other
officers are appointed by the executive officers. Officers serve at the pleasure
of the board of directors or the executive officer authorized to make the
appointment until their successors are chosen and qualified or until their
earlier resignation or removal.
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COMMITTEES OF THE BOARD OF DIRECTORS AND NOMINATIONS BY SHAREHOLDERS
We maintain three committees, an Audit Committee, a Compensation and Stock
Option Committee and an Executive Committee. The Audit Committee consists of
Messrs. Speight, Sturm, Turner and Yusefzadeh. The Compensation and Stock Option
Committee consists of Messrs. Boggs, Brown, Speight, Turner and Yusefzadeh. The
Executive Committee consists of Messrs. Boggs, Brown, Collins, Edwards, Sturm
and Yusefzadeh. At least two members of each of the audit and compensation
committees are non-employee independent directors.
We do not have a standing nominating committee. The board of directors
nominates candidates to stand for election as directors. Under our bylaws,
shareholders may make nominations for directors, but only if nominations are
delivered in writing to the Secretary no less than 60 and no more than 90 days
before the first anniversary of the previous year's annual meeting. Nominations
must also include the identity of the nominee and certain other information.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires executive officers and directors
and persons who beneficially own more than 10% of a registered class of equity
securities to file reports of securities ownership and changes in such ownership
with the Securities and Exchange Commission and NASDAQ. These persons also are
required to furnish us with copies of all Section 16(a) forms they file. Based
solely on review of the copies of such reports furnished and representations
that no other reports were required, we believe that, during fiscal 1998, our
executive officers, directors and greater than 10% beneficial owners complied
with all applicable Section 16(a) filing requirements, except John D. Schneider,
Jr., who failed to file a Form 3 in a timely manner upon his appointment to the
Board.
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TOWNE SERVICES' EXECUTIVE COMPENSATION
The following table sets forth information concerning the cash and non-cash
compensation during 1998 and 1997 earned by or awarded to the Chief Executive
Officer and to the other three executive officers whose combined salary and
bonus exceeded $100,000 during 1998 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
OTHER UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ---------------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Drew W. Edwards.......................... 1998 $150,000 $342,000 $ 7,380 170,000
Chief Executive Officer and 1997 $ 62,000 $100,000 $ 5,400 --
Chairman of the Board
Henry M. Baroco.......................... 1998 $150,000 $274,000 $10,272 170,000
President and 1997 $100,000 $ 50,000 $ 5,400 --
Chief Operating Officer
Bruce F. Lowthers, Jr.................... 1998 $125,000 $168,700 $ 5,400 120,000
Senior Vice President and 1997 $ 16,666 -- -- 300,000
Chief Financial Officer
Cleve B. Shultz.......................... 1998 $ 90,000 $114,000 $ 5,880 85,000
Executive Vice President 1997 $ 60,000 -- -- --
and Secretary
</TABLE>
- ---------------
(1) Represents automobile lease payments.
OPTION GRANTS AND EXERCISES DURING 1998
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE GRANT EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR PRICE DATE DATE 5% 10%
---- ---------- ------------ -------- ----- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Drew W. Edwards............. 170,000 20.7% $7.20 5/98 5/03 $338,169 $ 747,264
Henry M. Baroco............. 170,000 20.7% $7.20 5/98 5/08 $869,455 $2,617,436
Bruce F. Lowthers, Jr....... 120,000 14.6% $7.20 5/98 5/08 $613,200 $1,848,000
Cleve B. Shultz............. 85,000 10.4% $7.20 5/98 5/08 $434,350 $1,309,000
</TABLE>
- ---------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the term will
be assumed 5% and 10% levels or at any other defined level. Unless the
market price of the common stock appreciates over the option term, no value
will be realized from the option grants made to the executive officers.
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During 1998, 275,000 stock options were exercised by the Named Executive
Officers. The following table sets forth in formation with respect to each of
the Named Executive Officers concerning the value of all unexercised options
held by such individuals at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Drew W. Edwards................ 100,000 412,500 350,923 50,000 $1,170,047 $325,000
Henry M. Baroco................ 100,000 412,500 1,205,923 50,000 $6,878,547 $325,000
Bruce F. Lowthers, Jr.......... 75,000 337,500 195,000 150,000 $ 450,000 $900,000
Cleve B. Shultz................ -- -- 365,923 50,000 $1,820,047 $325,000
</TABLE>
- ---------------
(1) Represents the difference between the exercise price per share and the $7.00
per share market value of the common stock at December 31, 1998 as reported
on the Nasdaq National Market.
1998 STOCK OPTION PLAN
In May 1998, we adopted the Towne Services, Inc. 1998 Stock Option Plan.
The 1998 plan advances our interests 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
our 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 January 1, 1999, there are 2,500,000 shares available for
grant 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
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- otherwise materially increases the benefits to recipients of
incentive stock options.
1996 STOCK OPTION PLAN
In November 1996, we adopted the Towne Services, Inc. 1996 Stock Option
Plan. As of June 15, 1998, options to acquire 2,090,000 shares had been
authorized for issuance and options to acquire 1,728,400 shares were
outstanding. All of these options were issued at the fair market value of the
common stock as determined by the board of directors. Effective May 19, 1998, we
decided not to issue any additional options under this plan.
MANAGEMENT BONUS PLAN
Our compensation committee has discussed and approved a 1999 management
bonus plan. This plan creates a bonus pool of $750,000 which may be adjusted
from time to time by the compensation committee or board of directors. All
non-commission employees are eligible for a percentage of the pool based on
their seniority level, length of employment and overall performance. If the 1999
revenue goal is exceeded, the bonus pool will increase by $0.078 for every $1.00
beyond the budgeted revenue goal, provided that the corresponding margins are in
line with the budget.
If the bonuses are paid, executive officers will receive the following
percentages of the total bonus pool: Mr. Edwards, 20%; Mr. Baroco, 20%; Mr.
Lowthers, 13.5%; and Mr. Shultz, 13.5%. Bonuses are payable as follows: 12.5% of
the pool is payable following the end of each quarter if we meet our goals for
that quarter, and the remaining 50% of the pool is payable following the end of
the fiscal year if we have met our goals for the entire year. In addition, Mr.
Edwards and Mr. Baroco will each receive $50,000 in additional bonus for 1999.
EMPLOYMENT AGREEMENTS
Our four executive officers have entered into employment agreements with
us. The current principal terms of these agreements are summarized below.
Drew W. Edwards
- serves as Chairman of the Board and Chief Executive Officer;
- current base salary: $200,000, which may be increased periodically;
- term of three years, which renews daily for each day served;
- incentive compensation based upon achievement of criteria established by
board of directors;
- participates in stock option plans, receives health insurance, club dues,
automobile allowance and other benefits;
- Towne may terminate the agreement upon death or disability or for cause;
- the executive may terminate the agreement for any reason, including after
a change in control;
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- if the agreement is terminated by either party after a change in control,
other than for cause:
- the executive receives accrued compensation and bonus, and 1/12 of
his annual base salary and bonus each month for 36 months, and Towne
must continue his insurance benefits until death; and
- options held by the executive vest and become immediately
exercisable; and
- if the agreement is terminated for any reason, the executive has the
right to demand that we register his shares.
Henry M. Baroco
- serves as President and Chief Operating Officer;
- current base salary: $200,000, which may be increased periodically;
- term of two years, which renews daily for each day served;
- incentive compensation based upon achievement of criteria established by
board of directors;
- participates in stock option plans, receives health insurance, club dues,
automobile allowance and other benefits;
- Towne may terminate the agreement upon death or disability or for cause;
- the executive may terminate the agreement for any reason, including after
a change in control; and
- if terminated by either party after a change in control, other than for
cause:
- the executive receives accrued compensation and bonus, and 1/12 of
his annual base salary and bonus each month for 24 months, and Towne
must continue his insurance benefits until death; and
- options held by the executive vest and become immediately
exercisable.
Bruce F. Lowthers, Jr.
- serves as Chief Financial Officer;
- current base salary: at least $140,000, which may be increased
periodically;
- term of one year, which renews daily for each day served;
- Towne may terminate the agreement upon death or disability, without cause
if determined by the board of directors, or for cause;
- the executive may terminate the agreement if the company breaches the
agreement, if he is forced to relocate outside of the Atlanta
metropolitan area or at any time upon 30 days notice; and
- if the agreement is terminated by the executive prior to a change in
control for any reason other than Towne's material breach of the
agreement, Towne may repurchase all stock options owned by executive at
the greater of the price paid or the current fair market value.
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Cleve B. Shultz
- serves as Executive Vice President;
- current base salary: at least $140,000, which may be increased
periodically;
- term of one year, which renews daily for each day served;
- Towne may terminate the agreement upon death or disability or for cause;
- if the agreement is terminated by the executive prior to a change in
control for any reason other than Towne's material breach of the
agreement, Towne may repurchase all stock options owned by the executive
at the greater of the price paid or the current fair market value.
DIRECTOR COMPENSATION
Historically, upon initial election to the board of directors, each
non-employee director has received options to acquire 30,000 shares of common
stock. All of these options vested immediately. In addition, non-employee
directors were granted 20,000 options each in March 1998 and 2,500 options each
in December 1998. Directors are also paid $1,000 for attending meetings of board
committees and may be reimbursed for other expenses incurred in their capacity
as directors. Our board of directors is planning to present to the shareholders
for approval in May 1999 an option plan for non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On December 11, 1996, we entered into a $250,000 line of credit with
Citizens Bank, Vienna, Georgia, to fund our working capital needs. J. Daniel
Speight, Jr., a director, is the president and chief executive officer of
Citizens Bank. The interest rate for any borrowings under the line of credit was
9.25% per year, but no money was drawn on this line of credit. Drew W. Edwards,
Henry M. Baroco, Cleve B. Shultz, Thomas M. Bryan, G. Lynn Boggs, John W.
Collins and Glenn W. Sturm guaranteed this line of credit. In consideration of
their guarantees, we issued each of these directors and officers options to
acquire 71,400 shares of common stock at an exercise price of $0.50 per share.
This loan matured in December 1997 and was not renewed.
On June 3, 1997, we entered into a $250,000 line of credit with First
Federal Savings Bank of LaGrange, Georgia, to fund our working capital needs.
Mr. Speight is the president and chief executive officer and a director of FLAG
Financial Corporation, the holding company for First Federal Savings Bank of
LaGrange. The interest rate for this loan was the lender's prime rate, and there
were no borrowings under this line of credit. Messrs. Edwards, Baroco, Shultz,
Bryan, Boggs, Collins and Sturm personally guaranteed this loan. In
consideration of their guaranties, we issued each of these directors and
officers options to acquire 59,523 shares of common stock at an exercise price
of $0.60 per share. FLAG Financial Corporation is the bank holding company for
several of our customer banks and is one of our shareholders.
During 1998, Towne billed FLAG Financial Corporation $207,000 for set-up
fees and related processing related to FLAG's use of the TOWNE CREDIT and TOWNE
FINANCE systems.
On June 5, 1998, we entered into a loan with Citizens Bank borrowing
$500,000 to fund our acquisition of assets and liabilities from Credit
Collection Solutions, Inc. The loan was repaid in August 1998 using proceeds of
our initial public offering. We have from time to time obtained financing from
Citizens Bank for the purchase of specific furniture and equipment. The total
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amount borrowed under these term loans was $90,000 and interest rates for these
loans range from 9.25% to 12.0% per year.
On March 13, 1998, we entered into a Stock Purchase Agreement with Capital
Appreciation Partners, L.P. under which Capital Appreciation Partners purchased
15,000 shares of Series A preferred stock for $1.5 million. These preferred
shares were automatically converted into 1,217,903 shares of common stock upon
completion of our initial public offering. We granted registration rights with
respect to these shares. See "Shares Eligible for Future Sale." Frank W. Brown,
a director, is the managing member of the general partner of Capital
Appreciation Partners, and became a director as a result of the stock purchase.
In addition, Brown Burke Capital Partners, of which Mr. Brown is a partner,
purchased 100,000 shares of common stock at a price of $1.00 per share in
October 1997 and 50,000 shares of common stock upon the exercise of options at
an exercise price of $1.25 per share in March 1998. In 1998, we paid Brown,
Burke Capital Partners $112,500 for financial advisory services relating to the
acquisition of Banking Solutions, Inc.
We entered into a General Marketing Agent Agreement with Phoenix
International Ltd., Inc., dated as of June 5, 1998, under which Phoenix
International agrees to market our products and services to its bank customers.
Bahram Yusefzadeh, a director, is the Chairman of the Board and Chief Executive
Officer of Phoenix International and Glenn W. Sturm, a director and member of
our Compensation and Stock Option Committee and our Audit Committee, is also a
director of Phoenix International. During 1998, we invoiced Phoenix for $585,000
pursuant to this agreement and paid Phoenix $21,000 for commissions related to
sales of our products.
From November 1, 1995 through May 1, 1996 we borrowed $45,000 from each of
Mr. Boggs, a director and principal shareholder, and Mr. Bryan, a principal
shareholder. We executed promissory notes and loan agreements to evidence these
loans. Each of these loans accrued interest at the rate of 7% per year, and had
principal payments due on October 31, 1998, 1999 and 2000. Messrs. Boggs and
Bryan agreed to subordinate our obligations under these loans to our obligations
to our other creditors. As of December 1997, these loans were paid in full.
Thomas A. Bryan, who served as the chairman of the compensation committee
during 1997, served without compensation as our Treasurer and Secretary from our
inception in October 1995 until 1996.
On March 31, 1997, we loaned $450,000 to J. Stephen Turner, a director, to
fund the purchase of 450,000 shares of common stock. Interest accrued at 6.0%
per year until May 31, 1997 and 8.0% per year thereafter until paid. Mr. Turner
pledged the shares of common stock received upon this purchase as collateral for
the loan. Mr. Turner paid this note in full prior to May 31, 1997.
COMPENSATION/STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Notwithstanding anything to the contrary set forth in any of our previous
or future filings under the Securities Act of 1933 or the Securities Exchange
Act of 1934 that might incorporate all or any part of this proxy statement, the
following report and Stock Performance Chart will not be deemed to be
incorporated by reference into any such filings.
The Compensation and Stock Option Committee reviews and determines
executive compensation objective and policies and administers our benefit plans.
The committee reviews and sets the compensation of the chief executive officer
and other highly compensated executive officers.
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The principal objectives of our executive compensation program are to:
- attract, retain and motivate highly talented and productive
executives;
- provide incentives for superior performance by paying above-average
compensation; and
- align the interests of the executive officers with the interests of
the shareholders by basing a significant portion of compensation upon
company performance.
The executive compensation program consists of three components, each of
which serves a specific purpose: base salary, bonus and long-term incentive
compensation, like stock option grants. It is our policy to set all three
components above an average of other corporations selected on the basis of
certain factors. We believe that above-average compensation is necessary to
attract and retain the high caliber executives necessary to make our business
successful.
Base Salary
The committee annually reviews the salaries of executives. In setting base
salary levels, it considers competitive market conditions for executive
compensation, company performance and individual performance.
The measures of individual performance considered in setting 1998 salaries
included a number of quantitative and qualitative factors:
- historical and recent financial performance in the officer's area of
responsibility;
- progress toward non-financial goals within this area of
responsibility;
- individual performance;
- experience and level of responsibility; and
- other contributions made to our success.
The committee does not assign relative weights to these specific factors in
determining base salary levels, and the factors actually used may vary among
individual officers. As is typical for most corporations, payment of a base
salary is not conditioned upon the achievement of any specific, pre-determined
performance targets.
Bonus
Our cash bonus program seeks to motivate executive to work effectively to
achieve financial performance objectives and to reward them when those
objectives are met. Executive bonus payments are based upon our overall
profitability.
Long-term Incentive Compensation
We believe that option grants:
- align executives' interests with shareholders' interests by creating a
direct link between compensation and shareholder return;
- give executives a significant, long-term interest in our success; and
- help retain key executives in a competitive market for executive
talent.
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The 1998 Stock Option Plan authorizes the committee to grant stock options
to executives. Option grants are made from time to time to executives whose
contributions have or will have a significant impact on our long-term
performance. The determination of whether option grants are appropriate each
year is based upon performance measures established for each individual. Options
are not necessarily granted to each executive during each year. Generally,
options granted to executive officers vest in annual installments over a period
of three to four years and expire ten years from the date of grant.
Benefits
We believe that we must offer a competitive benefit program to attract and
retain key executives. During 1998, we provided medical and other benefits to
our executive officers that are generally available to our other employees.
Compensation of the Chief Executive Officer
The chief executive officer's compensation plan included the same elements
and performance measures as those of the other executive officers. The committee
believes that Mr. Edwards' total compensation reflects the unique contributions
that he makes to our long-term strategic performance. Mr. Edwards' salary for
1998 increased to $150,000 from $62,000 in 1997, and he was awarded a bonus of
$342,000. For 1999, the committee decided to increase Mr. Edwards' base salary
to $200,000. The committee believes that this increase is appropriate based upon
our financial performance, including earnings per share, revenue growth and cash
flow from operations.
Submitted by: G. Lynn Boggs
Frank W. Brown
J. Daniel Speight, Jr.
J. Stephen Turner
Bahram Yusefzadeh
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Stock Performance Graph
The chart below compares the cumulative total shareholder return on the
common stock with the cumulative total return on the Nasdaq (U.S. Companies)
Index and the Nasdaq Computer and Data Processing Services Index for the period
commencing July 31, 1998 (the first date of trading of the common stock as a
result of our initial public offering) and ending December 31, 1998, assuming an
investment of $100 and the reinvestment of any dividends. The base price for the
common stock is the initial public offering price of $8.00 per share. The
comparisons in the graph below are based upon historical data and are not
indicative of, nor intended to forecast, future performance of the common stock.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year
Covered) Towne Services, Nasdaq Nasdaq
Inc. (U.S. Companies) (Computer & Data
Processing Services)
<S> <C> <C> <C>
7/31/98 100 100 100
12/31/98 88 118 126
</TABLE>
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information, as of April 5, 1999, concerning
the beneficial ownership of common stock by: (i) each person or entity known by
Towne to beneficially own more than 5% of the outstanding common stock; (ii)
each director; (ii) each Named Executive Officer; and (iv) all directors and
executive officers as a group. The information in the table is based on
information from the named persons regarding their ownership of common stock.
Unless otherwise indicated, each of the shareholders has sole voting and
investment power with respect to the shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NATURE OF COMMON
BENEFICIAL STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OUTSTANDING
--------------------------------------- ------------ -----------
<S> <C> <C>
Drew W. Edwards(3).......................................... 2,033,830 10.1%
Henry M. Baroco(4).......................................... 1,761,133 8.4%
Bruce F. Lowthers, Jr.(5)................................... 346,893 1.7%
Cleve B. Shultz(6).......................................... 677,935 3.4%
G. Lynn Boggs(7)............................................ 1,713,423 8.6%
Frank W. Brown(8)........................................... 395,833 2.0%
John W. Collins(9).......................................... 515,123 2.6%
J. Stanley Mackin(10)....................................... 52,500 *
Joe M. Rodgers(11).......................................... 274,148 1.4%
John D. Schneider, Jr.(12).................................. 37,500 *
J. Daniel Speight, Jr.(13).................................. 454,200 2.3%
Glenn W. Sturm(14).......................................... 357,404 1.8%
J. Stephen Turner(15)....................................... 555,000 2.8%
Bahram Yusefzadeh(16)....................................... 105,000 *
Thomas A. Bryan(17)......................................... 1,697,598 8.5%
SAFECO Asset Management Company(18)......................... 953,000 4.8%
SAFECO Corporation(19)...................................... 1,055,000 5.3%
All directors and executive officers as a group(14
persons).................................................. 9,279,922 41.1%
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated below, the address of the beneficial owners of
more than 5% of our common stock is in care of Towne Services, Inc., 3295
River Exchange Drive, Suite 350, Norcross, Georgia 30092.
(2) The percentage of shares beneficially owned includes common stock of which
the person has the right to acquire beneficial ownership within 60 days of
April 5, 1999, including but not limited to by exercise of an option;
however, this common stock is not deemed outstanding for the purpose of
computing the percentage owned by any other person.
(3) Includes currently exercisable options to purchase 350,923 shares of common
stock and 5,500 shares owned by Mr. Edwards' spouse. Mr. Edwards disclaims
beneficial ownership of his spouse's shares.
(4) Includes currently exercisable options to purchase 1,205,923 shares of
common stock.
(5) Includes currently exercisable options to purchase 195,000 shares of common
stock.
(6) Includes currently exercisable options to purchase 365,923 shares of common
stock.
(7) Includes currently exercisable options to purchase 203,423 shares of common
stock.
(8) Includes (a) 150,000 shares of common stock held by Brown, Burke Capital
Partners, Inc., of which Mr. Brown is a principal, (b) 25,047 shares of
common stock held by Capital Appreciation Partners, L.P. of which Mr. Brown
is the managing member of the managing general partner and (c) options to
acquire 2,500 shares of common stock.
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(9) Includes (a) 331,700 shares of common stock held by Mr. Collins, (b) 50,000
shares of common stock held by The Intercept Group, Inc., of which Mr.
Collins is Chief Executive Officer, Chairman of the Board and a significant
shareholder and (c) option to acquire 133,423 shares of common stock held
by Mr. Collins. Mr. Collins disclaims beneficial ownership with respect to
the shares held by The Intercept Group, Inc.
(10) Includes options to acquire 52,500 shares of common stock.
(11) Includes (a) option to acquire 52,500 shares of common stock, (b) 200,000
shares of common stock held by Rodgers Capital Group, L.P., of which Mr.
Rodgers is a partner, and (c) warrants to acquire 21,648 shares of common
stock.
(12) Includes currently exercisable options to purchase 37,500 shares of common
stock.
(13) Includes (a) 361,700 shares of common stock held by FLAG Financial
Corporation, of which Mr. Speight is Chief Executive Officer, President and
a director and (b) options to acquire 92,500 shares of common stock.
(14) Includes currently exercisable options to purchase 2,500 shares of common
stock.
(15) Includes currently exercisable options to purchase 55,000 shares of common
stock.
(16) Includes (a) 50,000 shares owned by the Yusefzadeh Family Limited
Partnership, for which Mr. Yusefzadeh is the general partner, (b) 38,400
shares owned by Mr. Yusefzadeh's children and (c) options to acquire 2,500
shares of common stock.
(17) Includes 24,000 shares owned by Mr. Bryan's minor children and currently
exercisable options to purchase 132,598 shares of common stock. Mr. Bryan
is a co-founder and served as a director from 1995 to 1998.
(18) As reported by SAFECO Asset Management Company in a Statement on Schedule
13G filed with the Securities and Exchange Commission (the "Commission") as
of December 31, 1998. In its Statement on Schedule 13G, SAFECO Asset
Management Company reports that it is an investment advisor registered
under Section 203 of the Investment Advisers Act of 1940 to several
registered investment companies. SAFECO Asset Management Company's address
is 601 Union Street, Suite 2500, Seattle, WA 98101.
(19) As reported by SAFECO Corporation in a Statement on Schedule 13G filed with
the Commission as of December 31, 1998. In its Statement on Schedule 13G,
SAFECO Corporation reports that it is a parent holding company in
accordance with Rule 13d-1(b)(ii)(G) to a subsidiary which serves an
investment advisor to several registered investment companies. SAFECO
Corporation's address is SAFECO Plaza, Seattle, WA 98185.
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TOWNE SERVICES' CERTAIN TRANSACTIONS
The information provided below summarizes certain transactions and
relationships during the past three years among Towne and its directors,
executive officers and shareholders owning more than 10% of our common stock.
LOAN FACILITIES
On December 18, 1997, we entered into a loan facility and issued a stock
purchase warrant to Sirrom Investments, Inc. Pursuant to this warrant, Messrs.
Edwards, Baroco and Shultz agreed, with certain exceptions, not to sell any of
their shares of common stock in Towne without first offering Sirrom Investments
the right to sell stock on the same terms. These co-sale rights terminated upon
completion of our initial public offering.
CERTAIN ISSUANCES OF STOCK AND WARRANTS
On October 21, 1997, we issued warrants to purchase a total of 75,000
shares of common stock at an exercise price of $1.00 per share to Joe M.
Rodgers, a director of Towne, and three other individuals who are principals of
Rodgers Capital Group, L.P. in consideration of professional services provided
by these individuals to us in connection with certain marketing efforts. As part
of such issuance, Mr. Rodgers received a warrant to purchase 21,648 shares of
common stock. Rodgers Capital Group also purchased 200,000 shares of Towne
common stock in October in 1997 at a price of $1.00 per share. In addition, we
paid Rodgers Capital a total of $220,000 as compensation for services provided
by Rodgers Capital during 1997 in connection with obtaining equity investments
for us. In connection with the Forseon merger, we have agreed to pay Rodgers
Capital a total of $300,000 for rendering advisory services and a fairness
opinion. We have also retained Rodgers Capital for advisory services related to
possible future acquisitions and have agreed to pay them $4,000 per month plus
costs and expenses for these services.
MANAGEMENT LOANS
In October 1998, we loaned our Chief Executive Officer, Drew W. Edwards,
$50,000 to exercise options to acquire 100,000 shares of our common stock. The
promissory note is full recourse and accrues interest at the rate of 8.5% per
year. The note matures on the earlier of February 2000 or the date on which Mr.
Edwards sells the common stock purchased with proceeds of the note.
In September 1997, we loaned our President and Chief Operating Officer,
Henry M. Baroco, $78,990 to exercise options to acquire 263,300 shares of our
common stock. In October 1998, we loaned Mr. Baroco an additional $30,000 to
exercise options to acquire 100,000 shares of our common stock. The promissory
notes are full recourse and accrue interest at the rate of 8.5% per year. The
1997 note matures on the earlier of September 8, 1999 or the date that Mr.
Baroco sells the common stock purchased with proceeds of the note. The 1998
promissory note matures on the earlier of February 2000 or the date on which Mr.
Baroco sells the common stock purchased with proceeds of the note. Mr. Baroco
pledged the shares of common stock received upon exercise of these options and
other personal assets as collateral for the loans.
In April 1998, we loaned our Chief Financial Officer, Bruce F. Lowthers,
Jr., $75,000 to exercise options to acquire 75,000 shares of our common stock.
This note is also full recourse and accrues interest at the rate of 8.75% per
year. The note matures on the earlier of December 31, 1999 or the date on which
Mr. Lowthers sells the common stock purchased with
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proceeds of the note. Mr. Lowthers pledged the shares of common stock received
upon this exercise and other personal assets as collateral for the loan.
OTHER TRANSACTIONS AND RELATIONSHIPS
During the year ended December 31, 1997, we incurred costs of $37,000 for
rent on office space leased from ProVesa, Inc., a subsidiary of The InterCept
Group. We also paid approximately $25,000 for utilities and accounting services
provided by The InterCept Group. During 1998, we incurred costs of $121,000 for
communications services provided by InterCept Communications Technologies, Inc.,
a subsidiary of The InterCept Group, Inc. Mr. Collins, a director, is the Chief
Executive Officer and Chairman of the Board of Directors of The InterCept Group
and Mr. Sturm, a Towne director, is also a director of The InterCept Group. On
June 23, 1998, Towne and The InterCept Group entered into a strategic marketing
agreement under which the parties agreed to jointly offer certain on-line
services to Towne's business customers.
Certain transactions with our officers, directors and principal
shareholders may be on terms more favorable to such persons than they could
obtain in a transaction with an unaffiliated party. Since our initial public
offering, we require that all material transactions with our officers, directors
and other affiliates be on terms no less favorable to us than could be obtained
from unaffiliated third parties and must be approved by both a majority of the
board and a majority of the disinterested directors.
FORSEON'S BUSINESS
GENERAL
Forseon provides 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. These products and services often improve our business customers'
ability to compete with larger chain retailers by providing automated processing
and business management capabilities similar to those used by these larger
competitors. Forseon's management reports assist its customers in developing and
implementing their merchandising strategies as well as receivables management
and marketing plans.
Forseon's business was founded in 1955 and merged with another business in
1981 to form Retail Merchandising Service Automation, Inc. In 1987 we acquired
Charter Data Systems, Inc. as a wholly owned subsidiary. In January 1996, the
company changed its name to Forseon Corporation, although it continues to use
Retail Merchandising Service Automation, or RMSA, as a trade name. Forseon's net
revenues for the 12 months ended December 31, 1998 were $11.8 million.
Forseon targets 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. These small
businesses typically have annual revenues of less than $10 million. We believe
our products and services are well-suited to assisting these businesses manage
and grow their operations.
PRODUCTS AND SERVICES
Forseon has two primary products: the RMSA Forecast and the Charter System.
These products are sold and implemented by a team of merchandising analysts who
also work with the
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retailers on an ongoing basis to interpret the data generated by the RMSA
Forecast and the Charter System. The analyst is instrumental in assisting the
retailer in understanding the forecast and in developing action plans designed
to improve their business performance.
The RMSA Forecast
We develop each customized RMSA Forecast using a combination of data
supplied by the customer coupled with proprietary business models developed by
Forseon. The RMSA Forecast enables our business customers to manage 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 on order but not yet delivered and
merchandise received. This data is collected monthly and transmitted to
Forseon's computer system, which contains historical information such as sales,
markdowns and merchandise receipts, for each individual business customer.
Merchandise forecasting models for the particular industry, geographical, 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 information provided allows these businesses to improve profitability
by effectively managing markups, markdowns, proper flow of receipts and
inventory, cost of goods sold and sales at retail. Importantly, all of this also
helps the business manage its cash flow.
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 Forseon 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
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designed to enable the retailer to collect detailed information ranging from
vendor preferences to customer's birthdays.
SALES AND MARKETING
Forseon's sales and marketing efforts are conducted by 60 analysts covering
customers in 28 states. The analysts play two important roles -- they are
business consultants for our existing clients and they are also salesmen in
promoting our products and services to potential new customers.
Forseon's analysts have first hand experience in retail, with many having
owned their own retail business. The majority of the analysts have been with
Forseon for over ten years. Each analyst has an average of between 15 and 20
clients that they are responsible for supporting.
Forseon executes a number of marketing programs to create awareness and
reinforce the recognition of the trade name, RMSA. Various trade shows, direct
mail, published articles, advertising, telesales, and the RMSA website, play an
integral role in keeping the RMSA name known in the marketplace. We also provide
industry trend reports, which we use as direct mail marketing pieces.
Forseon maintains working relationships with numerous associations that
serve as sources of new business. For example, we have entered into marketing
relationships with three college bookstore associations and a golf club
management company, pursuant to which these groups recommend our services to
their members. We intend to seek new relationships with similar organizations
that service our target customer businesses across the United States.
COMPETITION
We believe that many retailers view forecasting as something that they can
do themselves, and are reluctant to relinquish that responsibility to an
"outsider." Forseon competes with numerous companies that provide comparable
business products and services across the country. In addition, it would not be
difficult for other companies to acquire or develop additional competitive
products or for new companies to enter into business in our industry. These
competitors could have, and certain of our existing competitors do have, some
key advantages over Forseon, including:
- substantially greater revenues and resources;
- the ability to adapt quickly to new technologies and change in customer
demands; and
- larger and more established customer bases and operations.
EMPLOYEES
As of April 5, 1999, Forseon had 132 employees, including 58 analysts, 24
in sales, service and marketing, 27 in processing, 5 in research and
development, and 18 in general and administrative capacities. None of Forseon's
employees is represented by a labor union or is subject to a collective
bargaining agreement. Forseon believes that its employee relations are
satisfactory, and has not experienced any work stoppage from any labor dispute.
PROPERTIES
Forseon occupies approximately 18,000 square feet of space in two buildings
at its headquarters in Riverside, California. The main building is 12,000 square
feet and is owned by
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Forseon. The second building is 6,000 square feet and is a month-to-month
rental. Forseon also leases office space in Seattle, Washington, Dallas, Texas,
New York, Phoenix, Arizona and Bristol, Tennessee, primarily for sales and
service use. Forseon believes that its existing facilities are adequate for its
current needs and that suitable additional space will be available as needed.
LEGAL PROCEEDINGS
In the ordinary course of business, Forseon and its subsidiary may become
involved in legal proceedings from time to time. As of the date of the mailing
of this proxy statement/prospectus, we are not a party to any pending legal
proceedings that we believe are material.
PROPRIETARY RIGHTS
Forseon's success is heavily dependent upon our proprietary software
technology. We currently rely on a combination of trade secret, copyright and
trademark laws, and contractual provisions to protect our proprietary rights in
our software products. We generally enter into proprietary information and
confidentiality agreements with our employees and distributors, and limit access
to and distribution of our software, documentation and other proprietary
information. Generally, we do not license or release the source code for our
proprietary software to our customers. However, unauthorized parties may attempt
to obtain and use information we regard as proprietary, despite our efforts to
protect them. Third parties may claim that our current or future products and
services infringe proprietary rights of these parties. We cannot guarantee that
we will prevail with respect to any such claims.
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FORSEON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Forseon's consolidated financial statements and related notes appearing
elsewhere in this proxy statement/ prospectus.
OVERVIEW
Forseon's revenues are primarily generated through initial set-up fees and
recurring monthly processing fees. These fees are largely derived from our two
main products -- the RMSA Forecast and the Charter System.
Management believes the prices charged for both its set-up and processing
fees are based upon the relative fair value of the related services provided.
Accordingly, Forseon recognizes these fees as the related services are provided.
Initial set-up fees and monthly processing fees vary based upon the number of
classifications of merchandise processed each month and the number of stores the
customer operates. Initial set-up fees are recognized upon execution of the
related contract and include charges for initial processing of data and related
analysis.
The Charter System generates initial set-up fees and monthly support and
rental fees. Telephone and software support services are included in the monthly
support and rental fees. Forseon recognizes revenues on perpetual software
license fees upon delivery of the software to the customer, including completion
of training, or if appropriate, upon settlement of any significant
contingencies.
Costs of processing include costs related to processing of customer data,
including payroll and benefit expenses and information systems supplies.
Research and development expense consists of salaries and related personnel
costs, including costs for employee benefits, computer equipment and support
services, used in product and technology development. During the three fiscal
years ended June 30, 1998, Forseon has expensed all research and development
costs as incurred, as the products have not reached technological feasibility
under Statement of Financial Accounting Standards ("SFAS") No. 86 until released
for marketing.
Sales, servicing and marketing expenses consist primarily of salaries and
commissions, travel expenses, advertising, trade show expenses and costs of
marketing materials.
Employee Stock Ownership Plan expense consists of Forseon's discretionary
contributions to the ESOP.
General and administrative expenses consist of salaries and related
personnel and employee benefits costs of administrative officers and staff, in
addition to professional fees, facilities costs and general operating expenses.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Forseon's revenues decreased from $6.0 million for the six
months ended December 31, 1997 to $5.8 million for the six months ended December
31 1998. Recurring revenues accounted for 87% of total revenues in both periods.
The decrease in revenues was primarily due to slightly greater than normal
client attrition, believed by Forseon to be temporary in nature.
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Costs of Processing. Costs of processing decreased from $1.2 million for
the six months ended December 31, 1997 to $1.1 million for the six months ended
December 31, 1998, representing 19% of revenues for both periods.
Research and Development. Research and development expense decreased from
$436,000 for the six months ended December 31, 1997 to $370,000 for the six
months ended December 31, 1998. These expenses represent 7% and 6% of total
revenue respectively. The decrease in research and development expense is a
result of projects nearing completion during the six months ended December 31,
1997 and a reduction of new development projects.
Sales, Servicing and Marketing. Sales, servicing and marketing expense
decreased from $3.6 million for the six months ended December 31, 1997 to $3.4
million for the six months ended December 31, 1998, representing 60% of revenues
for both periods.
General and Administrative. General and administrative expense decreased
from $796,000 for the six months ended December 31, 1997 to $760,000 for the six
months ended December 31, 1998, representing 13% of revenues for both periods.
Income Tax Provision. The income tax provision expense increased from $0
for the six months ended December 31, 1997 to $30,000 for the six months ended
December 31, 1998. This increase reflects an increase in income (loss) before
income tax provision resulting from a $9,000 net operating loss for the six
months ended December 31, 1997 to $61,000 in operating income after interest
expense for the six months ended December 31, 1998.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1998
Revenues. Forseon's revenues decreased from $12.1 million in fiscal year
1997 to $12.0 million in fiscal year 1998, a decrease of less than 1%. Recurring
revenues accounted for 84% and 87% of these revenues, respectively. The decrease
in revenues was a result of lower license fees and other non-recurring revenues
in fiscal year 1998.
Costs of Processing. Costs of processing decreased from $2.6 million in
1997 to $2.3 million in 1998. Processing expenses were 22% of revenues in 1997
and 19% of revenues in 1998. Decreases were primarily the result of reassignment
of personnel to sales, servicing and marketing and research and development
functions and reduced salaries and employee benefits costs as certain operating
efficiencies were realized.
Research and Development. Research and development expense increased from
$620,000 for the year ended June 30, 1997 to $801,000 for the year ended June
30, 1998. These expenses were 5% and 7% of total revenues respectively. This
expense increase is primarily due to an increase in the number of projects
undertaken during 1998.
Sales, Servicing and Marketing. Sales, servicing and marketing expense
increased from $6.8 million in 1997 to $7.3 million in 1998. These expenses were
57% of total revenues for 1997 and 61% of total revenues for 1998. This increase
was a result of a more aggressive marketing effort to promote sales through an
increase in sales staff, marketing materials, incentive programs and trade
shows.
General and Administrative. General and administrative expenses increased
from $1.4 million in 1997 to $1.7 million in 1998, representing 12% of revenues
for 1997 and 15% of revenues for 1998. The increase is primarily due to
increased administrative payroll costs, the hiring of additional administrative
staff to support our products, and increased use of legal services and other
consultants.
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Income Taxes. For the fiscal year 1998, Forseon recognized an income tax
benefit of $34,000 as a result of a net operating loss ("NOL"). Forseon has a
NOL carryforward of approximately $111,000 for Federal income tax purposes,
which if not used, will expire in 2013.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND 1997
Revenues. Forseon's revenues increased from $11.7 million in 1996 to $12.1
million in 1997. Recurring revenues accounted for 85% and 84% of these revenues,
respectively. New clients were added throughout 1997.
Costs of Processing. Costs of processing increased from $2.4 million in
1996 to $2.6 million in 1997, representing 21% of revenues for both 1996 and
1997.
Research and Development. Research and development expense declined from
$783,000 in 1996 to $620,000 in 1997, representing 7% of revenues in 1996 and 5%
of revenues in 1997. In 1996, Forseon primarily relied on consultants for its
research and development efforts. In late 1996 and continuing on through 1997,
Forseon created an internal software development staff to perform its research
and development efforts, resulting in reduced costs.
Sales, Servicing and Marketing. Sales, servicing and marketing expense
increased from $6.5 million in 1996 to $6.8 million in 1997, representing 56% of
revenues for both 1996 and 1997.
General and Administrative. General and administrative expense increased
from $1.3 million in 1996 to $1.4 million in 1997, representing 12% of revenues
for 1996 and 1997.
Income Tax Provision. The income tax provision expense increased from
$233,000 in 1996 to $241,000 in 1997. Forseon's effective tax rate decreased
from 49% in 1996 to 44% in 1997, as a result of lower effective state income tax
rates.
While Forseon's past net operating results have been fairly constant, a
number of factors could cause our future operating results to fluctuate
significantly. These factors include: increased competition, timing of new
product announcements, pricing changes by Forseon or its competitors, length of
sales cycles, market acceptance or delays in the introduction of new products or
versions, seasonal factors and economic conditions generally and in the retail
industry specifically.
LIQUIDITY AND CAPITAL RESOURCES
Forseon's operating activities provided cash of $102,000, $658,000 and
$265,000 during 1998, 1997 and 1996, respectively. During 1998, the net loss of
$178,000 was offset by a decrease in accounts receivable of $108,000. Cash was
provided by operating activities in 1997 primarily as a result of net income. In
1996, cash was provided by operating activities primarily through net income for
the period and an increase in accounts payable due to timing differences of
vendor payments offset by a decrease in accrued expenses.
Cash used in investing activities consisted of capital expenditures of
$106,000, $264,000 and $266,000 for 1998, 1997, and 1996, respectively.
Cash used in financing activities was $277,000, $508,000 and $247,000 for
1998, 1997 and 1996, respectively. During 1998, cash used in financing
activities was primarily a result of the principal payments of long-term debt.
Financing activities in 1997 consisted primarily of the Forseon's repurchase of
common stock and principal payments of long-term debt offset by proceeds of
$733,000 from long-term debt. During 1996, cash used in financing activities was
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primarily a result of the repurchase of common stock and the payments of
long-term debt partially offset by the issuance of common stock.
Under the terms of Forseon's ESOP and other agreements with certain
shareholders, Forseon has committed to repurchase outstanding shares of common
stock. Generally, Forseon may require shareholders electing to sell common stock
to be paid in monthly installments over two to five years, plus interest.
Forseon believes its internally generated funds and its cash and cash
equivalents balance at December 31, 1998 will be sufficient to fund its
requirements for working capital for the foreseeable future.
EFFECTS OF ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. There is no difference between net income (loss) and
comprehensive income loss for the Company.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 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 and annual financial reports issued to shareholders. SFAS
No. 131 is effective for financial statements issued for periods beginning after
December 15, 1997. The Company operates principally in one business segment;
accordingly, the adoption of SFAS No. 131 will not have an impact on the
consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Startup
Activities." This SOP No. 98-5 requires that costs incurred during startup
activities, including organization costs, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Initial application of the SOP No. 98-5 should be as of the beginning of
the fiscal year in which the SOP is first adopted and should be reported as a
cumulative effect of a change in accounting principles. Adoption of SOP No. 98-5
will not have a material impact on the consolidated financial statements.
In 1998, the FASB issued Statement of Financial Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
modifies the accounting for derivative and hedging activities and is effective
for fiscal years beginning after December 15, 1999. Adoption of SFAS No. 133
will not have a material impact on the consolidated financial statements.
SOP No. 97-2, "Software Revenue Recognition" was issued in October 1997 and
addresses software revenue recognition matters. The SOP No. 97-2 supersedes SOP
No. 91-1 and is effective for transactions entered into for fiscal years
beginning after December 15, 1997. Based upon its reading and interpretation of
SOP No. 97-2 the Company believes its current revenue recognition policies and
practices are materially consistent with the SOP No. 97-2. However,
implementation guidelines for this standard have not yet been issued and a wide
range of
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potential interpretations are being discussed by the accounting profession. Once
available, such implementation guidance could lead to unanticipated changes in
the Company's current revenue accounting practices, and such changes could
materially adversely affect the Company's future revenue and earnings. Such
implementation guidance may necessitate substantial changes in the Company's
business practices in order for the Company to continue to recognize a
substantial portion of its license fee revenue upon delivery of its software
products. Such changes may reduce demand, extend sales cycles, increase
administrative costs and otherwise adversely affect operations.
EFFECTS OF THE YEAR 2000
The Year 2000 issue is the result of computer systems and other equipment
with software applications or processors that use fewer than four digits to
identify a year. If not corrected, many computer systems and date sensitive
equipment could fail or create erroneous results before, during and after the
Year 2000. We utilize information technology systems, such as mainframes and
proprietary databases and software, and non-information technology devices,
which may contain embedded processors. Both information technology systems and
non-information technology devices are susceptible to potential failure due to
the Year 2000 issue.
Forseon adopted a Year 2000 plan in 1997. The plan consists of assessing,
remediating and testing our information technology and non-information
technology systems. We are reliant on certain information technology systems
including the Charter System software, which is licensed to customers, and our
mainframe-based forecasting system. We have completed the remediation and
testing of the Charter System, and 98% of our clients are now using the
remediated version. The remaining 2% of our clients are unable to use the
remediated version at this time because they have not completed necessary
hardware upgrades. We believe the mainframe-based forecasting system we employ
in our forecasting services has been remediated. The mainframe-based forecasting
system is currently being tested and we estimate that testing will be complete
by April 30, 1999. Following the completion of successful testing, we will put
the remediated mainframe-based forecasting software into production.
We transmit data to and from our clients electronically. We have tested
such electronic data transmissions and reasonably expect that they will function
normally after the Year 2000, however, a failure of such data transmissions
could negatively impact our ability to operate. We also use certain third party
software such as Microfocus software development tools and Windows in our
operations. We have not yet assessed whether such third party software presents
a Year 2000 risk. We plan to complete such assessment by July 1, 1999. We have
completed assessment of our workstations and have determined that no more than
approximately 30 workstations require replacement due to Year 2000 problems.
We are in the process of assessing any Year 2000 risks presented by
non-information technology devices and systems. Our phone, facsimile and
reproduction equipment have been tested and found to be compliant.
We are dependent on certain key suppliers for services such as shipping and
hardware maintenance. We are currently assessing the Year 2000 compliance of our
critical suppliers and cannot provide any assurance that our suppliers will
resolve, in a timely manner, all Year 2000 issues with their systems and
devices.
We have used internal resources to implement our Year 2000 plan. To date,
we have spent approximately $125,000 for programming required by Year 2000
issues. This amount does not include the cost of employee benefits, computer
time, and the salaries of computer operators,
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customer support personnel, account specialists and planners who have also
assisted with our Year 2000 efforts. Expenditures to date have been paid from
our income. In order to complete our Year 2000 efforts in a timely manner, we
have had to defer other information technology projects such as the enhancement
and conversion of the Charter System from DOS to Windows, which may have had a
negative impact on our financial condition and results of operations. We
estimate spending up to an additional $100,000 to complete our Year 2000
efforts. $30,000 of this amount will be for additional remediation by
programmers, and up to $70,000 will be for the replacement of non-compliant
workstations. Expectations about future Year 2000-related costs are subject to
various uncertainties that could cause the actual results to differ materially
from our expectations, including:
- our success in identifying systems and programs that are not Year 2000
ready;
- the nature and amount of programming required to upgrade or replace the
affected programs;
- the availability, rate and magnitude of related labor and any consulting
costs; and
- the success of our business partners, vendors and clients in addressing
the Year 2000 issue.
Our Year 2000 program is subject to a variety of risks and uncertainties,
some of which are beyond our control. Those risks and uncertainties include, but
are not limited to, the Year 2000 readiness of third parties, the Year 2000
compliance of systems and equipment provided by our suppliers, and our ability
to timely correct the Year 2000 issues we have identified. We have identified
certain risks, such as the possible Year 2000 failure of our shipping and
telecommunications providers, or our possible failure to timely remediate our
mainframe system which could negatively impact our operations. We will continue
to analyze the risks presented by the Year 2000. Although we are taking steps to
reduce these risks, we cannot provide assurance that we will achieve Year 2000
readiness.
We are developing contingency plans to address Year 2000 issues that may
present a significant risk. This is an ongoing process as we continue to
identify the risks presented. These contingency plans will include, but not be
limited to, manual processing of shipments, identifying alternate suppliers, and
the possibility of purchasing an alternate mainframe computer and operating
system. We plan to complete our contingency planning by July 1, 1999. However,
we cannot provide any assurance that any contingency plan we implement will be
successful or adequate to meet our needs without materially altering our
operations or financial results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Forseon does not use derivative financial instruments in its operations or
investments and does not have significant operations subject to fluctuations in
foreign currency exchange rates. Forseon does not have debt with variable
interest rates and, therefore, is not subject to interest rate risks.
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STOCK OWNED BY FORSEON MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of Forseon's common stock as of May , 1999, the record date of the
special meeting, by (i) each person who is known by Forseon to own beneficially
more than 5% of its common stock, (ii) each director, (iii) each of the
executive officers and (iv) all directors and executive officers as a group.
Except as otherwise noted, Forseon knows of no agreements among its shareholders
which relate to voting or investment power over its common stock.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) PERCENT
- --------------------------------------- ------------ -------
<S> <C> <C>
Dan Paul.................................................... 91,057(3) 13.45%
Allen Merrill............................................... 33,350(4) 5.43
H. Joseph Smith............................................. 27,850(5) 4.25
Russell Oliver.............................................. 27,336(6) 4.25
James A. Dixon.............................................. 12,234(7) 1.88
Louis A. Delmonico.......................................... 6,400(8) *
Ken Bankson................................................. 4,139(9) *
Robert Grotte............................................... 0 0
Trust for Forseon Employee Stock Ownership Plan............. 342,368 53.32
All executive officers and directors as a group (8
persons).................................................. 175,030(10) 24.52
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address of stockholder is c/o Forseon
Corporation, 6600 Jurupa Avenue, Riverside, CA 92504.
(2) Unless otherwise indicated, the persons named in the table have sole voting
and investment power with respect to all shares shown as beneficially owned
by them, subject to community property laws where applicable. The shares of
common stock shown as beneficially owned include stock options exercisable
on or within 60 days after May , 1999.
(3) Includes 35,000 shares under stock options that are currently exercisable.
Also includes 3,336 shares held by Mr. Paul's wife through the ESOP.
(4) Includes 9,500 shares under stock options that are currently exercisable.
(5) Includes 12,500 shares under stock options that are currently exercisable.
(6) Includes 1,000 shares under stock options that are currently exercisable.
(7) Includes 7,000 shares under stock options that are currently exercisable.
(8) Consists of 6,400 shares under stock options that are currently exercisable
(9) Includes 1,400 shares under stock options that are currently exercisable.
(10) Includes 72,800 shares under stock options that are currently exercisable.
FORSEON'S CONTINUING EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of Forseon who will continue as executive
officers of Forseon after the merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dan Paul.................................. 55 President, Chief Executive Officer and
Chairman of the Board of Directors
Allen Merrill............................. 45 Senior Vice President -- Finance and
Administration, Chief Financial Officer,
Secretary and Treasurer
</TABLE>
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DAN PAUL is President, Chief Executive Officer and Chairman of Forseon. He
joined Forseon in 1968 as a retailing analyst after owning his own retail
stores. He was promoted to Sales Manager in 1979 and Executive Vice President in
1981. He has been responsible for establishing the field sales force of Forseon
and managing its nationwide expansion. He was appointed President in 1988 and
Chief Executive Officer in 1989. Mr. Paul has been a director of Forseon since
1981. He is the son-in-law of Russell Oliver, one of Forseon's directors. Mr.
Paul will continue to serve Forseon as President, Forseon Division after the
merger.
ALLEN MERRILL is Senior Vice President -- Finance and Administration, Chief
Financial Officer, Secretary and Treasurer of Forseon and is responsible for
finance, accounting, operations and administrative matters. Prior to joining
Forseon in 1981 he was on the Audit staff at Price Waterhouse. Mr. Merrill has a
B.A. in Business Administration from the University of Redlands and a M.B.A.
from the University of California at Los Angeles. Mr. Merrill is a Certified
Public Accountant. Mr. Merrill will continue to serve Forseon as Vice President
of Finance after the merger.
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FORSEON EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation of Forseon's Chief Executive Officer and Senior Vice
President -- Finance, the executive officers who earned over $100,000 in salary
and bonuses (the "named executive officers") for the fiscal year ended June 30,
1998 and each of whom will continue as executive officers of Forseon following
the merger.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Dan Paul................................................ 1998 $155,000 $31,750 $2,692(1)
Chairman of the Board, President and Chief Executive
Officer
Allen Merrill........................................... 1998 $ 94,375 $14,500 $1,930(2)
Senior Vice President -- Finance and Administration,
Chief Financial Officer, Secretary and Treasurer
</TABLE>
- ---------------
(1) Comprised of $2,223 in matching contributions to 401K plan and $469 in
premiums for group term life insurance.
(2) Comprised of $1,461 in matching contributions to 401K plan and $469 in
premiums for group term life insurance.
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the Forseon named
executive officers, concerning the exercise of options during the year ended
June 30, 1998, and unexercised options held as of June 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT JUNE 30, 1998 JUNE 30, 1998(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dan Paul......................... -- -- 35,000 -0- $98,500 -0-
Allen Merrill.................... -- -- 9,500 -0- 25,975 -0-
</TABLE>
- ---------------
(1) Represents the total gain which would be realized if all in-the-money
options held at June 30, 1998 were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the fair market value of $6.90 per share at
June 30, 1998. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
DIRECTOR COMPENSATION
Nonemployee members of the Forseon board receive an annual fee of $2,000,
plus $2,000 for each regular meeting of the Forseon board in which they
participate. Directors who are also officers of Forseon or its subsidiary
receive no additional compensation for their services as directors.
Out-of-pocket expenses incurred by the board members in the performance of their
duties as directors are reimbursed by Forseon.
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FORSEON'S CERTAIN TRANSACTIONS
On March 26, 1998, Forseon entered into agreements with each of Dan Paul
and Allen Merrill. Pursuant to these agreements, each of Mr. Paul and Mr.
Merrill will receive a severance payment if they are terminated within six
months before, or within three years after a change of control of Forseon. In
Mr. Paul's case, the severance payment would be 30 times his monthly salary, and
in Mr. Merrill's case the severance payment would be 18 times his monthly
salary. The proposed merger with the subsidiary of Towne Services would
constitute a change of control for this purpose. No payments are due to Mr. Paul
or Mr. Merrill, however, unless they are terminated within three years after the
change of control, or if they voluntarily terminate their own employment, or if
the termination is as a result of death or disability, or if they are terminated
for cause.
On March 18, 1998, Forseon entered into put agreements with each of Jerry
A. Magnin and Neil L. Diver, each of whom is a former director of Forseon. The
put agreements provide that Mr. Magnin and Mr. Diver can require Forseon to buy
back their shares of Forseon stock. The price per share is established by the
most recent independent appraisal obtained for the ESOP. Forseon must buy back
the shares, unless our Board of Directors decides in good faith that doing so
would have a material adverse effect on Forseon. The agreements terminate on the
earlier of March 18, 2000, or upon a change of control. The merger with
subsidiary of Towne Services would result in a change of control that would
terminate the put agreements.
Dan Paul, Allen Merrill and James Dixon serve as trustees to the ESOP
and/or other employee benefit plans of Forseon. On March 25, 1999, Forseon
entered into an agreement with each of these persons to indemnify them against
any claims arising from their service as trustees. The indemnification payments
do not have to be made where these persons acted dishonestly, or where they are
separately protected by insurance.
On February 1, 1998, Forseon entered into a consulting agreement with L.A.
Delmonico Consulting, Inc., a consulting firm owned by Louis A. Delmonico, one
of our directors. Under the agreement, the consulting firm receives a monthly
fee of $4,800 based on four days' work per month, plus $1,200 per additional day
and $150 per additional hour. The services that the consulting firm are to
provide consist of marketing advice and general business planning. If there is a
change of control at Forseon, however, the consulting firm is to be paid a lump
sum of 12 times its monthly fee. The proposed merger with the subsidiary of
Towne Services would result in a change of control and would, therefore, trigger
a lump sum payment to the consulting firm of $57,600. The consulting firm is
also entitled to reimbursement for certain expenses. Mr. Delmonico's contract
has been extended for an additional 12 months to assist with the transition and
integration of the two companies. In addition to the consulting agreement, Mr.
Delmonico will receive payments totaling $57,600 in shares and consulting fees
related to the merger.
Forseon has entered into employment agreements with each of Messrs. Dan
Paul and Allen Merrill. These employment agreements are contingent upon and will
become effective upon completion of the merger. Under his agreement, Mr. Paul
will be the President, Forseon Division and will be paid a base annual salary of
$165,000. Mr. Merrill will be the Vice President of Finance and will be paid an
annual base salary of $95,000.
Both employment agreements provide that if either employee is terminated
for any reason other than cause during the initial term of employment, then
Towne will pay him his base compensation for the remaining term of the
agreement. The initial term for Dan Paul's employment is 36 months and for Allen
Merrill's employment agreement is 24 months. The
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terminated employee will also be eligible to participate in the Forseon employee
benefit plans to the extent permitted under such plans. If either employee
voluntarily terminates his employment or Towne terminates either employee for
cause, then that employee will be paid all salary and benefits through the date
of termination of employment, but nothing else.
Other current executive officers of Forseon have executed or will execute
employment agreements, conditioned on closing of the merger, with one year
terms. Additionally, under all of these employment agreements, during the
employee's employment with Forseon and for two years after termination of such
employment, neither employee will, directly or indirectly, solicit or attempt to
solicit the employment of any employee of Forseon, Towne or its affiliates or
the business of any customer of Forseon, Towne or any of its affiliates in a
line of business that is competitive with the Forseon's or Towne's business.
California or other applicable law may make it difficult to enforce any of
the non-solicitation provisions contained in the agreements described above.
Therefore, Towne may not be able to protect its business relationships from
competition by current Forseon officers in the event they leave our company.
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF TOWNE SERVICES CAPITAL STOCK
The authorized capital stock of Towne consists of 50,000,000 shares of
common stock, no par value per share, and 20,000,000 shares of preferred stock,
no par value per share.
Towne Common Stock
Under Towne's Articles of Incorporation, holders of common stock are
entitled to receive such dividends as may be legally declared by the board of
directors. Each shareholder is entitled to one vote per share on all matters to
be voted upon. Shareholders are not entitled to cumulate votes for the election
of directors. Holders of common stock do not have preemptive, redemption or
conversion rights and, upon liquidation, dissolution or winding up of Towne,
will be entitled to share ratably in the net assets of Towne available for
distribution to common shareholders. All shares outstanding prior to this
offering are, and all shares to be issued in this offering will be, validly
issued, fully paid and non-assessable.
Towne Preferred Stock
Towne's Articles of Incorporation authorize the board of directors to
issue, without further action or vote by the holders of the common stock, shares
of preferred stock in one or more series and to fix any preferences, conversion
and other rights, voting powers, restrictions, limitations, qualifications and
terms and conditions of redemption as shall be set forth in resolutions adopted
by the board of directors. Articles of Amendment must be filed with the Georgia
Secretary of State prior to the issuance of any shares of preferred stock of the
applicable series. Any preferred stock issued may rank senior to the common
stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, this preferred stock may have
class or series voting rights. Issuances of preferred stock, while providing
Towne with flexibility in connection with general corporate purposes, may have
an adverse effect on the rights of holders of common stock. In addition, the
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of
107
<PAGE> 115
the outstanding voting stock of Towne or the effect of decreasing the market
price of the common stock. Towne has no present plan to issue any additional
shares of preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar of the Towne common stock is First Union
National Bank and its telephone number is .
DESCRIPTION OF FORSEON CAPITAL STOCK
The authorized capital stock of Forseon consists of 5,000,000 shares of
common stock, $0.01 par value per share, and no shares of preferred stock.
Forseon Common Stock
As of the record date, there were 642,069 shares of Forseon common stock
outstanding held of record by approximately 110 stockholders, although Forseon
has been informed that there are in excess of 240 beneficial owners. Holders of
Forseon common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. Pursuant to Forseon's certificate of
incorporation, the stockholders may cumulate votes in connection with the
election of Forseon directors. The holders of Forseon common stock are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the Forseon board of directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of Forseon, the holders of
Forseon common stock are entitled to share ratably in all assets remaining after
payment of liabilities. The Forseon common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Forseon common stock. All outstanding shares of
Forseon common stock are fully paid and non-assessable, and the shares of Towne
common stock which are to be received in exchange for the Forseon common stock
to be outstanding upon completion of the Merger will be fully paid and
non-assessable.
Transfer Agent and Registrar
Forseon serves as its own transfer agent and registrar.
ESOP MATTERS
The Forseon ESOP currently holds shares of Forseon stock. If the
merger is approved, these shares will be exchanged for shares of Towne stock, at
a ratio that currently equals 2.82 shares of Towne stock for each share of
Forseon stock. Following the merger, the Forseon ESOP will hold only shares of
Towne stock. The merger will not itself create any rights in participants to
receive distributions from the ESOP. Participants in the Forseon ESOP will be
entitled to receive distributions from the ESOP only upon termination of
employment prior to or upon retirement, or upon death or disability.
COMPARISON OF RIGHTS OF STOCKHOLDERS
Forseon is a Delaware corporation and Towne and its merger subsidiary are
Georgia corporations. Forseon stockholders' rights will be governed after the
merger by Georgia law, as well as Towne's of incorporation and bylaws.
108
<PAGE> 116
The following is a summary of the material differences between the rights
of holders of Forseon common stock and the rights of holders of Towne common
stock. These differences arise from differences between Delaware and Georgia
law, Forseon's amended and restated certificate of incorporation, Forseon's
bylaws, Towne's amended and restated articles of incorporation and Towne's
bylaws.
NOMINATIONS FOR BOARD OF DIRECTORS AND ADVANCE NOTICE OF STOCKHOLDER NOMINEES
Towne's bylaws provide that with respect to an annual meeting of
shareholders, nominations of persons for election to the board of directors and
the proposal of business to be considered by shareholders may be made only by or
at the direction of the board of directors, the Chairman of the board of
directors or the President; or by a shareholder who has complied with the
advance notice procedures set forth in the bylaws. Nominations, other than those
made by Towne's board of directors must be preceded by notification in writing
received by the secretary of the corporation not less than 60 nor more than 90
days prior to the first anniversary of the prior year's annual meeting.
Forseon's bylaws provide that nominations for election to the board of
directors of Forseon must be made by or at the direction of the board of
directors or by any stockholder entitled to vote for the election of directors
who complies with certain notice procedures. To be timely, notice must be
received at Forseon's principal executive offices not less than 30 nor more than
60 calendar days prior to the meeting.
AMENDMENT TO GOVERNING DOCUMENTS
Delaware law requires a vote of the corporation's board of directors
followed by the affirmative vote of a majority of the outstanding stock of each
class entitled to vote for any amendment to the certificate of incorporation,
unless a greater level of approval is required by the certificate of
incorporation. If an amendment would alter the powers, preferences or special
rights of a particular class or series of stock so as to affect them adversely,
the class or series shall be given the power to vote as a class notwithstanding
the absence of any specifically enumerated power in the certificate of
incorporation. Georgia law provides similar rights, except that a corporation's
board of directors may amend the articles of incorporation on certain routine
matters without shareholder action.
Delaware law provides that the power to adopt, amend or repeal a
corporation's bylaws shall be in the stockholders entitled to vote, provided
that the corporation in its certificate of incorporation may confer such power
on its board of directors in addition to the stockholders. Georgia law, however,
provides that the power to adopt, amend or repeal a corporation's bylaws is held
by both the shareholders and the board of directors, unless the articles of
incorporation reserve the power exclusively to the shareholders. Also, certain
bylaw provisions may only be adopted, amended or repealed by the shareholders.
STOCKHOLDER CONSENT IN LIEU OF MEETING
Under Delaware corporate law, unless otherwise provided in a corporation's
certificate of incorporation, any action required to be taken or which may be
taken at an annual or special meeting of stockholders may be taken without a
meeting by proper written consent. Proper written consent is a consent in
writing signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize such action at a
meeting at which all shares entitled to vote were present and voted.
109
<PAGE> 117
Under Georgia law, a consent must be signed by all the shareholders
entitled to vote on the action, unless the articles of incorporation allow
action by the minimum number necessary to authorize the action. The articles of
incorporation of Towne do not provide for a consent by less than all the
shareholders entitled to vote on the action.
ANTI-TAKEOVER PROVISIONS
Towne's articles of incorporation require the affirmative vote of at least
66 2/3% of the directors for the following actions of Towne to be submitted to a
vote of the shareholders:
- a sale of all or substantially all assets;
- a liquidation or dissolution;
- a merger, consolidation or reorganization, unless the shareholders
immediately prior to the transaction will own at least a majority of
the combined voting power of the company resulting from the merger,
consolidation or reorganization; or
- any increase in the number of directors above 12 directors.
In addition, the affirmative vote of 66 2/3% of the holders of the common
stock is required for shareholder approval of any such actions.
The board of directors has the power to issue preferred stock, in one or
more classes or series and with such rights and preferences as determined by the
board of directors, all without shareholder approval. Because the board of
directors has the power to establish the preferences and rights of each class or
series of preferred stock, it may afford the holders of any series of preferred
stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of common stock. The board of directors has no present plans to issue
any additional shares of preferred stock.
Georgia law generally restricts a company from entering into certain
business combinations with an interested shareholder, which is defined as any
person or entity that is the beneficial owner of at least 10% of the company's
voting stock, or its affiliates for a period of five years after the date on
which the shareholder became an interested shareholder, unless:
- the transaction is approved by the board of directors prior to the
date the person became an interested shareholder;
- the interested shareholder acquires 90% of the company's voting stock
in the same transaction in which it exceeds 10%; or
- subsequent to becoming an interested shareholder, the shareholder
acquires 90% of the company's voting stock and the business
combination is approved by the holders of a majority of the voting
stock entitled to vote on the matter.
Georgia law provides that these restrictions will not apply unless the
bylaws of the corporation specifically provide that these provisions of Georgia
law are applicable to the corporation. Towne has not elected to be covered by
such statute, but it could do so by action of the board of directors at any
time.
SPECIAL MEETINGS
Towne's bylaws provide that special meetings of its stockholders may be
called by the president, the Towne board of directors, the chairman of the board
or, provided that Towne has
110
<PAGE> 118
more than 100 beneficial owners, the holders of a majority of the votes entitled
to be cast on any issue to be considered at the meeting. Forseon's bylaws
provide that special meetings of their stockholders may only be called by the
president or the board of directors. See "Comparison of Capital Stock."
CUMULATIVE VOTING
The bylaws of Forseon provide for cumulative voting in elections of
directors. The bylaws and articles of incorporation of Towne do not provide for
cumulative voting in elections of directors. Therefore, under Georgia law,
cumulative voting rights are not available to Towne shareholders.
The foregoing discussion of certain similarities and material differences
between the rights of Forseon stockholders, the rights of Towne shareholders
under the respective certificates of incorporation and bylaws is only a summary
of certain provisions in each of these documents. This discussion is not a
complete description of the similarities and differences, and is qualified by
reference to the Delaware General Corporate Law, the Georgia Business
Corporation Code, the common law of Delaware and Georgia and the full text of
Towne's and Forseon's certificates of incorporation and bylaws.
EXPERTS
The financial statements of Towne Services, Inc. as of December 31, 1996,
1997, and 1998 and for the period from inception (October 23, 1995) to December
31, 1995 and for each of the three years in the period ended December 31, 1998
included or incorporated by reference in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of Banking Solutions, Inc. as of December 31, 1996
and 1997 and for each of the years then ended included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Forseon Corporation as of June 30, 1997 and
1998 and for each of the years in the three-year period ended June 30, 1998,
have been included in this document and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this document, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Towne common stock offered hereby, the
federal income tax consequences in connection with the merger and certain other
matters relating to the Merger and the transactions contemplated thereby will be
passed upon for Towne by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta,
Georgia. Certain legal matters with respect to federal income tax consequences
in connection with the Merger and certain other legal matters relating to the
merger and the transactions contemplated thereby will be passed upon for Forseon
by Gibson, Dunn & Crutcher, LLP, Irvine, California.
111
<PAGE> 119
TOWNE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
</TABLE>
F-1
<PAGE> 120
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Towne Services, Inc.:
We have audited the accompanying consolidated balance sheets of TOWNE
SERVICES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997
and 1998 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Towne Services, Inc. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in Item
21(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
February 12, 1999
F-2
<PAGE> 121
TOWNE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,536,439 $ 13,081,284
Accounts receivable, net of allowance for uncollectible
accounts of $25,000 and $347,065 in 1997 and 1998,
respectively........................................... 121,566 3,552,478
Note receivable........................................... 0 167,305
Other..................................................... 68,273 229,732
----------- ------------
Total current assets.............................. 2,726,278 17,030,799
PROPERTY AND EQUIPMENT, net................................. 489,849 2,116,987
NOTES RECEIVABLE............................................ 78,990 81,565
DEBT ISSUANCE COSTS, net.................................... 288,815 0
GOODWILL, net............................................... 0 14,955,414
OTHER INTANGIBLES, net...................................... 0 1,134,614
OTHER ASSETS, net........................................... 2,500 100,249
----------- ------------
$ 3,586,432 $ 35,419,628
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 297,937 $ 125,763
Accrued liabilities....................................... 215,109 1,273,148
Accrued compensation...................................... 220,300 250,391
Accrued termination costs................................. 0 497,910
Current portion of long-term debt......................... 46,757 5,000,000
----------- ------------
Total current liabilities......................... 780,103 7,147,212
----------- ------------
LONG TERM DEBT, net of discount of $249,500 and $0 in 1997
and 1998, respectively.................................... 1,289,666 0
----------- ------------
COMMITMENTS AND CONTINGENCIES
WARRANTS WITH REDEMPTION FEATURE............................ 255,000 0
----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value; 20,000,000 shares
authorized, 0 issued and outstanding in 1997 and 1998,
respectively........................................... 0 0
Common stock, no par value; 50,000,000 shares authorized,
11,706,766 and 19,651,390 issued and outstanding in
1997 and 1998, respectively............................ 4,417,696 52,363,084
Warrants outstanding...................................... 41,000 41,000
Accumulated deficit....................................... (3,197,033) (24,131,668)
----------- ------------
Total shareholders' equity........................ 1,261,663 28,272,416
----------- ------------
$ 3,586,432 $ 35,419,628
=========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 122
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ------------
<S> <C> <C> <C>
REVENUES................................................ $ 105,285 $ 722,364 $ 6,397,628
---------- ----------- ------------
COSTS AND EXPENSES:
Costs of processing, servicing, and support........... 219,621 832,102 2,027,160
Research and development.............................. 51,871 332,470 306,482
Sales and marketing................................... 118,163 839,323 6,251,564
Stock compensation expense............................ 10,020 0 6,267,497
Employee termination costs............................ 0 0 2,291,102
General and administrative............................ 358,606 1,139,642 3,858,564
---------- ----------- ------------
Total costs and expenses...................... 758,281 3,143,537 21,002,369
---------- ----------- ------------
OPERATING LOSS.......................................... (652,996) (2,421,173) (14,604,741)
---------- ----------- ------------
OTHER EXPENSES:
Interest expense (income), net........................ 5,802 95,946 (263,503)
Other expense (income)................................ 3,509 (1,018) (5,814)
Financing costs for stock issued to nonemployees...... 0 0 323,000
---------- ----------- ------------
Total other expenses.......................... 9,311 94,928 53,683
---------- ----------- ------------
Loss before extraordinary loss on early extinguishment
of debt............................................... (662,307) (2,516,101) (14,658,424)
Extraordinary loss on early extinguishment of debt...... 0 0 476,239
---------- ----------- ------------
NET LOSS................................................ $ (662,307) $(2,516,101) $(15,134,663)
========== =========== ============
PREFERRED STOCK DIVIDENDS............................... 0 0 (5,108,000)
ACCRETION OF WARRANTS WITH REDEMPTION FEATURE........... 0 0 (691,972)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS BEFORE
EXTRAORDINARY LOSS.................................... $ (662,307) $(2,516,101) $(20,458,396)
========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON
SHARE BEFORE EXTRAORDINARY LOSS:
Basic................................................... $ (0.10) $ (0.26) $ (1.32)
========== =========== ============
Diluted................................................. $ (0.10) $ (0.26) $ (1.32)
========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS............ $ (662,307) $(2,516,101) $(20,934,635)
========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON
SHARE:
Basic................................................... $ (0.10) $ (0.26) $ (1.35)
========== =========== ============
Diluted................................................. $ (0.10) $ (0.26) $ (1.35)
========== =========== ============
Weighted Average Common Shares Outstanding.............. 6,337,356 9,600,592 15,516,170
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 123
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
-------------------- ------------------------ WARRANTS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT OUTSTANDING DEFICIT EQUITY
------- ---------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995......... -- -- 5,000,000 $ 15,750 -- $ (18,625) $ (2,875)
------- ---------- ---------- ----------- ------- ------------ ------------
Issuance of common stock........... -- -- 2,905,700 720,150 -- -- 720,150
Fair value of stock options
granted.......................... -- -- -- 64,124 -- -- 64,124
Net loss........................... -- -- -- -- -- (662,307) (662,307)
------- ---------- ---------- ----------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1996......... -- -- 7,905,700 800,024 -- (680,932) 119,092
------- ---------- ---------- ----------- ------- ------------ ------------
Issuance of common stock........... -- -- 3,537,766 3,471,099 -- -- 3,471,099
Issuance of warrants............... -- -- -- -- 41,000 -- 41,000
Exercise of stock options.......... -- -- 263,300 78,990 -- -- 78,990
Fair value of stock options
granted.......................... -- -- -- 67,583 -- -- 67,583
Net loss........................... -- -- -- -- -- (2,516,101) (2,516,101)
------- ---------- ---------- ----------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1997......... -- -- 11,706,766 4,417,696 41,000 (3,197,033) 1,261,663
------- ---------- ---------- ----------- ------- ------------ ------------
Issuance of preferred stock........ 15,000 $1,500,000 -- -- -- -- 1,500,000
Issuance of common stock........... -- -- 1,052,308 5,532,500 -- -- 5,532,500
Preferred stock dividend (Note
8)............................... -- -- -- 5,100,000 -- (5,108,000) (8,000)
Exercise of stock options.......... -- -- 771,000 583,500 -- -- 583,500
Employee compensation expense for
stock options granted or
amended.......................... -- -- -- 2,275,266 -- -- 2,275,266
Accretion of warrants with
redemption feature............... -- -- -- 691,972 -- (691,972) --
Conversion of preferred stock...... (15,000) (1,500,000) 1,217,903 1,508,000 -- -- 8,000
Conversion of outstanding
warrants......................... -- -- 308,982 255,000 -- -- 255,000
Initial public offering
transactions, net (Note 3)....... -- -- 3,850,000 26,989,129 -- -- 26,989,129
Issuance of common shares in
connection with the purchase of
Banking Solutions, Inc........... -- -- 744,431 5,010,021 -- -- 5,010,021
Net loss........................... -- -- -- -- -- (15,134,663) (15,134,663)
------- ---------- ---------- ----------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1998......... -- -- 19,651,390 $52,363,084 $41,000 $(24,131,668) $ 28,272,416
------- ---------- ---------- ----------- ------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE> 124
TOWNE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.............................................. $(662,307) $(2,516,101) $(15,134,663)
--------- ----------- ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation expense recognized for stock option
grants........................................... 10,020 0 6,267,497
Financing costs for stock issued to nonemployees... 0 0 323,000
Issuance of warrants............................... 0 41,000 0
Loss on disposal of property and equipment......... 7,234 0 0
Extraordinary loss from early extinguishment of
debt............................................. 0 0 476,239
Depreciation....................................... 12,895 103,629 285,354
Amortization of goodwill and other intangibles..... 0 0 113,337
Amortization of debt financing fees................ 0 39,423 13,496
Amortization of debt discount...................... 0 5,500 33,025
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.............................. (1,596) (119,970) (2,969,117)
Prepaid & other assets........................... (8,713) (259,209) (265,166)
Accounts payable................................. 39,487 257,836 (401,993)
Accrued liabilities.............................. 94,022 200,922 993,439
Accrued compensation............................. 0 139,977 30,092
Deferred revenue................................. 23,103 (23,103) 0
--------- ----------- ------------
Total adjustments............................. 176,452 386,005 4,899,203
--------- ----------- ------------
Net cash used in operating activities......... (485,855) (2,130,096) (10,235,460)
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from shareholders..................... 0 (78,990) (169,880)
Purchase of Credit Collection Solutions, Inc., net of
cash acquired...................................... 0 0 (510,000)
Purchase of Banking Solutions, Inc., net of cash
acquired........................................... 0 0 (10,351,129)
Purchase of property and equipment, net............... (151,813) (451,569) (1,870,672)
--------- ----------- ------------
Net cash used in investing activities......... (151,813) (530,559) (12,901,681)
--------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options............... 0 78,990 583,500
Repayment of debt..................................... 0 (318,702) (2,236,761)
Proceeds from Sirrom Capital loan..................... 0 1,500,000 0
Proceeds from short/long-term borrowings.............. 60,000 314,625 5,628,849
Proceeds from issuance of preferred stock............. 0 0 1,500,000
Proceeds from issuance of common stock................ 710,130 3,471,099 28,206,398
--------- ----------- ------------
Net cash provided by financing activities..... 770,130 5,046,012 33,681,986
--------- ----------- ------------
NET INCREASE IN CASH.................................... 132,462 2,385,357 10,544,845
CASH AND CASH EQUIVALENTS, beginning of period.......... 18,620 151,082 2,536,439
--------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period................ $ 151,082 $ 2,536,439 $ 13,081,284
========= =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes.............................. $ 0 $ 0 $ 0
========= =========== ============
Cash paid for interest.................................. 0 $ 15,900 $ 235,030
========= =========== ============
Fair value of stock options granted..................... $ 64,124 $ 67,583 $ 0
========= =========== ============
ACQUISITION OF BSI:
Fair value of assets acquired......................... $ 0 $ 0 $ 413,534
Liabilities assumed................................... 0 0 (1,285,120)
Value of common shares issued......................... 0 0 (4,517,230)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 125
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Towne Services, Inc. ("Towne Services" or the "Company") designs, develops
and markets products and services that convert the in-house credit transactions
of small businesses into automated accounts which are processed electronically
in much the same way as credit card transactions are processed. Usually,
in-house credit transactions are completed without a credit card or cash, are
recorded and processed manually and then billed to the customer at a later date.
To automate this process, Towne Services offers the following electronic
processing systems, TOWNE CREDIT, TOWNE FINANCE and CASHFLOW MANAGER, which
process small business' in-house credit transactions in much the same way as
credit card transactions are processed.
The TOWNE CREDIT system electronically processes in-house consumer credit
transactions of small and medium size retail merchants. The TOWNE FINANCE
system, a commercial version of TOWNE CREDIT, is an automated asset management
and financing system that processes business-to-business credit transactions for
small commercial businesses. The CASHFLOW MANAGER system is an accounts
receivable financing program similar to the TOWNE FINANCE product. Through the
use of the Company's products and services, small businesses can automate
certain manual processes, accelerate cash flow, provide better customer service,
reduce paperwork and shift many other administrative burdens to Towne Services.
In addition, the Company provides complementing products and services to banks
that enable them to generate interest-bearing revolving credit accounts by
financing the accounts receivable of these small businesses. Through the use of
the Company's products, banks can monitor customers' accounts receivable and
generate detailed status reports, and may attract new business customers who, in
turn, may become customers of Towne Services.
Incorporated on October 23, 1995, Towne Services had no significant
operations until it released its TOWNE CREDIT product and related services in
June 1997. Accordingly, the Company has only a limited operating history. The
Company has incurred significant losses in each quarter since it commenced
operations. Towne Services had net losses of $662,000, $2.5 million and $15.1
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
Company expects that it will continue to incur net losses until it is able to
attain sufficient revenues to support its business. The Company can provide no
assurances as to when, if ever, this may occur.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS 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 and
disclosure of contingent assets and liabilities at the date of
F-7
<PAGE> 126
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company functions as a service bureau whereby customers process
transactions utilizing the Company's software on an outsourced basis. The
Company's revenues are generated primarily through initial set-up fees and
recurring monthly transaction processing fees. Revenues related to the initial
set-up fee are recognized upon execution of the related contract. Revenues are
deferred for contracts that contain certain cancellation clauses and/or return
guarantees until the guarantee period is expired. Transaction fees are
recognized on a monthly basis as earned. The Company also leases point of sale
terminal equipment to certain customers under month-to-month operating leases.
Such operating lease revenues are recognized on a monthly basis as earned.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed as incurred.
Depreciation is provided using the straight-line method for financial reporting.
The detail of property and equipment at December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1997 1998 USEFUL LIVES
--------- ---------- ------------
<S> <C> <C> <C>
Furniture and fixtures............................ $ 114,841 $ 280,144 Seven years
Automobiles....................................... 18,406 18,406 Three years
Computers and equipment........................... 219,328 651,740 Five years
Point-of-sale equipment........................... 193,843 1,279,644 Three years
Leasehold improvements............................ 9,337 32,267 Five years
Computer Software................................. 0 162,653 Five years
Software development costs........................ 47,000 59,500 Three years
--------- ----------
602,755 2,484,354
Less accumulated depreciation..................... (112,906) (367,367)
--------- ----------
$ 489,849 $2,116,987
========= ==========
</TABLE>
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.
F-8
<PAGE> 127
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND OTHER INTANGIBLES
In connection with the purchase of Credit Collection Solutions, Inc.
("CCS") (Note 4), the Company has recorded goodwill in the amount of $440,000,
which is being amortized over a period of 5 years.
In connection with the purchase of Banking Solutions, Inc. ("BSI") (Note
4), the Company has recorded goodwill in the amount of $14.6 million, which is
being amortized over a period of 25 years. The Company has allocated $1.1
million to BSI's customer list, which is being amortized over a period of 5
years.
OFFICERS' LIFE INSURANCE
The Company carries life insurance policies on four key executives. The
aggregate face value of these policies is $4,250,000, and the Company is
entitled to receive any proceeds as the beneficiary. The Company had no cash
surrender value in these policies at December 31, 1997 and 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of salary related personnel
costs, including costs for employee benefits, computer equipment and support
services used in products necessary to deliver the Company's services. The
Company's policy is to capitalize research and development costs upon
establishing technological feasibility, subject to a periodic assessment of
recoverability based on expected future revenues. The Company had capitalized
approximately $47,000, and $60,000 of software development costs at December 31,
1997 and 1998, respectively.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective
for fiscal years ending after December 15, 1997. The Company adopted the new
guidelines for the calculation and presentation of earnings per share, and all
prior periods have been restated. Basic loss per share is based on the weighted
average number of shares outstanding. Diluted loss per share is based on the
weighted average number of shares outstanding, and the dilutive effect of common
stock equivalent shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). All common stock equivalents have been
excluded, as their effect would be anti-dilutive. Therefore, the weighted
average shares used for basic and diluted earnings per share are the same.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires the use of an asset and liability
method of accounting for deferred income taxes. Under SFAS No. 109, deferred tax
assets or liabilities at the end of each period are determined using the tax
rate expected to apply to taxable income in the period in which the deferred tax
asset or liability is expected to be settled or realized.
F-9
<PAGE> 128
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts payable,
and other financial instruments approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of the
Company's long-term debt is estimated based on the current rates offered to the
Company for debt of similar terms and maturities.
RISK OF POSSIBLE SYSTEM FAILURE
The Company's operations depend on its ability to protect its network
infrastructure and equipment against damages from human error, natural
disasters, power and telecommunications failures, intentional acts of vandalism,
and similar events. Despite precautions taken by the Company, the occurrence of
human error, a natural disaster, or other unanticipated problems could halt the
Company's services, damage network equipment, and result in substantial expense
for the Company to repair or replace damaged equipment. In addition, the failure
of the Company's telecommunications providers to supply the necessary services
could also interrupt the Company's services. The inability of the Company to
supply services to its customers could negatively affect the Company's business
and financial results and may also harm the Company's reputation.
LOSS OF CUSTOMERS
Customer attrition is a normal part of the electronic processing business.
The Company has and will experience losses of small business customers due to
attrition. Towne Services' written agreements with its customers generally
provide that either party may terminate the agreement upon 30 to 60 days' notice
for any reason. Consolidation in the financial services industry in the United
States may result in fewer potential bank customers. In addition, the Company
may elect not to process or continue processing for customers that experience
financial difficulties or other problems.
PRODUCT RISKS
Towne Services may be liable if the use of any of its products causes
damage to its customers' businesses. Towne Services also may be required to
recall certain of its products if they become damaged or unable to perform their
intended functions. Towne Services has 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
F-10
<PAGE> 129
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements and other methods. However, unauthorized parties may attempt to copy
aspects of the Company's technology, products and services or to otherwise
obtain and use information that the Company regards as proprietary, despite the
Company's efforts to protect them. Third parties may claim that the Company's
current or future products and services infringe the patent, copyright or
trademark rights of such third parties. No assurance can be given that, if such
actions or claims are brought, the Company will ultimately prevail. Any such
claims, whether with or without merit, could be costly and time consuming, cause
delays in introducing new or improved products and services, require Towne
Services to enter royalty or licensing agreements or discontinue using the
challenged technology and otherwise could have a material adverse effect on the
Company's business and financial results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general purpose financial statements. This statement is effective for
periods beginning after December 15, 1997. The Company adopted SFAS No. 130
effective March 31, 1998. The adoption of SFAS No. 130 did not have a material
impact on the Company's financial statements, as comprehensive income did not
differ from the reported net loss.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company's
operating business segments provide electronic transaction processing for small
business in-house accounts. The product lines offered by the Company use the
Company's central administrative offices for customer support, centralized
processing and sales support. In addition, the Company's sales force markets all
products within their assigned markets. Consequently, the Company considers all
of its products as one reportable segment under the definitions in SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other 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
F-11
<PAGE> 130
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued, acquired, or substantively modified after December 31, 1997. The
adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial statements.
3. INITIAL PUBLIC OFFERING
In July 1998 the Company completed an initial public offering ("IPO") of
its common stock. The total proceeds of the IPO, net of underwriting discounts
and offering expenses, were approximately $27.0 million. The Company issued
3,850,000 shares at an offering price at $8.00 per share. Subsequent to the IPO,
the Company converted all outstanding shares of Series A Preferred Stock to
1,217,903 shares of common stock and warrants for 308,982 shares of common stock
were exercised.
4. ACQUISITIONS
In June 1998, the Company acquired certain assets and liabilities of Credit
Collection Solutions, Inc. ("CCS") for approximately $510,000 cash and the
issuance of up to 100,000 shares of the Company's common stock if certain
financial results are achieved. CCS is a developer of computer software for
processing payments and tracking collections. In connection with the purchase of
CCS, the Company has recorded goodwill in the amount of $440,000, which is being
amortized over a period of 5 years. This amount includes $200,000 which was
originally recognized as purchased in-process development at the time of the
acquisition.
In December 1998, the Company acquired the outstanding stock of Banking
Solutions, Inc. ("BSI") for approximately $14.9 million in cash and stock. In
connection with the acquisition of Banking Solutions, the Company issued 744,431
shares of Towne's common stock at $6.73 per share. The remainder of the purchase
price was paid in cash. Towne also agreed to pay former officers of Banking
Solutions amounts of money which are contingent upon future performance
criteria. BSI is a developer and provider of a transaction processing system,
CASHFLOW MANAGER, an accounts receivable financing program similar to the TOWNE
FINANCE product. The Company recorded this transaction using the purchase method
of accounting. The Company has allocated goodwill in the amount of $14.6
million, which is being amortized over a period of 25 years. The Company has
recorded $1.1 million to an intangible asset for BSI's customer list, which is
being amortized over a period of 5 years. The Company recognized a one-time
charge in the amount of $2.3 million in December 1998 related to employee
terminations which were not identified at the date of purchase.
Pro forma financial information as if the acquisitions had occurred at the
beginning of the respective periods during which they occurred would be as
follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES................................................... $ 8,808,177 $ 14,510,777
NET LOSS BEFORE EXTRAORDINARY ITEM......................... (3,484,053) (15,429,602)
NET LOSS................................................... (3,484,053) (15,905,842)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS............... $(3,484,053) $(21,705,813)
=========== ============
NET LOSS ATTRIBUTABLE PER COMMON SHARE..................... $ (0.34) $ (1.35)
----------- ------------
</TABLE>
F-12
<PAGE> 131
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Note payable to First Union Bank, interest at LIBOR+2.0%
(7.1% at December 31, 1998)............................... $ 0 $ 5,000,000
Note payable to Sirrom Investments, Inc. ("Sirrom") (the
"Sirrom Note"), interest at 14%, $1,500,000 due December
2002, secured by certain assets of the Company and all
shares owned by the Company's principal shareholders...... 1,500,000 0
Notes payable to Citizens Bank, interest ranging from 9.25%
to 12%, payable monthly through 2000, secured by
equipment................................................. 85,923 0
---------- -----------
1,585,923 5,000,000
Less current portion........................................ (46,757) (5,000,000)
---------- -----------
1,539,166 0
Less original issue discount................................ (249,500) 0
---------- -----------
$1,289,666 $ 0
========== ===========
</TABLE>
In August 1998, the Company repaid all of its then current and long-term
debt obligations then outstanding using proceeds of the initial public offering.
This resulted in an extraordinary one-time charge to net income of $476,000,
which is comprised of $218,000 unamortized discount on a note payable to Sirrom
Investments, Inc. (the "Sirrom Note") and $258,000 deferred debt issuance costs.
In January 1999, the Company paid in full the First Union National Bank
note of $5,000,000.
6. INCOME TAXES
The following is a reconciliation of income taxes at the federal statutory
rate with income taxes recorded by the Company for the years ended December 31,
1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Income tax benefit computed
at the federal statutory rate.................... $ 225,184 $ 843,568 $ 5,145,786
State income tax benefit,
net of federal income tax benefit................ 30,220 96,136 605,387
Other, net......................................... (2,784) (16,193) (49,994)
Change in valuation allowance...................... (252,620) (923,511) (5,701,179)
--------- --------- -----------
$ 0 $ 0 $ 0
========= ========= ===========
</TABLE>
F-13
<PAGE> 132
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities for 1996, 1997 and 1998 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences that give rise to deferred tax assets and liabilities at December
31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation.......................... $ 30,523 $ 38,000 $ 76,114
Accounts receivable reserves................... 0 7,980 131,885
Other.......................................... 10,837 16,068 70,300
Net operating loss carryforwards............... 211,129 1,134,584 6,693,044
--------- ----------- -----------
Deferred tax assets.................... 252,489 1,196,632 6,971,343
Deferred tax liability:
Depreciation................................... (131) (20,501) (94,033)
--------- ----------- -----------
252,358 1,176,131 6,877,310
Valuation allowance.............................. (252,358) (1,176,131) (6,877,310)
--------- ----------- -----------
Net deferred tax asset................. $ 0 $ 0 $ 0
========= =========== ===========
</TABLE>
Due to the Company's current year operating loss position and projected
losses for the fiscal year ending December 31, 1999, no benefit for income taxes
for the year ended December 31, 1998 has been provided in the accompanying
financial statements as management has not determined it is more likely than not
that such benefits will be realized.
At December 31, 1998, the Company has net operating loss carryforwards
("NOLs") of approximately $17.6 million which will expire if not utilized
beginning in 2011. Due to changes in the Company's ownership structure, the
Company's use of its NOLs as of October 1, 1997 of approximately $2.5 million
will be limited to approximately $550,000 in any given year to offset future
taxes. If the Company does not realize taxable income in excess of the
limitation in future years, certain NOLs will be unrealizable. NOLs generated
after October 1, 1997 may be further limited as a result of any future sales of
stock by the Company. Once these net operating loss carryforwards are utilized
or expire, the Company's projected effective tax rate will increase which will
adversely affect the Company's operating results and financial condition.
7. WARRANTS WITH REDEMPTION FEATURE
In connection with the issuance of the Sirrom Note, the Company issued
warrants to purchase 308,982 shares of common stock at a price of $0.01 per
share. Upon completion of the IPO (Note 3), warrants for 308,982 shares of
common stock were exercised. The value assigned to these warrants was $255,000.
The excess of the redemption value over the carrying value was accrued by
periodic charges to retained earnings over the redemption period. As the
redemption feature expired upon the IPO, the total amount of $946,972 charged to
retained earnings was transferred to permanent equity subsequent to the IPO.
F-14
<PAGE> 133
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In January 1998, the Company authorized 20,000,000 shares of Series A
preferred Stock ("Preferred Stock") with a stated value of $100 per share. The
board of directors has the authority to issue these shares and to establish
dividends, voting and conversion rights, redemption provisions, liquidation
preferences, and other rights and restrictions. In March 1998, the Company sold
15,000 shares of Preferred Stock to Capital Appreciation Partners, L.P. for
$1,500,000. These shares were converted into common stock at a conversion price
of $1.25 per share at the completion of the Company's IPO (Note 3).
The Company recorded $5.1 million as a preferred stock dividend for the
difference between the estimated fair market value of the common stock at the
date of the issuance and the conversion price.
In July 1998 the IPO was declared effective by the Securities and Exchange
Commission (Note 3) and all outstanding shares of Series A Preferred Stock were
converted to 1,217,903 shares of common stock.
COMMON STOCK
During 1996 the Company issued 2,872,300 shares of common stock at prices
ranging from approximately $.04 to $.30 per share. In addition, the Company
granted 33,400 shares to an employee in the form of a bonus. The Company
recorded compensation expense related to these shares at $.30 per share which
represented management's estimate of the fair value of the common stock on the
date of issuance.
In January 1997, the Company effected a 100-for-1 stock split. All
references in the accompanying financial statements to number of shares and per
share amounts of the Company's common stock have been retroactively restated to
reflect the increased number of shares outstanding of common stock.
In an attempt to raise a minimum of $500,000 to serve as bridge financing
for the Company, the Company offered to sell shares of common stock for $1.00
per share to accredited investors as defined by Rule 501(a) under the Federal
Securities Act of 1933. The private placement began in late March 1997 and ended
October 17, 1997. Through this private placement and certain other issuances of
common stock, the Company raised $3.4 million.
In February 1998, the Company sold 76,000 shares of common stock to third
parties at $1.25 per share. The Company recorded $323,000 as financing costs for
stock issued to nonemployees for the difference between the sale price to these
third parties and the estimated fair market value on the date of sale.
In October 1998, the Company issued 33,225 shares of common stock at $5.625
per share as an incentive compensation to employees for achieving performance
expectations established in the second quarter of 1998.
In connection with the acquisition of BSI (Note 4), Towne issued 744,431
shares of restricted common stock of the Company at $6.73 per share. The
restricted stock award grantees
F-15
<PAGE> 134
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may not sell, transfer, assign, pledge or otherwise encumber or dispose of these
restricted shares until June 30, 2000.
STOCK SALE TO EMPLOYEES
In February 1998, the board of directors authorized the sale of the
Company's common stock to all employees of the Company for approximately $1.19
per share. The stock sale was available through March 6, 1998 and 943,083 shares
were purchased by employees. The Company recorded $3.8 million as compensation
expense for the difference between the sales price to employees and the
estimated fair market value at the date of sale.
OPTIONS
The Company has a stock option plan for key employees of the Company (the
"Plan") which provides for the issuance of options to purchase up to 2,090,000
shares of the Company's common stock. Options are granted at an exercise price
which is not less than fair value as determined by a committee appointed by the
board of directors and generally vest over a period not to exceed five years.
Options granted under the Plan generally expire ten years from the date of
grant. At December 31, 1998, options to purchase 1,652,000 shares of common
stock were available for future grant under the Plan.
In September 1996, the board of directors granted options to purchase
1,118,300 shares of common stock outside the Plan to the president of the
Company. These options vested immediately and have an exercise price of $.30 per
share. No compensation expense was recorded for these options, as the option
price was made at the estimated fair market value of the common stock at the
date of grant.
In September 1997, the board of directors granted options to purchase
100,000 shares of common stock outside the Plan to a member of the board of
directors. These options vested immediately and have an exercise price of $1.00
per share. No compensation expense was recorded for these options, as the option
price was established at the estimated fair market value of the common stock at
the date of grant.
The Company granted options to purchase 111,000 and 60,000 shares of common
stock under the Plan at $1.25 per share to key employees in January 1998 and
February 1998, respectively. These options vest 20% per year beginning upon the
first anniversary of the date of grant. The Company will record $726,750
($145,350 per year) of compensation expense over the five year period of the
options for the difference between the exercise price and the estimated fair
market value on the date of grant.
In February 1998, the board of directors approved an amendment to the
vesting period for options to purchase 397,000 shares of common stock granted
during 1996 and 1997 to nonemployee directors from a five year vesting period to
immediate vesting. As of the date of the amendment, options to purchase 150,000
of these shares were already vested. As this change in vesting period created a
new measurement date, the Company recorded compensation expense of $1,188,750
for the difference between the original exercise price and the estimated fair
market value on the date the options were amended.
F-16
<PAGE> 135
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the board of directors granted options to purchase 20,000
shares of common stock to each nonemployee director, and options to purchase
30,000 shares of common stock to a new nonemployee director. These options vest
immediately and have an exercise price of $1.25 per share. The Company has
recorded $977,500 as compensation expense for the difference between the
exercise price and the estimated fair market value on the date of grant.
In May 1998, the board of directors granted options to certain board
members and key employees to purchase 595,000 shares of common stock. These
options vest immediately and have an option price of $7.20 per share. Options to
purchase 170,000 shares expire on May 2003 and the remaining options to purchase
425,000 share expire in May 2008. All of these options vest immediately. The
Company did not record any compensation expense related to these grants as the
option price represented the estimated fair value of the Company's common stock
at the date of grant.
Stock option activity for the years ended December 31, 1996, 1997 and 1998
is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
SUBJECT TO EXERCISE PRICE
OPTIONS PER SHARE
---------------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1995............... 0 $0.00
Granted.............................................. 2,601,500 0.42
Canceled............................................. 0 0.00
Exercised............................................ 0 0.00
--------- -----
Options outstanding at December 31, 1996............... 2,601,500 0.42
Granted.............................................. 1,020,161 0.83
Canceled............................................. 0 0.00
Exercised............................................ (263,300) 0.30
--------- -----
Options outstanding at December 31, 1997............... 3,358,361 0.55
Granted.............................................. 1,212,675 5.23
Canceled............................................. (29,000) 1.22
Exercised............................................ (771,000) 0.76
--------- -----
Options outstanding at December 31, 1998............... 3,771,036 $2.00
========= =====
Exercisable at December 31, 1997..................... 2,157,361
=========
Exercisable at December 31, 1998..................... 3,088,561
=========
</TABLE>
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date at December 31, 1998:
<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> <C>
$0.30-$0.50.. 1,938,200 $0.42 5.82 1,763,200 $0.41
$0.60....... 436,661 0.60 8.07 421,661 0.60
$1.00-$1.25.. 584,500 1.11 8.92 223,700 1.11
$6.50-$8.00.. 811,675 7.20 9.47 680,000 7.22
--------- ---------
Total.. 3,771,036 $2.00 7.27 3,088,561 $1.99
========= =========
</TABLE>
F-17
<PAGE> 136
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it also allows
an entity to continue to measure compensation costs for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting in APB No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1997 using the minimum
value option pricing model as prescribed by SFAS No. 123 as the Company was
privately held. For options issued in 1998, the Company has determined the fair
value using the Black-Scholes pricing method. The Company used the following
weighted average assumptions for grants in 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate...................... 5.9% to 6.7% 6.3% to 6.7% 4.6% to 5.6%
Expected dividend yield...................... 0.0% 0.0% 0.0%
Expected lives............................... Five years Five years Five years
Expected volatility.......................... 0.0% 0.0% 55%
</TABLE>
The total value of the options granted during the years ended December 31,
1996, 1997 and 1998 were computed as approximately $199,000, $356,000 and $3.1
million, respectively, which would be amortized over the vesting period of the
options. If the Company had accounted for these options in accordance with SFAS
No. 123, the Company's reported pro forma net loss and pro forma net loss per
share for the years ended December 31, 1997 and 1998 would have increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Net loss attributable to common shareholders:
As reported................................... $(662,307) $(2,516,101) $(20,934,635)
Pro forma..................................... (669,307) (2,548,527) $(23,277,560)
Basic:
As reported................................... $ (.10) $ (.26) $ (1.35)
Pro forma..................................... (.11) (.27) (1.50)
Diluted:
As reported................................... (.10) (.26) (1.35)
Pro forma..................................... (.11) (.27) (1.50)
</TABLE>
WARRANTS
In October 1997, the Company issued warrants to certain principals of
Rodgers Capital Corporation in connection with services performed by Rodgers
Capital Corporation to assist the Company in securing a marketing agreement with
a third party. These warrants allow the holders to purchase 75,000 shares of
common stock for $1.00 per share. The warrants vest immediately and expire in
2002. The Company has recorded $41,000, the estimated fair value of these
warrants at the date of issuance using the minimum value method under SFAS No.
123, as warrants outstanding on the accompanying balance sheet.
F-18
<PAGE> 137
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
LEASES
For the year ended December 31, 1997, the Company incurred approximately
$37,000 in rent expense for leased office space from ProVesa, Inc., a subsidiary
of The InterCept Group, Inc. ("InterCept"), a company for which a director of
Towne serves as Chairman and Chief Executive Officer. The Company was also
allocated costs for utilities and accounting services from ProVesa, Inc. based
on usage by the Company. In February 1998, the Company began leasing office
space under a noncancelable operating lease agreement with a nonrelated third
party expiring in January 2003. For the year ended December 31, 1998, the
Company incurred approximately $210,000 in rent expense for this leased office
space. Future minimum rental payments for this noncancelable lease are as
follows:
<TABLE>
<S> <C>
1999........................................................ $184,205
2000........................................................ 184,205
2001........................................................ 184,205
2002........................................................ 184,205
2003........................................................ 15,350
--------
$752,170
========
</TABLE>
EMPLOYEE LEASING
Effective March 1998, the Company began leasing all personnel from an
independent personnel leasing company. Under the lease agreement, the Company
paid a percentage of compensation per leased employee (in addition to
compensation costs) to the employee leasing company to cover payroll processing,
unemployment insurance and workers' compensation. This employment lease
agreement was terminated in November 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers of the Company. The agreements, which are substantially similar,
provide for compensation to the officers in the form of annual base salaries and
bonuses based on earnings of the Company. The employment agreements also provide
for severance benefits upon the occurrence of certain events, including a change
in control, as defined.
10. RELATED-PARTY TRANSACTIONS
In September 1997, the Company loaned the President of the Company $78,990
to exercise stock options. The full recourse loan is secured by the underlying
common stock and personal assets of the president, bears interest at 8.5% per
annum, and is due in full in September 1999, as amended.
On April 1, 1998, the Company loaned its Chief Financial Officer $75,000
pursuant to a full recourse promissory note to fund the exercise of options to
acquire 75,000 shares of its common stock. This full recourse note accrues
interest at the rate of 8.75% per year and matures on the earlier of (i)
December 31, 1999 or (ii) the date on which the common stock purchased is sold.
F-19
<PAGE> 138
TOWNE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All shares of common stock received upon this exercise as well as other personal
assets of the executive were pledged as collateral for the loan.
In October 1998, the Company loaned the President of the Company $30,000 to
fund the exercise of options to acquire 100,000 shares of the Company's common
stock. The full recourse loan bears interest at 8.5% per annum, and is due in
full in February 2000.
In October 1998, the Company loaned the Chief Executive Officer of the
Company $50,000 to fund the exercise of options to acquire 100,000 shares of the
Company's common stock. The full recourse loan bears interest at 8.5% per annum,
and is due in full in February 2000.
During the years ended December 31, 1996, 1997 and 1998, the Company
incurred fees of approximately $37,000, $55,000 and $1.0 million, respectively,
for legal services to a law firm in which a director and shareholder of the
Company is a partner. As of December 31, 1997 and 1998, approximately $42,000
and $185,000 respectively, of such fees are included in accounts payable in the
accompanying balance sheets.
During the years ended December 31, 1996, 1997 and 1998, the Company
incurred costs of approximately $4,000, $15,000, and $121,000, respectively, for
communication services from InterCept. As of December 31, 1998, approximately
$30,000 of such fees is included in the accrued accounts payable in the
accompanying balance sheets.
In October 1997, Rodgers Capital Group purchased 200,000 shares of common
stock from the Company at a price of $1.00 per share. In addition, the Company
paid Rodgers Capital a total of $220,000 and $217,000 as compensation for
services provided by Rodgers Capital in connection with obtaining equity
investments for the Company during 1997 and 1998, respectively.
During 1998, the Company incurred costs of approximately $21,000 from
Phoenix International for commission fees related to sales of the Company's
products. Phoenix International has a strategic marketing alliance with the
Company and its Chairman and Chief Executive Officer is a director and
shareholder of the Company. The Company also invoiced Phoenix International
approximately $585,000 for marketing-related services of the Company's products.
During 1998, the Company incurred costs of approximately $113,000 from
Brown Burke Capital Partners, Inc. for merger and acquisition advisory services
in connection with the purchase of BSI (Note 4). One of the principals of this
corporation is a director and shareholder of the Company.
During 1998, the Company invoiced FLAG Financial Corporation $207,000 for
set-up fee and processing services related to the purchase of TOWNE CREDIT and
TOWNE FINANCE products. The Chief Executive Officer of FLAG Financial
Corporation is a director and shareholder of the Company.
11. QUARTERLY DATA (UNAUDITED)
Amounts for the quarter ended June 30, 1998 have been restated to reflect
reallocation of the purchase price of CCS (Note 4).
F-20
<PAGE> 139
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
FISCAL 1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUE............................................ $ 548 $ 875 $ 1,715 $ 3,260
COSTS AND EXPENSES:
Costs of processing, servicing, and support........ 374 403 544 706
Research and development........................... 74 102 117 13
Sales and marketing................................ 486 1,140 1,971 2,656
Stock compensation expense......................... 5,972 223 36 36
Employee termination costs......................... 0 0 0 2,291
General and administrative......................... 1,347 729 645 1,138
-------- ------- ------- -------
Total costs and expenses................. 8,253 2,597 3,313 6,840
-------- ------- ------- -------
OPERATING LOSS..................................... (7,705) (1,722) (1,598) (3,580)
-------- ------- ------- -------
OTHER EXPENSES (INCOME):
Interest expense (income), net..................... 64 68 (158) (238)
Other expense (income), net........................ 0 4 (9)
Financing costs for stock issued to nonemployees... 323 0 0 0
-------- ------- ------- -------
Total other expenses............................... 387 68 (154) (247)
-------- ------- ------- -------
Loss before extraordinary loss on early
extinguishment of debt........................... $ (8,092) $(1,790) $(1,444) $(3,333)
-------- ------- ------- -------
Extraordinary loss on early extinguishment of
debt............................................. $ 0 $ 0 $ 476 $ 0
-------- ------- ------- -------
NET LOSS........................................... $ (8,092) $(1,790) $(1,920) $(3,333)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS....... $(13,411) $(2,074) $(2,117) $(3,333)
======== ======= ======= =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
Basic.............................................. $ (1.11) $ (0.16) $ (0.12) $ (0.17)
======== ======= ======= =======
Diluted............................................ $ (1.11) $ (0.16) $ (0.12) $ (0.17)
======== ======= ======= =======
Weighted Average Common Shares Outstanding......... 12,077 13,297 16,997 19,155
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
FISCAL 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES............................................. $ 97 $ 88 $ 198 $ 340
COSTS AND EXPENSES:
Costs of processing, servicing, and support.......... 103 150 222 357
Research and development............................. 11 34 114 173
Sales and marketing.................................. 94 118 207 421
General and administrative........................... 170 181 268 521
------ ------ ------ -------
Total costs and expenses............................. 378 483 811 1,472
------ ------ ------ -------
OPERATING LOSS....................................... (282) (395) (613) (1,132)
------ ------ ------ -------
</TABLE>
F-21
<PAGE> 140
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
FISCAL 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OTHER EXPENSES (INCOME):
Interest expense (income), net....................... 19 26 29 22
Other expense (income), net.......................... (1) 0 0 0
Financing costs for stock issued to nonemployees..... 0 0 0 0
------ ------ ------ -------
Total other expenses................................. 18 26 29 22
------ ------ ------ -------
NET LOSS............................................. $ (300) $ (421) $ (642) $(1,154)
====== ====== ====== =======
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS:........ $ (300) $ (421) $ (642) $(1,154)
====== ====== ====== =======
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
Basic................................................ $(0.04) $(0.05) $(0.07) $ (0.10)
====== ====== ====== =======
Diluted.............................................. $(0.04) $(0.05) $(0.07) $ (0.10)
====== ====== ====== =======
Weighted Average Common Shares Outstanding........... 8,077 9,101 9,684 11,912
====== ====== ====== =======
</TABLE>
F-22
<PAGE> 141
BANKING SOLUTIONS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND
SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-24
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998........................................ F-25
Statement of Operations for the Years Ended December 31,
1996 and 1997 and for the Nine Months Ended September 30,
1998...................................................... F-26
Statement of Shareholders' Deficit for the Years Ended
December 31, 1996 and 1997 and for the Nine Months Ended
September 30, 1998........................................ F-27
Statement of Cash Flows for the Years Ended December 31,
1996 and 1997 and for the Nine Months Ended September 30,
1998...................................................... F-28
NOTES TO FINANCIAL STATEMENTS............................... F-29
</TABLE>
F-23
<PAGE> 142
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 years then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 15, 1999
F-24
<PAGE> 143
BANKING SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-25
<PAGE> 144
BANKING SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................................ $5,791,265 $8,085,813 $6,638,031
---------- ---------- ----------
COSTS AND EXPENSES:
Costs of processing, servicing, and support........... 2,994,431 3,867,946 3,225,843
Research and development.............................. 228,122 266,322 351,538
Sales and marketing................................... 282,501 459,774 844,068
General and administrative............................ 2,429,837 3,665,590 2,239,434
---------- ---------- ----------
Total costs and expenses...................... 5,934,891 8,259,632 6,660,883
---------- ---------- ----------
OPERATING LOSS.......................................... (143,626) (173,819) (22,852)
---------- ---------- ----------
INTEREST EXPENSE, NET................................... 3,268 5,719 12,866
---------- ---------- ----------
LOSS BEFORE INCOME TAXES................................ (146,894) (179,538) (35,718)
---------- ---------- ----------
PROVISION FOR INCOME TAXES (NOTE 4)..................... 0 0 0
---------- ---------- ----------
NET LOSS................................................ $ (146,894) $ (179,538) $ (35,718)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 145
BANKING SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ------ ----------- -----------
<S> <C> <C> <C> <C>
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)
========= ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 146
BANKING SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(146,894) $(179,538) $ (35,718)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation........................................ 32,906 35,415 51,302
Changes in operating assets and liabilities:
Accounts receivable............................... (163,310) 1,677 (99,521)
Other assets...................................... (10,756) 1,250 0
Accounts payable.................................. 31,325 43,464 32,890
Accrued liabilities............................... 43,547 (8,445) 14,591
Deferred revenue.................................. 267,738 78,356 (65,154)
--------- --------- ---------
Net cash provided by (used in) operating
activities................................... 54,556 (27,821) (101,610)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, net............................. (54,876) (132,752) (27,843)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt...................................... (11,911) (79,427) (185,758)
Proceeds from long-term borrowings..................... 0 240,000 315,211
--------- --------- ---------
Net cash (used in) provided by financing
activities................................... (11,911) 160,573 129,453
--------- --------- ---------
NET DECREASE IN CASH..................................... (12,231) 0 0
CASH, BEGINNING OF PERIOD................................ 12,231 0 0
--------- --------- ---------
CASH, END OF PERIOD...................................... $ 0 $ 0 $ 0
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................. $ 3,268 $ 9,586 $ 16,434
========= ========= =========
Cash paid for taxes.................................... $ 159,855 $ 0 $ 0
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 147
BANKING SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
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 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.
F-29
<PAGE> 148
BANKING SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed as incurred.
Depreciation is provided using the straight-line method for financial reporting.
The detail of property and equipment at December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
USEFUL
1996 1997 LIVES
-------- -------- -------------------
<S> <C> <C> <C>
Furniture and fixtures......................... $ 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
======== ========
</TABLE>
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment, to determine whether any impairments are other
than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
RESEARCH AND DEVELOPMENT 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 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.
F-30
<PAGE> 149
BANKING SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
At December 31, 1997, aggregate maturities of long-term debt are as
follows:
<TABLE>
<S> <C>
1998........................................................ $163,956
1999........................................................ 7,671
2000........................................................ 8,349
2001........................................................ 9,087
2002........................................................ 4,003
--------
$193,066
========
</TABLE>
F-31
<PAGE> 150
BANKING SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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,
1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Income tax benefit computed at the federal statutory
rate................................................... $ (49,944) $(61,043)
Other, net................................................ 5,795 3,465
Change in valuation allowance............................. 44,149 57,578
--------- --------
$ 0 $ 0
========= ========
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets (liabilities) at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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:
<TABLE>
<S> <C>
1998........................................................ $187,512
1999........................................................ 186,228
2000........................................................ 180,234
2001........................................................ 172,874
2002........................................................ 33,532
--------
$760,380
========
</TABLE>
Total rent expense under operating leases was $43,859 and $126,707 for the
years ended December 31, 1996 and 1997, respectively.
F-32
<PAGE> 151
BANKING SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-33
<PAGE> 152
FORSEON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-35
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and 1998.... F-36
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997 and 1998.............................. F-37
Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 1996, 1997 and 1998.................. F-38
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998.............................. F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-40
</TABLE>
F-34
<PAGE> 153
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Forseon Corporation:
We have audited the accompanying consolidated balance sheets of Forseon
Corporation as of June 30, 1997 and 1998 and the related consolidated statements
of operations, shareholders' equity and cash flows for the three years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forseon
Corporation as of June 30, 1997 and 1998 and the results of their operations and
their cash flows for the three years then ended in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
September 18, 1998
Los Angeles, California
F-35
<PAGE> 154
FORSEON CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,213,000 $ 932,000
Accounts receivable, less allowance for doubtful accounts
of $41,000 and $34,000 in 1997 and 1998,
respectively........................................... 942,000 786,000
Deferred income taxes (note 4)............................ 104,000 69,000
Income tax receivable..................................... -- 59,000
Other current assets...................................... 85,000 88,000
---------- ----------
Total current assets.............................. 2,344,000 1,934,000
Deferred income taxes (note 4).............................. 10,000 63,000
Land, building and equipment, net (note 3).................. 1,441,000 1,374,000
---------- ----------
$3,795,000 $3,371,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5)................ $ 255,000 $ 273,000
Accounts payable.......................................... 182,000 178,000
Accrued commissions payable............................... 498,000 456,000
Accrued wages and fringe benefits......................... 455,000 495,000
Accrued expenses.......................................... 96,000 99,000
Income taxes payable (note 4)............................. 55,000 2,000
---------- ----------
Total current liabilities......................... 1,541,000 1,503,000
---------- ----------
Long-term debt, excluding current portion (note 5).......... 461,000 187,000
---------- ----------
Redeemable common stock (note 7)............................ 249,000 548,000
Net shareholders' equity (notes 6 and 7):
Common stock, $.01 par value. Authorized 5,000,000 shares;
issued and outstanding 640,919 and 651,113 shares in
1997 and 1998, respectively............................ 6,000 7,000
Capital in excess of par value............................ 1,350,000 1,137,000
Retained earnings (accumulated deficit)................... 188,000 (11,000)
---------- ----------
Total net shareholders' equity.................... 1,544,000 1,133,000
Commitments and contingencies (note 8)
---------- ----------
$3,795,000 $3,371,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 155
FORSEON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $11,670,000 $12,051,000 $12,004,000
Costs and Expenses:
Costs of processing............................... 2,375,000 2,620,000 2,311,000
Research and development.......................... 783,000 620,000 801,000
Sales, servicing and marketing.................... 6,519,000 6,829,000 7,310,000
Employee stock ownership plan..................... 102,000 -- --
General and administrative........................ 1,346,000 1,395,000 1,746,000
----------- ----------- -----------
Total costs and expenses.................. 11,125,000 11,464,000 12,168,000
Operating profit (loss)........................... 545,000 587,000 (164,000)
Other Expenses -- Interest Expense.................. 67,000 44,000 48,000
----------- ----------- -----------
Income (loss) before income tax provision
(benefit)............................... 478,000 543,000 (212,000)
Income tax provision (benefit) (note 4)............. 233,000 241,000 (34,000)
----------- ----------- -----------
Net income (loss)......................... $ 245,000 $ 302,000 $ (178,000)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 156
FORSEON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
CAPITAL IN RETAINED
COMMON STOCK EXCESS OF EARNINGS
------------------ PAR (ACCUMULATED
SHARES AMOUNT VALUE DEFICIT) TOTAL
-------- ------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995................ 752,920 $ 8,000 $ 410,000 $ 604,000 $1,022,000
Net income for the year................. -- -- -- 245,000 245,000
Stock options exercised................. 1,000 -- 4,000 -- 4,000
Stock bonus awarded..................... 26,667 -- 105,000 -- 105,000
Contribution of newly issued shares of
ESOP.................................. 17,000 -- 102,000 -- 102,000
Repurchase of common stock.............. (23,561) -- -- (137,000) (137,000)
Change in value of redeemable common
stock (note 7)........................ -- -- (22,000) -- (22,000)
-------- ------- ---------- --------- ----------
BALANCE AT JUNE 30, 1996................ 774,026 8,000 599,000 712,000 1,319,000
Net income for the year................. -- -- -- 302,000 302,000
Repurchase of common stock (note 7)..... (133,107) (2,000) -- (826,000) (828,000)
Change in value of redeemable common
stock (note 7)........................ -- -- 751,000 -- 751,000
-------- ------- ---------- --------- ----------
BALANCE AT JUNE 30, 1997................ 640,919 6,000 1,350,000 188,000 1,544,000
Net loss for the year................... -- -- -- (178,000) (178,000)
Repurchase of common stock (note 7)..... (3,096) -- -- (21,000) (21,000)
Shares redeemed......................... (1,000) -- -- -- --
Issuance of common stock................ 14,290 1,000 86,000 -- 87,000
Change in value of redeemable common
stock (note 7)........................ -- -- (299,000) -- (299,000)
-------- ------- ---------- --------- ----------
BALANCE AT JUNE 30, 1998................ 651,113 $ 7,000 $1,137,000 $ (11,000) $1,133,000
======== ======= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 157
FORSEON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 245,000 $ 302,000 $ (178,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 157,000 171,000 173,000
Provisions for doubtful accounts.................... 66,000 62,000 48,000
Compensation expense on issuance of common stock.... -- -- 87,000
Deferred income taxes............................... 194,000 153,000 (18,000)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable....... (48,000) (86,000) 108,000
Increase in income tax receivable................ -- -- (59,000)
(Increase) decrease in other current assets...... (36,000) 22,000 (3,000)
Increase (decrease) in accounts payable.......... 108,000 (142,000) (4,000)
Increase (decrease) in accrued expenses.......... (390,000) 122,000 1,000
Increase (decrease) in income taxes payable...... (31,000) 54,000 (53,000)
---------- ---------- ----------
Cash provided by operating activities....... 265,000 658,000 102,000
---------- ---------- ----------
Cash used in investing activities -- capital
expenditures............................................. (266,000) (264,000) (106,000)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of long-term debt............................... 55,000 733,000 --
Principal payments on long-term debt..................... (376,000) (413,000) (256,000)
Issuance of common stock................................. 211,000 -- --
Repurchase of common stock............................... (137,000) (828,000) (21,000)
---------- ---------- ----------
Cash used in financing activities........... (247,000) (508,000) (277,000)
---------- ---------- ----------
Net decrease in cash and cash equivalents... (248,000) (114,000) (281,000)
Cash and cash equivalents at beginning of year............. 1,575,000 1,327,000 1,213,000
---------- ---------- ----------
Cash and cash equivalents at end of year................... $1,327,000 $1,213,000 $ 932,000
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash and cash equivalents paid during the year for:
Interest............................................ $ 50,000 $ 43,000 $ 48,000
Income taxes........................................ $ 72,000 $ 32,000 $ 96,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 158
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Forseon Corporation (Forseon or the Company) provides merchandise
forecasting and related services to independent specially retail stores
throughout the United States. In addition, accounts receivable billing,
point-of-sale data collection, and sales and inventory analysis services are
offered by Charter Data Systems, Inc. (CDS), a wholly owned subsidiary. Through
January 1996, the Company was named Retail Merchandising Service Automation,
Inc. and continues to use Retail Merchandising Service Automation (RMSA) as a
trade name.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions are eliminated in consolidation.
(B) RECOGNITION OF REVENUE
Generally, revenues for services are recorded as services are provided and
costs are expensed as incurred. The percentage-of-completion method is used for
the recognition of revenue associated with software conversion and installation
contracts. Revenue from the licensing, in perpetuity, of software is recognized
upon acceptance by the client. Revenues from contracts subject to discretionary
acceptance by the client are recognized when the product is unconditionally
accepted. Revenues from software support and maintenance services are recognized
equally over the related support and maintenance period (see also item (j) of
note 1).
(C) DEPRECIATION AND AMORTIZATION
Land, building and equipment are stated at cost. Depreciation is computed
using accelerated methods over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed using an accelerated method
over the estimated useful lives of the improvements, which are less than the
anticipated period of occupancy of the leasehold premises, including anticipated
lease renewals.
(D) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Certain costs related to the development of software for licensing to
customers may be capitalized and amortized over the expected useful life of the
software. Capitalization begins upon the establishment of technological
feasibility of the project, including the completion of a detailed program
design or a working model. Capitalization ends upon the general release of the
software to customers. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain external
factors including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technologies. No software development costs were capitalized in fiscal
years 1996, 1997 and 1998.
F-40
<PAGE> 159
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(E) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under that method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
(F) CASH EQUIVALENTS
All highly liquid securities purchased with an original maturity of three
months or less are considered cash equivalents. Cash and cash equivalents
included cash of $523,000 and $536,000 and commercial paper of $690,000 and
$396,000 at June 30, 1997 and 1998, respectively.
(G) USE OF ESTIMATES
The preparation of the financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 fiscal
year. Actual results could differ from those estimates.
(H) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. No impairment adjustment
was recorded during fiscal 1996, 1997 and 1998.
(I) STOCK OPTION PLAN
The Company accounts for its stock options under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25 and provide pro forma net income (loss)
disclosures for employee stock option grants made in fiscal year 1997 and 1998
as if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provision of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
F-41
<PAGE> 160
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(J) NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. There is no difference between net income (loss) and
comprehensive income loss for the Company.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 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 and annual financial reports issued to shareholders. SFAS
No. 131 is effective for financial statements issued for periods beginning after
December 15, 1997. The Company operates principally in one business segment;
accordingly, the adoption of SFAS No. 131 will not have an impact on the
consolidated financial statements.
STARTUP ACTIVITIES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Startup
Activities." This SOP No. 98-5 requires that costs incurred during startup
activities, including organization costs, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Initial application of the SOP No. 98-5 should be as of the beginning of
the fiscal year in which the SOP is first adopted and should be reported as a
cumulative effect of a change in accounting principles. Adoption of SOP No. 98-5
will not have a material impact on the consolidated financial statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the FASB issued Statement of Financial Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
modifies the accounting for derivative and hedging activities and is effective
for fiscal years beginning after December 15, 1999. Adoption of SFAS No. 133
will not have a material impact on the consolidated financial statements.
SOFTWARE REVENUE RECOGNITION
SOP No. 97-2, "Software Revenue Recognition" was issued in October 1997 and
addresses software revenue recognition matters. The SOP No. 97-2 supersedes SOP
No. 91-1 and is effective for transactions entered into for fiscal years
beginning after December 15, 1997. Based upon its reading and interpretation of
SOP No. 97-2 the Company believes its current revenue recognition policies and
practices are materially consistent with the SOP No. 97-2. However,
F-42
<PAGE> 161
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
implementation guidelines for this standard have not yet been issued and a wide
range of potential interpretations are being discussed by the accounting
profession. Once available, such implementation guidance could lead to
unanticipated changes in the Company's current revenue accounting practices, and
such changes could materially adversely affect the Company's future revenue and
earnings. Such implementation guidance may necessitate substantial changes in
the Company's business practices in order for the Company to continue to
recognize a substantial portion of its license fee revenue upon delivery of its
software products. Such changes may reduce demand, extend sales cycles, increase
administrative costs and otherwise adversely affect operations.
2. EMPLOYEE STOCK OWNERSHIP PLAN AND 401(K) PLAN
The Company has adopted an employee stock ownership plan (the ESOP)
covering all employees with more than one year of service. Contributions are
allocated to individual employee accounts and are invested principally in the
Company's common stock. Generally, employees will receive distributions from the
plan only upon separation from service, retirement, death or permanent
disability.
The Company's policy is to make discretionary contributions to the plan. In
fiscal 1996, the Company contributed 17,000 newly issued shares to the ESOP,
representing an expense of $102,000. In fiscal years 1997 and 1998, the Company
made no contributions to the Plan.
The ESOP is administered by a committee, which is comprised of four
employees appointed by the Board of Directors. All ESOP assets are held by a
non-independent trustee.
Effective January 1, 1997, the Company adopted a 401(k) plan generally
covering all employees over age 21 and more than six months of service. Employee
contributions may range between 2% and 15% of compensation, not to exceed
$10,000 per year. The Company matches 25% of employee contributions up to 6% of
compensation, representing an expense of $33,000 in fiscal year 1997 and $73,000
in fiscal year 1998. Generally, employees will receive distributions from the
plan only upon separation from service, retirement, death or permanent
disability.
3. LAND, BUILDING AND EQUIPMENT:
Land, building and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30, RANGE OF
----------------------- LIVES IN
1997 1998 YEARS
---------- ---------- --------------
<S> <C> <C> <C>
Land............................................... $ 404,000 $ 404,000 --
Building........................................... 931,000 931,000 30
Data processing equipment.......................... 1,102,000 1,174,000 3 to 7
Furniture and fixtures............................. 276,000 265,000 5 to 7
Automobiles........................................ 26,000 26,000 5
Leasehold improvements............................. 143,000 151,000 7 to 19
---------- ----------
2,882,000 2,951,000
Less accumulated depreciation and amortization..... 1,441,000 1,577,000
---------- ----------
$1,441,000 $1,374,000
========== ==========
</TABLE>
F-43
<PAGE> 162
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
The income tax provision (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ 41,000 $(40,000)
State................................................ 39,000 48,000 24,000
Deferred:
Federal.............................................. 162,000 130,000 (18,000)
State................................................ 32,000 22,000 --
-------- -------- --------
$233,000 $241,000 $(34,000)
======== ======== ========
</TABLE>
The income tax provision (benefit) differs from the amounts computed by
applying the U.S. Federal tax rate of 34% to the income before income tax
provision. A reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income tax provision (benefit) calculated at
statutory rate....................................... $163,000 $184,000 $(72,000)
Effect of graduated tax rates.......................... -- -- 7,000
State income tax provision, net of Federal tax
benefit.............................................. 47,000 46,000 15,000
Other, net............................................. 23,000 11,000 16,000
-------- -------- --------
$233,000 $241,000 $(34,000)
======== ======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the Company's deferred income tax benefits at June 30, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued costs not deductible until following tax year..... $ 67,000 $ 48,000
Deferred revenue taxable in current year.................. 20,000 11,000
Direct write-off method for doubtful accounts............. 17,000 14,000
Tax returns versus financial statement depreciation....... 10,000 3,000
Net operating loss carryforwards.......................... -- 45,000
Other..................................................... -- 15,000
-------- --------
114,000 136,000
Deferred tax liability............................ -- 4,000
-------- --------
Net deferred tax assets........................... $114,000 $132,000
======== ========
</TABLE>
Management believes it is more likely than not that the Company will
realize the $132,000 in net deferred tax assets at June 30, 1998 as the
temporary differences become available to reduce future taxable income and,
accordingly, has not recorded a valuation allowance as of June 30, 1998.
F-44
<PAGE> 163
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $111,000 and $148,000 for Federal and state income tax purposes,
respectively. If not used to offset future taxable income, the net operating
loss carryforwards will expire between June 30, 2003 and June 30, 2013.
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Promissory note for purchase of 105,000 shares of common
stock from Mr. Vernon Rossi (note 7) annual principal and
interest payments of $248,000, interest rate of 8.25%, due
December 31, 1999......................................... $557,000 $347,000
Notes payable to former ESOP participants (note 7), annual
principal payments of approximately $46,000, average
interest rate of 7%, due from 1998 to 2002................ 159,000 113,000
Note payable to bank........................................ -- --
-------- --------
716,000 460,000
Current portion............................................. 255,000 273,000
-------- --------
Long-term debt.................................... $461,000 $187,000
======== ========
</TABLE>
The note payable to the bank was repaid in 1997.
The aggregate annual maturities for long-term debt in fiscal years
subsequent to June 30, 1998 are as follows:
<TABLE>
<S> <C>
Fiscal year:
1999........................................................ $273,000
2000........................................................ 159,000
2001........................................................ 21,000
2002........................................................ 7,000
</TABLE>
6. STOCK OPTION AND STOCK BONUS PLANS
The Company has two stock option plans. The Company's 1997 stock option
plan, which expires as to the grant of new stock options on November 7, 2007,
provides that stock options for a maximum of 100,000 shares of common stock may
be granted to directors, employees or consultants of the Company. The exercise
price of options granted must be equal to or greater than 85% of the stock's
fair market value at the date of grant. The option may be exercised up to ten
years after the option is granted. Options which are exercised, canceled or are
not exercised are available for subsequent reissuance.
The Company's 1987 stock option plan provides that stock options for a
maximum of 130,000 shares of common stock may be granted to directors or
employees of the Company. New stock options may not be granted under this plan
after September 16, 1997. Previously granted stock options will continue until
they are canceled, exercised or otherwise expire, in
F-45
<PAGE> 164
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with the terms of the specific stock option grant. The exercise price
of options granted must be equal to or greater than the stock's fair market
value at the date of grant. The option may be exercised up to ten years after
the option is granted.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at beginning
of year........................ 120,500 $4.19 118,850 $4.27 120,200 $4.38
Options granted.................. 6,600 6.00 7,000 6.75 13,400 4.90
Options exercised................ (1,000) 4.00 -- -- (14,290) 4.20
Options canceled................. 7,250) 4.60 (2,150) 6.00 (19,710) 4.20
Options expired.................. -- -- (3,500) 4.57 (8,175) 4.78
------- ----- ------- ----- ------- -----
Shares under option at end of
year........................... 118,850 $4.27 120,200 $4.38 91,425 $4.48
======= ===== ======= ===== ======= =====
</TABLE>
The number of shares available for future grants was 8,800 and 86,000 at
June 30, 1997 and 1998, respectively. As of June 30, 1996, 112,500 shares were
exercisable, at exercise prices ranging from $3.85 to $4.60 per share and a
weighted average exercise price of $4.17. As of June 30, 1997, 113,200 shares
were exercisable, at exercised prices ranging from $3.85 to $6.00 per share and
a weighted average exercise price of $4.23. As of June 30, 1998, 87,210 shares
were exercisable, at exercise prices ranging from $3.85 to $6.75 per share, a
weighted average exercise price of $4.37 and a weighted average remaining
contract life of 5.5 years.
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $2.87, $3.13 and $4.16, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: fiscal year 1996 -- expected dividend yield 0%, risk interest rate
of 6.63%, volatility assumed to be 0, and an expected life of ten years; fiscal
year 1997 -- expected dividend yield 0%, risk-free interest rate of 6.33%,
volatility assumed to be 0, and an expected life of ten years; fiscal year
1998 -- expected dividend yield 0%, risk-free interest rate of 5.9% and 5.83%,
volatility factor assumed to be 0, and expected life of ten years.
The Company applies APB Opinion No. 25 in accounting for its stock options
plans, and, accordingly, recognized compensation expense for stock options
granted in fiscal years 1997 and 1998 of $0 and $87,000, respectively. Had the
Company determined compensation expense based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income (loss)
would have been reduced (increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported......................................... $245,000 $302,000 $(178,000)
Pro forma........................................... 227,000 292,000 (247,000)
</TABLE>
F-46
<PAGE> 165
FORSEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. REDEEMABLE COMMON STOCK
The Company may be required to repurchase common stock distributed to
separated ESOP participants. Generally, the Company must repurchase this stock
at its most recent appraised value, as determined annually by an independent
valuation. The Company may, at its option, pay for the repurchased stock through
equal annual installments over five years, plus interest, or in a lump sum. In
fiscal years 1996, 1997 and 1998, the Company purchased $137,000, $172,000, and
$21,000, respectively, in common stock as a result of this requirement. At June
30, 1997, and 1998, the Company could be required to repurchase a maximum of
$90,000, and $259,000 in common stock, if all separated ESOP participants
exercised their rights to have the Company repurchase their stock.
The Company may 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 June 30, 1997,
and 1998, the Company could be required to repurchase a maximum of $159,000, and
$190,000 in common stock if all eligible ESOP participants exercised these
rights.
Through March 18, 2000, the Company may be required to repurchase common
stock owned by two former directors of the Company. The Company must repurchase
this stock at its most recent appraised value, as determined annually by an
independent valuation. At June 30, 1998, the Company could be required to
repurchase approximately $99,000 in common stock as a result of this commitment.
The Company may, at its option, pay for the repurchased stock through equal,
monthly installments over twenty-four months, plus interest, or in a lump sum.
In January 1997, the Company purchased 105,000 shares of common stock from
the retired founder of the Company as a result of an option granted in 1988. In
accordance with the terms of the option, the $6.25 per share purchase price was
equal to the appraised value of the Company's common stock as of June 30, 1996,
as determined by the ESOP's independent valuation consultant.
As certain shareholders have the right to require the Company to repurchase
outstanding shares of common stock as discussed above, the Company has
classified this value as redeemable common stock on the consolidated balance
sheet.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain office facilities under operating leases which
are, for the most part, renewable. The future minimum rental obligations under
noncancelable lease agreements at June 30, 1998 totaled $134,000, payable
$47,000, $34,000, $26,000, $17,000 and $10,000 in fiscal years 1999 through
2003, respectively. Total rental expense for all operating leases was $169,000,
$171,000 and $164,000 for fiscal years 1996, 1997 and 1998, respectively.
The Company is party to various legal action which arose in the normal
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-47
<PAGE> 166
APPENDIX A
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
<PAGE> 167
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 -- THE MERGER.............................................. A-1
1.1 The Merger.................................................. A-1
1.2 Closing..................................................... A-1
1.3 Effective Time of the Merger................................ A-2
1.4 Articles of Incorporation; Bylaws........................... A-2
1.5 Directors and Officers of the Surviving Corporation......... A-2
ARTICLE 2 -- CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES..... A-2
2.1 Consideration............................................... A-2
2.1(a) Company Common Stock................................. A-2
2.1(b) Treasury Shares...................................... A-2
2.1(c) Merger Sub Common Stock.............................. A-2
2.1(d) Escrow of Certain Shares............................. A-3
2.2 No Fractional Shares........................................ A-3
2.3 Surrender and Exchange of Certificates Representing Company
Common Stock................................................ A-3
2.3(a) Exchange Agent....................................... A-3
2.3(b) Surrender of Certificates............................ A-3
2.3(c) Lost Certificates.................................... A-4
2.3(d) No Interest.......................................... A-4
2.3(e) Dividends on Parent Common Stock..................... A-4
2.3(f) No Liability......................................... A-4
2.4 Share Calculations.......................................... A-4
2.5 Stock Transfer Books........................................ A-4
2.6 Company Stock Options and Other Securities.................. A-5
2.7 Adjustments................................................. A-5
ARTICLE 3 -- RULES OF CONSTRUCTION................................... A-6
ARTICLE 4 -- REPRESENTATIONS AND WARRANTIES OF COMPANY AND THE
MANAGEMENT STOCKHOLDERS................................. A-8
4.1 Corporate Organization...................................... A-8
4.2 Capitalization.............................................. A-9
4.3 Authority; No Violation..................................... A-10
4.4 Financial Statements........................................ A-11
4.5 Broker's and Other Fees..................................... A-12
4.6 Absence of Certain Changes or Events........................ A-12
4.7 Legal Proceedings........................................... A-13
4.8 Taxes and Tax Returns....................................... A-14
4.9 Benefit Plans............................................... A-15
4.10 Compliance with Applicable Laws............................. A-18
4.11 Certain Contracts........................................... A-19
4.12 Properties and Insurance.................................... A-20
4.13 Environmental Matters....................................... A-21
4.14 Intellectual Property....................................... A-22
4.15 Adequacy of Technical Documentation......................... A-23
4.16 Third-Party Components in Software.......................... A-24
4.17 Third-Party Interests or Marketing Rights in Software....... A-24
</TABLE>
i
<PAGE> 168
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.18 No Parachute Payments....................................... A-24
4.19 Absence of Certain Agreements and Practices................. A-24
4.20 Major Vendors and Customers................................. A-25
4.21 Accounts Receivable......................................... A-25
4.22 Sufficiency of Rights....................................... A-25
4.23 Solvency.................................................... A-25
4.24 Combinations Involving Company.............................. A-25
4.25 Bank Accounts............................................... A-25
4.26 Labor Relations............................................. A-26
4.27 Year 2000 Matters........................................... A-26
4.28 Change in Control Provisions................................ A-26
4.29 Pooling-of-Interests........................................ A-26
4.30 No Prior Convictions........................................ A-26
4.31 Statements; Proxy Statement/Prospectus...................... A-26
4.32 Disclosure.................................................. A-27
ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT
STOCKHOLDERS............................................ A-27
5.1 Ownership of Shares......................................... A-27
5.2 Authorization............................................... A-28
5.3 Absence of Violations or Conflicts.......................... A-28
5.4 No Consents Required........................................ A-28
5.5 No Claims Against Company................................... A-28
5.6 Litigation Related to this Agreement........................ A-29
5.7 Resales of Parent Common Stock.............................. A-29
5.8 Tax Advice.................................................. A-29
ARTICLE 6 -- REPRESENTATIONS AND WARRANTIES OF PARENT................ A-29
6.1 Corporate Organization...................................... A-29
6.2 Capitalization.............................................. A-30
6.3 Authority; No Violation..................................... A-31
6.4 Parent SEC Reports; Financial Statements.................... A-32
6.5 Broker's and Other Fees..................................... A-33
6.6 Parent Common Stock......................................... A-33
6.7 No Material Adverse Effect on Parent........................ A-33
6.8 Absence of Certain Changes or Events........................ A-33
6.9 Legal Proceedings........................................... A-33
6.10 Taxes and Tax Returns....................................... A-34
6.11 Compliance with Applicable Laws............................. A-34
6.12 Pooling-of-Interests........................................ A-35
6.13 Statements; Proxy Statement/Prospectus...................... A-35
6.14 Contract Default............................................ A-35
6.15 Disclosure.................................................. A-35
ARTICLE 7 -- COVENANTS AND CERTAIN ACTIONS OF THE PARTIES............ A-36
7.1 Conduct of Business......................................... A-36
7.2 Negative Covenants.......................................... A-36
</TABLE>
ii
<PAGE> 169
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.3 No Solicitation............................................. A-39
7.4 Current Information......................................... A-40
7.5 Access to Properties and Records; Confidentiality........... A-40
7.6 Governmental Matters; Consents; Cooperation, etc............ A-41
7.7 Parties' Efforts; Further Assurances; Cooperation........... A-41
7.8 Public Announcements........................................ A-42
7.9 Failure to Fulfill Conditions............................... A-42
7.10 Disclosure Supplements...................................... A-42
7.11 Affiliates.................................................. A-43
7.12 Pooling-of-Interests........................................ A-43
7.13 Employee Matters............................................ A-43
7.13(a) Employee Benefits................................... A-43
7.13(b) Employment Agreements............................... A-44
7.13(c) Certain Benefit Plan Matters........................ A-44
7.13(d) Stock Options....................................... A-44
7.14 Proxy Statement/Prospectus; Registration Statement; Other
Filings..................................................... A-45
7.15 Company Stockholders' Meeting............................... A-45
7.16 Termination of Puts and Other Agreements.................... A-46
7.17 No Transfers................................................ A-46
7.18 Tax Matters................................................. A-46
7.18(a) Transfer Taxes...................................... A-46
7.18(b) Cooperation and Exchange of Information............. A-46
7.18(c) Tax-Free Transaction................................ A-46
7.19 Listing of Merger Consideration............................. A-47
7.20 Special Provisions with Respect to Company.................. A-47
7.21 Existing Indemnification Obligations........................ A-47
7.22 Solvency of Stockholders and Other Stockholder Matters...... A-47
7.23 Future Commission Reports................................... A-47
ARTICLE 8 -- CLOSING CONDITIONS...................................... A-48
8.1 Conditions of Each Party's Obligations Under this
Agreement................................................... A-48
8.1(a) Authorizations and Governmental Filings.............. A-48
8.1(b) Suits and Proceedings................................ A-48
8.1(c) Escrow Agreement..................................... A-48
8.1(d) Effectiveness of Registration Statement.............. A-48
8.1(e) Pooling Letters...................................... A-48
8.2 Conditions to the Obligations of Parent and Merger Sub Under
this Agreement.............................................. A-49
8.2(a) Covenants and Agreements; Consents................... A-49
8.2(b) Opinion of Counsel................................... A-49
8.2(c) Certificates......................................... A-49
8.2(d) Management Stockholder Employment Agreements......... A-49
8.2(e) Employment Agreements................................ A-49
8.2(f) Resignations......................................... A-49
8.2(g) Remediation of Benefit Plans......................... A-49
8.2(h) Cancellation and Severance Agreements................ A-49
8.2(i) Fairness Opinion..................................... A-49
8.2(j) Nonsolicitation, Work Product and Confidentiality
Agreements........................................... A-50
</TABLE>
iii
<PAGE> 170
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
8.2(k) Completion of Due Diligence on Company............... A-50
8.2(l) Stockholder Approval................................. A-50
8.2(m) No Material Adverse Change on Company................ A-50
8.3 Conditions to the Obligations of Company and the Management
Stockholders Under this Agreement........................... A-51
8.3(a) Covenants and Agreements; Consents................... A-51
8.3(b) Opinion of Counsel to Parent......................... A-51
8.3(c) Certificates......................................... A-51
8.3(d) Merger Consideration................................. A-51
8.3(e) No Material Adverse Change on Parent................. A-51
8.3(f) Management Stockholder Employment Agreements......... A-52
8.3(g) Tax Opinion.......................................... A-52
ARTICLE 9 -- TERMINATION, AMENDMENT AND WAIVER....................... A-52
9.1 Termination................................................. A-52
9.2 Effect of Termination....................................... A-53
9.3 Specific Performance........................................ A-53
9.4 Amendment................................................... A-54
9.5 Extension; Waiver........................................... A-54
ARTICLE 10 -- INDEMNIFICATION........................................ A-54
10.1 Indemnification by Stockholders............................. A-54
10.2 Indemnification by Parent................................... A-55
10.3 Claims for Indemnification.................................. A-55
10.4 Matters Involving Third Parties............................. A-55
10.5 Settlement of Indemnification Claims After Closing.......... A-56
10.6 Manner of Indemnification by Stockholders................... A-57
10.7 Indemnification Exclusive Remedy............................ A-57
10.8 Certain Limitations......................................... A-57
ARTICLE 11 -- STOCKHOLDERS' REPRESENTATIVE........................... A-57
11.1 Appointment; Acceptance..................................... A-57
11.2 Actions..................................................... A-58
11.3 Successors.................................................. A-58
11.4 Effectiveness............................................... A-58
ARTICLE 12 -- MISCELLANEOUS.......................................... A-58
12.1 Expenses.................................................... A-58
12.2 Notices..................................................... A-59
12.3 Parties in Interest......................................... A-59
12.4 Entire Agreement............................................ A-60
12.5 Counterparts................................................ A-60
12.6 Governing Law and Venue..................................... A-60
12.7 Invalidity of any Part...................................... A-60
12.8 Time of the Essence; Computation of Time.................... A-60
12.9 Arbitration................................................. A-61
</TABLE>
iv
<PAGE> 171
EXHIBITS AND SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
Exhibit 2.1 Form of Escrow Agreement
Exhibit 2.3 Form of Company Stockholder Certificate
Exhibit 7.2 Form of Stockholder Employment Management Agreements
Exhibit 7.5 Confidentiality Agreement
Exhibit 7.11 Form of Affiliate Representation Letter
Exhibit 7.12 Pooling Conditions
Exhibit 7.13(b) Form of Employment Agreements
Exhibit 7.16 List of Puts and Other Agreements to be Terminated
Exhibit 8.2(h) Cancellation Agreements
Exhibit 8.2(j) Form of Noncompetition, Nonsolicitation and Confidentiality
Agreement
Exhibit 8.3(g) Form of Tax Opinion
</TABLE>
COMPANY DISCLOSURE
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<S> <C>
Schedule 4.1 Corporate Documents
Schedule 4.2 Company's Capitalization
Schedule 4.3 Company Approvals; Defaults; Conflicts and Liens Created
Schedule 4.4 Company Financial Statements
Schedule 4.5 Broker's and Other Fees
Schedule 4.6 Certain Changes and Events
Schedule 4.7 Legal Proceedings
Schedule 4.8 Taxes and Tax Returns
Schedule 4.9 Employee Benefit Plans
Schedule 4.10 Compliance with Applicable Laws
Schedule 4.11 Material Contracts
Schedule 4.12 Insurance Policies
Schedule 4.14 Intellectual Property
Schedule 4.14(a) Procedures for Copyright Protection
Schedule 4.14(b) Procedures for Trade Secret Protection
Schedule 4.14(d) Absence of Claims
Schedule 4.14(e) Patents, Patent Applications, Trade Names
Schedule 4.18 Parachute Payments
Schedule 4.19 Certain Agreements and Practices
Schedule 4.20 Major Vendors and Customers
Schedule 4.21 Accounts Receivable
Schedule 4.22 Sufficiency of Rights
Schedule 4.23 Solvency
Schedule 4.25 Bank Accounts
Schedule 4.26 Labor Relations
Schedule 4.27 Year 2000 Matters
Schedule 4.28 Change in Control
</TABLE>
MANAGEMENT STOCKHOLDER DISCLOSURE
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<S> <C>
Schedule 5.3 Absence of Violations or Conflicts
Schedule 5.4 Consents
Schedule 5.5 Claims
</TABLE>
v
<PAGE> 172
PARENT DISCLOSURE
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<S> <C>
Schedule 6.1 Parent's Subsidiaries; Corporate Documents
Schedule 6.2 Parent's Options and Warrants Outstanding
Schedule 6.3 Defaults; Conflicts and Liens Created
Schedule 6.4 Parent SEC Report Issues
Schedule 6.5 Broker's and Other Fees
Schedule 6.8 Absence of Certain Changes or Events
Schedule 6.9 Legal Proceedings
Schedule 6.10 Taxes Being Contested
Schedule 6.11 Compliance with Applicable Laws
</TABLE>
vi
<PAGE> 173
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 25th day of March, 1999
(this "AGREEMENT"), is by and among Towne Services, Inc., a Georgia corporation
("PARENT"), TSI Acquisition One, Inc., a Georgia corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), Forseon Corporation, a Delaware corporation
("COMPANY"), and the stockholders of Company named on the signature pages hereto
(collectively, the "MANAGEMENT STOCKHOLDERS").
WHEREAS, this Agreement provides for the strategic combination of Parent
and Company in furtherance of the parties' long-term strategic plans;
WHEREAS, the combination will be accomplished by a merger of Merger Sub
with and into Company (the "MERGER") with Company surviving and the stockholders
of Company (including persons who have rights to acquire stock in Company,
collectively, the "COMPANY STOCKHOLDERS") receiving the consideration
hereinafter set forth;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "CODE");
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling-of-interests; and
WHEREAS, the Boards of Directors of Company, Parent and Merger Sub have
duly adopted and approved this Agreement and Merger Sub's sole holder has
approved the Agreement, and the Board of Directors of Company has resolved to
recommend this Agreement to the Company Stockholders;
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
ARTICLE 1
THE MERGER
1.1 The Merger. At the Effective Time (as defined below), Merger Sub
shall be merged with and into Company in accordance with the provisions of this
Agreement, the Georgia Business Corporation Code (the "GBCC") and the Delaware
General Corporation Law (the "DGCL"), and the separate existence of Merger Sub
shall thereupon cease, and Company, as the surviving corporation in the Merger
(sometimes referred to as the "SURVIVING CORPORATION"), shall continue its
corporate existence under the laws of the State of Delaware as a wholly-owned
subsidiary of Parent. The Merger shall have the effect provided under applicable
laws including, but not limited to, Section 14-2-1106 of the GBCC and Subchapter
IX, Sections 251, 252 and 259-261 of the DGCL.
1.2 Closing. The consummation of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 or at such other place as the parties agree at 10:00 a.m. on the
first business day after all conditions set forth in Article 8 (other than the
delivery of certificates, opinions and other instruments and documents to be
delivered at the Closing) have been satisfied or waived in writing or at such
other place and time as Parent and Company may agree (the "CLOSING DATE"). The
parties agree to use all commercially reasonable efforts to hold the Closing on
or before June 15, 1999. At the Closing,
A-1
<PAGE> 174
the parties shall execute and deliver the certificates, opinions and other
instruments and documents referred to in Article 8.
1.3 Effective Time of the Merger. Contemporaneous with or immediately
following the Closing, the parties shall cause a certificate of merger (the
"CERTIFICATE OF MERGER") to be executed, delivered and filed with the Secretary
of State of the State of Georgia and with the Secretary of State of the State of
Delaware in accordance with the provisions of the GBCC and DGCL. The Merger
shall become effective at the close of business on the date of such filing,
unless a different effective time is specified in the Certificate of Merger (the
"EFFECTIVE TIME").
1.4 Articles of Incorporation; Bylaws. The Certificate of Incorporation
and Bylaws of Company shall be amended and restated so that the Articles of
Incorporation and Bylaws of Merger Sub as in effect immediately prior to the
Effective Time shall become the Certificate of Incorporation and Bylaws of the
Surviving Corporation, to the extent the provisions thereof are permitted under
the DGCL, until duly amended in accordance with applicable law.
1.5 Directors and Officers of the Surviving Corporation. At the Effective
Time, the persons who are directors and officers of Merger Sub at the Effective
Time will become the directors and officers of the Surviving Corporation until
such time as they may be replaced in accordance with the Bylaws of the Surviving
Corporation, except that Dan Paul and Allen Merrill shall be the President,
Forseon Division and Vice President of Finance, respectively, of the Surviving
Corporation.
ARTICLE 2
CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES
2.1 Consideration. At the Effective Time, in consideration for and
fulfillment of the obligations, covenants, terms and conditions set forth in
this Agreement, by virtue of the Merger and without any action on the part of
any holder thereof:
(a) Company Common Stock. All of the then issued and outstanding
shares of common stock of Company, $0.01 par value per share (the "COMPANY
COMMON STOCK") calculated on a fully-diluted basis taking into account the
exercise or conversion of all Outstanding Options (as defined in Section
2.6) and all other rights to acquire Company Common Stock (an aggregate of
735,294 shares, excluding any shares held in the treasury of Company) shall
automatically be canceled and extinguished and shall thereafter be
converted into only the right to receive a total of 2,075,345 shares of
common stock, without par value, of Parent (the "PARENT COMMON STOCK"),
subject to the escrow provided for in Section 2.1(d) below. Based upon the
foregoing, the conversion ratio is approximately 2.82 shares of Parent
Common Stock for each one issued and outstanding share of Company Common
Stock.
(b) Treasury Shares. Each share of Company Common Stock held in the
treasury of Company, if any, shall be automatically canceled and
extinguished, and no payment shall be made in respect of such shares.
(c) Merger Sub Common Stock. Each issued and outstanding share of
Merger Sub common stock at the Effective Time shall be converted into and
shall thereafter represent one validly issued, fully paid and nonassessable
share of common stock of the Surviving Corporation, which shall then
constitute all of the issued and outstanding shares of the Surviving
Corporation.
A-2
<PAGE> 175
(d) Escrow of Certain Shares. At the Closing, Parent shall deliver
(or cause to be delivered) to the escrow agent set forth in the Escrow
Agreement in the form of Exhibit 2.1 hereto (the "ESCROW AGREEMENT"), one
certificate for Parent Common Stock equal to ten percent (10%) of the
Parent Common Stock to be issued in connection with the Merger pursuant to
Section 2.1(a) (collectively, the "ESCROW SHARES") for the escrow
established pursuant to the Escrow Agreement. Until such Escrow Shares are
disbursed under the terms of the Escrow Agreement, the Company Stockholders
and holders of the Outstanding Options shall be entitled to vote such
Escrow Shares according to their pro rata interest, as provided in the
Escrow Agreement. Dividends and distributions, if any, paid with respect to
the Escrow Shares during the escrow period shall be held in escrow and
disbursed under the Escrow Agreement in the same manner as the Escrow
Shares. Certificates for the remaining shares of Parent Common Stock to be
delivered in connection with the Merger shall be delivered to Company
Stockholders in accordance with Section 2.3 below.
2.2 No Fractional Shares. No scrip or fractional shares of Parent Common
Stock shall be issued in the Merger upon conversion of Company Common Stock as
provided in Section 2.1(a). In lieu of the issuance of any such fractional
shares, Parent shall pay to each Company Stockholder who would otherwise be
entitled to receive a fractional share of Parent Common Stock (after taking into
account all Parent Common Stock into which such Stockholder's Company Common
Stock was converted pursuant to this Agreement) an amount in cash (rounded to
the nearest whole cent) determined by multiplying (i) the fair market value (as
hereinafter defined) of a share of Parent Common Stock by (ii) the fraction of a
share of Parent's Common Stock which such holder would other wise be entitled to
receive pursuant to this Article 3. The fair market value of a share of Parent's
Common Stock shall be the average of the closing prices as reported on the
National Association of Securities Dealers Automated Quotation System for one
(1) share of Parent Common Stock for the last ten (10) consecutive trading days
ending with the close of trading on the third business day preceding the Closing
Date.
2.3 Surrender and Exchange of Certificates Representing Company Common
Stock.
(a) Exchange Agent. Parent shall appoint First Union National Bank or
such other reputable bank or trust company as may be selected by Parent to
act as exchange agent for the Merger (the "EXCHANGE AGENT"). At the
Effective Time, Parent shall, pursuant to irrevocable instructions, direct
the Exchange Agent to deliver the number of shares of Parent Common Stock
as provided for in Section 2.1. The Parent Common Stock to be paid and
issued to the Company Stockholders and holders of the Outstanding Options
hereunder shall sometimes be referred to as the "MERGER CONSIDERATION."
(b) Surrender of Certificates. Prior to the Effective Time, Parent
shall use all commercially reasonable efforts to cause the Exchange Agent
to make available to each record holder as of the Effective Time of an
outstanding certificate or certificates which immediately prior to the
Effective Time represented Company Common Stock (the "CERTIFICATES"), a
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Exchange Agent) and instructions for
use in effecting the surrender of the Certificates for conversion thereof,
which letter of transmittal shall comply with all Applicable Laws and rules
of The Nasdaq Stock Market, Inc. ("NASDAQ"). Company shall promptly deliver
to the Company Stockholders and shall use all commercially reasonable
efforts to cause each Company Stockholder to execute and deliver to Parent
and Merger
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Sub at or prior to the Closing a certificate in substantially the form of
Exhibit 2.3 attached hereto, subject to such changes as Parent may approve.
Upon surrender to the Exchange Agent of the Certificates at the Closing or
thereafter, together with such letter of transmittal duly executed, the
holder of such Certificates shall be entitled to receive at the Closing (or
promptly after such surrender if after the Closing) in exchange therefor,
one or more certificates as requested by the holder (properly issued,
executed and countersigned, as appropriate) representing that number of
whole shares of Parent Common Stock to which such holder of Company Common
Stock shall have become entitled pursuant to the provisions of Section 2.1
and Certificates so surrendered shall forthwith be canceled. From the
Effective Time until surrender in accordance with the provisions of this
Section 2.3, each Certificate (other than Certificates representing
treasury shares) shall represent for all purposes only the right to receive
the Merger Consideration. All payments in respect of Company Common Stock
that are made in accordance with the terms hereof shall be deemed to have
been made in full satisfaction of all rights pertaining to such securities.
(c) Lost Certificates. In the case of any lost, misplaced, stolen or
destroyed Certificate, the holder thereof may be required, as a condition
precedent to delivery to such holder of the Merger Consideration, to
deliver to Parent an indemnity agreement and a bond in such reasonable sum
as Parent may direct as indemnity against any claim that may be made
against the Exchange Agent, Parent or the Surviving Corporation with
respect to the Certificate alleged to have been lost, misplaced, stolen or
destroyed.
(d) No Interest. No interest shall be paid or accrued on any portion
of the Merger Consideration regardless of the cause for delay in payment of
the Merger Consideration.
(e) Dividends on Parent Common Stock. No holder of a Certificate
shall be entitled to delivery of any dividend or other distribution from
Parent having a record date after the Effective Time until surrender of
such holder's Certificate pursuant to this Section 2.3. Upon such
surrender, there shall be paid to the holder the amount of any dividends or
other distributions (without interest) that theretofore became payable by
Parent, but were not paid by reason of the foregoing with respect to the
number of whole shares of Parent Common Stock represented by the
Certificate or Certificates issued upon such surrender. From and after the
Effective Time, Parent shall, however, be entitled to treat any such
Certificate that has not yet been surrendered for exchange as evidencing
the ownership of the aggregate Merger Consideration into which the Company
Common Stock represented by such Certificate shall have been converted,
notwithstanding any failure to surrender such Certificate.
(f) No Liability. Neither Parent nor the Surviving Corporation shall
be liable to any holder of shares of Company Common Stock for any Parent
Common Stock (or dividends or distributions with respect thereto) delivered
to a public official pursuant to any abandoned property, escheat or similar
law.
2.4 Share Calculations. Prior to the Effective Time, Company shall
prepare and deliver to Parent (subject to the Parent's review and approval) a
complete list of the number of shares of Parent Common Stock to be issued to
each Company Stockholder in accordance with the provisions of Section 2.1(a) in
connection with the Merger.
2.5 Stock Transfer Books. From and after the Effective Time, no transfer
of Company Common Stock outstanding prior to the Effective Time shall be
registered on the stock transfer books of the Surviving Corporation. If, after
the Effective Time, certificates for Company
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Common Stock are presented to the Surviving Corporation for transfer, such
certificates shall be canceled and exchanged for the appropriate portion of the
Merger Consideration.
2.6 Company Stock Options and Other Securities.
(a) Prior to or contemporaneously with the Closing, Company shall
convert into Company Common Stock or cancel all outstanding options,
restricted stock awards, stock appreciation rights, warrants and other
securities convertible into or exchangeable for shares of Company Common
Stock or other securities of Company (collectively, the "OUTSTANDING
OPTIONS") pursuant to the change in control and exercise provisions of (i)
the Company's 1987 Incentive Stock Option Plan and Nonstatutory Stock
Option Plan, as amended; (ii) the Company's 1997 Stock Option Plan; and
(iii) all other agreements related to the Outstanding Options
(collectively, with the plans referenced in clauses (i) and (ii) above, the
"STOCK OPTION PLANS"); provided, however, that no such conversions shall
affect the total Merger Consideration to be paid by Parent and Merger Sub
in connection with the Merger. Copies of all Outstanding Options are
attached as part of Seller Disclosure Schedule 4.2.
(b) Each of the Outstanding Options remaining after the Company
performs its obligations under paragraph (a) above shall be converted into
the right to receive shares of Parent Common Stock as of the Effective Time
in accordance with the provisions of Section 2.1.
(c) At or prior to the Closing, Company shall amend the Stock Option
Plans so that no further shares of Company Common Stock or Parent Common
Stock may be issued thereunder, subject to amendment, modification,
suspension, abandonment or termination as provided therein, and the Stock
Option Plans as so continued (i) shall relate only to the issuance of
Parent Common Stock as provided in this Section 2.6, and (ii) Parent and
its Stock Option Committee shall be substituted for Company and the
Committee of Company's Board of Directors (including, if applicable, the
entire Board of Directors of Company) administering such Company Stock
Option Plans.
(d) Prior to the Closing, Company shall collect and withhold all
required employment and other withholding taxes applicable or relating to
the exercise of, or any other action, omission or other thing relating to,
the Outstanding Options, regardless of whether any such withholding tax
arises prior to, contemporaneously with, or after the Closing.
2.7 Adjustments. In the event that at any time after the date hereof and
prior to the Effective Time, Parent shall declare, set a record date for, or
effect (a) a dividend or other distribution with respect to Parent Common Stock
payable in Parent Common Stock or other property (other than cash), including
the common stock, preferred stock or other securities of a Parent Subsidiary,
(b) a combination or conversion of outstanding Parent Common Stock into a
smaller number of such Parent Common Stock, or (c) any reorganization or
reclassification, or any consolidation or merger of Parent, with another
corporation, or the sale of all or substantially all of its assets to another
corporation, in such a way that holders of outstanding Parent Common Stock shall
be entitled to receive (either directly or upon subsequent liquidation) stock,
securities or other property with respect to or in exchange for such Parent
Common Stock (any such event described in (a)-(c) above referred to as a
"DILUTING EVENT"), then, as a condition of such Diluting Event, lawful and
adequate provision shall be made whereby the Company Stockholders shall
thereafter be entitled to receive (under the same terms otherwise applicable to
their receipt of Parent Common Stock), in addition to or in lieu of (as the case
may be) the number of shares of Parent Common Stock to which such Company
Stockholders are entitled immediately
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prior to such Diluting Event, such shares of stock, securities or other property
as may be issued or payable with respect to or in exchange for that number of
shares of Parent Common Stock to which the Company Stockholders were so
entitled, and in any case appropriate provision shall also be made with respect
to such Company Stockholders' rights and interests to the end that the
provisions of this Section 2.7 shall thereafter be applicable in relation to any
shares of stock, securities or other property thereafter deliverable to such
Company Stockholders pursuant to the provisions hereof.
ARTICLE 3
RULES OF CONSTRUCTION
In the interpretation of this Agreement, unless otherwise provided or the
context otherwise requires:
(a) The singular includes the plural and vice versa and, in particular
(but without limiting the generality of the foregoing), any word or
expression defined in the singular has the corresponding meaning used in
the plural and vice versa;
(b) Any reference to any gender includes the other genders;
(c) Any reference to an Article, Section, Exhibit, clause, subclause,
paragraph, subparagraph, Schedule or recital is a reference to an Article,
Section, Exhibit, clause, subclause, paragraph, subparagraph, Schedule or
recital of this Agreement;
(d) Any reference to any agreement, instrument or other document (i)
shall include all appendices, exhibits and schedules thereto and all
agreements, documents or other writings incorporated by reference therein,
and (ii) shall be a reference to such agreement, instrument or other
document as amended, supplemented, modified, suspended, restated or novated
from time to time;
(e) Any reference to any statute shall be construed as including all
statutory provisions consolidating, amending or replacing such statute and
all governmental regulations and rules promulgated thereunder;
(f) Any reference to "writing" includes printing, typing, lithography
and other means of reproducing words in a visible form;
(g) Any reference to a time or date or to a local time or date is a
reference to the time and date in Atlanta, Georgia;
(h) Any reference to "dollars" and the symbol "$" means dollars
constituting legal tender for the payment of public and private debts in
the United States of America;
(i) The headings and Article, Section and paragraph numbering
contained in this Agreement are used solely for convenience and do not
constitute a part of this Agreement, nor shall such headings and numbering
be used in any manner to aid in the construction of this Agreement;
(j) The term "APPLICABLE LAWS" means all applicable (i) statutes,
ordinances or other legislative enactments of the United States of America
or other country or foreign government, or of any state or agency thereof,
(ii) rules, regulations, orders, permits, directives or other actions or
approvals of any Governmental Authority, and (iii) judgments, awards,
orders, decrees, writs and injunctions of any court, Governmental Authority
or arbitrator.
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(k) References in this Agreement to the "COMPANY DISCLOSURE SCHEDULES"
shall mean the disclosure schedules, dated as of the date of this
Agreement, which have been delivered on the date of this Agreement by
Company to Parent, and references to a numbered Company Disclosure Schedule
shall mean that portion of the Company Disclosure Schedules that refers to
the specific section or subsection of Article 4 of this Agreement;
(l) References in this Agreement to the "MANAGEMENT STOCKHOLDER
DISCLOSURE SCHEDULES" shall mean the disclosure schedules, dated as of the
date of this Agreement, which have been delivered on the date of this
Agreement by the Management Stockholders to Parent, and references to a
numbered Management Stockholder Disclosure Schedule shall mean that portion
of the Management Stockholder Disclosure Schedules that refers to the
specific section or subsection of Article 5 of this Agreement;
(m) References in this Agreement to the "PARENT DISCLOSURE SCHEDULES"
shall mean the disclosure schedules, dated as of the date of this
Agreement, which have been delivered on the date of this Agreement by
Parent to Company, and references to a numbered Parent Disclosure Schedule
shall mean that portion of the Parent Disclosure Schedules that refers to
the specific section or subsection of Article 6 of this Agreement;
(n) The term "DISCLOSED BY PARENT" shall mean, with respect to
information concerning any event, fact or circumstance, information
contained in Parent's SEC Reports (as defined below), annual and other
reports furnished by Parent to its shareholders as a group, and press
releases of Parent disseminated to (i) the Dow Jones News Service,
Associated Press, United Press, Business Wire or other national newswire
service, or (ii) the Nasdaq or a United States national securities
exchange, as well as information disclosed in writing directly to Company
or the Management Stockholders by Parent in this Agreement or otherwise;
(o) The term "GAAP" means generally accepted accounting principles and
practices as in force in the United States from time to time.
(p) The term "GOVERNMENTAL AUTHORITY" means any United States federal,
state or local, or any foreign governmental, governmental or administrative
authority, agency, department, board, investigative body or commission or
any court, tribunal, or judicial or arbitral body;
(q) The term "KNOWLEDGE" means actual knowledge and, as used with
respect to Parent and Merger Sub means the actual knowledge of the chief
executive officer, president and chief financial officer of Parent and
Merger Sub; and, as used with respect to Company means the actual knowledge
of the Management Stockholders and the information which, after reasonable
consideration and inquiry by the Management Stockholders (recognizing the
confidentiality associated with the execution and delivery of this
Agreement), would be recognized by reasonable persons of similar experience
in such positions as relevant to the matter(s) qualified by the words "to
the Knowledge of" or "known to" such person.
(r) The term "MATERIAL ADVERSE EFFECT" with respect to a person or
entity means (unless otherwise indicated) any circumstance, change in, or
effect on the business and affairs of such person or entity or any
Subsidiary thereof that, individually or in the aggregate with any other
circumstances, changes in, or effects on, the business and affairs of such
person or entity and its Subsidiaries: (i) is, or would reasonably be
expected to be, materially adverse to the business, operations, assets or
liabilities, prospects, results of operations or financial condition of
such person or entity and its Subsidiaries, taken as a
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whole, or (ii) would reasonably be expected to materially adversely affect
the ability of such person or entity and its Subsidiaries to operate or
conduct its or their business and affairs in the manner in which they are
currently operated or conducted or contemplated by such person or entity to
be operated or conducted; provided, however, that a Material Adverse Effect
with respect to Parent and Merger Sub shall not include any decline in the
trading price of Parent's Common Stock for any reason or any event or
circumstance arising from any such decline, including without limitation,
any change caused or arising from the failure by Parent for any reason to
achieve operating results in accordance with market expectations or any
market factors such as volatility, fluctuations in the market price of
stocks generally or general economic factors;
(s) The term "PARENT SUBSIDIARY" means any Subsidiary of Parent;
(t) The term "SUBSIDIARY" means any corporation, partnership, joint
venture or other legal entity in which a specified person or entity,
directly or indirectly, owns or controls the voting of at least a 50% share
or other equity interest or for which such person or entity, directly or
indirectly, acts as a general partner;
(u) The terms "hereof," "hereby," "hereunder" and similar terms shall
refer to this Agreement as a whole;
(v) The term "including" shall mean "including, without limitation";
and
(w) Each party and its counsel have had the opportunity to negotiate
the terms and provisions of this Agreement. This Agreement, therefore,
shall be construed without regard to any presumption or other rule
requiring construction against the party causing the Agreement to be
drafted.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF COMPANY
AND THE MANAGEMENT STOCKHOLDERS
Company hereby represents and warrants to Parent and Merger Sub (except as
set forth on the Company Disclosure Schedules) as follows and as to the
specified portions of Sections 4.2(b), 4.6(a), 4.6(b), 4.7, 4.8(b), 4.10,
4.11(e), 4.12(c), 4.13(c), 4.22, 4.29, 4.30, 4.31 and 4.32 Company and the
Management Stockholders hereby represent and warrant, jointly and severally, to
Parent and Merger Sub as follows:
4.1 Corporate Organization.
(a) Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware. Except as set
forth on Company Disclosure Schedule 4.1, Company has the corporate power
and authority to own or lease all of its properties and assets and to carry
on its business as it is now being conducted, and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse
Effect on Company.
(b) Company Disclosure Schedule 4.1 sets forth the full name and
jurisdiction of organization of the sole Subsidiary of Company (the
"COMPANY SUBSIDIARY") as well as all trade names used by Company and the
Company Subsidiary currently or at any time during
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the past five years. The Company Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the
state or other jurisdiction of its organization. Except as set forth on
Company Disclosure Schedule 4.1, the Company Subsidiary has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse
Effect on Company.
(c) Company Disclosure Schedule 4.1 sets forth copies of the
Certificate of Incorporation and bylaws of Company and the Company
Subsidiary. Company's and the Company Subsidiary's bylaws, stock book and
minute books are complete and correct in all material respects and contain
all amendments thereto to date, a record of all corporate proceedings of
the Company and such Subsidiary, and a record of all stock issuances and
transfers of the Company and such Subsidiary.
(d) Except as set forth in Company Disclosure Schedule 4.1, Company
and the Company Subsidiary do not own or control, directly or indirectly,
any equity interest in any corporation, company, association, partnership,
joint venture, organization or other entity.
4.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of
Company consists solely of 5,000,000 shares of Company Common Stock and no
shares of preferred stock or any other capital stock. As of the date of
this Agreement, there are 642,069 shares of Company Common Stock issued and
outstanding and 93,225 shares of Company Common Stock are reserved for
issuance pursuant to the exercise or conversion of Outstanding Options.
Company Disclosure Schedule 4.2 sets forth the number of shares of Company
Common Stock owned by each of the Company Stockholders, together with (to
Company's Knowledge) the correct residence address of each such Company
Stockholder and provides the same information for the Company Subsidiary.
Except as set forth on Company Disclosure Schedule 4.2, no shares of
Company Common Stock or capital stock of the Company Subsidiary are
outstanding. All issued and outstanding shares of Company Common Stock and
capital stock of the Company Subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable, were not issued in
violation of any preemptive rights and were issued in material compliance
with and under available exemptions from all applicable federal and state
securities laws. All of the outstanding shares of capital stock of the
Company Subsidiary are owned by Company and are free and clear of any
liens, encumbrances, charges, restrictions or rights of third parties.
(b) Except as set forth on Company Disclosure Schedule 4.2, neither
Company nor the Company Subsidiary has granted or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character (except for this Agreement) calling for the
transfer, purchase, subscription or issuance of any shares of capital stock
of Company or the Company Subsidiary or any securities representing the
right to purchase, subscribe or otherwise receive any shares of such
capital stock or any securities convertible into any such shares, and there
are no agreements or understandings to which Company or the Company
Subsidiary is a party or otherwise to Company's Knowledge with respect to
voting of any such shares. To Company's and the Management Stockholders'
Knowledge, no Company Stockholder has granted or is bound by any of the
foregoing agreements.
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Company Disclosure Schedule 4.2 sets forth copies of the plans and
agreements pursuant to which Company and the Company Subsidiary granted any
of the foregoing securities and a list of each such outstanding security,
together with a schedule of the persons entitled to any of the foregoing.
(c) All transactions whereby Company or the Company Subsidiary
repurchased, redeemed, canceled or reacquired shares of its capital stock
and the solicitation of stockholder consents in connection with the Merger
have been or will be effected in compliance with all applicable corporate
and securities laws, and documentation prepared by or on behalf of the
Company or the Company Subsidiary in connection therewith did not and will
not include any untrue statement of any material fact or omit to state any
material fact necessary to make the statements made therein correct and
complete.
4.3 Authority; No Violation.
(a) Except for the filing of the Proxy Statement (as defined in
Section 7.14) under the Securities Exchange Act of 1934, as amended (the
"1934 ACT"), the effectiveness of the Registration Statement (as defined in
Section 7.14) and satisfaction of other requirements under the Securities
Act of 1933, as amended (the "1933 ACT"), approval of the Merger by the
affirmative vote of the holders of a majority in interest of the Company
Common Stock, Nasdaq listing approval requirements for the Merger
Consideration shares, and the filing of the Certificate of Merger in
accordance with the GBCC and the DGCL, and except as set forth on Company
Disclosure Schedule 4.3 (collectively, the "COMPANY APPROVALS"), no
consents, approvals, authorizations, clearances or orders of, filings or
registrations with or notices to (collectively, the "AUTHORIZATIONS") any
third party or any Governmental Authority are necessary on behalf of
Company or, to Company's Knowledge, any of the Company Stockholders, in
connection with (i) the execution and delivery by Company and the Company
Stockholders of this Agreement and all other documents, certificates and
agreements executed pursuant to or in connection with this Agreement
(collectively, the "MERGER DOCUMENTS") and (ii) the consummation by Company
and the Company Stockholders of the Merger and the other transactions
contemplated by this Agreement and the other Merger Documents. Subject to
receipt of the Company Approvals, Company has the full corporate power and
authority to execute and deliver this Agreement and to consummate the
Merger and the other transactions contemplated by this Agreement and the
other Merger Documents in accordance with the terms of this Agreement and
the other Merger Documents. The execution and delivery of this Agreement
and the other Merger Documents have been duly and validly approved by the
Board of Directors of Company and by the Management Stockholders in
accordance with the Certificate of Incorporation and bylaws of Company and
with Applicable Laws. Except for the Company Approvals, no other corporate
proceedings on the part of Company are necessary for Company and the
Management Stockholders to execute and deliver this Agreement and for
Company and the Company Stockholders be bound by the terms of this
Agreement and, when executed and delivered, the other Merger Documents.
This Agreement has been duly and validly executed and delivered by Company
and the Management Stockholders and constitutes the valid and binding
obligation of Company and the Management Stockholders enforceable against
Company and the Management Stockholders in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium or
similar laws affecting the enforcement of creditors' rights generally, and
except that the availability of the equitable remedy of specific
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performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought.
(b) Neither the execution and delivery of this Agreement by Company or
the Management Stockholders, nor the consummation by Company and the
Company Stockholders of the Merger and the other transactions contemplated
by this Agreement in accordance with the terms of this Agreement and the
other Merger Documents, nor compliance by Company and the Company
Stockholders with any of the terms or provisions of this Agreement or the
other Merger Documents, will: (i) assuming the Company Approvals are duly
obtained, violate any provision of Company's Certificate of Incorporation
or bylaws; (ii) assuming that the Company Approvals are duly obtained,
violate any Applicable Laws; or (iii) except as set forth in Company
Disclosure Schedule 4.3, violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, mortgage, security interest, pledge, charge, other
right of third parties or other encumbrance (collectively, "LIENS") upon
any of the respective properties or assets of Company under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation
to which Company is a party, or by which they or any of their respective
properties or assets may be bound or affected except, with respect to (ii)
and (iii) above, such as individually or in the aggregate will not have a
Material Adverse Effect on Company, and which will not prevent or delay the
consummation of the Merger and the other transactions contemplated by this
Agreement and the other Merger Documents.
4.4 Financial Statements.
(a) Company Disclosure Schedule 4.4 sets forth copies of the following
(collectively, together with the related notes and any additional financial
statements set forth on such Schedule, the "COMPANY FINANCIAL STATEMENTS"):
(i) the consolidated balance sheet of Company as of June 30, 1998, 1997 and
1996 and the consolidated statements of operations, shareholders' equity
and cash flows for the period ended June 30, 1998, 1997 and 1996, together
with the audit reports thereon of KPMG Peat Marwick LLP, and (ii) the
interim financial statements of Company (balance sheet and income
statement) as of December 31, 1998 and for the six month period ended
December 31, 1998. Except as set forth on Company Disclosure Schedule 4.4,
the Company Financial Statements have been prepared in accordance with GAAP
and present fairly, in all material respects, the consolidated financial
position of Company as of the respective dates set forth in the Company
Financial Statements, and the consolidated results of Company's operations
and its cash flows for the respective periods set forth in the Company
Financial Statements; except that the unaudited interim financial
statements were or are subject to normal and recurring year-end
adjustments, lack footnote disclosures, and do not include statements of
cash flow or stockholders equity, nor do they take into account accounting
pronouncements effective after June 30, 1998, all of which adjustments,
footnote disclosures, statements and pronouncements are not, in the
aggregate, believed by Company or by the Management Stockholders to be
material and adverse to the information presented in the interim Company
Financial Statements, business or operations of Company when taken as a
whole.
(b) The books and records of Company have been maintained in
compliance with applicable legal and accounting requirements and in
accordance with GAAP. Except as set
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forth on Company Disclosure Schedule 4.4, the corporate record books
(including the share records) of Company are complete, accurate and up to
date in all material respects and set forth all meetings and actions taken
by the Company Stockholders and directors of Company and all transactions
involving the shares of Company (and contain all necessary signatures and
all canceled share certificates).
(c) Except as and to the extent reflected, disclosed or reserved
against in the Company Financial Statements, or as disclosed in Company
Disclosure Schedule 4.4, as of December 31, 1998, Company had no material
liabilities or obligations of any kind, whether absolute, accrued, direct,
indirect, contingent or otherwise ("LIABILITIES"). Except as set forth on
Company Disclosure Schedule 4.4, since December 31, 1998, Company has not
incurred, created, assumed or guaranteed any Liabilities except in the
ordinary course of business and consistent with past practice other than
Liabilities incurred in connection with this Agreement. Further, at the
Effective Time Company shall have no Liabilities other than trade payables
due and owing for periods consistent with Company's past practices in the
ordinary course of business, capitalized leases for equipment, and other
liabilities in the ordinary course of business consistent with past
practices and which are not material in amount other than Liabilities
incurred in connection with this Agreement.
4.5 Broker's and Other Fees. Except as disclosed in Company Disclosure
Schedule 4.5, neither Company nor, to Company's Knowledge, any Company
Stockholder, has employed any broker or finder or incurred any liability for any
broker's or finder's fees or commissions in connection with any of the
transactions contemplated by this Agreement. Except as disclosed in Company
Disclosure Schedule 4.5, there are no fees payable to any consultants, including
lawyers and accountants, in connection with this Agreement or the transactions
contemplated by this Agreement or which would be triggered by consummation of
this Agreement or the transactions contemplated by this Agreement or the
termination of the services of such consultants by Company or otherwise pursuant
to the Merger.
4.6 Absence of Certain Changes or Events.
(a) Except as disclosed in Company Disclosure Schedule 4.6, there has
been no Material Adverse Effect on Company since December 31, 1998 and to
Company's and the Management Stockholders' Knowledge, no facts or
conditions exist which will cause (or may be reasonably likely to cause) a
Material Adverse Effect on Company, including after the Merger.
(b) Except as set forth in Company Disclosure Schedule 4.6, and except
for execution of this Agreement, since December 31, 1998 Company has
conducted its business only in the ordinary course, consistent with past
practice, and has not (and to the Management Stockholders' Knowledge,
Company has not):
(i) suffered any physical damage, destruction or casualty loss
(whether or not such loss or damage shall have been covered by
insurance) which materially and adversely affects the properties,
business or prospects of Company, or suffered any deterioration in the
operating condition of any material physical assets of Company, normal
wear and tear excepted;
(ii) materially increased, or made any material change in any
assumptions underlying the method of calculating, any bad debt,
contingency or other reserves; (iii) made any material change in the
method of valuing assets included in the Company Financial Statements;
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(iv) made any material change in any method of accounting or
keeping its books of account or accounting practices or systems of
internal accounting controls;
(v) paid, discharged or satisfied any Liability, other than by
payment, discharge or satisfaction in the ordinary course of business;
(vi) permitted or allowed any of its material assets (real,
personal or mixed, tangible or intangible) to be subjected to any Lien;
(vii) written down the value of any inventory or written off as
uncollectible any notes or accounts receivable, except for write-downs
and write-offs in the ordinary course of business;
(viii) canceled or waived any claims or rights, or sold,
transferred, distributed or otherwise disposed of any assets or
properties, except in the ordinary course of business;
(ix) declared or paid any dividend or distribution on or in respect
of the Company Common Stock, or directly or indirectly redeemed,
purchased, or otherwise acquired any shares of its capital stock, any
securities convertible into or exchangeable for its capital stock, or
any options, warrants or other rights to purchase any of the foregoing,
or authorized the issuance of, or issued, sold or committed to sell (or
granted any options or rights to purchase) any additional shares of its
capital stock, or sold, issued or incurred any debt security (except for
and in connection with issuances of stock pursuant to the exercise
(whether cashless or otherwise) of outstanding options or pursuant to
the ESOP (as defined in Section 4.9));
(x) experienced any strike, walkout, similar labor trouble or other
similar event;
(xi) increased the salaries or other remuneration payable or to
become payable to, or made any advance (excluding advances for ordinary
business expenses) or loan to, any officer, director, employee or
shareholder (except normal merit increases made in the ordinary course
of business, consistent with past practice and previously disclosed to
Parent in Company's budget), or established, made any increase in, or
any addition to, other benefits (including, without limitation, any
Benefit Plans, as hereinafter defined) to which any of them may be
entitled, or made any payments to any Benefit Plans, except payments in
the ordinary course of business and consistent with past practice, or
entered into any agreement, arrangement or transaction with any such
person not in the ordinary course of business, or failed to make any
required payment under any Benefit Plans; or
(xii) entered into, terminated, modified or amended any agreement
with any director, officer or other "affiliate" of such director or
officer, as that term is defined in Section 14A of the 1934 Act (an
"AFFILIATE").
4.7 Legal Proceedings. Except as disclosed in Company Disclosure Schedule
4.7, neither Company nor either of the Management Stockholders is a party to
any, and there is no pending or, to Company's or the Management Stockholders'
Knowledge, threatened legal, administrative, arbitral or other proceeding,
claim, action or governmental investigation of any nature against Company, that
if determined adversely to Company could reasonably be expected to have a
Material Adverse Effect on Company. Except as disclosed in Company Disclosure
Schedule 4.7, Company is not a party to any order, judgment or decree entered in
any lawsuit or proceeding that is reasonably likely to have a Material Adverse
Effect on Company. Without limiting the foregoing, except as disclosed in
Company Disclosure Schedule 4.7, no actions, suits, demands,
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notices, claims, investigations or proceedings that are reasonably likely to
have a Material Adverse Effect on Company are pending or, to Company's or the
Management Stockholders' Knowledge, threatened against or otherwise involving,
directly or indirectly, any officer, director, employee or agent of Company (in
connection with such officer's, director's, employee's or agent's activities on
behalf of Company or that otherwise relate, directly or indirectly, to Company
or its properties or securities) including without limitation any notices,
demand letters or requests from any Governmental Authority relating to such
potential Liabilities, nor, to the Knowledge of Company or the Management
Stockholders, are there any circumstances which could lead to such actions,
suits, demands, notices, claims, investigations or proceedings.
4.8 Taxes and Tax Returns. Except as disclosed in Company Disclosure
Schedule 4.8:
(a) Company has duly filed (and until the Effective Time will so file)
all returns, declarations, reports, information returns and statements
("RETURNS") required to be filed by it in respect of any United States
federal, state or local Taxes and has duly paid (and until the Effective
Time will so pay) all such Taxes due and payable as finally determined by
the applicable Governmental Authority, other than Taxes which are being
contested in good faith (and disclosed to Parent in writing). As used in
this Agreement, "TAX" or "TAXES" means and includes any and all taxes,
fees, levies, assessments, duties, tariffs, imposts, and other charges of
any kind (together with any and all interest, penalties, additions to tax
and additional amounts imposed with respect thereto) imposed by any
Governmental Authority, including, without limitation: foreign, domestic,
central, local, state or other jurisdictional taxes or other charges on or
with respect to income, estimated income, franchises, business, occupation,
windfall or other profits, gross receipts, property, sales, use, capital
stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth; taxes or other charges in the
nature of excise, withholding, ad valorem, stamp, transfer, value added, or
gains taxes; license, registration and documentation fees; and customs
duties, tariffs, and similar charges. Company has established (and until
the Effective Time will establish) on its books and records reserves that
are adequate for the payment of all Taxes not yet due and payable, but that
are incurred in respect of Company through such date.
(b) Neither Company nor the Management Stockholders have received any
notice that any of the Returns of Company has been examined by the United
States Internal Revenue Service (the "IRS"), or any other United States
federal or state Governmental Authority within the past six years. There
are no audits or other Governmental Authority proceedings currently
pending, nor any other disputes pending with respect to, nor, to the
Knowledge of Company and the Management Stockholders claims asserted for,
Taxes upon Company greater than $250 individually or $10,000 in the
aggregate; nor has Company given any currently outstanding waivers or
comparable consents regarding the application of any statute of limitations
with respect to any Taxes or Returns. There are no Liens for Taxes upon the
assets of Company, except for Liens for Taxes not yet due and payable or
being properly contested. Any Taxes being properly contested are disclosed
on Company Disclosure Schedule 4.8. Company has complied (and until the
Effective Time will comply) in all material respects with all Applicable
Laws relating to the payment and withholding of Taxes.
(c) Company (i) has not requested any extension of time within which
to file any Return which Return has not since been filed; (ii) is not a
party to any agreement providing for the indemnification, allocation or
sharing of Taxes; (iii) is not required to include in
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income any adjustment by reason of a voluntary change in accounting method
initiated by Company (nor does Company have any Knowledge that any
Governmental Authority has proposed any such adjustment or change of
accounting method); (iv) has not filed a consent with any Governmental
Authority pursuant to which Company has agreed to recognize gain (in any
manner) relating to or as a result of this Agreement or the transactions
contemplated by this Agreement; or (v) has not been a member of an
affiliated group other than one of which Company was the common parent.
4.9 Benefit Plans.
(a) Certain definitions used in this Section are as follows:
"CODE" shall mean the Internal Revenue Code of 1986, as amended,
together with the regulations promulgated thereunder.
"DOL" shall mean the United States Department of Labor.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA AFFILIATE" shall mean, with respect to a Person, any other
Person which is required to be aggregated with such Person under Code
Section 414(b), (c), (m) and/ or (o) at any time prior to the Closing.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established under Title IV of ERISA.
"PERSON" shall include, but is not limited to, an individual, a
trust, an estate, a partnership, an association, a company, a
corporation, a sole proprietorship, a professional corporation or a
professional association.
(b) Company Disclosure Schedule 4.9 lists (i) each pension,
retirement, profit-sharing, cash or deferred, deferred compensation, stock
option, phantom stock, stock appreciation rights, employee stock ownership,
severance pay, vacation, paid time off, education-reimbursement, bonus,
incentive, and other or similar plan, program or other arrangement, (ii)
each cafeteria, Section 125, medical, vision, dental, disability, death
benefit, life insurance, health and/or accident plan, program or other
arrangement, (iii) each material written or unwritten employee or other
similar program, arrangement, agreement or understanding, whether arrived
at through collective bargaining or otherwise, and (iv) each other employee
benefit plan, voluntary employees' beneficiary association, fringe benefit
plan, and other similar plan, program or other arrangement, agreement or
understanding, including, without limitation, each "employee benefit plan,"
as that term is defined in Section 3(3) of ERISA, which is currently
maintained, sponsored in whole or in part, required to be contributed by,
or contributed to by Company or any ERISA Affiliate of Company, for the
benefit of, providing any remuneration or benefits to, or covering any
current or former employee, retiree, dependent, spouse or other family
member or beneficiary of such employee or retiree, director, independent
contractor, stockholder, officer or consultant or other beneficiary of
Company or any ERISA Affiliate of Company or under (or in connection with)
which Company or an ERISA Affiliate of Company has any contingent or
noncontingent liability of any kind, whether or not probable of assertion
(all of the items set forth in clauses (i) through (iv) above,
collectively, the "BENEFIT PLANS," and each a "BENEFIT PLAN"). Any of the
Benefit Plans which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, or an "employee welfare benefit
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plan," as that term is defined in Section 3(1) of ERISA, is referred to
herein as an "ERISA PLAN."
(c) Company Disclosure Schedule 4.9 also lists, with respect to all
Benefit Plans listed therein: (i) all trust agreements or other funding
arrangements, including insurance contracts, all annuity contracts,
financial contributions, actuarial statements or valuations, fidelity
bonds, fiduciary liability policies, investment manager or advisory
contracts, corporate resolutions or memoranda, administrative committee
minutes or memoranda or records, and all amendments (if any) thereto, (ii)
where applicable, with respect to any such plans or plan amendments, the
most recent determination letters issued by the IRS, (iii) all material
communications or other correspondence issued within the last six (6) years
by any Governmental Authority, including without limitation, the IRS, DOL
and the PBGC with respect to such Benefit Plan, (iv) annual reports or
returns and audited or unaudited financial statements for the most recent
three plan years and any amendments thereto, and (v) the most recent
summary plan descriptions, any material modifications thereto, and all
material employee communications with respect to such Benefit Plans other
than routine disclosures as required by statute. Prior to or
contemporaneous with the delivery of Company Disclosure Schedule 4.9,
Company has delivered a true and complete copy of all such Benefit Plans,
agreements, letters, rulings, opinions, letters, reports, returns,
financial statements and summary plan descriptions described in this
Section 4.9.
(d) Except as set forth on Company Disclosure Schedule 4.9, all the
Benefit Plans and any related trusts subject to ERISA comply in all
material respects with and have been administered in compliance in all
material respects with the provisions of ERISA, all applicable provisions
of the Code relating to qualification and tax exemption under Code Sections
401(a) and 501(a) or otherwise necessary to secure intended tax
consequences, all applicable state or federal securities laws and all other
applicable laws, rules and regulations and collective bargaining
agreements, and Company has not received any notice from any Governmental
Authority or instrumentality questioning or challenging such compliance.
All available material governmental approvals for the Benefit Plans have
been obtained, including, but not limited to, timely determination letters
on the qualification of the ERISA Plans and tax exemption of, related
trusts, as applicable, under the Code and timely registration and
disclosure under applicable securities laws, and all such governmental
approvals continue in full force and effect. No event has occurred that
will or could give rise to disqualification of any such Benefit Plan under
Sections 401(a) or 501(a) of the Code or to a tax under Section 511 of the
Code.
(e) Neither Company nor any administrator or fiduciary of any such
Benefit Plan (or agent or delegate of any of the foregoing) has engaged in
any transaction or acted or failed to act in any manner that could subject
Company to any direct or indirect material liability (by indemnity or
otherwise) for a breach of any fiduciary, co-fiduciary or other duty under
ERISA. No oral or written representation or communication with respect to
any aspect of the Benefit Plans has been or will be made to employees of
Company prior to the Closing that is not in accordance with the written or
otherwise preexisting terms and provisions of such Benefit Plans in effect
immediately prior to the Closing, except for any amendments or terminations
required by the terms of this Agreement. There are no unresolved claims or
disputes under the terms of, or in connection with, the Benefit Plans other
than routine claims and benefits and no action, legal or otherwise, has
been commenced with respect to any claim.
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(f) All annual reports or returns, audited or unaudited financial
statements, actuarial valuations, summary annual reports and summary plan
descriptions issued, and all records and data maintained by Company with
respect to the Benefit Plans are correct, complete and accurate in all
material respects as of the dates thereof; and there have been no
amendments filed to any of such reports, returns, statements, valuations or
descriptions or required to make the information therein true and accurate.
(g) Neither Company nor any other "party in interest" (as defined in
Section 3(14) of ERISA) or "disqualified person" (as defined in Section
4975(e)(2) of the Code) of any Benefit Plan has engaged in any "prohibited
transaction" (within the meaning of Sections 503(b) or 4975(c) of the Code
or Section 406 of ERISA) with respect to such Benefit Plan, for which there
is no statutory, Governmental or individual or class exemption. There has
been no (a) "reportable event" (as defined in Section 4043 of ERISA), or
event described in Section 4062(f) or Section 4063(a) of ERISA or (b)
termination or partial termination, withdrawal or partial withdrawal with
respect to any of the ERISA Plans that Company or any ERISA Affiliate of
Company maintains or contributes to or has maintained or contributed to or
was required to maintain or contribute to for the benefit of employees of
Company or any ERISA Affiliate of Company now or formerly in existence.
(h) For any ERISA Plan that is an employee pension benefit plan as
defined in ERISA Section 3(2), the fair market value of such Benefit Plan's
assets equals or exceeds the present value of all benefits (whether vested
or not) accrued to date by all participants in such Benefit Plan. For this
purpose the assumptions prescribed by the PBGC for valuing plan assets or
liabilities upon plan termination shall be applied and the term "benefits"
shall include the value of any early retirement or ancillary benefits
(including shutdown benefits) provided under any Benefit Plan. As of the
Closing, full payment will have been made of all amounts which Company is
required to have made at or prior to such time, under any Applicable Laws,
as a contribution to any Benefit Plan of Company or of an ERISA Affiliate
of Company, and no accumulated funding deficiency (as defined in ERISA
Section 302 or Code Section 412), whether or not waived, will exist with
respect to any Benefit Plan.
(i) Except as described on Company Disclosure Schedule 4.9, as of the
Closing, Company will have no material current or future liability with
respect to any events or matters occurring, arising or accruing on or prior
to such date under any Benefit Plan (A) that was not reflected in the
Company Financial Statements or (B) that represents contributions required
to be made under written terms of such Benefit Plan as of the Closing.
(j) Company does not maintain any Benefit Plan providing deferred or
stock based compensation which is not reflected in the Company Financial
Statements.
(k) Except as disclosed on Company Disclosure Schedule 4.9, neither
Company nor any ERISA Affiliate of Company has maintained, and neither now
maintains, a Benefit Plan providing welfare benefits (as defined in ERISA
Section 3(1)) to employees after retirement or other separation of service
except to the extent required under Part 6 of Title I of ERISA and Code
Section 4980B.
(l) Except as set forth on Company Disclosure Schedule 4.9, the
consummation of the Merger and the other transactions contemplated by this
Agreement will not (i) entitle any current or former employee (or any
spouse, dependent or other family member of such employee) of Company or
any ERISA Affiliate of Company to severance pay,
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unemployment compensation or any payment contingent upon a change in
control or ownership of Company, or (ii) accelerate the time of payment or
vesting, or increase the amount, of any compensation due to any such
employee or former employee (or any spouse, dependent or other family
member of such employee).
(m) All Benefit Plans subject to Section 4980B of the Code, as amended
from time to time, or Part 6 of Title I of ERISA or both have been
maintained in good faith compliance with the requirements of such laws and
any regulations (proposed or otherwise) issued thereunder.
(n) No liability to the PBGC has been incurred as of the Closing by
Company or any ERISA Affiliate of Company, except for PBGC insurance
premiums, and all such insurance premiums incurred or accrued up to and
including the Closing have been timely paid.
(o) Neither Company nor any ERISA Affiliate of Company maintains or
has maintained, has contributed to or has been required to contribute to, a
multi-employer plan (as defined in Section 3(37) of ERISA). No amount is
due or owing from Company on account of a multi-employer plan (as defined
in Section 3(37) of ERISA) on account of any withdrawal therefrom.
(p) All annual reports (as described in Section 103 of ERISA) and all
Forms 5500 relating to the applicable provisions of the Code required to be
filed in connection with one or more of the Benefit Plans have been timely
and properly filed in accordance with Applicable Laws.
(q) Under the Forseon Corporation Employee Stock Ownership Plan
("ESOP") and Applicable Laws (including, without limitation, all U.S.
Treasury and U.S. Department of Labor regulations and pronouncements), in
the event that the portion of a Participant's Account which is or was not
Vested is required to be restored, as a result of a restoration
contemplated by Section 8.8(c) of the ESOP, a termination of the ESOP or
otherwise, each and every such restoration is required in an amount which
is not greater than the value of such portion of such Account which is not
Vested at the time such Participant received or is deemed to have received
a distribution from the ESOP. For purposes of the preceding sentence, the
terms "Participant," "Account," and "Vested" shall have the same meaning as
set forth under the ESOP.
(r) There is no loan or other debt obligation relating to the ESOP or
secured by stock owned by the ESOP or its trustee.
(s) Except as set forth on Company Disclosure Schedule 4.9, there is
no put option relating to stock which has been distributed from the ESOP in
respect of more than 7,000 shares of Company Common Stock.
4.10 Compliance with Applicable Laws. Except as set forth in Company
Disclosure Schedule 4.10, Company and the Company Subsidiary hold all licenses,
franchises, permits, consents and authorizations ("LICENSES") necessary for the
lawful conduct of their business, except where the failure to hold any License
would not have a Material Adverse Effect on Company. No proceeding is pending
or, to the Knowledge of Company or the Management Stockholders, threatened
seeking the revocation or suspension of any License. Except as set forth on
Company Disclosure Schedule 4.10, Company and the Company Subsidiary are and
have been in compliance in all respects with all Applicable Laws, except where
the failure to be in compliance would not have a Material Adverse Effect on
Company. There is no outstanding or, to the Knowledge of Company and Management
Stockholders, threatened order, writ, injunction,
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or decree of Governmental Authority against Company or the Company Subsidiary
affecting, involving, or relating to their business or assets.
4.11 Certain Contracts.
(a) Company Disclosure Schedule 4.11 lists the following written
agreements (collectively, the "MATERIAL CONTRACTS"), to which Company or
the Company Subsidiary is a party or by which Company or the Company
Subsidiary or any of its or their properties or assets is bound:
(i) all written agreements that involve an annual commitment or
payment by any party thereto of more than $25,000 individually or
$100,000 in the aggregate or which have a fixed term extending more than
12 months from the date of this Agreement (there being no oral
agreements of this kind);
(ii) all joint venture, sales agency, sales representative or
distributorship, broker, franchise, license or similar agreements;
(iii) all leases relating to real property or to other material
assets used in Company's business;
(iv) all notes, bonds, mortgages, security agreements, and other
agreements and instruments for or relating to any lending or borrowing
by Company or the Company Subsidiary in any amount (exclusive of
advances to employees for expenses and trade payables incurred in the
ordinary course of business);
(v) all powers of attorney, guarantees, suretyships or similar
agreements; and
(vi) all other written agreements the breach of or default under
which would or would be reasonably likely to have a Material Adverse
Effect on Company.
(b) Each of the Material Contracts is valid, binding and enforceable
on the parties thereto in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium or similar laws
affecting the enforcement of creditors' rights generally, and except that
the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding may be brought.
(c) Except as disclosed in Company Disclosure Schedule 4.11, (i)
Company is not a party to or bound by any agreement or understanding
(whether written or oral) with respect to the employment (on any basis
other than at-will) of any officers, employees, directors, consultants or
other persons, and (ii) the consummation of the transactions contemplated
by this Agreement will not (either alone or upon the occurrence of any
additional acts or events) result in any payment (whether of severance pay
or otherwise) becoming due from Company to any officer, employee, director,
consultant or other person. Company Disclosure Schedule 4.11 sets forth
true and correct copies of all written severance or employment agreements
with officers, directors, employees, agents, consultants and other persons
to which Company is a party. Except as set forth on Company Disclosure
Schedule 4.11, Company is not a party to any oral agreements of the kind
referred to in the preceding sentence.
(d) Except as disclosed in Company Disclosure Schedule 4.11, no
agreement or understanding to which Company or, to Company's Knowledge, any
Company Stockholder is a party or by which Company, any of its Affiliates
or any Company Stockholder is bound
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limits the freedom of Company, any of its Affiliates or any Company
Stockholder to compete in any line of business or with any person.
(e) Except as disclosed in Company Disclosure Schedule 4.11, neither
Company nor the Company Subsidiary nor, to the Knowledge of Company and the
Management Stockholders, any other party thereto, is in default under any
of the Material Contracts to which Company or the Company Subsidiary is a
party or to which Company, the Company Subsidiary or its or their
properties is bound; no event has occurred which (whether with or without
notice, lapse of time or the happening or occurrence of any other event)
would constitute a default thereunder entitling any party to terminate a
Material Contract; and the continuation, validity and effectiveness of all
such Material Contracts under the current terms thereof and the current
rights and obligations of Company or any Subsidiary thereunder will in no
way be affected, altered or impaired by the consummation of the
transactions contemplated by this Agreement. To the Knowledge of Company
and the Management Stockholders, except as disclosed in Company Disclosure
Schedule 4.11, upon consummation of the Merger, the Surviving Corporation
will be entitled to enjoy the advantages and benefits of the business
arrangements, opportunities and relationships as enjoyed by Company and its
Subsidiary prior to the date of this Agreement without interference or
interruption.
4.12 Properties and Insurance.
(a) Except as disclosed in the Company Financial Statements or in
Company Disclosure Schedule 4.12, Company and the Company Subsidiary have
good and, as to owned real property, marketable title to all assets and
properties, whether real or personal, tangible or intangible, reflected in
the Company Financial Statements as of December 31, 1998 or owned and
acquired subsequent thereto (except to the extent that such assets and
properties have been disposed of in the ordinary course of business since
such date), subject to no Liens except (i) statutory liens for amounts not
yet delinquent or which are being contested in good faith; (ii) such Liens
and title imperfections that do not in the aggregate have a Material
Adverse Effect on Company; (iii) statutory liens securing the claims or
demands of materialmen, mechanics, carriers, warehousemen, landlords, and
other like persons for labor, materials, supplies, or rentals, if any; (iv)
Liens resulting from deposits made in connection with workers'
compensation, unemployment insurance, social security and like laws; and
(v) Liens of banks and financial institutions with respect to funds on
deposit therewith or other property in possession thereof. Company and the
Company Subsidiary as lessee have the right under valid and subsisting
leases to occupy, use, possess and control all real property leased by
Company and its Subsidiary as currently occupied, used, possessed and
controlled by Company and its Subsidiary or necessary in the operation of
their business as currently conducted.
(b) The business operations and all insurable properties and assets of
Company and the Company Subsidiary are insured for their benefit against
all risks which, in the reasonable judgment of the Company and the Company
Subsidiary, should be insured against, in each case under policies or bonds
issued by insurers of recognized responsibility, in such amounts with such
deductibles and against such risks and losses as are in the opinion of the
Company adequate for the businesses engaged in by it and the Company
Subsidiary. Certificates of insurance with respect to all such policies as
in effect on the date of this Agreement are attached hereto as Company
Disclosure Schedule 4.12. Neither Company nor the Company Subsidiary has
received any written notice of cancellation or
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written notice of a material amendment of any such insurance policy or
bond, and Company and the Company Subsidiary are not in default under any
such policy or bond, no coverage thereunder is being disputed and all
material claims thereunder have been filed in a timely fashion.
(c) No person other than Company and the Company Subsidiary is
currently entitled to possession of or other right to any of the properties
of Company and the Company Subsidiary, whether owned or leased by Company
or the Company Subsidiary. To the Knowledge of Company, the real property,
buildings, structures and improvements owned or leased by Company and the
Company Subsidiary conform to all Applicable Laws, including zoning
regulations, none of which would upon consummation of the transactions
contemplated by this Agreement materially and adversely interfere with the
use of such properties, buildings, structures or improvements for the
purposes for which they are now utilized. Neither Company nor either of the
Management Stockholders has received written notice, nor does Company or
the Management Stockholders have Knowledge of (i) any pending or
contemplated condemnation or eminent domain proceeding affecting the
properties owned or leased by Company or the Company Subsidiary, (ii) any
proposal for materially increasing the assessed value of any such
properties for state, county, local or other ad valorem Taxes or (iii) any
pending or contemplated proceedings or public improvements that would
result in the levy of any special Tax or assessment against any such
properties; and there are no outstanding requirements or recommendations by
Company's and the Company Subsidiary's insurance providers requiring or
recommending any repairs or work to be done with reference to any such
properties. The properties and assets owned or leased by Company and the
Company Subsidiary are adequate for the conduct of their business as
currently conducted and are in good repair and operating condition, normal
wear and tear excepted. The properties and assets owned or leased by
Company and the Company Subsidiary constitute all of the property and
assets that Company and the Company Subsidiary use or may reasonably need
in connection with the operation of their business as currently conducted,
and the consummation of the transactions contemplated by this Agreement
will not impair the ability of Parent to use such properties and assets.
4.13 Environmental Matters.
(a) The operations of Company and the Company Subsidiary comply, and
have complied, in all material respects with all applicable Environmental
Laws (as defined below).
(b) Company and the Company Subsidiary have obtained all material
environmental, health and safety Licenses and other authorizations
necessary for the operation of its and their business, all of which are
valid and in good standing and are not subject to any modification or
revocation proceeding, and Company and the Company Subsidiary are in
compliance in all material respects with all terms and conditions thereof.
(c) Neither Company nor either of the Management Stockholders has
received any written notice of any pending or threatened investigation,
proceeding or claim to the effect that Company is or may be liable to any
person or entity, or responsible or potentially responsible for the costs
of any remedial or removal action or other cleanup costs, as a result of
noncompliance with any Environmental Laws or arising out of the presence,
generation, storage or disposal of hazardous waste, including liability
under the United States Comprehensive Environmental Response, Compensation
and Liability Act, as amended, any
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state superfund law or any Environmental Law, and there is no past or
present action, activity, condition or circumstance that could be expected
to give rise to any such liability on the part of Company to any person or
entity or for any such cleanup costs.
(d) The term "ENVIRONMENTAL LAWS" shall mean all Applicable Laws
relating to pollution or protection of the environment.
4.14 Intellectual Property. Company and the Company Subsidiary have
developed and conduct an active program of licensing certain proprietary
application software products and systems and provide inventory data processing
services using such products and systems (the "SOFTWARE PROGRAMS"), and in
connection therewith the Company and the Company Subsidiary have developed
certain related technical documentation and user reference manuals (the
"DOCUMENTATION"). The Software Programs and the Documentation are collectively
referred to as the "SOFTWARE." The Software Programs and Documentation are
listed in Company Disclosure Schedule 4.14.
(a) Procedures for Copyright Protection. Company Disclosure Schedule
4.14(a) sets forth the form and placement of the proprietary legends and
copyright notices displayed in or on the Software, including screen
displays. In no instance has the eligibility of the Software for protection
under copyright law been forfeited to the public domain.
(b) Procedures for Trade Secret Protection. Neither Company nor the
Company Subsidiary has ever disclosed the source code for the Software to a
third party other than the consultants and other persons identified in
Company Disclosure Schedule 4.14(b), each of which has executed a
nondisclosure agreement in favor of Company, and Company and the Company
Subsidiary disclose source code to employees only on a need-to-know basis
in connection with the performance of their duties to Company and the
Company Subsidiary. Except as described in Company Disclosure Schedule
4.14(b), each current and former employee of Company has executed and
delivered a nondisclosure and assignment agreement or an employment or
other agreement containing provisions for the protection of trade secrets
and confidential information of Company and the Company Subsidiary and the
absolute ownership by Company and the Company Subsidiary of all work
resulting from the performance of services by such employee. The form of
such agreement is attached to Company Disclosure Schedule 4.14(b) and there
are no material deviations from that form which have been executed. The
source code and system documentation comprising the Software have at all
times been maintained by Company and the Company Subsidiary in confidence,
and Company and the Company Subsidiary have not taken (nor have they failed
to take) any action which would result in such source code and system
documentation not being protectable as a trade secret under applicable law.
(c) Ownership of Software. All persons who have contributed to or
participated in the conception and development of the Software have been
full-time employees of Company or the Company Subsidiary hired to prepare
such works within the scope of employment, except for the consultants
identified in Company Disclosure Schedule 4.14(b). As a consequence,
Company and the Company Subsidiary have all ownership interests in the
Software.
(d) Absence of Claims. Except as set forth in Company Disclosure
Schedule 4.14(d), no claims have been asserted against Company or the
Company Subsidiary by any person to rights in the Software, and no valid
basis for any such claim exists. The use of the Software by Company, the
Company Subsidiary and their licensees does not infringe on the rights of
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any person (whether arising under copyright, trade secret, patent, unfair
competition or other state or federal laws which protect intellectual
property rights).
(e) Company Disclosure Schedule 4.14(e)(i) lists and describes all
patents, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations and applications, and all patent,
trademark and service mark licenses, (ii) describes all copyrights,
computer software, databases, and all other intellectual property that are
owned by or registered in the name of Company or the Company Subsidiary or
to which Company or the Company Subsidiary has any rights as licensee or
otherwise (except "off-the-shelf" computer software being used in
accordance with the standard license therefor), which list specifies which
items are owned and to which items Company or the Company Subsidiary has
rights as a licensee or otherwise; and (iii) lists and describes all
contracts, agreements or understandings pursuant to which Company or the
Company Subsidiary has authorized any person to use, or which any person
otherwise has the right to use, in any business or commercial activity, any
of the items listed in clauses (i) and (ii) above. All federal trademark or
service mark registrations, and all applications to register any trademarks
or service marks or any trademark register maintained by the United States
government or any state or provincial government are based on truthful
affidavits or declarations of use.
(f) All Necessary Property. The items listed or described in Company
Disclosure Schedule 4.14 pursuant to the preceding subsections constitute
or represent all of the intellectual property necessary to the conduct of
Company's and the Company Subsidiary's business, and Company's and the
Company Subsidiary's ownership and use rights with respect thereto are free
and clear of Liens.
(g) No Infringement. Company has not nor has the Company Subsidiary
infringed upon, and Parent's conduct of Company's and the Company
Subsidiary's business after the Closing as currently conducted will not
infringe upon, any patent, service mark, trade name, trademark, copyright,
trade secret or other intellectual property belonging to any other person
or entity; and, except as described in Company Disclosure Schedule 4.4(g),
Company has not nor has the Company Subsidiary agreed to indemnify any
person or entity for or against any infringement of or by the intellectual
property set forth in the Company Disclosure Schedule 4.14. To the
Knowledge of Company, no person or entity is infringing upon any of
patents, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations, licenses, copyrights, computer
software or other intellectual property of Company and the Company
Subsidiary. No claim has been asserted against Company or the Company
Subsidiary or otherwise to Company's Knowledge by any person to the effect
that any current or former employee of Company has violated the provisions
of any noncompete or nondisclosure agreement with such person, or has
disclosed any proprietary information of such person to Company, the
Company Subsidiary or any third party.
4.15 Adequacy of Technical Documentation. The Software includes the
source code, system documentation and statements of principles of operation for
all Software Programs, as well as any pertinent commentary or explanation that
may be reasonably necessary to render such materials understandable and usable
by a trained computer programmer. The Software also includes any program
(including compilers), workbenches, tools, and higher level language used for
the development, maintenance and implementation of a Software Program.
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4.16 Third-Party Components in Software. Company and the Company
Subsidiary have validly obtained the right and license to use, copy, modify and
distribute any third-party programming and materials contained in the Software
pursuant to the contracts identified in Company Disclosure Schedule 4.14(e),
subject to no further license fee, royalty or other payment obligations, other
than software maintenance payments customarily associated therewith. The
Software contains no other programming or materials in which any third party may
claim superior, joint or common ownership, including any right or license. The
Software does not contain derivative works of any programming or materials not
owned in their entirety by Company and the Company Subsidiary.
4.17 Third-Party Interests or Marketing Rights in Software. Company and
the Company Subsidiary have not granted, transferred, or assigned any right or
interest in the Software to any person, except pursuant to the contracts
identified in Company Disclosure Schedule 4.14(e). There are no contracts,
agreements, licenses, commitments or arrangements in effect with respect to the
marketing, distribution, licensing or promotion of the Software by any
independent salesperson, distributor, sublicensor or other remarketer or sales
organization, except as set forth in Company Disclosure Schedule 4.14 (b) and
(e).
4.18 No Parachute Payments. Except as disclosed in Company Disclosure
Schedule 4.18, no officer, director, employee or agent (or former officer,
director, employee or agent) of Company or the Company Subsidiary is entitled
now, or will or may be entitled as a consequence of this Agreement or the
Merger, to any payment or benefit from Company or from Parent, which if paid or
provided would constitute an "excess parachute payment," as defined in Section
280G of the Code.
4.19 Absence of Certain Agreements and Practices.
(a) Except as set forth in Company Disclosure Schedule 4.19 or in
connection with customary transactions in the ordinary course of business,
no present or former Affiliate or Stockholder of Company or the Company
Subsidiary:
(i) owes money to Company or the Company Subsidiary;
(ii) has any claim (as defined in Section 101 of the U.S.
Bankruptcy Code) or other right or cause of action against Company or
the Company Subsidiary;
(iii) has any interest in any property or assets used by Company or
the Company Subsidiary in their business;
(iv) has any benefits that are contingent on the transactions
contemplated by this Agreement, other than as stated in this Agreement;
(v) has any agreement with Company or the Company Subsidiary that
is not terminable by Company or the Company Subsidiary without penalty
or notice;
(vi) has any agreement providing severance benefits or other
benefits, which are conditioned upon a change of control after the
termination of employment of such employee regardless of the reason for
such termination of employment; or
(vii) has any agreement or plan, any of the benefits of which will
be increased, vested or accelerated by the occurrence of any of the
transactions contemplated by this Agreement.
(b) Neither Company, the Company Subsidiary, nor their directors,
officers, agents, affiliates or employees, nor any other person acting on
behalf of Company or the Company
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Subsidiary, has (i) given or agreed to give any gift or similar benefit
having a value of $1,000 or more to any customer, supplier or governmental
employee or official or any other person, for the purpose of directly or
indirectly furthering the business of Company or the Company Subsidiary,
(ii) used any corporate funds for contributions, payments, gifts or
entertainment, or made any expenditures, relating to political activities
to government officials or others in violation of any Applicable Laws, or
(iii) received any unlawful contributions, payments, gifts or expenditures
in connection with the business of Company or the Company Subsidiary.
4.20 Major Vendors and Customers. Company Disclosure Schedule 4.20 sets
forth a list of each licensor, developer, remarketer, distributor and supplier
of property or services to, and each licensee, end-user or customer of, Company
and the Company Subsidiary, to whom Company or the Company Subsidiary paid or
billed in the aggregate in excess of $25,000 from January 1, 1997 through
December 31, 1998.
4.21 Accounts Receivable. Company Disclosure Schedule 4.21 sets forth the
accounts receivable of Company and the Company Subsidiary as of December 31,
1998, as reflected in the Company Financial Statements as of that date, together
with an aging of these accounts. These accounts receivable arose from, and all
accounts receivable of Company and the Company Subsidiary created after that
date arose from, valid transactions in the ordinary course of business, and
except as disclosed in Company Disclosure Schedule 4.21, will be good and
collectible at the recorded amounts thereof. Except as disclosed in Company
Disclosure Schedule 4.21, no portion of the accounts receivable is subject to
counterclaim or setoff.
4.22 Sufficiency of Rights. Except as set forth in Company Disclosure
Schedule 4.22, and assuming the renewal or continuation of all business
arrangements, including goodwill, employment, customer, client and vendor
relationships currently in place (and, to Company's and the Management
Stockholders' Knowledge, no reason exists why such renewal or continuation in
favor of Parent could be diminished or obstructed), the assets of Company and
the Company Subsidiary as reflected in the Company Financial Statements
constitute all of the properties, rights, and privileges necessary for the
continuation of the conduct of Company's and the Company Subsidiary's business
by Parent for a reasonable period after Closing in substantially the same manner
as it has been operated by Company and the Company Subsidiary during the
12-month period preceding the Closing.
4.23 Solvency. Since January 1, 1991, except as set forth on Company
Disclosure Schedule 4.23, neither Company nor the Company Subsidiary has been a
party to any bankruptcy, insolvency or similar proceeding, whether voluntary or
involuntary, and no receiver, trustee or other similar party has been appointed
with respect to Company or the Company Subsidiary or any of their assets.
Company and the Company Subsidiary are solvent and, after giving effect to the
Merger contemplated by this Agreement will be solvent.
4.24 Combinations Involving Company. All mergers, consolidations or other
business combinations involving Company and its present or former Subsidiaries,
and all liquidations, purchases or other transactions by which Company and the
Company Subsidiary acquired any of their business and property were conducted in
all material aspects in accordance with applicable certificates of
incorporation, bylaws, any other applicable agreements, instruments and
documents and Applicable Laws.
4.25 Bank Accounts. Company Disclosure Schedule 4.25 lists all bank,
internet, money market, savings and similar accounts and safe deposit boxes of
Company and the Company Subsidiary, specifying the account numbers, the
institutions where located and the authorized
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signatories or persons having access to them. In addition, Company and the
Company Subsidiary shall deliver all passwords with respect to the foregoing
accounts to Parent at Closing.
4.26 Labor Relations. Except as disclosed on Company Disclosure Schedule
4.26, Company and the Company Subsidiary are in compliance in all material
respects with all Applicable Laws respecting employment and employment
practices, terms and conditions of employment, wages and hours, and is not
engaged in any unfair labor or unlawful employment practice. There is no
unlawful employment practice or discrimination charge pending before the Equal
Employment Opportunity Commission ("EEOC") or any EEOC recognized state
"referral agency." There is no unfair labor practice charge or complaint against
Company or the Company Subsidiary pending before the National Labor Relations
Board ("NLRB"). There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the Knowledge of Company or the Management Stockholders,
threatened against or involving or affecting Company or the Company Subsidiary
and no NLRB representation question exists respecting any of its employees. No
grievance, complaint, citation, investigation or arbitration proceeding is
pending and no written claim therefor exists. There is no collective bargaining
agreement that is binding on Company or the Company Subsidiary.
4.27 Year 2000 Matters. Except as set forth on Company Disclosure
Schedule 4.27, the software, systems and computer programs listed on Company
Disclosure Schedule 4.14 are designed to be used prior to, during, and after the
calendar year 2000 AD, and such software and computer programs will operate
during each such time period without material error relating to date data,
specifically including any error relating to, or the product of, date data which
represents or references different centuries or more than one century or any
leap year. Except as set forth on Company Disclosure Schedule 4.27, Company's
internal operating and computer systems and software and the network connections
it maintains are adequately programmed to address the Year 2000 issue in all
material respects.
4.28 Change in Control Provisions. Company Disclosure Schedule 4.28
contains a true and complete copy of all agreements in effect to which Company,
or the Company Subsidiary, is a party and which contain any provisions which
become effective upon a change in control, merger, consolidation, sale of assets
or other business combination involving Company or the Company Subsidiary or
otherwise require any payment or performance by Company, or any officer or
director thereof, now or in the future, in connection with or as a result of any
of the transactions contemplated by this Agreement.
4.29 Pooling-of-Interests. To Company's Knowledge and the Knowledge of
the Management Stockholders based on consultation with Company's independent
accountants, neither Company nor any of its directors, officers, other
Affiliates or stockholders has taken any action which would interfere with
Parent's ability to account for the Merger as a pooling-of-interests.
4.30 No Prior Convictions. No Management Stockholder or, to the Knowledge
of Company and the Management Stockholders, any other executive officer or
director of Company has been convicted, or has any action pending, of a crime
involving fraud, embezzlement or theft or any similar crime.
4.31 Statements; Proxy Statement/Prospectus. The information supplied by
Company for inclusion in the Registration Statement (as defined in Section 7.14)
shall not, at the time the Registration Statement is filed with the Securities
and Exchange Commission (the "COMMISSION"), at the time any amendment or
supplement thereto is filed and at the time it becomes effective under the 1933
Act, contain any untrue statement of a material fact or omit to
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state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by Company
for inclusion in the Proxy Statement (as defined in Section 7.14) shall not, on
the date the Proxy Statement is first mailed to Company's Stockholders, at the
time of the Company Stockholders' meeting (as required by Section 7.15) and at
the Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not false or misleading, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Company Stockholders' meeting which has become
false or misleading. To the Knowledge of the Management Stockholders, the
representations made in the preceding two sentences are and shall be true,
accurate and complete in all material respects. The Proxy Statement will comply
as to form in all material respects with the provisions of the 1934 Act and the
rules and regulations thereunder. If, at any time prior to the Effective Time,
any event relating to Company or any of its Affiliates or the Company Subsidiary
should be discovered by Company or any Management Stockholder which should be
set forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement, Company and such Management Stockholder shall promptly inform
Parent. Notwithstanding the foregoing, Company and the Management Stockholders
make no representation or warranty with respect to any information supplied by
Parent which is contained in any of the foregoing documents.
4.32 Disclosure. No representation, warranty or statement made by Company
in this Agreement or in any document or certificate furnished or to be furnished
to Parent pursuant to this Agreement contains or will contain any untrue or
incomplete statement or omits or will omit to state any fact necessary to make
the statements contained in this Agreement or in such document or certificate
not misleading in any material respect. All facts known or reasonably available
to Company that are material to the financial condition, operation, or prospects
of the business and assets of Company have been disclosed to Parent. No
representation, warranty or statement made by the Management Stockholders in
this Agreement or in any document or certificate furnished or to be furnished to
Parent pursuant to this Agreement contains or will contain any untrue or
incomplete statement or omits or will omit to state any fact necessary to make
the statements contained in this Agreement or in such document or certificate
not misleading in any material respect. To the Knowledge of the Management
Stockholders, all facts that are material to the financial condition, operation,
or prospects of the business and assets of Company have been disclosed to
Parent.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF THE MANAGEMENT STOCKHOLDERS
Each Management Stockholder, severally and not jointly, represents and
warrants to Parent, with respect to himself and his ownership of Company Common
Stock, as follows:
5.1 Ownership of Shares. The Management Stockholder owns of record and
beneficially all of the Company Common Stock set forth opposite his name on
Company Disclosure Schedule 4.2. The Management Stockholder owns all right,
title and interest in and to such Company Common Stock, free and clear of all
Liens (including those for federal or state estate or inheritance taxes),
options, rights of refusal or similar rights or other transfer restrictions of
any nature whatsoever (including any arising from any pending or threatened
litigation) other
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than restrictions on transfers arising out of applicable federal and state
securities laws, state community property laws, and the agreements identified on
Company Disclosure Schedule 4.2 (which restrictions shall be terminated at or
prior to the Closing). The Management Stockholder owns no other securities of
Company except for his interest in the ESOP set forth in Company Disclosure
Schedule 4.9 and the Outstanding Options listed in Company Disclosure Schedule
4.2.
5.2 Authorization. With respect to this Agreement and any other
agreements, instruments and documents executed and delivered by the Management
Stockholder pursuant to this Agreement (this Agreement and such other
agreements, instruments and documents are collectively referred to as the
"STOCKHOLDER DELIVERED AGREEMENTS"): (i) the Management Stockholder has the
right, power and authority to enter into the Stockholder Delivered Agreements
executed and delivered by him and to consummate the transactions contemplated
by, and otherwise to comply with and perform his obligations under them; and
(ii) the Stockholder Delivered Agreements will, when delivered, constitute valid
and binding obligations of the Management Stockholder enforceable against the
Management Stockholder in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium or similar laws
affecting the enforcement of creditors' rights generally, and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought.
5.3 Absence of Violations or Conflicts. Except as set forth on Management
Stockholder Disclosure Schedule 5.3, the execution and delivery of the
Stockholder Delivered Agreements and the consummation by the Management
Stockholder of the transactions contemplated by, or other compliance with the
performance under them do not and will not with the passing of time or giving of
notice or both: (i) constitute a violation of, be in conflict with, constitute a
default or require any payment under, permit a termination of, or result in the
creation or imposition of any Lien upon any assets of Company or any of the
Company Common Stock under (A) any contract, agreement, commitment, undertaking
or understanding (including rights of refusal or similar rights or other
transfer restrictions) to which the Management Stockholder is a party or to
which he or his properties or Company or its properties are subject or bound, or
(B) any Applicable Law or judgment, decree or order of any Governmental
Authority to which the Management Stockholder or his properties are subject or
bound; or (ii) create, or cause the acceleration of the maturity of, any debt,
obligation or liability of the Management Stockholder that would result in any
Lien or other claim upon the assets of Company.
5.4 No Consents Required. Except for the Company Approvals, and except as
set forth on Management Stockholder Disclosure Schedule 5.4, no Authorization of
or with any Governmental Authority or any other Authorization of or with any
other third party on the part of the Management Stockholder is required in
connection with his execution or delivery of the Stockholder Delivered
Agreements or the consummation of the transactions contemplated by, or other
compliance with the performance under, such Stockholder Delivered Agreements by
the Management Stockholder.
5.5 No Claims Against Company. Except as set forth on Management
Stockholder Disclosure Schedule 5.5, the Management Stockholder has no claim or
cause of action against Company or any of the Company Subsidiary, except for
accrued compensation and benefits and expenses or similar obligations incurred
in the ordinary course of business (including reimbursement of medical expenses
pursuant to the Benefit Plans disclosed pursuant to this Agreement), and except
as otherwise specifically provided in this Agreement.
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5.6 Litigation Related to this Agreement. The Management Stockholder is
not a party to or subject to any judgment, decree or order entered in any
lawsuit or proceeding brought by any Governmental Authority or other third party
seeking to prevent the execution of this Agreement or the consummation of the
transactions contemplated by this Agreement.
5.7 Resales of Parent Common Stock. The Management Stockholder will not
make any sale, transfer or other disposition of the Parent Common Stock in
violation of the 1933 Act or any applicable state securities laws (the "STATE
ACTS"). Without limiting the foregoing, the Management Stockholder has no
current plan or intention to distribute any of the Parent Common Stock issued to
him pursuant to this Agreement. The Management Stockholder agrees that there
will be placed on the certificate or other evidence of the Parent Common Stock
issued to any "affiliate" of Company for purposes of Rule 145 of the 1933 Act,
or any substitutions therefor, the following:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") MAY NOT
BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN UPON RECEIPT BY THE
ISSUER OF EVIDENCE SATISFACTORY TO IT OF COMPLIANCE WITH THE 1933 ACT AND
THE APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE ISSUER SHALL
BE ENTITLED TO REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO IT WITH
RESPECT TO COMPLIANCE WITH THE ABOVE LAWS. THE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFER RELATED TO POOLING-OF-INTERESTS SET FORTH IN AN
AGREEMENT AND PLAN OF MERGER (THE AGREEMENT) DATED AS OF MARCH 25, 1999
AMONG THE ISSUER, THE HOLDER OF THE SECURITIES AND OTHERS. ANY ATTEMPTED
TRANSFER IN VIOLATION OF THE AGREEMENT SHALL BE NULL AND VOID. A COPY OF
THE AGREEMENT OR A SUMMARY OF SUCH RESTRICTIONS IS AVAILABLE FROM THE
ISSUER UPON REQUEST.
5.8 Tax Advice. The Management Stockholder has reviewed with his tax
advisor the United States federal and state tax consequences of an investment in
the Parent Common Stock and the transactions contemplated by this Agreement. The
Management Stockholder is relying solely on such advisors and not on any
statements or representations of Parent, Company or the agent of either, except
for the Tax Opinion required in Section 8.3 to be delivered by Parent's counsel
(which shall not be considered personal tax advice provided to such Management
Stockholder) and except for the statements, representations and covenants
provided in this Agreement, and understands that he (and not Parent or any other
party) shall be responsible for his own tax liability that will arise as a
result of this investment or the transactions contemplated by this Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Company (except as disclosed by Parent
pursuant to this Agreement and in the Parent Disclosure Schedules) as follows:
6.1 Corporate Organization.
(a) Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia. Parent has the
corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being
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conducted, and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets owned or
leased by it makes such licensing or qualification necessary, except where
the failure to be so licensed, qualified or in good standing would not have
a Material Adverse Effect on Parent.
(b) All Subsidiaries of Parent are listed on Parent Disclosure
Schedule 6.1. Each Parent Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of its state or other
jurisdiction of incorporation. Each Parent Subsidiary has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or
location of the properties and assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse
Effect on Parent. Parent Disclosure Schedule 6.1 sets forth copies of the
Articles of Incorporation and bylaws, if any, as in effect on the date of
this Agreement, of Parent and each of the Parent Subsidiaries. Except as
set forth in the Parent Disclosure Schedule 6.1, Parent and its
Subsidiaries do not own or control, directly or indirectly, any equity
interest in excess of five percent (5%) in any corporation, company,
association, partnership, joint venture or other entity.
6.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of
Parent consists of 50,000,000 shares of Parent Common Stock and 20,000,000
shares of preferred stock, without par value ("PARENT PREFERRED STOCK"). As
of the date of this Agreement, there are 19,782,313 shares of Parent Common
Stock issued and outstanding, no shares of Parent Preferred Stock issued
and outstanding, and 4,120,113 shares of Parent Common Stock reserved for
issuance upon the exercise of outstanding stock options and warrants
("PARENT STOCK OPTIONS"). All issued and outstanding shares of Parent
Common Stock, and all issued and outstanding shares of capital stock of
each of the Parent Subsidiaries, have been duly authorized and validly
issued and are fully paid and nonassessable, were not issued in violation
of any preemptive rights and were issued in material compliance with all
applicable federal and state securities laws. All of the outstanding shares
of capital stock of each Parent Subsidiary are owned by Parent and are free
and clear of any Liens.
(b) Except for the Parent Stock Options disclosed in Parent Disclosure
Schedule 6.2 or as otherwise disclosed by Parent in the Parent SEC Reports
(defined below), neither Parent nor any of the Parent Subsidiaries has
granted or is bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the transfer,
purchase, subscription or issuance of any shares of capital stock of Parent
or any of the Parent Subsidiaries or any securities representing the right
to purchase, subscribe or otherwise receive any shares of such capital
stock or any securities convertible into any such shares, and there are no
agreements or understandings with respect to voting of any such shares.
(c) All transactions whereby Parent or the Parent Subsidiaries
repurchased, redeemed, canceled or reacquired shares of its capital stock
and the solicitation of stockholder consents in connection with the Merger
have been or will be effected in material compliance with all applicable
corporate and securities laws, and documentation prepared by or on behalf
of the Parent or the Parent Subsidiaries in connection therewith did not
and will not include any
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untrue statement of any material fact or omit to state any material fact
necessary to make the statements made therein correct and complete.
6.3 Authority; No Violation.
(a) Except for the filing of the Proxy Statement (as defined in
Section 7.14) under the 1934 Act, the effectiveness of the Registration
Statement (as defined in Section 7.14) and satisfaction of other
requirements under the 1933 Act, 1934 Act and any applicable State Acts,
Nasdaq listing approval requirements, and filing of the Certificate of
Merger as required by the GBCC and the DGCL (collectively, the "PARENT
APPROVALS"), no Authorization of any third party or any Governmental
Authority is necessary on behalf of Parent in connection with the execution
and delivery by Parent of this Agreement and the other Merger Documents and
the consummation by Parent of the Merger and the other transactions
contemplated by this Agreement and the other Merger Documents. Subject to
receipt of the Parent Approvals, Parent has the full corporate power and
authority to execute and deliver this Agreement and to consummate the
Merger and the other transactions contemplated by this Agreement and the
other Merger Documents in accordance with the terms of this Agreement and
the other Merger Documents. The execution and delivery of this Agreement
and the other Merger Documents and the consummation of the Merger and the
other transactions contemplated by this Agreement and the other Merger
Documents have been duly and validly approved by the Board of Directors of
Parent in accordance with the Articles of Incorporation and bylaws of
Parent and Applicable Laws. Except for the Parent Approvals, no other
corporate proceedings on the part of Parent are necessary to consummate the
Merger and the other transactions contemplated by this Agreement and, when
executed and delivered, the other Merger Documents. This Agreement has been
duly and validly executed and delivered by Parent and constitutes the valid
and binding obligation of Parent enforceable against Parent in accordance
with its terms.
(b) Neither the execution and delivery of this Agreement by Parent and
Merger Sub, nor the consummation by Parent and Merger Sub of the Merger and
the other transactions contemplated by this Agreement in accordance with
the terms of this Agreement and the other Merger Documents, nor compliance
by Parent and Merger Sub with any of the terms or provisions of this
Agreement or the other Merger Documents, will (i) assuming that the Parent
Approvals are duly obtained, violate any provision of Parent's or Merger
Sub's Articles of Incorporation or bylaws, (ii) assuming that the Parent
Approvals are duly obtained, violate any Laws applicable to Parent, any of
the Parent Subsidiaries, or any of their respective properties or assets,
or (iii) except as set forth in Parent Disclosure Schedule 6.3, violate,
conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any Lien upon any of
the respective properties or assets of Parent or the Parent Subsidiaries
under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Parent or any of the Parent Subsidiaries
is a party, or by which they or any of their respective properties or
assets may be bound or affected except, with respect to (ii) and (iii)
above, such as individually or in the aggregate will not have a Material
Adverse Effect on Parent, and which will not prevent or delay the
consummation of the Merger and the other transactions contemplated by this
Agreement and the other Merger Documents.
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(c) Subject to receipt of the Parent Approvals, Merger Sub has the
full corporate power and authority to execute and deliver this Agreement
and to consummate the Merger and the other transactions contemplated by
this Agreement and the other Merger Documents in accordance with the terms
of this Agreement and the other Merger Documents. The execution and
delivery of this Agreement and the other Merger Documents and the
consummation of the transactions contemplated by this Agreement and the
other Merger Documents have been duly and validly approved by the Board of
Directors and the sole Shareholder of Merger Sub in accordance with the
Articles of Incorporation and bylaws of Merger Sub and Applicable Laws.
Except for the Parent Approvals, no other corporate proceedings on the part
of Merger Sub are necessary to consummate the Merger and the other
transactions contemplated by this Agreement and the other Merger Documents.
This Agreement has been duly and validly executed and delivered by Merger
Sub and constitutes the valid and binding obligation of Merger Sub
enforceable against Merger Sub in accordance with its terms.
6.4 Parent SEC Reports; Financial Statements.
(a) Parent has timely filed all forms, reports and documents required
to be filed by it with the Commission, and has heretofore made available to
Company, in the form filed with the Commission (excluding any exhibits
thereto) (i) Parent's registration statement on Form S-1 as declared
effective by the Commission on July 30, 1998, (ii) its Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (or the most recent
draft thereof), (iii) its Quarterly Reports on Form 10-Q for the periods
ended June 30 and September 30, 1998, (iv) all proxy statements relating to
Parent's meetings of shareholders (whether annual or special) held since
July 31, 1998, (v) all Current Reports on Form 8-K since July 31, 1998, and
(vi) all amendments and restatements of the foregoing (collectively, the
"PARENT SEC REPORTS").
(b) Except as set forth in Parent Disclosure Schedule 6.4, the Parent
SEC Reports (i) were prepared in all material respects in accordance with
the then-current requirements of the 1933 Act and the 1934 Act, as the case
may be, and the rules and regulations thereunder and (ii) did not at the
time they were filed (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading; provided, that any pro forma financial statements contained in
the Parent SEC Reports are not necessarily indicative of the consolidated
financial position of Parent and the Parent Subsidiaries as of the
respective date of such financial statements nor are such pro forma
financial statements necessarily indicative of the consolidated results of
operations and cash flows of Parent and the Parent Subsidiaries for the
periods indicated therein. No Subsidiary of Parent is required to file any
forms, documents or reports with the Commission under the 1934 Act.
(c) The Parent SEC Reports set forth copies of: (i) the consolidated
balance sheets of Parent and the Parent Subsidiaries as of December 31,
1998, 1997 and 1996, and the consolidated statements of income,
shareholders' equity and cash flows for the periods ended December 31,
1998, 1997 and 1996, in each case accompanied by the audit report of Arthur
Andersen LLP, independent public accountants with respect to Parent and the
Parent Subsidiaries (collectively, together with the related notes and any
additional financial statements delivered pursuant to Section 7.4, the
"PARENT FINANCIAL STATEMENTS").
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(d) The Parent Financial Statements have been prepared in accordance
with GAAP applied consistently during the periods involved (except as may
be indicated therein or in the notes thereto), and present fairly, in all
material respects, the consolidated financial position of Parent and the
Parent Subsidiaries as of the respective dates set forth therein, and the
consolidated results of Parent's and the Parent Subsidiaries' operations
and their cash flows for the respective periods set forth therein, in
accordance with GAAP (subject, in the case of unaudited statements, to
normal and recurring year-end adjustments which were not and are not known
or reasonably expected, individually or in the aggregate, to be material in
amount); provided, that any pro forma financial statements contained in the
Parent SEC Reports are not necessarily indicative of the consolidated
financial position of Parent and the Parent Subsidiaries as of the
respective dates of such financial statements nor are such pro forma
financial statements necessarily indicative of the consolidated results of
operations and cash flows of Parent and the Parent Subsidiaries for the
periods indicated therein.
(e) Except as and to the extent reflected, disclosed or reserved
against in the Parent Financial Statements, or as disclosed in Parent
Disclosure Schedule 6.4, neither Parent nor any of the Parent Subsidiaries
has had any Liabilities and, since December 31, 1998, Parent and the Parent
Subsidiaries have not incurred any Liabilities except in the ordinary
course of business and consistent with past practice (which, in the
aggregate, are not material) other than Liabilities incurred in connection
with this Agreement.
6.5 Broker's and Other Fees. Other than as set forth on Parent Disclosure
Schedule 6.5, neither Parent nor any of the Parent Subsidiaries nor any of their
directors or officers has employed any broker or finder or incurred any
liability for any broker's or finder's fees or commissions in connection with
any of the transactions contemplated by this Agreement.
6.6 Parent Common Stock. At the Effective Time, the Parent Common Stock
to be issued pursuant to the Merger will be duly authorized and validly issued,
fully paid and nonassessable, free of preemptive rights and free and clear of
all Liens created by or through Parent (except as set forth in this Agreement
and the other Merger Documents).
6.7 No Material Adverse Effect on Parent. From December 31, 1998 to the
date of this Agreement, there has been no change, occurrence or circumstance
affecting the business, results of operations or financial condition of Parent
or any Parent Subsidiary that has had, individually or in the aggregate, a
Material Adverse Effect on Parent, other than changes, occurrences and
circumstances referred to in any Parent SEC Reports or otherwise disclosed by
Parent on Parent Disclosure Schedule 6.7.
6.8 Absence of Certain Changes or Events. Except as set forth in Parent
Disclosure Schedule 6.8, since December 31, 1998, except for the execution of
this Agreement, and except as reflected in the Parent SEC Reports and Parent
Financial Statements, Parent has conducted its business only in the ordinary
course, consistent with past practice, and has not declared or paid any dividend
or distribution on or in respect of the Parent Common Stock.
6.9 Legal Proceedings. Except as disclosed in Parent Disclosure Schedule
6.9 or the Parent SEC Reports, and except for normal debt collection proceedings
instituted in the ordinary course by Parent and the Parent Subsidiaries, neither
Parent nor any of the Parent Subsidiaries is a party to any, and there are no
pending or, to the Parent's Knowledge, threatened legal, administrative,
arbitral or other proceedings, claims, actions or governmental investigations of
any nature against Parent or any of the Parent Subsidiaries which, if determined
adversely to Parent could reasonably be expected to have a Material Adverse
Effect on Parent. Except as disclosed
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in Parent Disclosure Schedule 6.9, the Parent SEC Reports or otherwise disclosed
by Parent, neither Parent nor any of the Parent Subsidiaries is a party to any
order, judgment or decree entered in any lawsuit or proceeding.
6.10 Taxes and Tax Returns. Except as disclosed in Parent Disclosure
Schedule 6.10:
(a) Each of Parent and Merger Sub has duly filed (and until the
Effective Time will so file) all Returns required to be filed by it in
respect of any United States federal, state or local Taxes and has duly
paid (and until the Effective Time will so pay) all such Taxes due and
payable as finally determined by the applicable Governmental Authority,
other than Taxes which are being contested in good faith (and disclosed to
Company in writing). Each of Parent and Merger Sub has established (and
until the Effective Time will establish) on its books and records reserves
that are adequate for the payment of all Taxes not yet due and payable, but
that are incurred in respect of Parent and Merger Sub through such date.
(b) None of the Returns of Parent or Merger Sub has been examined by
the IRS, or any other United States federal, state or local or any foreign
Governmental Authority within the past six years. To the Knowledge of
Parent and Merger Sub: there are no audits or other Governmental Authority
proceedings presently pending, nor any other disputes pending with respect
to, or claims asserted for, Taxes upon Parent or Merger Sub; nor has Parent
or Merger Sub given any currently outstanding waivers or comparable
consents regarding the application of any statute of limitations with
respect to any Taxes or Returns. There are no Liens for Taxes upon the
assets of Parent or Merger Sub, except for Liens for Taxes not yet due and
payable or being properly contested. Any Taxes being properly contested are
disclosed on Parent Disclosure Schedule 6.10. Parent has complied (and
until the Effective Time will comply) in all material respects with all
Applicable Laws relating to the payment and withholding of Taxes.
(c) Neither Parent nor Merger Sub (i) has requested any extension of
time within which to file any Return which Return has not since been filed;
(ii) is a party to any agreement providing for the indemnification,
allocation or sharing of Taxes; (iii) is required to include in income any
adjustment by reason of a voluntary change in accounting method initiated
by Parent or Merger Sub (nor does Parent or Merger Sub have any Knowledge
that any Governmental Authority has proposed any such adjustment or change
of accounting method); (iv) has filed a consent with any Governmental
Authority pursuant to which Parent or Merger Sub has agreed to recognize
gain (in any manner) relating to or as a result of this Agreement or the
transactions contemplated by this Agreement; or (v) has been a member of an
affiliated group other than one of which Parent or Merger Sub was the
common parent.
6.11 Compliance with Applicable Laws. Except as set forth in Parent
Disclosure Schedule 6.11, each of Parent and Merger Sub holds all Licenses
necessary for the lawful conduct of its business except where the failure to
hold any License would not have a Material Adverse Effect on Parent or Merger
Sub. No proceeding is pending or, to the Knowledge of Parent or Merger Sub,
threatened seeking the revocation or suspension of any License. Each of Parent
and Merger Sub is and has been in compliance in all material respects with all
Applicable Laws, except where the failure to be in compliance would not have a
Material Adverse Effect on Parent or Merger Sub; and neither Parent nor Merger
Sub has received any written notices from any Governmental Authority of any
allegation of any violation of any Applicable Laws or Licenses. There is no
outstanding or, to the Knowledge of Parent, threatened
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order, writ, injunction or decree of any Governmental Authority against Parent
or the Parent Subsidiaries affecting, involving, or relating to their business
or material assets.
6.12 Pooling-of-Interests. To Parent's Knowledge, based on consultation
with its independent accountants, neither Parent nor the Parent Subsidiaries nor
any of their respective directors, officers, other Affiliates or shareholders
has taken any action which would interfere with Parent's ability to account for
the Merger as a pooling-of-interests.
6.13 Statements; Proxy Statement/Prospectus. The information supplied by
Parent for inclusion in the Registration Statement (as defined in Section 7.14)
shall not, at the time the Registration Statement is filed with the Commission,
at the time any amendment or supplement thereto is filed and at the time it
becomes effective under the 1933 Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by Parent for inclusion in the Proxy Statement (as defined
in Section 7.14) shall not, on the date the Proxy Statement is first mailed to
Company's Stockholders, at the time of the Company Stockholders' meeting (as
required by Section 7.15) and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Stockholders' meeting which has become false or misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the 1934
Act and the rules and regulations thereunder. If, at any time prior to the
Effective Time, any event relating to Parent or any of its Affiliates or
Subsidiaries should be discovered by Parent which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
Parent shall promptly inform Company. Notwithstanding the foregoing, Parent
makes no representation or warranty with respect to any information supplied by
Company, the Company Subsidiary or the Management Stockholders which is
contained in any of the foregoing documents.
6.14 Contract Default. Neither Parent nor any Parent Subsidiary nor, to
the Knowledge of Parent, any other party thereto, is in default under any of the
Material Contracts to which Parent or any Parent Subsidiaries is a party or to
which it or its properties is bound; no event has occurred which (whether with
or without notice, lapse of time or the happening or occurrence of any other
event) would constitute a default thereunder entitling any party to terminate a
Material Contract; and the continuation, validity and effectiveness of all such
Material Contracts under the current terms thereof and the current rights and
obligations of Parent or any Parent Subsidiary thereunder will in no way be
affected, altered or impaired by the consummation of the transactions
contemplated by this Agreement. "Material Contracts" of Parent shall mean only
those contracts listed as exhibits to Parent's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, but shall not include those contracts
listed as "form of" agreements.
6.15 Disclosure. No representation, warranty, or statement made by Parent
or Merger Sub in this Agreement or in any document or certificate furnished or
to be furnished by Parent or Merger Sub to Company or the Company's Stockholders
pursuant to this Agreement contains or will contain any untrue or incomplete
statement or omits or will omit to state any fact necessary to make the
statements contained in this Agreement or in such document or certificate not
misleading in any material respect. All facts known or reasonably available to
Parent or Merger
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Sub that are material to the financial condition, operation, or prospects of the
business and assets of Parent and Merger Sub have been disclosed to Company and
the Management Stockholders.
ARTICLE 7
COVENANTS AND CERTAIN ACTIONS OF THE PARTIES
7.1 Conduct of Business. Company and the Company Subsidiary agree that
from the date hereof to the Effective Time, Company and the Company Subsidiary
shall conduct their business only in the ordinary course and consistent with
prudent business practice and past practice, except for transactions permitted
hereunder or with the prior written consent of Parent, which consent shall not
be unreasonably withheld, conditioned or delayed. Without limiting the
generality of the foregoing, Company shall use all commercially reasonable
efforts to:
(a) maintain its and the Company Subsidiary's existence and status in
good standing in all jurisdictions in which they are required to be
qualified or registered to conduct their business, except where the failure
to do so would not have a Material Adverse Effect on Company;
(b) maintain all of its and the Company Subsidiary's tangible assets
in good operating condition and maintain the protection of all intellectual
property in substantially the same standing as exists on the date hereof;
(c) continue performance in the ordinary course of its obligations
under its contracts and agreements;
(d) preserve its and the Company Subsidiary's business organization
intact, keep available its and the Company Subsidiary's present officers,
consultants and employees and preserve its and the Company Subsidiary's
present relationships with suppliers, customers and others having business
relationships with it and the Company Subsidiary; and
(e) maintain its and the Company Subsidiary's existing insurance,
subject to variations in amount required by the ordinary operations of its
and the Company Subsidiary's business.
7.2 Negative Covenants.
(a) Company agrees that from the date hereof to the Effective Time,
except as otherwise approved by Parent in writing or as permitted or
required by this Agreement, Company will not and will not permit the
Company Subsidiary to:
(i) change any provision of its Certificate of Incorporation or
bylaws;
(ii) except pursuant to the exercise or conversion of currently
outstanding options, warrants or other securities convertible into or
exchangeable for Company Common Stock and pursuant to the terms of the
ESOP, issue any additional shares of Company Common Stock or other
securities or change the number of shares of its authorized or issued
capital stock or issue or grant any option, warrant, call, commitment,
subscription, right to purchase or agreement of any character relating
to the authorized or issued capital stock of Company or the Company
Subsidiary or any securities convertible into shares of such stock, or
split, combine or reclassify any shares of its capital stock, or
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock;
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(iii) directly or indirectly redeem, purchase or otherwise acquire
any of its capital stock except as required by the terms of the ESOP or
in connection with the exercise of Outstanding Options;
(iv) grant any severance or termination pay (other than pursuant to
policies or contracts in effect on the date hereof, that were not
required to be modified or terminated pursuant to the terms hereof and
that have been disclosed to Parent pursuant hereto, totaling no more
than $125,000 in the aggregate) to, or enter into or amend any
employment or severance agreement with, any of its directors, officers
or employees (except for the Employment Agreements with the Management
Stockholders, copies of which are attached hereto as Exhibit 7.2 (the
"MANAGEMENT STOCKHOLDER EMPLOYMENT AGREEMENTS"), the Employment
Agreements with the persons listed on Exhibit 7.13(b) (the "Employment
Agreements"), and the Nonsolicitation, Work Product and Confidentiality
Agreements executed pursuant to Section 8.2(j) hereof (the "Nonsolicit
Agreements")); adopt any new employee benefit plan or arrangement of any
type; or award any increase in compensation or benefits to its
directors, officers or employees except with respect to employee
increases in the ordinary course of business and consistent with past
practices and policies and, with regard to bonuses, in amounts that do
not result in a material variance from the amounts reserved for such
payments through the date of the most recent balance sheet included in
the Company Financial Statements;
(v) sell or dispose of any assets other than in the ordinary course
of business consistent with past practices;
(vi) make any capital expenditures outside the ordinary course of
business;
(vii) acquire in any manner whatsoever any business or entity;
(viii) enter into, terminate, modify or amend any agreement or
arrangement with any Affiliate, except for the Management Stockholder
Employment Agreements, the Employment Agreements and the Nonsolicit
Agreements;
(ix) make any material change in its accounting methods or
practices as shown in the Company Financial Statements, other than
changes required by GAAP or Governmental Authorities;
(x) incur, create, assume or guarantee any Liabilities except in
the ordinary course of business and as would not have a Material Adverse
Effect on Company;
(xi) increase, or make any change in any assumptions underlying the
method of calculating any bad debt, contingency or other reserves (other
than making reserves totaling no more than $200,000 in connection with
the refocusing of operations and similar matters in connection with this
Merger Agreement) from those reflected in the Company Financial
Statements;
(xii) make any change in the method of valuing assets included in
the Company Financial Statements;
(xiii) pay, discharge or satisfy any Liabilities, other than by
payment, discharge or satisfaction in the ordinary course of business;
(xiv) permit or allow any of its assets (real, personal or mixed,
tangible or intangible) to be subjected to any Lien, except for Liens
which are in existence on the
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date hereof and which are disclosed on the Company Disclosure Schedules
and Liens for amounts not yet due and payable which Liens are contested
in good faith and for which adequate reserves have been made;
(xv) write down the value of any inventory or write off as
uncollectible any notes or accounts receivable, except for write-downs
and write-offs in the ordinary course of business;
(xvi) cancel or waive any claims or rights, or sell, transfer,
distribute or otherwise dispose of any assets or properties, except in
the ordinary course of business;
(xvii) declare, file or permit to be filed any voluntary or
involuntary bankruptcy, receivership, insolvency or other similar
proceeding or petition with any Governmental Authority with respect to
Company or the Company Subsidiary or declare or file such proceeding
against any Company Stockholder;
(xviii) fail to perform its obligations under any Material Contract
(except those being contested in good faith) or enter into, assume or
amend any agreement that would be a Material Contract other than
agreements to provide services entered into in the ordinary and usual
course of business;
(xix) take any action that would or could reasonably be expected to
result in (A) a Material Adverse Effect on Company or (B) any of its
representations and warranties contained in Article 4 not being true and
correct in any material respect at the Effective Time, or that would
cause any of its conditions to Closing not to be satisfied; or
(xx) directly or indirectly agree to do any of the foregoing.
(b) Parent agrees that from the date hereof to the Effective Time,
except as otherwise approved by Company in writing, which approval shall
not be unreasonably withheld, conditioned or delayed, or as permitted or
required by this Agreement, it will not, nor will it permit any of the
Parent Subsidiaries to:
(i) declare, set aside or pay any dividend or other distribution of
cash or property (other than capital stock) in respect of its capital
stock other than pursuant to the private placement of up to $20.0
million of securities of Parent pursuant to terms and conditions which
may include, among other things, the payment of dividends (including
securities convertible into Parent Common Stock);
(ii) make any material change in its accounting methods or
practices as shown in the Parent Financial Statements, other than
changes required by GAAP or by Governmental Authorities;
(iii) take any action that would result or could reasonably be
expected to result in (A) a Material Adverse Effect on Parent or (B) any
of its representations and warranties contained in Article 6 not being
true and correct in any material respect at the Effective Time, or that
would cause any of its conditions to Closing not to be satisfied; or
(iv) directly or indirectly agree to do any of the foregoing.
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7.3 No Solicitation. From the date hereof to the Effective Time or the
earlier termination of this Agreement in accordance with its terms:
(a) Company and the Management Stockholders shall not, and Company
shall not allow the Company Subsidiary or its Affiliates, employees, agents
and representatives (including without limitation, any investment banker,
attorney or accountant retained by it) to: (a) directly or indirectly
initiate, solicit, or encourage any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to any of the Company Stockholders) with respect to any
proposed or potential: (i) sale of assets or transfer of liabilities of
Company or any of its present or future subsidiaries, divisions or other
affiliates (other than any such sale or transfer in the ordinary course of
business); (ii) issuance, purchase or sale of capital stock or debt or
other securities of Company or any of its present or future subsidiaries,
divisions or other affiliates (other than the incurrence of liabilities in
the ordinary course of its business or the issuance of stock pursuant to
the ESOP or in connection with the exercise of currently Outstanding
Options); or (iii) merger, consolidation, restructuring, recapitalization
or other significant transaction involving Company or any of its present or
future subsidiaries, divisions or other affiliates (any such proposal or
offer being referred to herein as an "ACQUISITION PROPOSAL"); or (b) except
pursuant to paragraphs (b) and (c) below, provide any confidential
information to, participate in discussions or negotiations relating to any
such transaction with, or otherwise cooperate with or assist or participate
in any effort to take such action by any person or entity (other than
Parent or its Affiliates, employees, representatives and agents).
(b) If, prior to the approval of the Merger by the Company
Stockholders: (i) the Board of Directors of Company shall receive (after
the date of this Agreement) a written proposal from a third party for an
Acquisition Proposal that was not initiated, solicited, encouraged or
knowingly facilitated by Company, the Management Stockholders or any of
their Affiliates or agents in violation of paragraph (a) above; (ii) the
Board of Directors shall determine in good faith that such Acquisition
Proposal, if consummated, would constitute a materially superior
Acquisition Proposal than the Merger (after taking into account any counter
proposal submitted by Parent in writing pursuant to paragraph (c) of this
section); and (iii) Company has received from its outside counsel, Gibson,
Dunn & Crutcher LLP, a written opinion (a copy of which shall be promptly
provided to Parent and its counsel) that the failure to negotiate with and
deliver information to such other person would reasonably be expected to
subject the members of Company's Board of Directors to personal liability
for breach of their fiduciary duty under law, Company may terminate this
Agreement without further liability and enter into a binding letter of
intent or definitive agreements for such third party Acquisition Proposal
upon payment by wire transfer on the date of such termination to Parent of
One Million Dollars ($1,000,000) and receipt by Parent of a written
acknowledgment from the third party making the Acquisition Proposal and
Company that such other party and Company permanently and completely waive
any and all rights to object to or otherwise contest such payment. For
purposes of this paragraph (b), a "materially superior" Acquisition
Proposal shall mean a bona fide written proposal which, if consummated,
would, in the good faith determination of Company's Board of Directors
(taking into account all legal, financial, regulatory, fiduciary and other
aspects), result in a transaction that (i) is materially more favorable to
the Company Stockholders than the Merger (including any proposed revisions
thereto pursuant to paragraph (c) below) and (ii) is reasonably capable of
being completed.
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(c) Company and the Management Stockholders will notify Parent
immediately of the identity of any potential acquiror and the terms of any
Acquisition Proposals, whether or not permitted by this Section 7.3, and
shall not accept such proposal or deliver the confidential information
described in (a) above until Parent has had 10 business days to propose
modifications to the Merger that would make the Merger, as so modified, in
the best interests of the Company Stockholders.
(d) Company and the Management Stockholders shall not take any other
action or permit any of its Affiliates to take any action contrary to the
terms of the Confidentiality Agreement (as defined in Section 7.5).
(e) Company and the Management Stockholders will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing,
and Company and the Management Stockholders will take the necessary steps
to inform the individuals or entities referred to above of the obligations
undertaken in this Section 7.3.
7.4 Current Information.
(a) During the period from the date of this Agreement to the Effective
Time or the earlier termination of this Agreement in accordance with its
terms, on a frequent basis:
(i) each of Company and Parent will cause one or more of its
representatives to confer with representatives of the other party
regarding its business, operations, properties, assets and financial
condition;
(ii) each of Company and Parent will cause one or more of its
representatives to confer with representatives of the other party
regarding matters relating to the completion of the transactions
contemplated herein; and
(iii) each of Company and Parent will notify the other party as
soon as practicable after any determination or discovery by it of any
fact or circumstance relating to either party which it has discovered
through the course of investigation and which represents, or is
reasonably likely to represent, a material breach of any representation,
warranty, covenant or agreement of either party or which has or is
reasonably likely to have a Material Adverse Effect on either party.
(b) Prior to the Effective Time, as soon as practicable after the end
of every month (but in no event later than 25 days thereafter) beginning
with the month in which this Agreement is signed, Company will deliver to
Parent an unaudited balance sheet as of the end of such month, and related
statements of income and cash flows for such month, each certified by the
President and Chief Financial Officer of the Company as meeting the
standards for Company Financial Statements set forth in Section 4.4.
7.5 Access to Properties and Records; Confidentiality.
(a) Company shall permit Parent and its representatives reasonable
access to its and the Company Subsidiary's respective properties, and shall
disclose and make available to Parent and its representatives all books,
papers and records and information relating to it and the Company
Subsidiary, their respective assets, stock ownership, properties,
operations, obligations and liabilities, including, but not limited to, all
books of account (including the general ledger), tax records, minute books
of directors' and stockholders' meetings, organizational documents,
agreements, filings with any Governmental Authority, accountants' work
papers, litigation files, plans affecting employees, and any other records
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and information in which Parent and its representatives may have a
reasonable interest; provided that such investigation shall be reasonably
related to the transactions contemplated by this Agreement and shall not
interfere unnecessarily with the normal business operations of Company and
the Company Subsidiary.
(b) All information furnished by the parties hereto previously in
connection with transactions contemplated by this Agreement or pursuant
hereto shall be used solely for the purpose of evaluating the Merger and
shall be treated in accordance with the Confidentiality and Standstill
Agreement dated as of March 8, 1999 between the parties, a copy of which is
attached hereto as Exhibit 7.5 (the "CONFIDENTIALITY AGREEMENT") and which
is incorporated herein by this reference. No investigation by the parties
heretofore or hereafter made shall affect the representations and
warranties of the other parties, and each of such representations and
warranties shall survive any such investigation, subject to Article 10.
7.6 Governmental Matters; Consents; Cooperation, etc.
(a) Each of the parties will promptly furnish each other with copies
of written communications received by them or any of their respective
Subsidiaries from, or delivered by any of the foregoing to, any
Governmental Authorities in respect of the transactions contemplated
hereby.
(b) As soon as practicable following the date hereof, Parent and
Company will each use its commercially reasonable efforts to obtain all
material consents, waivers and other Company Approvals and Parent Approvals
under any of their respective, or their respective Subsidiaries',
agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby.
(c) At or prior to the Closing, Company, if requested by Parent, shall
deliver to the IRS a notice that the Company Common Stock is not a "U.S.
Real Property Interest" as defined and in accordance with the requirements
of Treasury Regulation Section 1.897-2(h)(2).
(d) Company acknowledges that Parent is or may be in the process of
acquiring other entities and that in connection with such acquisitions,
information concerning Company may be required to be included in the
registration statements, if any, for the sale of securities of Parent or in
Parent SEC Reports in connection with such acquisitions. Company shall
provide Parent with any information or other materials relating to Company
as are reasonably necessary to be included in such registration statements
or in Parent SEC Reports, including financial statements or in Parent SEC
Reports, which may be filed by Parent prior to the Effective Time. Company
shall use its reasonable efforts to cause its attorneys and accountants to
provide Parent and any underwriters for Parent with any consents, comfort
letters, opinion letters, reports or information which are necessary in
connection therewith.
7.7 Parties' Efforts; Further Assurances; Cooperation. Subject to the
other provisions in this Agreement, the parties hereto shall in good faith
attempt to close the Merger on or before June 30, 1999 and perform their
obligations under this Agreement before, at and after the Effective Time, and
shall each use all commercially reasonable efforts to do, or cause to be done,
all things necessary, proper or advisable under Applicable Laws to obtain all
Authorizations and satisfy all conditions to the obligations of the parties
under this Agreement and to cause the transactions contemplated by this
Agreement to be carried out promptly in accordance with the terms hereof and
shall cooperate fully with each other and their respective officers, directors,
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employees, agents, counsel, accountants and other designees in connection with
any steps required to be taken as part of their respective obligations under
this Agreement. Upon the execution of this Agreement and thereafter, each party
shall take such actions and execute and deliver such documents as may be
reasonably requested by the other parties hereto in order to consummate the
transactions contemplated by this Agreement.
7.8 Public Announcements. Prior to the Effective Time or the earlier
termination of this Agreement in accordance with its terms, Company, the
Management Stockholders and Parent shall consult and cooperate with each other
as to the timing, content and form of any press release or other public
disclosure related to this Agreement or the transactions contemplated herein,
and will not issue a press release or make any such public disclosure without
the prior consent of the other party, which shall not be unreasonably withheld,
conditioned or delayed. After the Effective Time, none of the Management
Stockholders shall make any public announcement regarding any aspect of this
Agreement without Parent's prior written consent. Nothing in this Section 7.8
shall be deemed to prohibit any party from making any disclosure which its
outside counsel deems necessary in order to satisfy such party's disclosure
obligations imposed by Applicable Law or Governmental Authority.
7.9 Failure to Fulfill Conditions. In the event that Parent or Company
determines that a material condition to its or the other's obligation to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to July 31, 1999 (the "DEADLINE DATE"), it will promptly notify the other party.
Except for any acquisition or merger discussions Parent may enter into with
other parties, Company and Parent will promptly inform the other of any facts
applicable to Company or Parent that would be likely to prevent or materially
delay consummation of the Merger.
7.10 Disclosure Supplements.
(a) The parties acknowledge that, due to the confidentiality of this
Agreement and its terms, some of the Company Disclosure Schedules (as
expressly indicated thereon) are incomplete or fail to contain copies of
agreements or documents requested therein as of the date of this Agreement.
Notwithstanding the incomplete status of these schedules, however, Company
represents and warrants that none of the matters listed on such schedules
as being subject to undisclosed matters or items which are not capable of
delivery on the date of this Agreement would constitute or cause a material
change in the disclosures made by Company herein. As soon as possible after
the date of this Agreement and prior to the date of filing of the
Registration Statement, Company shall deliver revised or supplementary
Company Disclosure Schedules to Parent which contain complete and accurate
information as of the date of this Agreement, in order to enable Parent to
confirm the accuracy of Company's representations and warranties and
otherwise to give full effect to the provisions of this Agreement. Such
revised or supplementary schedules shall not modify or be deemed part of
this Agreement (or otherwise modify the obligations of the parties
hereunder) unless agreed by Parent in writing with reference to the
specific schedules to be so treated.
(b) From time to time prior to the Effective Time, each party hereto
will promptly notify the other party of any inaccuracy in its respective
Disclosure Schedules delivered pursuant hereto including, without
limitation, any matter which, if existing, occurring or known at the date
of this Agreement, would have been required to be set forth or described in
such Schedule or which is necessary to correct any information in such
Schedule that has been rendered inaccurate. Notwithstanding the foregoing,
for the purpose of determining satisfaction of the conditions set forth in
Article 8, no such notification shall be deemed to
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amend such Disclosure Schedules or shall be deemed to be part hereof unless
agreed to in writing by the other party.
7.11 Affiliates. Promptly after the execution and delivery of this
Agreement and before that date which is 30 calendar days before the Closing
Date, Company shall take all commercially reasonable efforts to deliver to
Parent copies of letter agreements, each substantially in the form of Exhibit
7.11 and each previously executed by Parent, executed by all directors,
executive officers, Management Stockholders and by any other person who is an
"affiliate" of Company for purposes of Rule 145 under the 1933 Act providing
that such person will not sell, pledge, transfer or otherwise dispose of any
shares of Company Common Stock held by such "affiliate" and the shares of Parent
Common Stock to be received by such "affiliate" in the Merger: (i) in the case
of shares of Parent Common Stock only, except in compliance with the applicable
provisions of the 1933 Act and the rules and regulations thereunder; (ii) during
the periods during which any such sale, pledge, transfer or other disposition
would, under GAAP or the rules, regulations or interpretations of the
Commission, disqualify the Merger for pooling-of-interest accounting treatment,
except as permitted by Staff Accounting Bulletin No. 76 issued by the
Commission; and (iii) representing substantially the same matters as set forth
in Article 5 hereof. The certificates of Parent Common Stock issued to such
"affiliates" of Company (each, a "RULE 145 AFFILIATE") will bear an appropriate
legend reflecting the foregoing and Parent shall be entitled to issue stop
orders to the transfer agent for Parent Common Stock consistent with the terms
of such letters. The parties understand that such periods in general encompass
the period commencing 30 days prior to the Merger and ending at the time of the
publication of financial results covering at least 30 days of combined
operations of Parent and Company within the meaning of Section 201.01 of the
Commission's Codification of Financial Reporting Policies. Parent covenants and
agrees that it will publish such financial results in accordance with past
practice as part of its applicable Form 10-Q or Form 10-K filing covering such
period.
7.12 Pooling-of-Interests. Each party shall use all commercially
reasonable efforts and shall in good faith attempt to cause the Merger to
qualify for pooling-of-interests accounting treatment. Each party represents and
warrants that its past transactions status conform to the conditions set forth
in Exhibit 7.12 hereto and covenants that it has no planned transactions that
would be contrary to any of the conditions set forth in Exhibit 7.12. Exhibit
7.12 also sets forth copies of letters from KPMG Peat Marwick LLP and Arthur
Andersen LLP regarding such firm's belief that the Merger, when completed
pursuant to this Agreement, shall be properly accounted for as a
"pooling-of-interests."
7.13 Employee Matters.
(a) Employee Benefits. Parent shall take all commercially reasonable
action necessary or appropriate to permit the employees of Company and the
Company Subsidiary at the Effective Time who shall continue to be employed
by the Surviving Corporation thereafter (the "CONTINUING EMPLOYEES") to
participate after the Effective Time in Parent's employee benefit programs
and to cause the Surviving Corporation to take all commercially reasonable
actions necessary or appropriate to adopt Parent's employee benefit
programs effective as of the Effective Time. Parent shall cause to be
waived all preexisting condition exclusions in connection with the welfare
plans and shall recognize expenses incurred and payments made for purposes
of applicable deductibles and co-payments required. Parent will cause the
Surviving Corporation to give each Continuing Employee full credit for
service with Company and the Company Subsidiary for purposes of eligibility
to participate in, vesting and payment of benefits under, and eligibility
for any subsidized benefit provided under (but
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not, except as provided in the preceding sentence, for purposes of
determining the amount of any benefit under) any Parent employee benefit
plan; provided, however, that nothing in this Agreement (other than the
terms of any written employment agreement that may be entered into) shall
be deemed to require Parent to cause to be continued any employee's
employment, responsibilities or officer title for any definite period, or
to change the terms or conditions of any existing employee benefit program.
(b) Employment Agreements. On or prior to the Closing Date, Company
shall take all commercially reasonable efforts to cause all agreements
between Company and any of its employees (other than Analyst Compensation
Plan Agreements and those portions of agreements relating to
confidentiality, trade secret protection, non-solicitation of customers or
employees, ownership of inventions and materials and similar agreements
benefiting Company) to be canceled at no cost to Company. On or prior to
the Closing Date, Company shall take all commercially reasonably efforts to
cause Employment Agreements substantially in the form attached hereto as
Exhibit 7.13(b) to be executed and delivered to Parent by each of the
individuals named on Exhibit 7.13(b) and any other employees of Company
deemed by Parent to be necessary or important to the continued business of
the Surviving Corporation.
(c) Certain Benefit Plan Matters. Notwithstanding anything in this
Agreement to the contrary, Company and the Company Stockholders do hereby
agree and covenant that, (i) effective not later than immediately before
the Closing, each Applicable Benefit Plan (defined hereinafter), except the
ESOP, shall be terminated; (ii) under this Agreement, Parent shall neither
assume nor have any liability at any time in relation to any Applicable
Benefit Plan other than with respect to causing any action taken after
Closing to complete the termination and liquidation of Applicable Benefit
Plans (other than the ESOP); (iii) the law firm of Gibson, Dunn & Crutcher
LLP shall, both before and after Closing, oversee and render advice and
counsel in relation to all remediation (which shall be initiated by Company
prior to Closing) of all items set forth on Company Disclosure Schedule
4.9, and in relation to the operation and administration of the ESOP and
any termination and liquidation of the ESOP which may be initiated after
Closing (including, without limitation, pursuit and obtainment of all
appropriate IRS determination letters); and (iv) Company prior to Closing
shall cause the ESOP and Forseon Corporation 401(k) Savings Plan to be
amended to comply with legislation enacted through 1998. For purposes of
this Section 7.13(c) and Section 10.1, the phrase "Applicable Benefit Plan"
shall include, without limitation, each and every Benefit Plan (for
purposes of this Section 7.13(c) and Section 10.1, the phrase "Benefit
Plan" shall mean each and every "Benefit Plan," regardless of whether such
applicable Benefit Plan is listed on Company Disclosure Schedule 4.9)
which, at any time up to the Closing, was sponsored by, contributed to or
required to be contributed to by, or was otherwise connected with, Company,
the Company Subsidiary, or both.
(d) Stock Options. The compensation or other relevant committee of
Company's Board of Directors shall have taken, or caused to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable on behalf of Company to effect the conversion of all Outstanding
Options into rights with respect to Parent Common Stock, as contemplated by
Section 2.6 hereof, without any other change in the terms of the
Outstanding Options (other than changes contemplated by Section 2.6).
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7.14 Proxy Statement/Prospectus; Registration Statement; Other
Filings. As promptly as practicable after the execution of this Agreement
(which the parties agree shall be targeted to be on or before April 15, 1999),
Company and Parent will prepare and file with the Commission a Proxy Statement
(the "PROXY STATEMENT"), and Parent will prepare and file with the Commission a
registration statement on Form S-4 (the "REGISTRATION STATEMENT") with respect
to the shares of Parent Common Stock to be issued to the Company Stockholders
and holders of the Outstanding Options pursuant to Article 2. Company and the
Management Stockholders shall cooperate fully in the preparation, filing,
amendment and completion of the Registration Statement. Each of Company and
Parent will respond to any comments of the Commission, will use its respective
commercially reasonable efforts to have the Registration Statement declared
effective under the 1933 Act as promptly as practicable after such filing and
will cause the Proxy Statement to be mailed to the Company Stockholders at the
earliest practicable time. As promptly as practicable after the date of this
Agreement, Company and Parent will prepare and file any other filings required
under the 1934 Act, the 1933 Act, any State Acts or any other federal or state
laws relating to the Merger and the transactions contemplated by this Agreement
(the "OTHER FILINGS"). Each of Company and Parent will notify the other promptly
upon the receipt of any comments from the Commission or its staff and of any
request by the Commission or its staff or any other government officials for
amendments or supplements to the Registration Statement, the Proxy Statement or
any Other Filing or for additional information and will supply the other with
copies of all correspondence between such party or any of its representatives,
on the one hand, and the Commission, or its staff or any other government
officials, on the other hand, with respect to the Registration Statement, the
Proxy Statement, the Merger or any Other Filing. The Proxy Statement, the
Registration Statement and the Other Filings will comply in all material
respects with all applicable requirements of the 1933 Act, the 1934 Act, the
State Acts and the rules and regulations promulgated thereunder. Whenever any
event occurs which is required to be set forth in an amendment or supplement to
the Proxy Statement, the Registration Statement or any Other Filing, Parent or
Company, as the case may be, will promptly inform the other of such occurrence
and cooperate in filing with the Commission or any other government entity,
and/or mailing to the Company Stockholders and/or the shareholders of Parent,
such amendment or supplement. The Proxy Statement will include the
recommendation of the Board of Directors of Company and the Management
Stockholders in favor of adoption and approval of this Agreement and approval of
the Merger and other transactions contemplated herein.
7.15 Company Stockholders' Meeting. As soon as practicable after the
effective date of the Registration Statement, Company shall hold a duly and
properly call a special meeting of the Company Stockholders for the purpose of
approving this Agreement, the Merger, and all other matters necessary to
consummate the transactions contemplated hereby, shall submit all of the
foregoing to its Company Stockholders for such approval as soon as reasonably
practicable, shall recommend such approval and shall use all reasonable
commercial efforts to obtain such approvals. In this regard, Company shall fully
cooperate in all respects with any and all actions and requests of the
Independent Manager of the ESOP necessary to carry out the Merger and other
transactions contemplated by this Agreement. Company and the Management
Stockholders shall use all commercially reasonable efforts to solicit proxies in
favor of the Merger and the other transactions contemplated by this Agreement
and shall take all other commercially reasonable actions necessary or advisable
to secure the vote or consent of the Company Stockholders required by this
Agreement and Applicable Law and to obtain Company Stockholders' signatures on
the certificate attached hereto as Exhibit 2.3.
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7.16 Termination of Puts and Other Agreements. On or prior to the Closing
Date, Company shall take all commercially reasonable efforts, in consultation
with Parent, to cause all voting agreements, rights of first refusal, voting
trusts, co-sale or put rights and other similar agreements among any of the
Company Stockholders and Company relating to the Company Common Stock (other
than as required by the ESOP) to have been waived or terminated at no cost to
Company or the Company Subsidiary or any other corporate party hereto, pursuant
to agreements reasonably satisfactory to Parent. Moreover, Company shall cause
all agreements listed on Exhibit 7.16 to have been canceled or modified in the
manner set forth on such exhibit pursuant to written agreements reasonably
acceptable to Parent.
7.17 No Transfers. Except pursuant to this Agreement or with the prior
written consent of Parent, Company shall not and shall not permit any Rule 145
Affiliates of Company to transfer, assign, convey or otherwise dispose of any of
the Company Common Stock or Subsidiary securities or any rights with respect to
such Company Common Stock or Subsidiary securities (including voting and
conversion or option rights) after the date of this Agreement and before the
Effective Time. This restriction shall not apply to transfers in the ordinary
course to the Rule 145 Affiliates under the ESOP or in connection with exercise
of the Outstanding Options.
7.18 Tax Matters
(a) Transfer Taxes. Company shall pay all stock transfer and other
similar Taxes and fees in respect of the exchange of the Company Common
Stock and shall be responsible for paying all the costs of filing all
Returns relating to such Taxes and fees.
(b) Cooperation and Exchange of Information. The Management
Stockholders, the Surviving Corporation and Parent agree to furnish, or to
cause to be furnished in good faith to each other, such cooperation and
assistance as is reasonably necessary to file any future returns, to
respond to audits, to negotiate settlements with Tax authorities and to
prosecute and defend against Tax claims.
(c) Tax-Free Transaction. The parties hereto intend that the Merger
shall be treated as a tax-free reorganization under the Code, shall report
the Merger as such for federal and state income tax purposes, and shall
take no action after the Effective Time to adversely affect the status of
the Merger as a tax-free reorganization under the Code. In addition to the
foregoing, Parent (i) will not, for a two-year period following the Merger,
sell, transfer or otherwise dispose of any of the significant assets
acquired from Company in the Merger (or cause the Surviving Corporation to
do the same), except for dispositions made in the ordinary course of
business or transfers of assets to controlled corporations pursuant to
Treasury Regulations Section 1.368-2(k)(2), (ii) will continue the historic
business of Company or use a significant portion of Company's historic
business assets in a business following the Merger, (iii) will not
liquidate the Surviving Corporation within two years of the Closing Date,
(iv) will not, for a two-year period following the Merger, sell, transfer
or otherwise dispose of any of the stock of the Surviving Corporation
except for transfers to controlled corporations pursuant to Section
368(a)(2)(C) of the Code and Treasury Regulations Section 1.368-2(k)(2),
and (v) will not cause or allow the Surviving Corporation, within a
two-year period following the Merger, to issue additional shares of stock
that would cause Parent to no longer "control" the Surviving Corporation
within the meaning of Section 368(c) of the Code. None of the foregoing
limitations will apply if the Parent obtains a tax opinion from a reputable
law firm, which can be relied upon by the
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Company Stockholders, that the proposed action will not cause the Merger to
fail to qualify as a reorganization under Section 368(a) of the Code.
7.19 Listing of Merger Consideration. Parent shall use all commercially
reasonable efforts to list the Merger Consideration on the Nasdaq National
Market and shall use all commercially reasonable efforts to cause such listing
to be approved prior to the Effective Time.
7.20 Special Provisions with Respect to Company. If the Effective Time
occurs as provided herein, then at that time all representations, warranties,
covenants and agreements in this Agreement (except for those set forth in
Section 4.9 and Section 7.13) to the extent made or adopted by Company and the
Management Stockholders in this Agreement (and only to such extent) shall
expire; provided, however, that such expiration of Company's and Management
Stockholders' representations, warranties, covenants and agreements shall in no
way limit the liability pursuant to Article 10 for breaches of those
representations, warranties, covenants and agreements or the ability of Parent
and Merger Sub to exercise any rights and remedies pursuant to this Agreement,
the other Merger Documents and Applicable Laws.
7.21 Existing Indemnification Obligations. Parent hereby agrees that all
rights to indemnification by Company now existing in favor of each present and
former director, officer, employee, consultant, trustee or agent of Company, any
past or present Subsidiary of Company, and Benefit Plan, and/or the ESOP as
provided in Company's or such Subsidiary's Certificate of Incorporation, bylaws
or existing indemnity agreements as of the date of this Agreement or as
otherwise provided by law shall survive the Merger with respect to acts and
other matters for which such persons may be indemnified thereunder arising prior
to the Effective Time. Company represents that all such indemnification rights
and agreements are disclosed in the Company Disclosure Schedules and that there
currently exist no claims to indemnification by Company or any other party to
such agreements and, to Company's knowledge, no basis for any such claim exists.
7.22 Solvency of Stockholders and Other Stockholder Matters. Company and
the Management Stockholders covenant and agree that, to the extent any Company
Stockholder has been a party to any bankruptcy, insolvency or similar
proceeding, whether voluntary or involuntary, and to the extent that any shares
of Company Common Stock are held by or subject to the provisions of a decedent's
estate, probate or other court proceeding or other similar circumstance, they
will take all commercially reasonable steps to coordinate the surrender of
shares of Company Common Stock by the receiver, trustee, administrator or other
similar party that has been appointed with respect any Company Stockholder or
any of its assets.
7.23 Future Commission Reports. Parent agrees and covenants that, as long
as it is subject to the reporting requirements of the 1934 Act, at all times
during which any Rule 145 Affiliate is subject to the resale restrictions of
Rule 144 and/or Rule 145 under the 1933 Act, Parent shall timely file all
reports required to be filed with the Commission under the 1933 Act and the 1934
Act (including Rule 12b-25 thereunder) in a manner that satisfies the
requirements of Rule 144(c)(1) under the 1933 Act.
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ARTICLE 8
CLOSING CONDITIONS
8.1 Conditions of Each Party's Obligations Under this Agreement. The
respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the satisfaction, or, where permissible under
Applicable Law, waiver, at or prior to the Closing Date, of the following
conditions:
(a) Authorizations and Governmental Filings. All necessary
Authorizations of Governmental Authorities required to consummate the
transactions contemplated by this Agreement (other than the filing of the
Certificate of Merger in Delaware and Georgia) shall have been obtained
without any term or condition that would materially impair (i) the value of
Company and the Company Subsidiary, taken as a whole or (ii) the value of
Parent and its Subsidiaries, taken as a whole. All conditions required to
be satisfied prior to the Effective Time by the terms of such
Authorizations shall have been satisfied; and all statutory waiting periods
in respect thereof shall have expired.
(b) Suits and Proceedings. The consummation of the transactions
contemplated by this Agreement will not violate the provisions of any
Applicable Law with respect to Parent or Company or their respective
Affiliates. No suit or proceeding shall have been instituted by any person,
or, to the Knowledge of Parent or Company, shall have been threatened by
any Governmental Authority, and not subsequently withdrawn, dismissed or
otherwise eliminated, which seeks (i) to prohibit, restrict or delay
consummation of the transactions contemplated by this Agreement or to limit
in any material respect the right of Parent to control any material aspect
of the business of Parent and the Parent Subsidiaries or Company and the
Company Subsidiary after the Effective Time, or (ii) to subject Parent or
Company or their respective Affiliates to material liability on the ground
that it or they have breached any Law or otherwise acted improperly in
relation to the transactions contemplated by this Agreement.
(c) Escrow Agreement. First Union National Bank, Parent, Merger Sub,
Company and the Stockholders' Representatives shall have executed and
delivered the Escrow Agreement relating to the shares of Parent Common
Stock to be placed in escrow pursuant to Article 2.
(d) Effectiveness of Registration Statement. The Registration
Statement shall have been declared effective by the Commission and shall be
effective at the Effective Time, and no stop order suspending effectiveness
shall have been issued, no proceeding by the Commission to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary authorizations from Nasdaq, under the State Acts, the 1933 Act or
the 1934 Act relating to the issuance and trading of the Parent Common
Stock to be issued in connection with the Merger shall have been received,
subject to notice of issuance.
(e) Pooling Letters. Parent and Company shall have received letters
dated as of the Closing Date from KPMG Peat Marwick LLP, Company's
independent certified public accountants, to the effect that, from
Company's perspective, it is a "poolable" entity and the Merger will
qualify to be accounted for as a "pooling-of-interests," based upon
Company's operations and history, and from Arthur Andersen LLP, Parent's
independent certified public accountants, to the effect that, based upon
such letter from KPMG, the Merger will qualify for pooling-of-interests
accounting treatment.
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8.2 Conditions to the Obligations of Parent and Merger Sub Under this
Agreement. The obligations of Parent and Merger Sub under this Agreement to
consummate the Merger (in addition to the matters set forth in Section 8.1)
shall be subject to the satisfaction or waiver, at or prior to the Closing
Date, of the following conditions (with the effectiveness of all agreements
listed below being expressly conditioned upon consummation of the Merger):
(a) Covenants and Agreements; Consents. Each of Company and the
Management Stockholders shall have performed in all material respects the
agreements, covenants and obligations to be performed by it or them under
this Agreement and the other agreements contemplated hereby at or before
the Effective Time. All Authorizations of or with any nongovernmental third
party (including the Company Approvals) that are required for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement by Company and the Management Stockholders
shall have been obtained or made, or waived by such third party, except
where the failure to obtain any such Authorization would not have a
Material Adverse Effect on Company.
(b) Opinion of Counsel. Parent shall have received an opinion of
Gibson Dunn & Crutcher LLP, counsel to Company, dated the Closing Date, in
form and substance reasonably satisfactory to Parent and Parent's counsel.
(c) Certificates. Company shall have furnished Parent with such
certificates of Company's officers or others and such other documents
described herein to evidence fulfillment of the conditions set forth in
this Article 8 and otherwise to consummate the transactions contemplated
pursuant to this Agreement as Parent may reasonably request.
(d) Management Stockholder Employment Agreements. Each of the
Management Stockholder Employment Agreements executed and delivered to
Parent as of the date of this Agreement shall remain in full force and
effect as of the Closing.
(e) Employment Agreements. Each of the individuals named on Exhibit
7.13(b) shall have executed and delivered an Employment Agreement with
Surviving Corporation in substantially the form attached hereto as Exhibit
7.13(b).
(f) Resignations. Company shall have delivered to Parent, to the
extent requested by Parent, the written resignations and signed severance
agreements of the directors, officers and employees of Company and the
Company Subsidiary.
(g) Remediation of Benefit Plans. All matters required to be
performed or completed by Company pursuant to Section 7.13 shall have been
performed or completed in a manner reasonably satisfactory to Parent and
its Counsel and Company shall have delivered to Parent such certificates or
other evidence reasonably satisfactory to Parent to evidence such
performance.
(h) Cancellation and Severance Agreements. At or prior to Closing,
Company shall deliver to Parent any and all documents and agreements
evidencing the cancellation of the agreements listed on Exhibit 8.2(h) and
such other agreement as Parent may reasonably request. At or prior to
Closing, Company shall deliver to Parent Severance Agreements substantially
in the form attached hereto as Exhibit 8.2(h) with respect to the persons
whose positions with the Company will be eliminated as a result of the
Merger.
(i) Fairness Opinion. Parent shall have received the opinion of
Rodgers Capital Group, L.P. that the Merger Consideration to be provided by
Parent to the Company
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Stockholders and holders of Outstanding Options pursuant to this Agreement
is fair from a financial point of view to the shareholders of Parent.
(j) Nonsolicitation, Work Product and Confidentiality Agreements. The
Affiliates and key employees of Company reasonably required by Parent shall
have executed and delivered to Parent and Surviving Corporation the
Nonsolicit Agreements substantially in the form attached hereto as Exhibit
8.2(j), with the blanks therein properly completed to the satisfaction of
Parent and Surviving Corporation.
(k) Completion of Due Diligence on Company. Parent shall have
completed its review of Company and the Company Subsidiary and the results
of such review shall not have revealed any breach of any representation,
warranty or covenant made by Company or the Management Stockholders in this
Agreement and the other Merger Documents which Parent, in good faith, deems
material to the value to Parent of Company, Surviving Corporation or the
Merger.
(l) Stockholder Approval. The holders of at least 90% of the Company
Common Stock entitled to vote thereon shall have approved the Merger in
compliance with Applicable Laws.
(m) No Material Adverse Change as to Company. None of the following
events shall have occurred and no fact or circumstance shall have arisen
which is likely to cause any of the following events (each such event a
"Company Material Adverse Change") with respect to Company or the Company
Subsidiary:
(i) the revocation of authority to transact business, dissolution,
liquidation or other termination of its existence or of a significant
portion of the business or operations of Company and the Company
Subsidiary, taken as a whole;
(ii) the declaration, filing or notice of intent to declare or file
any voluntary or involuntary bankruptcy, receivership, insolvency or
similar proceedings or petition with any Governmental Authority;
(iii) the filing, initiation or receipt of notice or written threat
with respect to any litigation, lawsuit, administrative proceeding,
audit by any Governmental Authority or other civil or criminal
proceeding, claim or action (1) alleging fraud, dishonesty, corruption
or other bad acts on the part of Company, the Company Subsidiary, or any
of their respective Affiliates, (2) stating a claim for monetary damages
or payments in excess of $1,000,000, (3) seeking to restrain or enjoin
the conduct of the business or operations of Company and the Company
Subsidiary, taken as a whole, in any material respect, (4) seeking to
revoke any License the loss of which would have a Material Adverse
Effect as to Company, or (5) stating a claim that the Software infringes
upon the intellectual property or other proprietary rights of any third
party;
(iv) the creation of any Liabilities or Liens since the date of
this Agreement which, individually or in the aggregate, result in or are
reasonably likely to result in a change of more than $1,000,000 in its
financial condition as reported in this Agreement;
(v) the material restatement of the financial condition or
operating results of Company from its financial position or operating
results indicated in this Agreement; or
(vi) the termination, breach or other modification, or notice of
any termination, breach or modification of one or more Material
Contracts which, individually or in the aggregate, results in or is
reasonably likely to result in the loss of greater than
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$1,000,000 in revenues for any year or shorter period, greater than 10%
of the customer base of Company and the Company Subsidiary, taken as a
whole, or the payment or obligation to pay more than $1,000,000.
(n) Compliance with Laws. Company shall have remedied its failure to
be in compliance in all respects with all Applicable Laws, as referenced on
Schedule 4.1 and on Schedule 4.10 (as it relates to disclosure on Schedule
4.1), except where any remaining failures to be in compliance do not have
(or are not reasonably likely to have) a Material Adverse Effect on Company
as of the Closing.
8.3 Conditions to the Obligations of Company and the Management
Stockholders Under this Agreement. The obligations of Company and the
Management Stockholders under this Agreement to consummate the Merger (in
addition to the matters set forth in Section 8.1) shall be further subject to
the satisfaction or waiver, at or prior to the Closing Date, of the following
conditions (with the effectiveness of all agreements listed below being
expressly conditioned upon consummation of the Merger):
(a) Covenants and Agreements; Consents. Each of Parent and Merger Sub
shall have performed in all material respects the agreements, covenants and
obligations to be performed by it under this Agreement and the other
agreements contemplated hereby at or before the Effective Time. All
Authorizations of or with any nongovernmental third party that are required
for or in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated by this Agreement by
Parent and the Merger Sub shall have been obtained or made, except where
the failure to obtain any such Authorizations would not have a Material
Adverse Effect on Parent or the Parent Subsidiaries, taken as a whole.
(b) Opinion of Counsel to Parent. Company shall have received an
opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to Parent,
dated the Closing Date, in form and substance reasonably satisfactory to
Company and its counsel.
(c) Certificates. Each of Parent and Merger Sub shall have furnished
Company with such certificates of their respective officers or others and
such other documents described herein to evidence fulfillment of the
conditions set forth in this Article 8 and otherwise to consummate the
transactions contemplated pursuant to this Agreement as Company may
reasonably request.
(d) Merger Consideration. Parent shall have delivered to the Exchange
Agent and the Escrow Agent all of the Merger Consideration.
(e) No Material Adverse Change as to Parent. None of the following
events shall have occurred and no fact or circumstance shall have arisen
which is likely to cause any of the following events (each such event a
"Parent Material Adverse Change") with respect to Parent or any Parent
Subsidiary:
(i) the revocation of authority to transact business, dissolution,
liquidation or other termination of its existence or of a significant
portion of the business or operations of Parent and its Subsidiaries,
taken as a whole;
(ii) the declaration, filing or notice of intent to declare or file
any voluntary or involuntary bankruptcy, receivership, insolvency or
similar proceedings or petition with any Governmental Authority;
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(iii) the filing, initiation or receipt of notice or written threat
with respect to any litigation, lawsuit, administrative proceeding,
audit by any Governmental Authority or other civil or criminal
proceeding, claim or action (1) alleging fraud, dishonesty, corruption
or other bad acts on the part of Parent, the Parent Subsidiary, or any
of their respective Affiliates, (2) stating a claim for monetary damages
or payments in excess of $1,000,000, (3) seeking to restrain or enjoin
the conduct of the business or operations of Parent and the Parent
Subsidiaries, taken as a whole, in any material respect, or (4) seeking
to revoke any License the loss of which would have a Material Adverse
Effect as to Parent and its Subsidiaries, taken as a whole;
(iv) the creation of any Liabilities or Liens since the date of
this Agreement which, individually or in the aggregate, result in or are
reasonably likely to result in a change of more than $1,000,000 in its
financial condition as reported in this Agreement;
(v) the material restatement of the financial condition or
operating results of Parent from its financial position or operating
results indicated in this Agreement of Parent and its Subsidiaries,
taken as a whole;
(vi) the termination, breach or other modification, or notice of
any termination, breach or modification of one or more Material
Contracts which, individually or in the aggregate, results in or is
reasonably likely to result in the loss of greater than $1,000,000 in
revenues for any year or shorter period, greater than 10% of the
customer base of Parent and its Subsidiaries, taken as a whole, or the
payment or obligation to pay more than $1,000,000.
(f) Management Stockholder Employment Agreements. Each of the
Management Stockholder Employment Agreements shall remain in full force and
effect as of the Closing and Surviving Company shall have executed and
delivered an Employment Agreement, in substantially the form attached
thereto as Exhibit 7.13(b), with each of the individuals listed on such
Exhibit 7.13(b).
(g) Tax Opinion. Company shall have received the opinion of Nelson
Mullins Riley & Scarborough, L.L.P., dated as of the Closing Date,
substantially in the form attached hereto as Exhibit 8.3(g). Parent and
Company shall have delivered to their counsel such certificates of their
respective stockholders or shareholders as may reasonably be required by
such counsel in order to render such opinion.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated prior to the Effective
Time, whether before or after approval of this Agreement by the Company
Stockholders, only as follows:
(a) by mutual written consent of Parent and Company;
(b) by Parent or Company if the Effective Time shall not have occurred
on or prior to the Deadline Date or such later date as shall have been
approved by the Boards of Directors of Parent and Company; provided,
however, that the right to terminate this Agreement under this Section
9.1(b) shall not be available to any party whose action or failure to act
has been a principal cause of or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes
a willful and material breach of this Agreement;
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(c) by Parent if there has been a material breach of any
representation, warranty, covenant, agreement or obligation of Company or
either Management Stockholder hereunder in each case which either is not
capable of being remedied, or, if capable of being remedied, shall not have
been remedied within 20 calendar days after receipt by Company or the
Management Stockholders, as appropriate, of notice in writing from Parent
specifying the nature of such breach and requesting that it be remedied;
(d) by Company, if there has been a material breach in any
representation, warranty, covenant, agreement or obligation of Parent
hereunder in each case which either is not capable of being remedied, or,
if capable of being remedied, shall not have been remedied within 20
calendar days after receipt by Parent of notice in writing from Company
specifying the nature of such breach and requesting that it be remedied;
(e) by Parent if any of the conditions set forth in Section 8.1 or 8.2
is not satisfied and is no longer capable of being satisfied by the
Deadline Date or such later date as shall have been approved by the Boards
of Directors of Parent and Company, provided that Parent shall not have
materially breached any of its representations, warranties, agreements,
obligations or covenants hereunder in a manner that shall have materially
contributed to the failure of such condition to be, or be capable of being,
so satisfied by such date;
(f) by Company if any of the conditions set forth in Section 8.1 or
8.3 is not satisfied and is no longer capable of being satisfied by the
Deadline Date, or such later date as shall have been approved by the Boards
of Directors of Parent and Company, provided that Company and/or Management
Stockholders shall not have materially breached any of its or their
representations, warranties, agreements, obligations or covenants hereunder
in a manner that shall have materially contributed to the failure of such
condition to be, or be capable of being, so satisfied by such date; or
(g) by Company, pursuant to and in accordance with the provisions of
Section 7.3.
9.2 Effect of Termination.
(a) If either Parent or Company terminates and abandons this Agreement
pursuant to Section 9.1(a)-(g), this Agreement, other than Sections 7.3(b),
7.5(b), 7.6(a) and (d), the relevant provisions of 7.14, this Section 9.2,
Section 9.3, Article 10, Section 12.1 and Section 12.2 (each of which shall
survive termination) shall forthwith become void and have no effect,
without any liability on the part of any party or its officers, directors
or shareholders except as provided in Section 9.2(b); provided, however,
that nothing contained in this Section 9.2, shall relieve any party from
any liability for any knowing, willful or bad faith breach of a
representation, warranty or covenant contained herein.
(b) If Company determines not to proceed with the Merger pursuant to
Section 9.1(d), then Parent shall reimburse Company for its out of pocket
expenses incurred in connection with the failed merger up to a maximum of
$100,000. If Parent determines not to proceed with the Merger pursuant to
9.1(c) or because the conditions set forth in Section 8.2(k) are not
satisfied, Company shall reimburse Parent for its out of pocket expenses
incurred in connection with the failed merger up to a maximum of $100,000.
Any payment by Parent or Company which is required by this Section 9.2(b)
shall be required within thirty (30) calendar days after receipt by Parent
or Company, as the case may be, of notice thereof from the other party to
whom such payment is owed.
9.3 Specific Performance. The parties acknowledge that many of the rights
of each party contemplated by this Agreement are special, unique, and of
extraordinary character, and that, in
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the event that any party violates or fails or refuses to perform any covenant
made by it in this Agreement relating to nonmonetary matters for which an
equitable remedy may be granted, the other party or parties will be without an
adequate remedy at law. Each party agrees, therefore, that in the event that it
violates, fails or refuses to perform any covenant or agreement made by it in
this Agreement that relates to nonmonetary matters for which an equitable remedy
may be granted, the other party or parties, so long as it or they are not in
breach of this Agreement, may, in addition to the remedies set forth in Article
10, institute and prosecute an action in a court of competent jurisdiction to
enforce specific performance of such covenant or agreement or seek any other
equitable relief.
9.4 Amendment. This Agreement may not be amended except by an instrument
in writing signed on behalf of all the parties hereto.
9.5 Extension; Waiver. The parties may (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(b) waive any inaccuracies in the representations and warranties contained in
this Agreement or in any document delivered pursuant thereto; or (c) waive
compliance with any of the agreements or conditions contained in this Agreement.
Any agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party against which the waiver is sought to be enforced and shall apply only to
the specific condition, representation or warranty identified by such writing as
being waived, extended or modified.
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification by Stockholders. Subject to the terms of this
Article 10, Company, the Company Stockholders and the holders of Outstanding
Options (but after the consummation of the Merger, solely the Company
Stockholders and the holders of Outstanding Options, and not the Company) shall
indemnify, defend, save and hold harmless Parent, Merger Sub, Company (after the
consummation of the Merger) and their successors and assigns (collectively, the
"PARENT INDEMNIFIED PARTIES"), from and against any demands, claims (as defined
in Section 101 of the U.S. Bankruptcy Code), actions, losses, damages,
deficiencies, liabilities, Applicable Benefit Plan Costs (as defined below),
costs and expenses (including, without limitation, reasonable attorneys' and
accountants' fees and expenses), together with interest and penalties, if any,
awarded by court order or otherwise agreed to (collectively, "INDEMNIFIABLE
DAMAGES"), suffered by the Parent Indemnified Parties that arise out of or
result from any of the following (whether or not a third party initiates the
proceeding or claim giving rise to such Indemnifiable Damages):
(a) any breach of any of the representations, warranties, covenants or
agreements made by Company or the Management Stockholders in this
Agreement;
(b) any breach of any representation, warranty, covenant or agreement
made by Company or any Management Stockholder in a document, certificate or
affidavit delivered by Company or the Management Stockholders at the
Closing; or
(c) any remediation connected with any Applicable Benefit Plan before
or after Closing but which is initiated prior to Closing. The term
"Applicable Benefit Plan Costs" shall mean the aggregate of all
contributions, penalties, taxes, interest, costs, fees, expenses, charges
and other amounts in excess of $260,000 incurred in relation to all
remediation
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connected with each Applicable Benefit Plan before or after Closing but is
initiated prior to the Closing.
Any of the foregoing to the contrary notwithstanding, the Company
Stockholders' indemnification obligations in connection with the breach of any
provision of Article 5 shall be several and not joint.
10.2 Indemnification by Parent. Subject to the terms of this Article 10,
Parent shall indemnify, defend, save and hold harmless Company (but after
consummation of the Merger, solely the Company Stockholders and holders of
Outstanding Options, and not the Company) (collectively, the "COMPANY
INDEMNIFIED PARTIES"), from and against any Indemnifiable Damages suffered by
the Company Indemnified Parties that arise out of or result from any of the
following (whether or not a third party initiates the proceeding or claim giving
rise to such Indemnifiable Damages):
(a) any breach of any of the representations, warranties, covenants
and agreements made by Parent or Merger Sub in this Agreement; or
(b) any breach of any representation, warranty, covenant or agreement
made by Parent or by Merger Sub in a document, certificate or affidavit
delivered by Parent or Merger Sub at the Closing.
10.3 Claims for Indemnification. The representations, warranties,
covenants and agreements in this Agreement shall survive the Closing subject to
the limitations set forth herein and shall not be affected by any investigation
made by the parties hereto prior to the date hereof or the Effective Time. The
party seeking indemnification (the "INDEMNIFIED PARTY") or their representative,
as the case may be, shall give the party from whom indemnification is sought
(the "INDEMNIFYING PARTY") a written notice ("NOTICE OF CLAIM") within sixty
(60) calendar days of the discovery of any loss, liability, claim or expense in
respect of which the right to indemnification contained in this Article 10 may
be claimed; provided, however, that the failure to give such notice within such
sixty (60) calendar day period shall not result in the waiver or loss of any
right to bring such claim hereunder after such period unless, and only to the
extent that, the Indemnifying Party is actually prejudiced by such failure. In
the event a claim is pending or threatened or the Indemnified Party has a
reasonable belief as to the validity of the basis for such claim, the
Indemnified Party may give written notice (a "NOTICE OF POSSIBLE CLAIM") of such
claim to the Indemnifying Party, regardless of whether a loss has arisen from
such claim. After the Effective Time, all "general contingency" claims under
Notices of Claim shall be resolved before the date of the first audit of
financial statements containing combined operations for those items that would
be expected to be encountered in the audit process and before the first
anniversary of the Effective Time for other items. If the Effective Time fails
to occur the parties shall use all commercially reasonable efforts to resolve
all claims within two years from the date of this Agreement. Any Notice of Claim
or Notice of Possible Claim shall set forth the representations, warranties,
covenants and agreements with respect to which the claim is made, the specific
facts giving rise to an alleged basis for the claim and the amount of liability
asserted or anticipated to be asserted by reason of the claim.
10.4 Matters Involving Third Parties.
(a) If any third party shall notify the Indemnified Party as to any
matter in respect of which the right to indemnification contained in this
Article 10 may be claimed (a "THIRD PARTY CLAIM"), the Indemnified Party
shall give the Indemnifying Party notice of such Third Party Claim as
provided in Section 10.3 above; and the Indemnifying Party will have
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the right to defend the Indemnified Party against the Third Party Claim
with counsel of the Indemnifying Party's choice, so long as the
Indemnifying Party notifies the Indemnified Party in writing, within
fifteen (15) days after the Indemnified Party has given the Indemnifying
Party notice of the Third Party Claim pursuant to Section 10.3, that the
Indemnifying Party will indemnify the Indemnified Party from and against
Indemnifiable Damages the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of or caused by the Third Party
Claim.
(b) If the Indemnifying Party undertakes the defense of any Third
Party Claim pursuant to Section 10.4(a) above, the Indemnified Party may
retain separate co-counsel at its sole cost and expense (and such expenses
shall not be Indemnifiable Damages) and participate in the defense of such
Third Party Claim. The Indemnified Party will not consent to the entry of
any judgment or enter into any settlement with respect to any Third Party
Claim without the prior written consent of the Indemnifying Party (not to
be withheld unreasonably). The Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim that does not include a full release by the third party
of the Indemnified Party from all Indemnifiable Damages relating to such
Third Party Claim, without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(c) The parties hereto shall provide, or cause their appropriate
employees or representatives to provide, to the other parties hereto
information or data in connection with the handling of the defense of any
Third Party Claim or litigation (including counterclaims filed by the
parties), and the party receiving such information or data shall reimburse
the other party for all of its reasonable costs and expenses in providing
these services, including, without limitation, (1) all out-of-pocket,
travel and similar expenses incurred by its personnel in rendering these
services; and (2) all fees and expenses for services performed by third
parties engaged by or at the request of such other party.
10.5 Settlement of Indemnification Claims After Closing. If the Closing
has occurred and a recipient of a Notice of Claim desires to dispute such claim,
it shall, within thirty (30) calendar days after receipt of the Notice of Claim,
give counternotice, setting forth the basis for disputing such claim, to Parent
or the Stockholders' Representative (as defined below), as the case may be. If
no such counternotice is given within such thirty (30) calendar day period, or
if Parent, or the Stockholders' Representative (as defined below), as the case
may be, acknowledges liability for indemnification, then the amount claimed
shall be promptly satisfied as provided in Section 10.6. If, within thirty (30)
calendar days after the receipt of counternotice by Parent or the Stockholders'
Representative, as the case may be, the Stockholders' Representative and Parent
shall not have reached agreement as to the claim in question, then the party
disputing the claim shall satisfy any undisputed amount as specified in Section
10.6 and the disputed amount of the claim of indemnification shall be submitted
to and settled by arbitration in accordance with the then prevailing commercial
arbitration rules of the American Arbitration Association. Such arbitration
shall be held in Kansas City, Missouri (or such other locale as may be mutually
agreed) before a panel of three (3) arbitrators, one selected by each of the
parties and the third selected by mutual agreement of the first two, and all of
whom shall be independent and impartial under the rules of the American
Arbitration Association. The decision of the arbitrators shall be final and
binding as to any matter submitted under this Agreement. To the extent the
decision of the arbitrators is that a party shall be indemnified hereunder, the
amount shall be satisfied as provided in Section 10.6. Judgment upon any award
rendered by the arbitrators may be entered in any court of competent
jurisdiction. The date of the arbitrator's decision or the
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date a claim otherwise becomes payable pursuant to this Section 10.5 is referred
to as the "DETERMINATION DATE." The full amount of any Indemnifiable Damages
resulting from the foregoing proceedings shall be paid by the Indemnifying Party
within thirty (30) calendar days of its final settlement or adjudication.
10.6 Manner of Indemnification by Stockholders. Where the Company
Stockholders are obligated to indemnify the Parent Indemnified Parties under
Section 10.1 after the Effective Time, such indemnity obligation must be
satisfied solely pursuant to the Escrow Agreement by the Company Stockholders,
to the extent they then hold Shares of Parent Common Stock, delivering to the
relevant Parent Indemnified Party such number of Shares of Parent Common Stock
(as adjusted to reflect share splits, reverse splits, dividends, consolidations
and proceeds with respect to the Parent Common Stock after the execution of this
Agreement), the value of which calculated at the "Value Per Share" specified in
the Escrow Agreement equals the amount of the Indemnifiable Damages until such
time as the aggregate amount of all indemnity obligations satisfied in
accordance with this provision equals ten percent (10%) of such Value Per Share
of all the Parent Common Stock transferred to the Company Stockholders pursuant
to Section 2.1.
10.7 Indemnification Exclusive Remedy. In the absence of fraud or gross
misrepresentations, and except for non-monetary equitable relief, if the Closing
occurs, indemnification pursuant to the provisions of this Article 10 shall be
the sole and exclusive remedy of the parties for any breach of any
representation or warranty contained in this Agreement.
10.8 Certain Limitations. The foregoing indemnification obligations are
subject to the limitation that no Indemnifying Party shall have any liability
for indemnification to any Indemnified Party pursuant to this Article 10 unless
and until the total Indemnifiable Damages for which the Indemnifying Party would
be liable exceed $100,000 in the aggregate; provided that once such threshold is
met, the Indemnifying Party shall be liable for the total Indemnifiable Damages,
not just the amount in excess of such threshold. In no event shall the aggregate
liability of Parent or the Company Stockholders for Indemnifiable Damages under
this Agreement and the other Merger Documents exceed the total Value Per Share
of all Escrow Shares held by the escrow agent pursuant to Section 2.1(d) hereof
and the Escrow Agreement.
ARTICLE 11
STOCKHOLDERS' REPRESENTATIVE
11.1 Appointment; Acceptance. At the Closing and by operation of this
Agreement, Dan Paul and Allen Merrill, and each of them, and each of their
successors, acting as hereinafter provided, are fully authorized and empowered
to act for and on behalf of the Company Stockholders in connection with the
transactions and agreements contemplated by this Agreement with respect to (i)
matters prior to the Closing Date, as specified herein, and (ii) matters
subsequent to the Closing Date (each a "STOCKHOLDERS' REPRESENTATIVE"), and
acknowledge that such appointment is coupled with an interest and is
irrevocable. In this regard (a) each Stockholder's Representative shall have
full and complete authorization, on behalf of the Company Stockholders to
authorize the Stockholders' Representative (i) to dispute or to refrain from
disputing any claim made by Parent under the Merger Documents, (ii) to negotiate
and compromise any dispute which may arise under, and to exercise or refrain
from exercising remedies available under the Merger Documents and to sign any
release or other document with respect to such dispute or remedy, (iii) to give
such instructions and to do such other things and
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refrain from doing such other things as the Stockholders' Representative shall
deem necessary or appropriate to carry out the provisions of the Merger
Documents, (iv) to waive any condition to the Closing, and (v) to agree in his
discretion with Parent to amend this Agreement from time to time; and (b) all of
the Company Stockholders shall be bound by all agreements and determinations
made by and documents executed and delivered by either of the Stockholders'
Representatives under the Merger Documents. By executing this Agreement under
the heading "Stockholders' Representatives," Dan Paul and Allen Merrill each
hereby (i) accepts his appointment and authorization to act as Stockholders'
Representatives as attorney-in-fact and agent on behalf of the Company
Stockholders in accordance with the terms of this Agreement, and (ii) agrees to
perform his obligations under, and otherwise comply with, this Article 11.
11.2 Actions. The Proxy Statement shall also provide that each of the
Company Stockholders, by approval of this Agreement, expressly acknowledges and
agrees that the Stockholders' Representatives are authorized to act on his or
her behalf, notwithstanding any dispute or disagreement between the Company
Stockholders, and that Parent and any other person or entity shall be entitled
to rely on any and all actions taken by the Stockholders' Representatives are
under the Merger Documents without any liability to, or obligation to inquire
of, any of the Company Stockholders. Parent and any other person or entity is
hereby expressly authorized to rely on the genuineness of the signatures of the
Stockholders' Representatives, and upon receipt of any writing which reasonably
appears to have been signed by both Stockholders' Representatives, Parent and
any other person or entity may act upon the same without any further duty of
inquiry as to the genuineness of the writing.
11.3 Successors. If either of the Stockholders Representatives ceases to
function in his capacity as a Stockholders' Representative for any reason
whatsoever, then Russell Oliver and thereafter H. Joe Smith shall be appointed
as his successor, and if both cease to function in such capacity for any reason
whatsoever, then the Company Stockholders, by action of the Company Stockholders
who formerly held a majority of the Company Common Stock immediately prior to
the Effective Time, shall have the right to appoint his successor; provided,
however, that if for any reason no successor has been appointed pursuant to the
foregoing within thirty (30) calendar days, then Parent shall have the right to
appoint a successor.
11.4 Effectiveness. The authorizations of the Stockholders'
Representatives shall be effective until their rights and obligations under this
Agreement terminate by virtue of the termination of any and all obligations of
the Company Stockholders to Parent and of Parent to the Company Stockholders
under this Agreement and the Escrow Agreement.
ARTICLE 12
MISCELLANEOUS
12.1 Expenses.
(a) Except as otherwise expressly stated in this Agreement, all costs
and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement (including legal, accounting
and investment banking fees and expenses) shall be borne by the party
incurring such costs and expenses.
(b) Notwithstanding any provision in this Agreement to the contrary,
if either of the parties shall knowingly, willfully or in bad faith breach
its obligations hereunder, the non-defaulting party may pursue any remedy
available at law or in equity to enforce its rights and shall be paid by
the willfully defaulting party for all damages, costs and expenses,
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including without limitation reasonable legal, reasonable accounting,
reasonable investment banking and reasonable printing expenses incurred or
suffered by the non-defaulting party in connection herewith or in the
enforcement of its rights hereunder.
12.2 Notices. All notices or other communications which are required or
permitted under this Agreement shall be in writing and sufficient if delivered
personally or by reputable overnight or express courier, sent by registered or
certified mail, postage prepaid, or by telefax (with subsequent delivery via one
of the two previous methods) as follows:
(a) If to Parent or Merger Sub, to:
Towne Services, Inc.
3295 River Exchange Drive
Suite 350
Norcross, Georgia 30092
Attn: Chief Executive Officer
Telecopy: (770) 582-8350
With a copy (which shall not constitute notice) to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Attn: Susan L. Spencer, Esq.
Telecopy: (404) 817-6050
(b) If to Company, to:
Forseon Corporation
6600 Jurupa Avenue
Riverside, California 92504
Telecopy: (909) 689-4124
Attention: President
With a copy (which shall not constitute notice) to:
Gibson, Dunn & Crutcher LLP
4 Park Plaza
Irvine, California 92614
Telecopy: (949) 475-4665
Attention: Mark W. Shurtleff, Esq.
(c) If to the Stockholders' Representatives, to their respective
addresses as set forth on the signature page to this Agreement;
or to such other addresses and telefax numbers as shall be furnished in writing
by any party, and any such notice or communications shall be deemed to have been
given as of two business days after the date actually sent via overnight or
express courier, five days after mailed and upon telefax confirmation of receipt
to addressee by the sender.
12.3 Parties in Interest. This Agreement shall be binding on and shall
inure to the benefit of the parties hereto, the Company Stockholders, the
holders of the Outstanding Options, the Parent Indemnified Parties, the Company
Indemnified Parties and their respective successors, representatives and
assigns. This Agreement (and the rights and interests in this Agreement)
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may not be assigned by any party without the written consent of the other
parties; provided, however, Parent may assign its interests in this Agreement to
a purchaser or transferee of all or substantially all of the business or assets
of Parent or the Surviving Corporation, whether by sale of stock or assets,
merger or otherwise. Any attempted assignment in contravention of the foregoing
shall be null and void. Nothing in this Agreement is intended to confer,
expressly or by implication, upon any other person any rights or remedies under
or by reason of this Agreement.
12.4 Entire Agreement. This Agreement, which includes the disclosure
schedules and the other documents, agreements and instruments executed and
delivered pursuant to or in connection with this Agreement, contains the entire
agreement among the parties hereto with respect to the transactions contemplated
by this Agreement, and supersedes all prior negotiations, arrangements or
understandings, written or oral, with respect thereto.
12.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, and each of which shall
constitute one and the same agreement. Any party may deliver an executed copy of
this Agreement and of any documents contemplated by this Agreement by facsimile
transmission to another party and such delivery shall have the same force and
effect as any other delivery of a manually signed copy of this Agreement or of
such other documents.
12.6 Governing Law and Venue. 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 parties consent to the
exclusive jurisdiction and venue of the courts of any county in the State of
Georgia and the United States Federal District Courts 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
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.
12.7 Invalidity of any Part. If any provision or part of this Agreement
shall for any reason be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement and shall be construed as if such invalid, illegal
or unenforceable provision or part thereof had never been contained in this
Agreement, but only to the extent of its invalidity, illegality, or
unenforceability. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
12.8 Time of the Essence; Computation of Time. Time is of the essence of
each and every provision of this Agreement. Whenever the last day for the
exercise of any right or the discharge of any duty under this Agreement shall
fall upon Saturday, Sunday or a federal, public or legal holiday, the party
having such right or duty shall have until 5:00 p.m., Atlanta, Georgia time on
the next succeeding regular business day to exercise such right or to discharge
such duty.
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<PAGE> 233
12.9 Arbitration.
(a) Any dispute, controversy or claim arising out of or relating to
this Agreement or any other related documents, agreements, certificates or
other writing, or the breach, termination, construction, validity or
enforceability hereof or thereof, shall be settled by binding arbitration
in accordance with the rules of the American Arbitration Association in
force at the time and in the manner described in Section 10.5 (except as
otherwise provided in this Section 12.9).
(b) Termination or limitation of Parent's rights in any of its
software, products, or any associated intellectual property rights or
documents may not be awarded under any circumstances. The right to demand
arbitration and to receive damages and obtain other available remedies as
provided hereunder shall be the exclusive remedy in the event an
arbitration demand is made, except that Parent shall be entitled to obtain
equitable relief, such as injunctive relief, from any court of competent
jurisdiction to protect its rights in any of its software products or any
associated intellectual property rights or documents while such proceeding
is pending or in support of any award made pursuant to such arbitration.
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<PAGE> 234
IN WITNESS WHEREOF, Parent, Merger Sub, Company, the Management
Stockholders and the Stockholders' Representatives have caused this Agreement to
be executed by their duly authorized officers or themselves as of the day and
year first above written.
TOWNE SERVICES, INC.
By: /s/ DREW W. EDWARDS
-----------------------------------
By: Drew W. Edwards
Its: Chairman and Chief Executive
Officer
TSI ACQUISITION ONE, INC.
By: /s/ DREW W. EDWARDS
-----------------------------------
By: Drew W. Edwards
Its: Chairman and Chief Executive
Officer
FORSEON CORPORATION
By: /s/ DAN PAUL
-----------------------------------
By: Dan Paul
Its: President
THE MANAGEMENT STOCKHOLDERS
/s/ DAN PAUL
--------------------------------------
DAN PAUL
Address: 4820 Stonehaven
Yorba Linda, California 92887
/s/ ALLEN MERRILL
--------------------------------------
ALLEN MERRILL
Address: 6771 De Grazia Road
Riverside, CA 92506
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<PAGE> 235
STOCKHOLDERS' REPRESENTATIVE
/s/ DAN PAUL
--------------------------------------
DAN PAUL
Address:
c/o Forseon Corporation
6600 Jurupa Avenue
Riverside, California 92504
/s/ ALLEN MERRILL
--------------------------------------
ALLEN MERRILL
Address:
c/o Forseon Corporation
6600 Jurupa Avenue
Riverside, California 92504
A-63
<PAGE> 236
APPENDIX B
DELAWARE GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
262. APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders hereof are required by
the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock any thing except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
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<PAGE> 237
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph;
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of constituent
corporations, and shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of his shares shall deliver to
the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights
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<PAGE> 238
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identify of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date of the
merger or consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the effective
date, the record date shall be close of business on the day next preceding
the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holder of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also
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<PAGE> 239
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair market value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to the appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal
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of his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 241
APPENDIX C
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FORSEON CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
JUNE , 1999
The undersigned stockholder of Forseon Corporation hereby acknowledges
receipt of the Notice of Special Meeting of Stockholders and proxy
statement/prospectus for the Special Meeting of Stockholders of Forseon
Corporation, to be held on June , 1999 at 10 a.m., California time, at the
offices of Gibson, Dunn & Crutcher LLP, Suite 1700, 4 Park Plaza, Irvine,
California. The Stockholder hereby revokes all previous proxies and appoints Dan
Paul and Allen Merrill, or either of them, with full power of substitution,
proxies and attorneys-in-fact, on behalf and in the name of the undersigned, to
vote and otherwise represent all of the shares registered in the name of the
undersigned at the Special Meeting of Stockholders, or any adjournment or
postponement thereto, with the same effect as if the undersigned were present
and voting such shares, on the following matters and in the following manner:
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING OF STOCKHOLDERS,
PLEASE MARK, SIGN AND DATE THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE. THE
FORSEON BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" EACH OF THE FOLLOWING
PROPOSALS.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE [X]
1. Proposal to: (a) approve and adopt the Agreement and Plan of Merger,
dated as of March 25, 1999 (the "reorganization agreement"), among
Towne Services, Inc., TSI Acquisition One, Inc., Forseon Corporation
and certain of the stockholders of Forseon Corporation.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR THE ABOVE PROPOSAL AND FOR SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING AS THE PROXYHOLDERS DEEM ADVISABLE.
Signature(s) Date , 1999
------------------------------------ --------------------
(This proxy should be marked, dated and signed by each stockholder exactly as
such stockholder's name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. A
corporation is requested to sign its name by its President or other authorized
officer, with the office held designated. If shares are held by joint tenants or
as community property, both holders should sign.)
PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
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<PAGE> 242
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Registrant's Amended and Restated Articles of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Georgia law.
Article VIII, Section 15 of the Registrant's Bylaws provides for the
indemnification of agents of the Registrant to the fullest extent authorized by
the State of Georgia.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
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 (incorporated by reference to Appendix A
of the proxy statement/prospectus which is a part of this
S-4 Registration Statement).
2.2 -- Form of Escrow Agreement to be entered into by and among
Towne Services, Inc., Dan Paul and Allen Merrill, each in
their capacity as a Stockholder Representative, and First
Union National Bank.***
2.3 -- Asset Purchase Agreement by and between Towne Services, Inc.
and Credit Collection Solutions, Inc., and Burton W. Crapps
and Robert M. Ragsdale dated as of June 11, 1998.*
2.4 -- Stock Purchase Agreement dated November 30, 1998 by and
between Towne Services, Inc., BSI Acquisition Corp., Banking
Solutions, Inc. ("BSI"), and certain shareholders of BSI
(incorporated by reference to Exhibit 2.1 of the Company's
Report on Form 8-K filed on December 15, 1998).
3.1 -- Amended and Restated Articles of Incorporation of Towne
Services, Inc., as filed with the Secretary of State of the
State of Georgia on July 29, 1998.*
3.2 -- Amended and Restated Bylaws of Towne Services, Inc.,
effective May 19, 1998.*
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of common stock of
the Company.
5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.**
10.1 -- 1996 Stock Option Plan (including form of Stock Option
Agreement.*
10.2 -- 1998 Stock Option Plan (including form of Stock Option
Agreement).*
10.3 -- Form of Non-Qualified Stock Option Agreement.*
10.4 -- Lease by and among River Exchange Associates Limited
Partnership and Towne Services, Inc. dated January 12,
1998.*
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Drew W. Edwards dated as of October 15, 1995.*
10.6 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997.*
</TABLE>
II-1
<PAGE> 243
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
10.7 -- Amended and Restated Employment Agreement by and between
Towne Services, Inc. and Bruce Lowthers dated as of May 18,
1998.*
10.8 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Shultz dated as of May 19, 1998.*
10.9 -- Employment Agreement by and between Towne Services, Inc. and
Dan Paul dated March 25, 1999 (effective upon closing of
merger).**
10.10 -- Employment Agreement by and between Towne Services, Inc. and
Allen Merrill dated March 25, 1999 (effective upon the
closing of merger).**
10.11 -- Form of TOWNE CREDIT Bank Marketing Agreement.*
10.12 -- Form of TOWNE Finance Bank Marketing Agreement.*
10.13 -- Form of TOWNE CREDIT Merchant Processing Agreement.*
10.14 -- Form of TOWNE Finance Client Processing Agreement.*
10.15 -- Form of CASHFLOW Manager Merchant Services Agreement.+
10.16 -- Form of CASHFLOW Manager License Agreement.+
10.17 -- Form of Independent Bankers Bank General Marketing Agent
Agreement.+
10.18 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.19 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.20 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*
10.21 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.*
10.22 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Drew W. Edwards.+
10.23 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco.+
10.24 -- Form of General Marketing Agent Agreement.*
10.25 -- Promissory Note by the Company to the order of First Union
National Bank dated December 31, 1998.+
10.26 -- Retail Merchandising Service Automation, Inc. Employee Stock
Ownership Plan, July 1, 1994 Restatement (Includes First
through Fourth Amendments).***
10.27 -- Fifth Amendment to the Retail Merchandising Service
Automation, Inc. Employee Stock Ownership Plan, effective as
of June 20, 1996.***
10.28 -- Sixth Amendment to the Forseon Corporation Employee Stock
Ownership Plan, effective as of July 1, 1987.***
10.29 -- Seventh Amendment to the Forseon Corporation Employee Stock
Ownership Plan, effective as of March 22, 1999.**
10.30 -- Form of Forseon Corporation Visionary Forecasting Service
Agreement.***
10.31 -- Form of Forseon Corporation Standard Agreement for
Purchase.***
10.32 -- Form of Forseon Corporation Software License Agreement.***
21.1 -- Subsidiaries of Towne Services, Inc.***
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG LLP.
24.1 -- Power of Attorney.***
</TABLE>
II-2
<PAGE> 244
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
27.1 -- Financial Data Schedule for the periods ending December 31,
1997 and 1998 (for SEC use only).+
99.1 -- Notice to Participants in the Forseon Corporation Employee
Stock Ownership Plan.***
</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.
** To be provided by amendment.
*** Previously filed.
+ Incorporated by reference to the exhibits to the Company's Report on Form
10-K filed on March 26, 1999.
(b) Schedule II Valuation and Qualifying Accounts
TOWNE SERVICES, INC.
<TABLE>
<CAPTION>
BEGINNING CHARGED TO ENDING
DESCRIPTION BALANCE EXPENSE DEDUCTIONS BALANCE
----------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1995 Allowance for Doubtful Accounts..... $ 0 $ 0 $0 $ 0
December 31, 1996 Allowance for Doubtful Accounts..... 0 0 0 0
December 31, 1997 Allowance for Doubtful Accounts..... 0 25,000 0 25,000
December 31, 1998 Allowance for Doubtful Accounts..... 25,000 322,065 0 347,065
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements, management's discussion and analysis or notes thereto.
ITEM 22. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned Registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against
II-3
<PAGE> 245
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(4) The undersigned registrant hereby undertakes to respond to request for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(5) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 246
SIGNATURES
Pursuant to the requirements of the securities act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on the 23rd day of April, 1999.
TOWNE SERVICES, INC.
By: /s/ DREW W. EDWARDS
------------------------------------
Drew W. Edwards
Chairman and Chief Executive Officer
Pursuant to the requirements of the securities act of 1933, as amended,
this registration statement has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ DREW W. EDWARDS Chairman of the Board and Chief April 23, 1999
- ----------------------------------------------------- Executive Officer (principal
Drew W. Edwards executive officer)
* President, Chief Operating April 23, 1999
- ----------------------------------------------------- Officer and Director
Henry M. Baroco
/s/ BRUCE F. LOWTHERS Chief Financial Officer April 23, 1999
- ----------------------------------------------------- (principal financial and
Bruce F. Lowthers accounting officer)
* Director April 23, 1999
- -----------------------------------------------------
G. Lynn Boggs
* Director April 23, 1999
- -----------------------------------------------------
Frank W. Brown
* Director April 23, 1999
- -----------------------------------------------------
John W. Collins
* Director April 23, 1999
- -----------------------------------------------------
J. Stanley Mackin
* Director April 23, 1999
- -----------------------------------------------------
Joe M. Rodgers
* Director April 23, 1999
- -----------------------------------------------------
John D. Schneider, Jr.
* Director April 23, 1999
- -----------------------------------------------------
J. Daniel Speight, Jr.
* Director April 23, 1999
- -----------------------------------------------------
Glenn W. Sturm
</TABLE>
II-5
<PAGE> 247
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
* Director April 23, 1999
- -----------------------------------------------------
J. Stephen Turner
* Director April 23, 1999
- -----------------------------------------------------
Bahram Yusefzadeh
By: /s/ DREW W. EDWARDS
- -----------------------------------------------------
Drew W. Edwards
Attorney-in-fact
</TABLE>
II-6
<PAGE> 248
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
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 (incorporated by reference to Appendix A
of the proxy statement/prospectus which is a part of this
S-4 Registration Statement).
2.2 -- Form of Escrow Agreement to be entered into by and among
Towne Services, Inc., Dan Paul and Allen Merrill, each in
their capacity as a Stockholder Representative, and First
Union National Bank.***
2.3 -- Asset Purchase Agreement by and between Towne Services, Inc.
and Credit Collection Solutions, Inc., and Burton W. Crapps
and Robert M. Ragsdale dated as of June 11, 1998.*
2.4 -- Stock Purchase Agreement dated November 30, 1998 by and
between Towne Services, Inc., BSI Acquisition Corp., Banking
Solutions, Inc. ("BSI"), and certain shareholders of BSI
(incorporated by reference to Exhibit 2.1 of the Company's
Report on Form 8-K filed on December 15, 1998).
3.1 -- Amended and Restated Articles of Incorporation of Towne
Services, Inc., as filed with the Secretary of State of the
State of Georgia on July 29, 1998.*
3.2 -- Amended and Restated Bylaws of Towne Services, Inc.,
effective May 19, 1998.*
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of common stock of
the Company.
5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.**
10.1 -- 1996 Stock Option Plan (including form of Stock Option
Agreement.*
10.2 -- 1998 Stock Option Plan (including form of Stock Option
Agreement).*
10.3 -- Form of Non-Qualified Stock Option Agreement.*
10.4 -- Lease by and among River Exchange Associates Limited
Partnership and Towne Services, Inc. dated January 12,
1998.*
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Drew W. Edwards dated as of October 15, 1995.*
10.6 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997.*
10.7 -- Amended and Restated Employment Agreement by and between
Towne Services, Inc. and Bruce Lowthers dated as of May 18,
1998.*
10.8 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Shultz dated as of May 19, 1998.*
10.9 -- Employment Agreement by and between Towne Services, Inc. and
Dan Paul dated March 25, 1999 (effective upon closing of
merger).**
10.10 -- Employment Agreement by and between Towne Services, Inc. and
Allen Merrill dated March 25, 1999 (effective upon the
closing of merger).**
10.11 -- Form of TOWNE CREDIT Bank Marketing Agreement.*
10.12 -- Form of TOWNE Finance Bank Marketing Agreement.*
10.13 -- Form of TOWNE CREDIT Merchant Processing Agreement.*
10.14 -- Form of TOWNE Finance Client Processing Agreement.*
10.15 -- Form of CASHFLOW Manager Merchant Services Agreement.+
</TABLE>
<PAGE> 249
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
10.16 -- Form of CASHFLOW Manager License Agreement.+
10.17 -- Form of Independent Bankers Bank General Marketing Agent
Agreement.+
10.18 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.*
10.19 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers.*
10.20 -- Promissory note dated September 8, 1997 issued to Towne
Services, Inc. by Henry M. Baroco.*
10.21 -- Promissory note dated April 1, 1998 issued to Towne
Services, Inc. by Bruce F. Lowthers, Jr.*
10.22 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Drew W. Edwards.+
10.23 -- Promissory Note dated October 8, 1998 issued to Towne
Services, Inc. by Henry M. Baroco.+
10.24 -- Form of General Marketing Agent Agreement.*
10.25 -- Promissory Note by the Company to the order of First Union
National Bank dated December 31, 1998.+
10.26 -- Retail Merchandising Service Automation, Inc. Employee Stock
Ownership Plan, July 1, 1994 Restatement (Includes First
through Fourth Amendments).***
10.27 -- Fifth Amendment to the Retail Merchandising Service
Automation, Inc. Employee Stock Ownership Plan, effective as
of June 20, 1996.***
10.28 -- Sixth Amendment to the Forseon Corporation Employee Stock
Ownership Plan, effective as of July 1, 1987.***
10.29 -- Seventh Amendment to the Forseon Corporation Employee Stock
Ownership Plan, effective as of March 22, 1999.**
10.30 -- Form of Forseon Corporation Visionary Forecasting Service
Agreement.***
10.31 -- Form of Forseon Corporation Standard Agreement for
Purchase.***
10.32 -- Form of Forseon Corporation Software License Agreement.***
21.1 -- Subsidiaries of Towne Services, Inc.***
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG LLP.
24.1 -- Power of Attorney.***
27.1 -- Financial Data Schedule for the periods ending December 31,
1997 and 1998 (for SEC use only).+
99.1 -- Notice to Participants in the Forseon Corporation Employee
Stock Ownership Plan.***
</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.
** To be provided by amendment.
*** Previously filed.
+ Incorporated by reference to the exhibits to the Company's Report on Form
10-K filed on March 26, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 22, 1999
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
Forseon Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts," "Conditions to the Merger," "Accounting
Treatment," and "Selected Historical Consolidated and Unaudited Pro Forma
Combined Condensed Financial Information" in the prospectus.
/s/ KPMG LLP
Los Angeles, California
April 23, 1999
