<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO , 19 .
--------------- ------------ -----
Commission file number : 000-24695
---------------
TOWNE SERVICES, INC.
(Exact name of registrant as specified in its charter)
Georgia 62-1618121
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3950 Johns Creek Court, Suite 100, Suwanee, Georgia 30024
(Address of principal executive
offices and zip code)
(678)-475-5200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days (1) Yes [X] No [ ]; (2) Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 27,164,011 shares
outstanding at August 11, 1999.
<PAGE> 2
TOWNE SERVICES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months ended June 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
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PART I.
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TOWNE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,060,284 $ 32,333,082
Accounts receivable, net of allowance
for uncollectible accounts of $415,065 and $428,792
at December 31, 1998 and June 30, 1999, respectively 4,338,478 6,931,745
Notes receivable from employees 167,305 258,909
Other 393,732 1,254,264
------------ ------------
Total current assets 18,959,799 40,778,000
------------ ------------
PROPERTY AND EQUIPMENT, net 3,452,987 7,107,684
NOTES RECEIVABLE FROM EMPLOYEES 81,565 --
GOODWILL, net 14,955,414 14,451,686
OTHER INTANGIBLES, net 1,134,614 1,021,153
OTHER ASSETS, net 100,249 172,608
------------ ------------
$ 38,684,628 $ 63,531,131
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 221,763 $ 3,469,635
Accrued liabilities 1,511,148 1,875,297
Accrued compensation 1,198,391 1,836,030
Accrued termination costs 497,910 355,699
Current portion of long-term debt 5,274,000 320,915
------------ ------------
Total current liabilities 8,703,212 7,857,576
------------ ------------
LONG TERM DEBT 55,000 819,317
REDEEMABLE COMMON STOCK 534,000 --
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 20,000,000 shares authorized, 0 and 20,000
issued and outstanding at December 31, 1998 and June 30, 1999, respectively -- 1,880,000
Common stock, no par value; 50,000,000 shares authorized, 19,651,390 and
26,407,906 issued and outstanding December 31, 1998 and June 30, 1999,
respectively 53,520,084 82,042,453
Warrants outstanding 41,000 161,000
Accumulated deficit (24,168,668) (29,229,215)
------------ ------------
Total shareholders' equity 29,392,416 54,854,238
------------ ------------
$ 38,684,628 $ 63,531,131
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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TOWNE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 and 1999
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ 3,848,581 $ 7,933,968 $ 7,405,535 $ 15,427,428
COSTS AND EXPENSES:
Costs of processing, servicing and support 995,707 1,596,866 1,932,835 3,115,856
Research and development 264,987 207,369 541,011 456,209
Sales and marketing 2,890,866 4,905,722 5,321,428 10,248,554
Stock compensation expense 36,338 36,339 6,007,928 72,678
Acquisition expense -- 2,286,400 -- 2,343,316
General and administrative 1,164,908 2,675,819 3,002,190 4,698,539
------------ ------------ ------------ ------------
Total costs and expenses 5,352,806 11,708,515 16,805,392 20,935,152
------------ ------------ ------------ ------------
OPERATING LOSS (1,504,225) (3,774,547) (9,399,857) (5,507,724)
------------ ------------ ------------ ------------
OTHER EXPENSES:
Interest (income) expense, net 76,743 (40,674) 152,032 (112,741)
Other expense (income) 252 -- 252 --
Financing costs for stock issued to nonemployees -- -- 323,000 --
------------ ------------ ------------ ------------
Total other expenses 76,995 (40,674) 475,284 (112,741)
------------ ------------ ------------ ------------
Loss before income taxes (1,581,220) (3,733,873) (9,875,141) (5,394,983)
------------ ------------ ------------ ------------
Benefit for income taxes -- (240,000) (34,000) (354,000)
NET LOSS $ (1,581,220) $ (3,493,873) $ (9,841,141) $ (5,040,983)
============ ============ ============ ============
PREFERRED STOCK DIVIDENDS -- -- (5,108,000) --
ACCRETION OF WARRANTS WITH REDEMPTION FEATURE (284,000) -- (495,000) --
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,865,220) $ (3,493,873) $(15,444,141) $ (5,040,983)
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE:
Basic $ (0.12) $ (0.16) $ (1.03) $ (0.23)
============ ============ ============ ============
Diluted $ (0.12) $ (0.16) $ (1.03) $ (0.23)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 15,372,128 21,994,027 15,037,281 21,913,816
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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TOWNE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 and 1999
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
1998 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(9,841,141) $ (5,040,983)
----------- ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense recognized for stock option grants 6,057,590 72,678
Financing costs for stock issued to nonemployees 323,000 --
Depreciation 179,840 446,645
Amortization of intangibles and goodwill -- 817,693
Amortization of deferred financing fees 6,856 --
Amortization of debt discount 24,962 --
Provision for doubtful accounts 24,000 82,984
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable (422,374) (2,676,251)
Prepaid & other assets (197,993) (947,393)
Stock subscriptions receivable 377,500 --
Accounts payable (105,258) 2,789,810
Accrued liabilities 544,468 317,106
Accrued compensation 50,703 596,639
Accrued termination costs -- (81,377)
----------- ------------
Total adjustments 6,863,294 1,418,534
----------- ------------
Net cash used in operating activities (2,977,847) (3,622,449)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in notes receivable from employees (81,677) (10,039)
Acquisitions, net of cash acquired (510,000) (178,295)
Purchase of property and equipment, net (548,911) (3,153,110)
----------- ------------
Net cash used in investing activities (1,140,588) (3,341,444)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 56,250
Repayment of debt (184,132) (5,137,000)
Proceeds from long-term borrowings 628,849 --
Proceeds from issuance of preferred stock 1,500,000 2,000,000
Proceeds from issuance of common stock 1,329,607 28,317,441
Repurchase of common stock (20,000) --
----------- ------------
Net cash provided by (used in) financing activities 3,254,324 25,236,691
----------- ------------
NET (DECREASE) INCREASE IN CASH (864,111) 18,272,798
CASH AND CASH EQUIVALENTS, beginning of period 3,643,439 14,060,284
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,779,328 $ 32,333,082
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ --
=========== ============
Cash paid for interest $ 44,539 $ 22,351
=========== ============
Stock subscription receivable $ 50,000 $ --
=========== ============
Acquisitions of property and equipment through capital leases $ -- $ 948,232
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
TOWNE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Towne Services, Inc. ("Towne Services" or the "Company") provides
services and products that process sales and payment information and related
financing transactions for small businesses and community banks in the United
States. The Company delivers these services and products online via an
electronic hub, or gateway, that links business and bank customers with the
Company and other providers of products and services that can benefit these
customers. The Company uses this electronic gateway to deliver a variety of
business and management solutions using internet and telecommunication
connections. The primary business capabilities we offer our customers include a
virtual credit card system and a merchandise forecasting system.
The virtual credit card system processes the in-house credit
transactions of small businesses and includes an automated receivables
management system that allows banks to quickly finance the working capital needs
of their small business customers. Towne Services' merchandise forecasting
system processes sales and inventory transactions of small businesses which
allow small business owners greater control over inventory levels and the
ability to make better inventory purchase decisions, in an effort to improve
cashflow and operating margins.
The Company's automated asset management systems are TOWNE CREDIT(R),
which processes consumer credit transactions for small and medium size retail
merchants, TOWNE FINANCE(R) and CASHFLOW MANAGER(SM), which process
business-to-business credit transactions for small commercial businesses, and
RMSA Forecast System, which processes sales and inventory transactions and
provides merchandising information for small specialty retail stores. 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.
2. BASIS OF PRESENTATION
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements for the three and
six months ended June 30, 1998 and 1999 are unaudited. The historical financial
information has been restated for the effects of the acquisition of Forseon
Corporation that was accounted for as a pooling of interests. In the opinion of
the management of the Company, these financial statements reflect all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial statements. Certain information and footnote
disclosures usually found in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. The
results of operations for the three and six months ended June 30,
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1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999 or for any other future periods.
3. 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 January 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, 2000. The adoption of SFAS No. 133 is not expected to
have a material impact on the Company's financial statements.
4. PUBLIC OFFERING
In June 1999, the Company completed a secondary public offering of
4,500,000 shares of common stock at an offering price to the public of $7.125
per share. The total proceeds from the public offering, net of underwriting
discounts and offering expenses, were approximately $28.0 million.
5. REVENUE RECOGNITION
The Company functions as a service bureau whereby customers process
transactions utilizing the Company's software on an outsourced basis. The
Company's revenues are generated primarily through initial set-up fees,
recurring monthly transaction processing fees and software license fees.
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. Revenues
related to software license fees are recognized in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2,
"Software Revenue Recognition," ("SOP 97-2"), as amended. The Company also
leases point of sale terminal equipment to certain customers under
month-to-month operating leases. Such operating lease revenues are recognized
on a monthly basis as earned.
7
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5. ACQUISITIONS
In June 1999, the Company acquired Forseon Corporation ("Forseon"), a
company based in Riverside, California. Forseon provides products and services
for retail businesses that process inventory, accounts receivable and point of
sale transaction information and generate merchandise forecasts and management
reports. Towne issued a total of 2,075,345 shares of its common stock in
exchange for all outstanding stock and options to acquire stock in Forseon. The
merger was accounted for as a pooling of interests. Ten percent of the Towne
common stock has been held back in escrow to satisfy the indemnification
obligations of Forseon stockholders under the merger agreement. The Company
incurred approximately $2.3 million in expenses related to the acquisition of
Forseon.
6. LONG TERM DEBT OBLIGATIONS
In June 1999, the Company entered into a five year capital lease
obligation with Synovus Leasing Company to finance the purchase of office
furniture and fixtures. The capital lease obligation of $633,000 includes
interest expense of $122,000, or 8.75%, of the principal. The amount of the
minimum monthly lease obligation, consisting of principal and interest, is
$11,000.
In June 1999, the Company entered into a five year capital lease
obligation with NEC America, Inc. to finance the purchase of office
telecommunications equipment. The capital lease obligation of $546,000 includes
interest expense of $104,000, or 8.61%, of the principal. The amount of the
minimum monthly lease obligation, consisting of principal and interest, is
$9,000.
7. SHAREHOLDERS' EQUITY
In June 1999, the Company sold 20,000 shares of Series B Preferred
Stock and issued a warrant to purchase 30,000 shares of the Company's common
stock to Synovus Financial Corporation for $2,000,000. The shares are
convertible into common stock at a conversion price equal to $9.08. The Series B
Preferred Stock is redeemable at any time on or after June 30, 2002 at the
option of the Company for cash, in whole or part, on at least 10 business days
but not more than 90 calendar days' notice. The Company allocated $1,880,000 to
the preferred stock based on the relative fair value at the date of issuance.
The holders of the Series B Preferred Stock are entitled to receive
cumulative cash dividends when, as and if declared by the Board of Directors out
of any funds legally available therefor at the rate of $2.00 per share of Series
B Preferred Stock per quarter. Dividends are payable quarterly on March 31, June
30, September 30 and December 31 in each year. Dividends accrue on each share of
Series B Preferred Stock beginning June 1999 and accrue from day to day, whether
or not earned or declared and whether or not there are funds legally available
for the payment of such dividends. Any accumulation of dividends on the Series B
Preferred Stock does not bear interest.
8
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The warrant allows Synovus to purchase 30,000 shares of the Company's
common stock for $9.08 per share and is exercisable beginning 12 months after
the issue date. The term of the warrant is 5 years. The Company allocated
$120,000 to the warrant based on the relative fair value of the warrant using
the Black-Scholes pricing method.
8. SUBSEQUENT EVENTS
On July 20, 1999, 675,000 shares of common stock were issued and sold
by the Company pursuant to an underwriters' over-allotment provision in
connection with the public offering in June 1999. The Company received proceeds
of $4.6 million, which increased the total proceeds from the public offering,
net of underwriting discounts and offering expenses, to approximately $32.6
million.
On July 20, 1999, the Company acquired all of the issued and
outstanding stock of Imaging Institute, Inc. ("III"), a Bloomington,
Minnesota-based company, for approximately $1.0 million cash and the issuance of
up to 81,016 shares of the Company's common stock. Founded in 1996, III is a
developer and retailer of document imaging and archiving products. III's main
products include AUGUSTA and EzVIEW VAULT(TM), which offer unique and functional
document management solutions tailored for small to medium size businesses.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This Report contains several "forward-looking statements" concerning Towne
Services' operations, performance, prospects, strategies and financial
condition, including its future economic performance, intent, plans and
objectives and the likelihood of success in developing and expanding its
business. These statements are based upon a number of assumptions and estimates
which are subject to significant uncertainties, many of which are beyond the
control of Towne Services. Words such as "may," "would," could," "will,"
"expect," "anticipate," "believe," "intend," "plan," and "estimate" are meant to
identify such forward-looking statements. Actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to:
- - Towne's limited operating history and whether it will be able to
achieve or maintain profitability or any other specific operating
results expected by public market analysts;
- - Whether Towne can successfully integrate the operations of companies it
acquires, including those of Forseon and III;
- - whether Towne can attract and retain sales and marketing personnel or
enter new marketing alliances to grow its business;
- - whether Towne can obtain, continue and manage growth or execute
agreements with new customers;
- - whether the market will accept new products and enhancements from
Towne, including those acquired as a result of the Forseon and III
transactions;
- - increased competition;
- - the unknown effects of possible system failures and rapid changes in
technology; and
- - other factors discussed in this report and in Towne's registration
statements on Form S-1 (No. 333-76859) as declared effective by the
Securities and Exchange Commission on June 23, 1999 and Form S-4 (No.
333-76493) as declared effective by the Securities and Exchange
Commission on June 10, 1999, including the "Risk Factors" section
contained therein.
OVERVIEW
Towne establishes an electronic gateway that links its business and
bank customers with Towne and other providers of products and services. We
currently generate revenues through the deployment and use of four primary
products and ancillary services: TOWNE CREDIT(R), TOWNE FINANCE(R), CASHFLOW
MANAGER(SM), and RMSA Forecast System. With each of these products, we generate
initial set-up fees, discount fees and recurring monthly transaction processing
fees. Management believes the prices charged for both the initial set-up fees
and the recurring transaction fees are based upon the relative fair value of the
related services provided. Accordingly, we recognize these fees as the related
services are provided.
Set-up fees include charges for installation, implementation and
training of our bank and
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business customers. Set-up fees charged to each bank vary depending on the
asset size of the bank and the number of communities served. We also charge
set-up fees to our business customers based either upon a flat rate or upon the
expected transaction volume.
With each of our transaction processing products, our business customer
pays a discount fee to its bank equal to a percentage of the value of each
transaction processed. In addition, the business' customer pays to the bank
interest and fees for amounts owed on account. We generate recurring revenue by
collecting a portion of the discount fee and, if applicable, interest paid on
these accounts, as well as by charging monthly transaction processing fees.
Monthly transaction processing fees include charges for electronic processing,
statement rendering and mailing, settling payments, recording account changes
and new accounts, leasing and selling point of sale terminals, telephone and
software support services, rental fees and collecting debts.
Other revenues include charges for software license fees, maintenance
agreements, the sale of hardware and equipment and marketing materials and
supplies.
Costs of processing, servicing and support include installation costs
for our products and costs related to customer service, information systems
personnel and installation services.
Research and development expenses consist of salary and related
personnel costs, including costs for employee benefits, computer equipment and
support services used in product and technology development. We believe that our
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 our marketplace. Most
research and development expenditures are expensed as incurred; however, we have
capitalized certain development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86 when the products reached technological feasibility.
Sales and marketing expenses consist primarily of salaries and
commissions, travel expenses, advertising costs, trade show expenses and costs
of marketing materials. These expenses also include the costs incurred to
develop our indirect marketing channels.
In June 1999, we completed a secondary public offering of 4,500,000
shares of common stock at an offering price to the public of $7.125 per share.
The total proceeds from the public offering, net of underwriting discounts and
offering expenses, were approximately $28.0 million.
In June 1999, we acquired Forseon Corporation ("Forseon"), a company
based in Riverside, California. Forseon provides products and services for
retail businesses that process inventory, accounts receivable and point of sale
transaction information and generate merchandise forecasts and management
reports. We issued a total of 2,075,345 shares of our common stock in exchange
for all outstanding stock and options to acquire stock in Forseon. The merger
was accounted for as a pooling of interests. Ten percent of the Towne common
stock has been held back in escrow to satisfy the indemnification obligations of
Forseon stockholders
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under the merger agreement. We incurred approximately $2.3 million in expenses
related to the acquisition of Forseon.
We had net losses of approximately $1.6 million and $3.5 million for
the three months ended June 30, 1998 and 1999, respectively. For the six months
ended June 30, 1998 and 1999, we had net losses of approximately $9.8 million
and $5.0 million, respectively. As of December 31, 1998, we had an accumulated
deficit of $24.2 million. Approximately $12.9 million 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. As of June 30, 1999, this
accumulated deficit was $29.2 million.
Our total revenues were $7.4 million and $15.5 million for the six
months ended June 30, 1998 and 1999, respectively. We have experienced net
losses of $9.8 million and $5.0 million in each of these periods, respectively
and expect to continue to incur losses for the foreseeable future. The number of
our employees at June 30, 1998 was 177, compared to 319 employees at June 30,
1999. We currently intend to expand our sales and marketing operations, to
invest more in product research and development, to pursue strategic
acquisitions and to improve our internal operating and financial infrastructure,
all of which will increase our operating expenses.
Because of our limited operating history, management believes that
period to period comparisons of our operating results are not meaningful.
Although we have 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. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development and relatively new
and changing markets. There can be no assurance that we will be successful in
addressing such risks and difficulties or that we will achieve profitability in
the future.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999
Revenues. Towne's revenues increased from $3.8 million for the three
months ended June 30, 1998 to $7.9 million for the three months ended June 30,
1999. During these two periods, recurring revenues accounted for approximately
73% and 67% of total revenues, respectively. Set-up fees accounted for
approximately 19% and 14% of total revenues, respectively. Other revenues
accounted for approximately 8% and 19% of total revenues, respectively. The
increase in revenues during these periods is attributed primarily to an increase
in transaction processing revenues and set up fees as a result of the increase
in the number of customers. The increase in other revenues is primarily a
result of an increase in software license fee revenues.
Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $996,000 for the three months ended June
30, 1998 to $1.6 million for the three
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months ended June 30, 1999. These costs were approximately 26% and 20% of
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. Research and development expenses decreased
from $265,000 for the three months ended June 30, 1998 to $207,000 for the three
months ended June 30, 1999. Research and development expenses represented
approximately 7% and 3% of revenues, respectively, during these two periods. 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 $2.9
million for the three months ended June 30, 1998 to $4.9 million for the three
months ended June 30, 1999. Sales and marketing expenses were approximately 75%
and 62% of revenues, respectively, during these two periods. The increase in the
dollar amount of 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. Costs of
sales and marketing decreased as a percentage of revenue as a result of
substantially increased revenues and improved operating efficiencies.
Stock Compensation Expense. Stock compensation expense was $36,000 for
the three months ended June 30, 1998 and $36,000 for the three months ended June
30, 1999. In the first quarter of 1998, Towne sold shares of common stock and
issued options to acquire common stock at what management believed to be the
fair market value of the common stock at that time. Towne retained an
independent appraiser who subsequently valued the common stock at a higher
price. The Company will record approximately $727,000 ($145,000 per year) of
compensation expense over the five year vesting period of the options.
Acquisition Expense. The Company incurred approximately $2.3 million of
expenses related to the acquisition of Forseon Corporation in June 1999.
General and Administrative. General and administrative expenses
increased from $1.2 million for the three months ended June 30, 1998 to $2.7
million for the three months ended June 30, 1999. These costs represented
approximately 30% and 34% of revenues, respectively, for these two periods. The
increase in the dollar amount of these expenses was the result of increases in
costs associated with executive and administrative expenses related to our
growth, costs related to acquisitions, writeoffs of uncollectible accounts
receivable and additional costs incurred for relocation to our new office
facility. Also, Towne incurred additional costs related to being a public
company, including annual and other public
13
<PAGE> 14
reporting costs, directors' and officers' liability insurance, investor
relations programs and professional services fees. We anticipate that general
and administrative expenses will continue to increase in the near future as
Towne 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
$77,000 for the three months ended June 30, 1998 and net interest income of
$41,000 for the three months ended June 30, 1999. Net interest expense decreased
as a result of the repayment of debt obligations and net interest income
increased as a result of earnings on investments of cash proceeds received from
the initial public offering.
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 beginning in 2011 if not utilized. In connection with the
acquisition of Forseon Corporation, Towne recognized income tax benefits in the
amounts of $0 and $240,000 for the periods ended June 30, 1998 and June 30,
1999, respectively.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Revenues. The Company's revenues increased from $7.4 million for the
six months ended June 30, 1998 to $15.4 million for the six months ended June
30, 1999. During these two periods, recurring revenues accounted for
approximately 75% and 69% of total revenues, respectively. Set-up fees
accounted for approximately 16% and 17% of total revenues, respectively. Other
revenues accounted for approximately 9% and 14% of total revenues,
respectively. The increase in other revenues is primarily a result of an
increase in software license fee revenues.
Costs of Processing, Servicing and Support. Costs of processing,
servicing and support increased from $1.9 million for the six months ended June
30, 1998 to $3.1 million for the six months ended June 30, 1999. These costs
were approximately 26% and 20% of revenues, respectively, for these two periods.
Towne anticipates that these costs will continue to increase as new customers
are added.
Research and Development. Research and development expenses decreased
from $541,000 for the six months ended June 30, 1998 to $456,000 for the six
months ended June 30, 1999. Research and development expenses represented
approximately 7% and 3% of revenues, respectively, during these two periods.
Sales and Marketing. Sales and marketing expenses increased from $5.3
million for the six months ended June 30, 1998 to $10.2 million for the six
months ended June 30, 1999. Sales and marketing expenses were approximately 72%
and 66% of revenues, respectively, during these two periods.
14
<PAGE> 15
Stock Compensation Expense. Stock compensation expense was $6.0 million
for the six months ended June 30, 1998 and $73,000 for the six months ended June
30, 1999. In addition, the Company will record approximately $727,000 ($145,000
per year) of compensation expense over the five year vesting period of options
issued to management.
Acquisition Expense. The Company incurred approximately $2.3 million of
expenses related to the acquisition of Forseon Corporation in June 1999.
General and Administrative. General and administrative expenses
increased from $3.0 million for the six months ended June 30, 1998 to $4.7
million for the six months ended June 30, 1999. These costs represented
approximately 41% and 30% of revenues, respectively, for these two periods. The
Company anticipates that the dollar amount of these general and administrative
expenses will continue to increase in the near future as it 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
$152,000 for the six months ended June 30, 1998 and net interest income of
$113,000 for the six months ended June 30, 1999. Net interest expense decreased
as a result of the repayment of debt obligations and net interest income
increased as a result of earnings on investments of cash proceeds received from
the initial public offering.
Income Taxes. As of December 31, 1998, Towne Services had NOLs of
approximately $17.6 million for federal tax purposes, which will expire
beginning in 2011 if not utilized. Towne recognized income tax benefits in the
amounts of $34,000 and $354,000 for the six months ended June 30, 1998 and June
30, 1999, respectively.
During Towne's short history, our operating results have varied
significantly and are likely to fluctuate significantly in the future as a
result of a combination of factors. These factors include:
- whether or not the market accepts our current and future
products and services;
- whether new competitors emerge or existing competitors gain
market share faster than we do;
- 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 and other operating costs;
- whether seasonal trends in consumer purchasing impact the
volume of transactions processed; and
- general economic factors and the impact of potential
acquisitions to our 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. We establish our expenditure levels for product
development, sales and marketing and other
15
<PAGE> 16
operating expenses based, in large part, on our anticipated revenues. As a
result, if revenues fall below expectations, operating results and net income
are likely to be adversely and disproportionately affected because only a
portion of our expenses vary with 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, its follow-on 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 June 1999, Towne received net proceeds of $28.0 million
from its follow on offering of its common stock and $2.0 million from the sale
of its Series B preferred stock in a private placement.
In June 1999, the Company entered into a five year capital lease
obligation with Synovus Leasing Company to finance the purchase of office
furniture and fixtures. The capital lease obligation of $633,000 includes
interest expense of $122,000 or 8.75% of the principal. The amount of the
minimum monthly lease obligation, consisting of principal and interest, is
$11,000.
In June 1999, the Company entered into a five year capital lease
obligation with NEC America, Inc. to finance the purchase of office
telecommunications equipment. The capital lease obligation of $546,000 includes
interest expense of $104,000 or 8.61% of the principal. The amount of the
minimum monthly lease obligation, consisting of principal and interest, is
$9,000.
Net cash used in operating activities was approximately $3.0 million
for the six months ended June 30, 1998 and $3.6 million for the six months ended
June 30,1999. Net cash used in operating activities for the six months ended
June 30, 1998 represents a $9.8 million net loss partially offset by a $490,000
increase in accounts payable and accrued expenses, a $422,000 growth in accounts
receivable, a $198,000 increase in prepaid expenses and other assets and a
$378,000 decrease in stock subscriptions receivable. Net cash used in operating
activities for the six months ended June 30, 1999 represents a $5.0 million net
loss partially offset by a $3.6 million increase in accounts payable and accrued
expenses, a $2.7 million increase in accounts receivable and a $947,000 increase
in prepaid expenses and other assets.
Net cash used in investing activities was approximately $1.1 million
for the six months ended June 30, 1998 and $3.3 million for the six months ended
June 30, 1999. Net cash used in investing activities for the six months ended
June 30, 1998 represents an increase of $82,000 in notes due from shareholders,
$510,000 to acquire certain assets and liabilities of Credit Collection
Solutions, Inc. and $549,000 for the purchases of computer equipment and other
capital equipment used in conducting Towne's business. Net cash used in
investing activities for the six months ended June 30, 1999 represents an
increase of $10,000 in notes receivable due
16
<PAGE> 17
from employees, $178,000 related to acquisition expenses and $3.2 million for
the purchase of computer equipment and other capital equipment used in
conducting Towne's business.
Net cash provided by financing activities was $3.3 million and $25.2
million for the six months ended June 30, 1998 and 1999, respectively. Net cash
provided by financing activities for the six months ended June 30, 1998
consisted primarily of $2.8 million of proceeds from the issuance of securities,
a three year note payable for $144,000 and a short term note payable for
$500,000. Net cash used in financing activities for the six months ended June
30, 1999 consisted primarily of $5.0 million for the repayment of outstanding
short term debt obligations, $56,000 of proceeds from stock option exercises and
$30.0 million of proceeds from the issuance of securities.
EFFECTS OF THE YEAR 2000
Our 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 our company and the affected
customers. We have conducted tests on our proprietary point of sale terminals,
network connections and transaction processing software and believe that our
TOWNE CREDIT, TOWNE FINANCE, CASHFLOW MANAGER, and COLLECTION WORKS products
and network connections we maintain are able to process dates after December 31,
1999. We rely on several 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 Charter System clients are now using the remediated
version. The remaining 2% of our Charter System 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 Year 2000 compliance
testing on the mainframe based forecasting system was completed on July 1, 1999
and the software is in production.
We transmit data to and from our clients electronically. We have tested
these electronic data transmissions and reasonably expect that they will
function normally after December 31, 1999; however, a failure of these data
transmissions could negatively impact our ability to operate. We also use
certain third party software such as Microfocus software development tools and
Windows(R) in our operations. We have not yet assessed whether third party
software presents a Year 2000 risk. We plan to complete such assessment by
September 1, 1999. We have completed assessment of our workstations and have
determined that approximately 30 workstations require replacement due to Year
2000 problems. The costs of replacement workstations and programming are
estimated to be $100,000.
17
<PAGE> 18
For our internal accounting and operating systems and network
communications, we use software and other products provided by third parties and
we have received warranties or other assurances that these products are
programmed to address the Year 2000 issue. Our personnel will continue to test
our network connections to help ensure that these programs and systems continue
to address the Year 2000 issue. We intend to modify or replace any products or
systems that are unable to properly function as a result of the Year 2000 issue
and currently believe we will be able to do so without incurring costs or delays
which would have a material adverse effect on our financial condition.
We supply 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 there can be no assurance that such
expenses, failures or delays will not have a material adverse effect on our
business, financial condition or results of operations.
EFFECTS OF ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general purpose
financial statements. This statement is effective for periods beginning after
December 15, 1997. Towne adopted SFAS No. 130 on January 1, 1998. The adoption
of SFAS 130 did not have a material impact on Towne's financial statements as
comprehensive income did not differ from the reported net loss for all periods
presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 did not have an impact on our
financial statements, as we operate in one business segment, electronic
transaction processing. Our operating business segments provide electronic
transaction processing for small business in-house accounts. The segments use
our central administrative offices for customer support, centralized processing
and sales support. In addition, our sales force markets all products within
their assigned markets. We consequently consider all of our products as one
reportable segment under the definitions in SFAS No. 131.
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<PAGE> 19
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 will not have a
material impact on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 1999, the Company sold 20,000 shares of its Series B
Preferred Stock and issued a warrant to acquire 30,000 shares of its
common stock to Synovus Financial Corporation. The Company received
$2,000,000 and executed a strategic customer agreement with Synovus in
connection with this transaction. The shares are convertible into
common stock at a conversion price equal to $9.08. The Series B
Preferred Stock is redeemable at any time on or after June 30, 2002 at
the option of the Company for cash, in whole or part, on at least 10
business days but not more than 90 calendar days' notice. The holders
of the Series B Preferred Stock are entitled to receive cumulative cash
dividends when, as and if declared by the Board of Directors out of any
funds legally available therefor at the rate of $2.00 per share of
Series B Preferred Stock per quarter. Dividends will be payable
quarterly on March 31, June 30, September 30 and December 31 in each
year. Dividends accrue on each share of Series B Preferred Stock
beginning June 1999 and accrue from day to day, whether or not earned
or declared and whether or not there are funds legally available for
the payment of such dividends. Any accumulation of dividends on the
Series B Preferred Stock does not bear interest. The warrant allows
Synovus to purchase 30,000 shares of the Company's common stock for
$9.08 per share and is exercisable beginning 12 months after the issue
date. The term of the warrant is 5 years. The Company relied upon the
exemptions from registration under Section 4(2) of the Securities Act
of 1933, including Regulation D and the guidance and interpretations
issued by the Staff of the Securities and Exchange Commission
thereunder in making these sales to a qualified institutional buyer.
On July 30, 1998 the Company's initial public offering was
declared effective by the Securities and Exchange Commission. In this
offering, the Company sold 3,850,000 shares of common stock at $8.00
per share. The Company received proceeds of $27.0 million (net), after
deducting underwriting discounts of $2.2 million and expenses related
to the offering. Upon completion of the initial public offering, all
outstanding shares of Series A Preferred Stock were converted to
1,217,903 shares of common stock and warrants for 308,982 shares of
common stock were exercised.
20
<PAGE> 21
The Company used all of the proceeds of its initial public
offering during the period from July 30, 1998 to June 30, 1999, as
follows:
1. $2.2 million for the repayment of indebtedness
outstanding under the Company's loan facility with
Sirrom Investments, Inc., and the Company's loan from
Citizens Bank.
2. $11.8 million for working capital and general
corporate purposes.
3. $13.0 million related to the acquisition of Banking
Solutions consisting of $10.7 million related to the
purchase of goodwill and $2.3 million related to
employee termination agreements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on May
21, 1999 for the following purposes:
1. to elect four Class I directors to serve for three
year terms and to elect one Class III director to
serve for a two year term
2. to consider and act upon the proposal to amend the
Company's Articles of Incorporation to increase the
maximum size of the board from 12 to 15 directors;
3. to consider and act upon the proposal to adopt the
Company's Director Stock Option Plan and to reserve
for issuance thereunder 250,000 shares; and
4. to ratify the appointment of Arthur Andersen LLP as
the Company's independent auditors for 1999.
Only shareholders of record at the close of business on April
15, 1999 were entitled to vote at the Annual Meeting. Proxies for the
meeting were solicited pursuant to the Georgia Business Corporation
Code, and there was no solicitation in opposition to management's
solicitations.
Proxies and ballots were received from the holders of
16,235,191 shares of the Company's common stock, representing 82.1% of
the outstanding shares of common stock.
The results were as follows:
1. The four individuals nominated to serve as Class I
directors and the one individual nominated to serve
as a Class III director were elected with the number
of votes for and withheld as indicated below:
21
<PAGE> 22
<TABLE>
<CAPTION>
CLASS I FOR WITHHELD
--------------------- ---------- --------
<S> <C> <C>
Frank W. Brown 16,226,791 8,400
J. Stanley Mackin 16,226,791 8,400
J. Daniel Speight, Jr. 16,226,791 8,400
Bahram Yusefzadeh 16,226,791 8,400
CLASS III
---------------------
John D. Schneider, Jr. 16,228,691 6,500
Continuing as directors are:
G. Lynn Boggs
Frank W. Brown
John W. Collins
Richardson M. Roberts
Joe M. Rodgers
Glenn W. Sturm
J. Stephen Turner
</TABLE>
Also, the shareholders approved the following matters with the
number of votes below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- --------- -------
<S> <C> <C> <C>
2. The proposal to amend the Company's
Articles of Incorporation 16,057,537 164,830 12,824
3. The proposal to adopt the Company's
Director Stock Option Plan 14,990,591 1,244,600 0
4. The proposal to ratify the Company's
appointment of Arthur Andersen LLP 16,227,847 0 7,344
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
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.**
22
<PAGE> 23
2.2 Escrow Agreement dated June 19, 1999 by and among Towne Services,
Inc., Dan Paul and Allen Merrill, each in their capacity as a
Stockholder Representative, and First Union National Bank.
3.1 Amended and Restated Articles of Incorporation, as filed with the
Secretary of the State of Georgia on July 29, 1998.*
3.2 Amended and Restated Bylaws, effective May 19,1998.*
3.3 Articles of amendment to the Amended and Restated Articles of
Incorporation of Towne Services Inc., as filed with the Secretary of
State of Georgia on May 21, 1999.*
3.4 Amendment to the Amended and Restated Bylaws of Towne Services Inc.,
effective May 21, 1999.*
3.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Towne Services Inc., as filed with the Secretary of
State of Georgia on June 11, 1999.*
4.1 See Exhibits 3.1 through 3.5 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws defining the
rights of the holders of Common Stock of the Company.
10.1 Sublease agreement by and among Technology Park/Atlanta, Inc. and
Towne Services dated March 9, 1999 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q filed on May 7, 1999).
10.2 Director Stock Option Plan, adopted April 15, 1999 (incorporated by
reference to Appendix B to the Company's definitive Proxy Statement
for its 1999 Annual Meeting filed on April 26, 1999).
10.3 Stock Purchase Warrant by and between Towne Services Inc., and
Synovus Financial Corporation dated June 16, 1999.
27.1 Financial Data Schedule (for SEC use only).
- -----------------
* Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-76859) as declared effective by the
Securities and Exchange Commission on June 23, 1999.
** Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-4 (No. 333-76493) as declared by effective by the
Securities and Exchange Commission on June 10, 1999.
B) REPORTS ON FORM 8-K
Form 8-K (No. 000-24695) filed with SEC on April 6, 1999 to report the
signing of Agreement and Plan of Merger by and among Towne Services,
Inc., Forseon Corporation and certain shareholders of Forseon on March
26, 1999.
23
<PAGE> 24
Form 8-K (No. 000-24695) filed with SEC on July 13, 1999 to report the
completion of the merger of Towne Services, Inc. with Forseon
Corporation, effective on June 30, 1999.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWNE SERVICES, INC.
August 13, 1999 /s/ Drew W. Edwards
- --------------- -------------------------------------------------
Date Drew W. Edwards
Chairman of the Board and Chief Executive Officer
(principal executive officer)
August 13, 1999 /s/ Bruce F. Lowthers, Jr.
- --------------- -------------------------------------------------
Date Bruce F. Lowthers, Jr.
Chief Financial Officer
(principal financial and accounting officer)
25
<PAGE> 1
EXHIBIT 2.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of June 29, 1999 (including the
exhibits and schedules attached hereto, this "AGREEMENT"), is by and among
Towne Services, Inc., a Georgia corporation (the "PARENT"), Dan Paul and Allen
Merrill, each in their capacity as a Stockholder Representative (collectively,
the "STOCKHOLDERS' REPRESENTATIVES") and First Union National Bank, a National
Banking Association (the "ESCROW AGENT").
W I T N E S S E T H :
WHEREAS, the Parent, Forseon Corporation, a Delaware corporation (the
"COMPANY") and certain of the stockholders of Company (the "MANAGEMENT
STOCKHOLDERS") have entered into an Agreement and Plan of Merger, dated as of
March 25, 1999 (including the exhibits, annexes, schedules, amendments and
attachments thereto, the "MERGER AGREEMENT"), pursuant to which the Parent has
agreed to acquire all of the capital stock of Company through the merger of TSI
Acquisition One, Inc., a Georgia corporation and wholly-owned subsidiary of
Parent, with and into Company; and
WHEREAS, it is contemplated under the Merger Agreement that the Parent
will deposit or cause to be deposited into escrow a certificate representing
ten percent (10%) of the Parent Common Stock to be issued in connection with
the Merger (the "ESCROW SHARES") to be held and disbursed by the Escrow Agent
in accordance with this Agreement; and
WHEREAS, pursuant to the terms of the Merger Agreement the Escrow
Shares are to be held by the Escrow Agent to satisfy any obligation of Company
and the Company Stockholders to indemnify Parent and the Parent Indemnified
Parties under the terms of the Merger Agreement; and
WHEREAS, the Parent and the Company desire to appoint the Escrow Agent
as escrow agent for the purpose of receiving, holding and distributing the
Escrow Fund (as defined below), and the Escrow Agent is willing to act as the
Escrow Agent subject to and in accordance with the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the agreements
contained herein, and intending to be legally bound hereby, the parties hereby
agree as follows:
1. Definitions. Capitalized terms used but not defined herein shall have
the meanings provided in the Merger Agreement. As used in this
Agreement, the following terms shall have the following meanings:
(a) "Distribution Date" shall mean that date which is one year
from the Effective Time of the Merger.
(b) "Value Per Share" shall mean the fair market value of a share
of Parent Common Stock at the Effective Time of the Merger.
<PAGE> 2
2. Appointment and Agreement of Escrow Agent. The Parent and the
Stockholders' Representatives (on behalf of themselves and all Company
Stockholders) hereby appoint the Escrow Agent to serve as, and the
Escrow Agent hereby agrees to act as, escrow agent upon the terms and
conditions of this Agreement.
3. Establishment of the Escrow Fund.
(a) Pursuant to Section 2.1(d) of the Merger Agreement, the
Parent shall deliver the Escrow Shares to the Escrow Agent on
the date hereof. The Escrow Agent shall hold the Escrow
Shares and any and all substitutions and replacements
thereof, all dividends, shares and other amounts issued with
respect thereto or earned thereon, and all cash and non-cash
proceeds from any sale or other disposition thereof, if any
(the "ESCROW FUND"), in escrow pursuant to this Agreement.
(b) Each of the Parent and the Stockholders' Representatives
confirms to the Escrow Agent and to each other that the
Escrow Fund is free and clear of all Liens except as may be
created or disclosed by this Agreement and the Merger
Agreement.
(c) The Escrow Agent acknowledges receipt of the Escrow Shares
and agrees to hold and disburse the Escrow Shares for the
benefit of Parent and the Company Stockholders, as the case
may be, in accordance with the provisions of this Agreement.
The portion of the Escrow Shares initially allocated to each
Company Stockholder is indicated on Exhibit A attached
hereto. Exhibit A shall be revised from time to time pursuant
to changes to the Escrow Fund made pursuant to Section 6 and
pursuant to distributions made in accordance with Section 4
below. The parties shall cooperate with Escrow Agent and
deliver to Escrow Agent such confirmations, certificates,
affirmations, information and other documents as Escrow Agent
shall reasonably request in the performance of its
obligations under this Agreement, including any and all such
items as Escrow Agent shall deem necessary to evidence
termination of this Agreement and to evidence the parties'
consent to the final distribution of the Escrow Fund in
accordance with the terms of this Agreement.
(d) The parties shall cooperate with each other to insure the
proper and timely disbursement of the Escrow Fund in
accordance with the terms of this Agreement.
4. Distributions from the Escrow Fund. The Escrow Agent shall make
distributions of the Escrow Fund in accordance with the following:
(a) Pursuant to the procedures set forth in this Agreement and
the Merger Agreement, the Escrow Agent shall distribute to
Parent, a number of Escrow Shares equal to the dollar amount
sought by Parent or any Parent Indemnified Parties divided by
the Value Per Share in respect of all Indemnifiable Damages
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<PAGE> 3
which may be owed to Parent or any other Parent Indemnified
Parties, as the case may be, as indicated on a Notice of
Claim submitted by Parent or any other Parent Indemnified
Parties in accordance with this Agreement, that arise out of
or result from any of the events listed in Sections 10.1(a),
(b) or (c) of the Merger Agreement. Claims under Notices of
Claims which are the subject of an objection by the
Stockholder Representatives shall be governed by Article 10
of the Merger Agreement and Section 4(g) hereof.
(b) In no event shall the actual damages chargeable by Parent or
any other Parent Indemnified Party for claims considered
"general contingencies" under a "pooling of interests" exceed
the product of (i) ten percent (10%) of the Value Per Share
multiplied by (ii) the number of shares of Parent Common
Stock issued as Merger Consideration. All "general
contingencies" shall be settled and resolved no later than
(i) 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, or (ii) one
year after the Effective Time for other items. All "specific
contingencies" shall be resolved as promptly as practicable;
however, the parties acknowledge that some specific
contingencies may not be resolved until after one year from
the Effective Time. In such event, a Notice of Claim shall be
submitted by Parent to the Escrow Agent (with a copy sent to
the Stockholders' Representatives) with respect to any
unresolved specific contingencies and the requisite number of
Escrow Shares (as provided in paragraph (e) below) shall be
held back in escrow beyond the Distribution Date until such
claims are resolved. Any such distribution shall be made 30
days after receipt by the Escrow Agent of such Notice of
Claims if the Escrow Agent does not receive a written
objection to such distribution from the Stockholder
Representatives within 30 days after receipt by the Escrow
Agent of such Notice of Claims. Claims under Notices of
Claims which are the subject of an objection by the
Stockholder Representatives shall be governed by Article 10
of the Merger Agreement and Section 4(g) hereof.
(c) The Escrow Agent shall distribute to the appropriate party in
accordance with a written disbursement notice signed by both
Parent and the Stockholder Representatives and delivered to
the Escrow Agent.
(d) The Escrow Agent shall distribute to Parent, a number of
Escrow Shares equal to the dollar amount awarded to Parent in
response to a Notice of Claim divided by the Value Per Share,
if such Notice of Claim is accompanied by and in accordance
with a final arbitration award or judgment of a court of
competent jurisdiction against the Company in favor of Parent
or the Parent Indemnified Parties.
(e) The Escrow Agent shall distribute to the Company Stockholders
on the Distribution Date, the Escrow Shares remaining
following any distributions under a., b., c. or d. above, if
any, less a number of Escrow Shares equal to the
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<PAGE> 4
quotient of the dollar amount of all pending and disputed
claims under all Notices of Claims divided by the Value Per
Share.
(f) Escrow Shares left following the Distribution Date shall be
distributed in accordance with a., b., c. and d. above, or to
the Company Stockholders upon delivery by a Stockholder
Representative of a request for distribution of the remaining
shares accompanied by a final arbitration award or judgment
of a court of competent jurisdiction dismissing all pending
and disputed claims.
(g) No later than 290 days subsequent to the Effective Time,
Parent shall deliver to the Stockholder Representatives a
list of all Indemnifiable Damages remaining subject to this
Agreement, and the total damages relating to each item (the
"CLAIMS SCHEDULE"). If the Stockholder Representatives
dispute the correctness of the Claims Schedule, they, acting
together, shall notify Parent of their objections within ten
(10) business days after delivery of the Claims Schedule and
shall set forth in reasonable detail in such notice the
reason for the Stockholder Representatives' objections. If
the Stockholder Representatives fail to deliver such notice
within such time period, the Company and the Company
Stockholders shall be deemed to have accepted Parent's
calculation of the Specified Liabilities and other items set
forth on the Claims Schedule. If the Stockholder
Representatives deliver such notice, Parent and the
Stockholder Representatives shall endeavor in good faith to
resolve their dispute concerning the Claims Schedule within
fifteen (15) business days after the receipt by Parent of
such notice. If they are unable to do so within such
15-business-day period, the dispute shall be submitted to an
audit partner experienced in the technology-based retail
inventory tracking and analysis industry of an independent
nationally-recognized accounting firm in the United States as
shall be mutually acceptable to Parent, on the one hand, and
the Stockholder Representatives, on the other hand (an
"INDEPENDENT ACCOUNTING FIRM"), whom the parties initially
designate to be PriceWaterhouseCoopers, LLP, who shall act as
an expert and not as an arbitrator, and who shall resolve the
dispute within 30 days of the submission of such dispute, or
if no such Independent Accounting Firm is available to a
mutually agreed neutral arbitrator (the "ARBITRATOR"). The
decision of the Independent Accounting Firm or the
Arbitrator, as the case may be, as to the Claims Schedule
shall be final and binding upon Parent and the Company
Stockholders. The expense of the Independent Accounting Firm
or the Arbitrator, as the case may be, shall be borne in
proportion to the difference between the final determined
amount of the Independent Accounting Firm or the Arbitrator,
as the case may be, and such amounts proposed by Parent, on
the one hand, and the Stockholder Representatives acting for
the Company Stockholders on the other hand. The Stockholder
Representatives and Parent shall cooperate with the other
party in the determination of the Claims Schedule, including
without limitation, allowing the Stockholder Representatives
access after the Effective Time to the books and records of
the Surviving Corporation and to the accounting and other
representatives and advisors of the Surviving
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<PAGE> 5
Corporation and its books and records for the purposes of
making such determination. Within three business days
following final determination of the Claims Schedule, the
Escrow Agent shall return to Parent that portion of the
Escrow Fund, valued at the Value Per Share, of Parent Common
Stock equal to the total Indemnifiable Damages listed on the
Claims Schedule and/or deliver the remaining portion of the
Escrow Fund to the Company Stockholders hereunder in
accordance with the written instructions of the Stockholders'
Representatives.
(h) If any certificate representing shares of Parent Common Stock
is to be made in a name other than that in which the
certificate theretofore surrendered for exchange is
registered, it shall be a condition of such exchange that the
certificate so surrendered be properly endorsed or otherwise
in proper form for transfer and that the person requesting
such transfer either pay to Parent any transfer or other
Taxes required by reason of the transfer to a person other
than the registered holder of the certificate surrendered or
establish to the satisfaction of Parent that such Tax has
been paid or is not payable.
(i) If the Merger Agreement is terminated, the Stockholders'
Representatives and the Parent shall notify the Escrow Agent
in writing to such effect, and the Escrow Agent shall,
immediately after its receipt of such notice, return all
contents of the Escrow Fund to Parent.
5. Suspension of Performance; Disbursement Into Court. If at any time
there shall exist any dispute among the Parent, Parent Indemnified
Parties, the Company, any of the Company Stockholders, and the Escrow
Agent, or between any of them, with respect to the holding or
disposition of any portion of the Escrow Shares or any other
obligations of the Escrow Agent under this Agreement, or if at any
time the Escrow Agent is unable to determine, to the Escrow Agent's
sole satisfaction, the proper disposition of any portion of the Escrow
Shares or the Escrow Agent's proper actions with respect to his
obligations under this Agreement, or if Parent and the Stockholder
Representatives have not within 30 days of the furnishing by the
Escrow Agent of a notice of resignation, appointed a successor escrow
agent to act under this Agreement, then the Escrow Agent may, in its
sole discretion:
(a) suspend the performance of any of its obligations (including
without limitation any disbursement obligations) under this
Agreement until such dispute or uncertainty shall be resolved
to the sole satisfaction of the Escrow Agent or until a
successor escrow agent shall have been appointed (as the case
may be); provided, however, that the Escrow Agent shall
continue to maintain the Escrow Fund and hold the
certificates for the Escrow Shares; and/or
(b) petition (by means of an interpleader action or any other
appropriate method) any court of competent jurisdiction in
any venue convenient to the Escrow Agent, for instructions
with respect to such dispute or uncertainty, and to the
extent required by law, deliver to such court, for holding
and disposition in
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<PAGE> 6
accordance with the instructions of such court, the
certificates for the Escrow Shares.
The Escrow Agent shall have no liability to the Parent, Parent
Indemnified Parties, Company, any of the Company Stockholders or any
other person with respect to any such suspension of performance or
disbursement into court, specifically including any liability or
claimed liability that may arise, or be alleged to have arisen, out of
or as a result of any delay in the disbursement of the Escrow Shares
or any delay in or with respect to any other action required or
requested of the Escrow Agent.
6. Dividends; Voting and Other Rights. Prior to disbursement from
the Escrow Fund, any and all cash dividends or other cash or non-cash
income or proceeds with respect to the Escrow Shares shall be paid
into and become part of the Escrow Fund and shall be disbursed in
accordance with Section 4 hereof in the same manner as the Escrow
Shares to which such dividends, income or proceeds relates. Each
Company Stockholder shall have the right to direct the Escrow Agent in
writing as to the exercise of voting rights with respect to his or her
Escrow Shares, and the Escrow Agent shall comply with any such
directions if received in a timely manner. In the absence of such
directions, the Escrow Agent shall not vote any Escrow Shares.
7. Investments.
(a) Subject to restrictions on transfer imposed by "pooling of
interests" and applicable law, the cash portion, if any, of
the Escrow Fund shall be invested and reinvested by the
Escrow Agent in Permitted Investments (as defined below) as
directed by the Stockholder Representatives. In giving such
instructions, the Stockholder Representatives shall undertake
in good faith to direct the making of Permitted Investments
that mature or are subject to redemption on or prior to the
date or dates on which the Stockholder Representatives
reasonably anticipate that distributions will be required
from the Escrow Fund, but the Escrow Agent shall, upon
written instructions from the Stockholder Representatives,
have the authority to liquidate any investments in order to
make distributions pursuant to this Agreement. The Escrow
Agent shall have no liability for losses arising from
liquidations of investments. The Escrow Agent may make all
Permitted Investments through its own bond department or the
trust department of any bank or trust company under common
control with the Escrow Agent or through the trust department
of any bank with which the Escrow Agent has a correspondent
relationship.
(b) For the purposes of this Agreement, "Permitted Investments"
shall be denominated in U.S. dollars and shall be limited to:
(i) direct general obligations of, or obligations the
payment of principal of and interest on which are
unconditionally guaranteed by, the United
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<PAGE> 7
States of America, any agency thereof, any State, or
any political subdivision or other agency thereof;
(ii) certificates of deposit or other evidences of
indebtedness issued by any bank which is insured by
the Federal Deposit Insurance Corporation;
(iii) prime commercial paper (including variable demand
notes) of companies whose commercial paper is rated
A-1 or P-1 by Moody's or Standard & Poor's;
(iv) repurchase agreements collateralized by United
States treasuries; and
(v) A money market fund maintained by the Escrow Agent.
In the absence of written instructions, the funds will be
invested in accounts or funds described in clause (v).
(c) All income and profits arising from Permitted Investments of
all or any portion of the Escrow Fund shall be reinvested by
the Escrow Agent and made a part of the principal of the
Escrow Fund. Such income and profits shall be distributed to
the parties on the Distribution Date as set forth in Section
4 hereof.
8. Stock Splits; Stock Dividends. In the event of any stock split or
stock dividend with respect to Parent Common Stock that becomes
effective during the term of this Agreement, the additional shares so
issued with respect to the Escrow Shares shall be added to the Escrow
Shares and subject to the escrow covered by this Agreement and any
other references herein to a specific number of shares of Parent
Common Stock, the Value Per Share, and any other references herein to
prices for or the number of shares of Parent Common Stock shall be
adjusted accordingly.
9. Maintenance of the Escrow Fund; Termination of the Escrow Fund. The
Escrow Agent shall continue to maintain the Escrow Fund and hold the
Escrow Shares until the earlier of (i) the time at which the Escrow
Fund is disbursed in accordance with Section 4 hereof and (ii) the
termination of this Agreement. Notwithstanding the foregoing, the
Escrow Agent shall have the power to release and transfer portions of
the Escrow Fund whenever the Escrow Agent shall be required to release
all or any portion of the Escrow Fund pursuant to Section 4 hereof.
10. Assignment; Successors. This Agreement may not be assigned by
operation of law or otherwise without the express written consent of
the other parties hereto (which consent may be granted or withheld in
the sole discretion of such other parties); provided, however, that
the Parent may, without the consent of the other parties, assign this
Agreement prior to the disbursement of the Escrow Fund and delivery of
the Escrow Fund pursuant to Section 4 hereof to an entity who controls
Parent or to an entity controlled by Parent to which the Parent has
assigned any of its rights under the Merger Agreement, but no such
assignment shall relieve the Parent of any of its obligations
7
<PAGE> 8
under this Agreement. This Agreement shall be binding upon and inure
solely to the benefit of the parties hereto and their permitted
assigns.
11. Escrow Agent.
(a) Except as expressly contemplated by this Agreement or by
written instructions given by a Company Stockholder after
Parent has advised Escrow Agent in writing that the ASR 135
restriction period has expired, the Escrow Agent shall not
sell, transfer or otherwise dispose of in any manner all or
any portion of the Escrow Fund, except pursuant to an order
of a court of competent jurisdiction.
(b) The duties and obligations of the Escrow Agent shall be
determined solely by this Agreement, and the Escrow Agent
shall not be liable except for the performance of such duties
and obligations as are specifically set forth in this
Agreement. The Escrow Agent shall neither be responsible for
or under, nor chargeable with knowledge of the terms and
conditions of, any other agreement, instrument or document in
connection herewith, including but not limited to the Merger
Agreement.
(c) In the performance of its duties hereunder, the Escrow Agent
shall be entitled to rely upon any document, instrument or
signature believed by it in good faith to be genuine and
signed by any party hereto or an authorized officer or agent
thereof, and shall not be required to investigate the truth
or accuracy of any statement contained in any such document
or instrument. The Escrow Agent may assume that any person
purporting to give any notice in accordance with the
provisions of this Agreement has been duly authorized to do
so. The Escrow Agent shall have no responsibility for the
contents of any such writing contemplated herein and may
conclusively rely without any liability upon the contents
thereof.
(d) The Escrow Agent shall not be liable for any error of
judgment, or any action taken, suffered or omitted to be
taken, hereunder except in the case of its gross negligence,
bad faith or willful misconduct. The Escrow Agent may consult
with counsel of its own choice and shall have full and
complete authorization and protection for any action taken or
suffered by it hereunder in good faith and in accordance with
the opinion of such counsel.
(e) The Escrow Agent shall have no duty as to the collection or
protection of the Escrow Fund or income thereon, nor as to
the preservation of any rights pertaining thereto, beyond the
safe custody of any such property actually in its possession.
(f) The Escrow Agent shall be paid its fees and shall be
reimbursed upon request for all expenses, disbursements and
advances, including reasonable fees of outside counsel, if
any, incurred or made by it in connection with the
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<PAGE> 9
preparation of this Agreement and the carrying out of its
duties under this Agreement. All such fees and expenses shall
be the responsibility of the Parent.
(g) To the extent that the Escrow Agent becomes liable for the
payment of Taxes, including withholding Taxes, in respect of
income derived from the investment of funds held hereunder
and/or possession of the Escrow Shares or any payment made
hereunder, the Escrow Agent may pay such Taxes. The Escrow
Agent may withhold from any payment of monies held by it
hereunder such amount, as directed by the Company and the
Parent in writing, to be sufficient to provide for the payment
of such Taxes not yet paid, and may use the sum withheld for
that purpose. Each of the Company and the Parent shall furnish
to Escrow Agent such information as may be reasonably
requested by the Escrow Agent so that the Escrow Agent may
prepare and file with the Internal Revenue Service any
required Tax reports.
(h) Parent shall reimburse and indemnify the Escrow Agent, its
employees, directors, officers and agents for, and hold each
harmless against, any loss, liability or expense, including,
without limitation, reasonable attorneys' fees, incurred
without gross negligence, bad faith or willful misconduct on
the part of the Escrow Agent arising out of, or in connection
with the acceptance of, or the performance of, its duties and
obligations under this Agreement; provided that the Company
Stockholders shall reimburse and indemnify the Escrow Agent
for, and hold it harmless against, any such loss, liability
or expense incurred as a result of gross negligence, bad
faith or willful misconduct on the part of Company, the
Company Stockholders or the Stockholders' Representatives.
Promptly after the receipt by the Escrow Agent of notice of
any demand or claim or the commencement of any action, suit
or proceeding, the Escrow Agent shall, if a claim in respect
thereof is to be made against any of the other parties
hereto, notify such other parties thereof in writing; but the
failure by the Escrow Agent to give such notice shall not
relieve such party from any liability which it may have to
the Escrow Agent hereunder, except to the extent such
indemnifying party is materially prejudiced by such failure.
For the purposes hereof, the term "expense or loss" shall
include all amounts paid or payable to satisfy any claim,
demand or liability, or in settlement of any claim, demand,
action, suit or proceeding settled with the express written
consent of the indemnifying party, and all reasonable costs
and expenses, including, but not limited to, counsel fees and
disbursements paid or incurred in investigating or defending
against any such claim, demand, action, suit or proceeding.
The Escrow Agent shall have no right of setoff under this
Agreement or otherwise against amounts in the Escrow Fund.
(i) The Escrow Agent may at any time resign by giving 20 business
days' prior written notice of resignation to the Stockholders'
Representatives and the Parent. The Stockholders'
Representatives and the Parent may at any time jointly remove
the Escrow Agent by giving 10 business days' prior written
notice signed by each of them to the Escrow Agent. If the
Escrow Agent shall
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<PAGE> 10
resign or be removed, a successor Escrow Agent, which shall
be a bank or trust company having assets in excess of $1
billion, shall be appointed by the Stockholders'
Representatives and the Parent by written instrument executed
by the Stockholders' Representatives and the Parent and
delivered to the Escrow Agent and to such successor Escrow
Agent and, thereupon, the resignation or removal of the
predecessor Escrow Agent shall become effective and such
successor Escrow Agent, without any further act, deed or
conveyance, shall become vested with all right, title and
interest to all cash and property held hereunder of such
predecessor Escrow Agent, and such predecessor Escrow Agent
shall, on the written request of the Stockholders'
Representatives, the Parent or the successor Escrow Agent,
deliver to such successor Escrow Agent all the right, title
and interest hereunder in and to the Escrow Fund and the
Escrow Shares of such predecessor Escrow Agent and all other
rights hereunder of such predecessor Escrow Agent. If no
successor Escrow Agent shall have been appointed within 20
business days of a notice of resignation by the Escrow Agent,
the Escrow Agent's sole responsibility shall thereafter be to
hold the Escrow Fund and the Escrow Shares until its receipt
of designation of a successor Escrow Agent, and the Escrow
Agent shall be entitled to apply to a court of competent
jurisdiction for the appointment of a successor. Upon its
resignation and delivery of the Escrow Fund and the Escrow
Shares as set forth above, the Escrow Agent shall be
discharged from any and all further obligations arising in
connection with the escrow contemplated by this Agreement.
12. Termination. This Escrow Agreement shall terminate on the date on
which there is no property remaining in the Escrow Fund and the Escrow
Shares have been delivered or returned in accordance with Section 4
hereof; provided that the rights of the Escrow Agent and the other
parties hereto under Section 4 hereof shall survive the termination
hereof and the resignation or removal of the Escrow Agent; provided
further that nothing herein shall relieve any party from liability for
any breach of this Agreement.
13. Further Assurances. From time to time on and after the date hereof,
the other parties hereto shall deliver or cause to be delivered to the
Escrow Agent such further documents and instruments and shall do and
cause to be done such further acts as the Escrow Agent shall
reasonably request (it being understood that the Escrow Agent shall
have no obligation to make any such request) to carry out more
effectively the provisions and purposes of this Agreement, to evidence
compliance herewith or to secure itself that it is protected in acting
hereunder.
14. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or
made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, by courier service, by telecopy or by
registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the following addresses (or at
such other address for a party as shall be specified in a notice given
in accordance with this Section 14):
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if to the Parent:
Towne Services, Inc.
3950 Johns Creek Court, Suite 100
Suwanee, GA 30024
Telecopy: 678-475-5252
Attention: Drew W. Edwards,
Chief Executive Officer
with a copy (which shall not constitute notice) to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, Suite 1400
Atlanta, GA 30309
Telecopy: (404) 817-6050
Attention: Susan L. Spencer, Esq.
if to the Stockholders' Representatives:
Forseon Corporation
6600 Jurupa Avenue
Riverside, CA 92504
Telecopy: (909) 689-4124
Attention: Allen Merrill, Senior Vice President
and Chief Financial Officer
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.
if to the Escrow Agent, to:
First Union National Bank
999 Peachtree Street, NE
Eleventh Floor
Atlanta, GA 30309
Telecopy: (404) 827-7305
Attention: Mr. Brian Justice
15. Headings. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.
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16. Severability. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public
policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and
legal substance of the transactions contemplated by this Agreement is not
affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order
that the transactions contemplated by this Agreement are consummated as
originally contemplated to the greatest extent possible.
17. Entire Agreement. This Agreement and the Merger Agreement constitute the
entire agreement of the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and undertakings, both written
and oral, among the Company, the Parent and the Escrow Agent with respect
to the subject matter hereof.
18. No Third Party Beneficiaries. This Agreement is for the sole benefit of
the parties hereto, their permitted assigns and the Company Stockholders
and nothing herein, express or implied, is intended to or shall confer
upon any other Person any legal or equitable right, benefit or remedy of
any nature whatsoever under or by reason of this Agreement.
19. Amendment. This Agreement may not be amended or modified except: (i) by an
instrument in writing signed by, or on behalf of, the Company, the Parent
and the Escrow Agent; or (ii) by a waiver in accordance with Section 20
hereof.
20. Waiver. Any party hereto (the "WAIVING PARTY") may: (i) extend the time
for the performance of any obligation or other act of any other party
hereto owed to the Waiving Party; or (ii) waive compliance with any
agreement or condition contained herein (it being understood and agreed
that such an extension or waiver shall not constitute, by itself, an
extension or waiver by any other party hereto of any such obligation, act,
agreement or condition owed to, or for the benefit of, such third party).
Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party or parties to be bound thereby.
Any waiver of any term or condition shall not be construed as a waiver of
any subsequent breach or a subsequent waiver of the same term or
condition, or a waiver of any other term or condition, of this Agreement.
The failure of any party to assert any of its rights hereunder shall not
constitute a waiver of any of such rights.
21. Governing Law. This Agreement shall be governed by the laws of the State
of Georgia. All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined in any Georgia state or federal
court and the parties hereto irrevocably submit
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<PAGE> 13
to the jurisdiction of such courts and waive any defense of an
inconvenient forum to the maintenance of any such action or
proceeding.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed to be an
original but all of which when taken together shall constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Escrow Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
TOWNE SERVICES, INC.
By: /s/ Bruce F. Lowthers, Jr.
-------------------------------
Name: Bruce F. Lowthers, Jr.
Title: Chief Financial Officer
STOCKHOLDERS' REPRESENTATIVE
/s/ Dan Paul
-------------------------------
Dan Paul
/s/ Allen Merrill
-------------------------------
Allen Merrill
FIRST UNION NATIONAL BANK
By: /s/ Brian K. Justice
-------------------------------
Name: Brian K Justice
Title: Assistant Vice President
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Forseon Corporation acknowledges and agrees to the foregoing provisions of this
Escrow Agreement and hereby constitutes and appoints the Escrow Agent as its
attorney-in-fact for the purpose of effecting any and all transfers of any
portion of the Escrow Fund contemplated or required by this Agreement. Pursuant
to this authority, the Escrow Agent shall have authority to take such action
and execute on behalf of Company such documents as may be necessary to effect
transfers of Escrow Shares or other property in the Escrow Fund, including
without limitation, stock powers and transfer orders.
FORSEON CORPORATION
By: /s/ Allen Merrill
----------------------------
Name: Allen Merrill
Title: Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.3
NEITHER THIS WARRANT NOR AND ANY WARRANT SHARES ACQUIRED FROM THE EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY SUCH WARRANT
SHARES MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION UNDER SUCH ACT AND APPLICABLE STATE SECURITIES AND BLUE
SKY LAWS OR EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT IS NONTRANSFERABLE
AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, EXCEPT AS
PERMITTED HEREIN.
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT (the "Warrant") is made and entered into
as of June 16, 1999 (the "Issuance Date"), by and between, TOWNE SERVICES,
INC., a Georgia corporation (the "Corporation"), and SYNOVUS FINANCIAL CORP., a
Georgia corporation (the "Warrantholder").
W I T N E S S E T H:
WHEREAS, the Corporation desires to grant the Warrantholder warrants
to purchase shares of the Corporation's Common Stock, no par value per share
(the "Common Stock"), upon the terms and conditions herein contained and
pursuant to the Stock Purchase Agreement of even date herewith between the
parties;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, and of other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT OF WARRANT. Subject to the terms and conditions of this
Warrant, the Corporation hereby grants to the Warrantholder the right to
purchase 30,000 shares of Common Stock (the "Warrant Shares").
2. EXERCISE PRICE. The purchase price (the "Exercise Price") for
each Warrant Share initially shall be $9.08. The Exercise Price shall be
subject to adjustment as provided in Section 6 below.
3. EXERCISE OF WARRANT.
(a) To the extent that the Warrant has become and remains
exercisable it may be exercised by the Warrantholder delivering to the
Corporation a written notice of exercise signed by the Warrantholder, in
substantially the form attached hereto as EXHIBIT A (a "Notice of Exercise"),
together with, at the option of the Warrantholder: (i) a check payable to the
Corporation in the amount of the total purchase price for the Warrant Shares to
be purchased pursuant to the Notice of Exercise; (ii) shares of Common Stock or
other security convertible into Common Stock duly endorsed for transfer to the
Corporation and owned by the Warrantholder; (iii) by authorization to the
Corporation to withhold shares of Common Stock otherwise issuable upon exercise
of the Warrant; or (iv) any combinations of (i), (ii) and (iii) of this Section
3(a). In cases of exercise whereby the Warrantholder tenders Common Stock or
other stock to the Corporation or otherwise withholds Common Stock pursuant to
provisions (ii) or (iii) of this Section 3(a), the Fair Market Value (as
defined below) on the date of exercise of the Common Stock tendered to the
Corporation or authorized to be withheld upon exercise of the Warrant shall be
credited against the Exercise Price of the Common Stock for which a Notice of
Exercise has been provided
<PAGE> 2
(however, the Company shall not be obligated to issue any fractional shares or
to make any cash payments in consideration of any excess of the aggregate Fair
Market Value of shares transferred or withheld over the aggregate Exercise
Price).
(1) "Fair Market Value" on any date shall mean:
(i) the closing sales price of the Common
Stock, regular way, on such date on NASDAQ
or such other national securities exchange
or market having the greatest volume of
trading in the Common Stock during the
thirty-day period preceding the date the
value is to be determined or, if such
exchange was not open for trading on such
date, the next preceding date on which it
was open; (ii) if the Common Stock is not
traded on any national securities exchange,
the average of the closing high bid and low
asked prices of the Stock on the
over-the-counter market on the day such
value is to be determined, or in the
absence of closing bids on such day, the
closing bids on the next preceding day on
which there were bids; or (iii) if the
Common Stock also is not traded on the
over-the-counter market, the fair market
value as determined in good faith by the
Board of Directors (the "Board") or the
Executive Committee (the "Committee") of
the Corporation based on such relevant
facts as may be available to the Board or
Committee, which may include opinions of
independent experts, the price at which
recent sales have been made, the book value
of the Common Stock, and the Company's
current and future earnings.
(b) The Warrant shall not become exercisable with respect
to the Warrant Shares until 12 months following the anniversary of the Issuance
Date. Thereafter, this Warrant shall be exercisable, in whole or in part as set
forth herein, during the term of the Warrant.
(c) Within 30 days after the proper exercise of the
Warrant as herein provided, the Corporation shall deliver to the Warrantholder
a certificate or certificates for the Warrant Shares being issued in the name
of the Warrantholder and in such denominations as are requested by the
Warrantholder.
(d) The Corporation covenants and agrees that all Warrant
Shares which may be issued upon exercise of the Warrant shall, upon issuance
and payment therefor, be legally and validly issued and outstanding, fully paid
and nonassessable, and free from all liens, claims and encumbrances, except
restrictions imposed by applicable securities laws, the Corporation's Amended
and Restated Articles of Incorporation and this Warrant. The Corporation shall
at all times reserve and keep available for issuance upon the exercise of the
Warrant such number of authorized but unissued shares of Common Stock as will
be sufficient to permit the exercise in full of the Warrant.
4. TERM OF WARRANT. The term of the Warrant shall continue in
effect until the earlier of: (i) the date on which the Warrant has been
exercised; or (ii) June 30, 2004.
5. CONSENT TO TRANSFER. Unless the Corporation consents thereto
in writing, this Warrant and all rights hereunder are nontransferable and
nonassignable by the Warrantholder, other than transfers to the partners,
wholly-owned subsidiaries or other affiliates of such Warrantholder. Any
transfer or attempted transfer except pursuant to the preceding sentence shall
be null and void and of no effect whatsoever.
2
<PAGE> 3
6. ADJUSTMENTS.
(a) If, prior to the termination of the Warrant as
provided in Section 4(a) hereof:
(i) The number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, or other similar
event, the Exercise Price shall be proportionately reduced and the
number of Warrant Shares that have not theretofore been purchased by
the Warrantholder shall be proportionately increased.
(ii) The number of outstanding shares of Common
Stock is decreased by a combination or reclassification of shares, or
other similar event, the Exercise Price shall be proportionately
increased and the number of Warrant Shares that have not theretofore
been purchased by the Warrantholder shall be proportionately reduced.
If any adjustment under this Section 6(a) would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded. In lieu of any fractional Warrant Share
to which the Warrantholder would otherwise be entitled, the Corporation shall
make a cash payment equal to the fair market value of such fractional Warrant
Share, as determined in good faith by the board of directors of the
Corporation.
(b) If, prior to the termination of the Warrant as
provided in Section 4(a) hereof, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Corporation or another entity, then the Warrantholder shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified in this Warrant and in lieu of the Warrant
Shares immediately theretofore purchasable and receivable upon the exercise of
the Warrant, such shares of stock and securities as may be issued or payable
with respect to or in exchange for the number of Warrant Shares immediately
theretofore purchasable and receivable upon the exercise of the Warrant had
such merger, consolidation, exchange of shares, recapitalization or
reorganization not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of the Warrantholder to
the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Exercise Price and of the number of shares purchasable
upon the exercise of the Warrant) shall thereafter be applicable, as nearly as
may be practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The foregoing notwithstanding, in the
event of a merger or consolidation in which the Corporation is not the
surviving entity, if the Corporation concludes that it will be unable to
satisfy the conditions of this subsection (b) without a material adverse effect
on the terms of such proposed transaction, then the Corporation shall have the
option, prior to or contemporaneously with the closing of such merger or
consolidation, to purchase the Warrant from the Warrantholder at its then fair
value, determined with regard to both the spread between the Exercise Price and
the value of the consideration to be received in the transaction and the
remaining term of the Warrant. The Corporation and the Warrantholder shall
agree on such fair value or, in the event they are unable to agree, shall
submit the question of fair value to an investment banking firm to be selected
by the Corporation, with the cost of such investment banking firm to be paid by
the Corporation.
7. INVESTMENT REPRESENTATION. The Warrantholder is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
of 1933, as amended (the "Act"). As a condition to the issuance of Warrant
Shares hereunder, the Warrantholder represents to the Corporation that the
Warrant Shares Warrantholder will acquire pursuant to such exercise are being
purchased for
3
<PAGE> 4
Warrantholder's own account for investment purposes only and not with a present
view to resale or a distribution thereof, unless the Warrantholder delivers to
the Corporation an opinion of counsel acceptable to the Corporation stating
that such a representation is not required under the Act, or any state
securities laws. The Warrantholder acknowledges that the Warrant Shares may be
"restricted securities" as defined in the Act and that such Warrant Shares may
not be able to be resold unless such resale is registered under the Act and
applicable state securities laws or unless an exemption is available. The
Warrantholder acknowledges that Warrantholder has no rights to cause the
registration of the Warrant Shares.
8. NO RIGHTS AS A SHAREHOLDER. The Warrantholder shall not have
any interest in or shareholder rights with respect to any shares of Common
Stock which are subject to the Warrant until such shares have been issued and
delivered to the Warrantholder in accordance with this Warrant.
9. TAXES. As a condition to the issuance of Warrant Shares
hereunder, the Corporation may withhold, or require the Warrantholder to pay or
reimburse the Corporation for, any taxes which the Corporation determines are
required to be withheld under federal, state or local law in connection with
the exercise of the Warrant.
10. HEIRS AND SUCCESSORS. This Warrant and all terms and
conditions hereof shall be binding upon the Corporation and its successors and
assigns and upon the Warrantholder and its successors and permitted assigns.
11. GOVERNING LAW. This Warrant shall be governed by, and
construed and enforced in accordance with, the laws of the State of Georgia
without regard to the principles of conflicts of laws.
12. NOTICES. All notices, requests and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given and received when delivered in person, when delivered by
overnight delivery service, or three business days after being mailed by
registered or certified mail, postage prepaid, return receipt requested, to the
following addresses (or to such other address as one party may from time to
time designate in writing to the other party hereto):
If to the Corporation: Towne Services, Inc.
3950 Johns Creek Court, Suite 100
Suwanee, Georgia 30024
Attn: Chief Financial Officer
If to the Warrantholder: Synovus Financial Corp.
901 Front Avenue, Suite 202
Columbus, GA 31901
Attn: President
13. ENTIRE AGREEMENT. This Warrant and the related Stock Purchase
Agreement and Amended and Restated Articles of Incorporation of the Corporation
in the form filed with the Secretary of State of the State of Georgia
(collectively, the "Related Documents") constitute the full and entire
agreement and understanding of the parties to this Warrant with respect to the
subjects hereof and thereof, and supersede all previous discussions and
agreements, if any, of the parties hereto. No party shall be liable for or
bound in any other manner by any representations, warranties, covenants or
agreements except as specifically set forth in this Warrant and the Related
Documents.
4
<PAGE> 5
14. SEVERABILITY. The provisions of this Warrant, and of each
separate section and subsection, are severable, and if any one or more
provisions may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any unenforceable provision to the
extent enforceable, shall nevertheless be binding and enforceable.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be
executed by its duly authorized officer, and the Warrantholder has executed
this Warrant, as of the Issuance Date.
TOWNE SERVICES, INC.
By: /s/ Henry M. Baroco
-----------------------------------------
Name: Henry M. Baroco
----------------------------------
Title: President/COO
----------------------------------
WARRANTHOLDER:
SYNOVUS FINANCIAL CORP.
By: /s/ Kathleen Moates
-----------------------------------------
Name: Kathleen Moates
----------------------------------
Title: Senior VP
----------------------------------
5
<PAGE> 6
EXHIBIT A
NOTICE OF EXERCISE
[DATE]
Towne Services
3950 Johns Creek Court, Suite 100
Suwanee, Georgia 30024
Attn: Chief Financial Officer
Re: Exercise of Stock Purchase Warrant
Dear Sir:
The undersigned, _____________________, pursuant to that certain Stock
Purchase Warrant, dated as of June _____, 1999, by and between Towne Services,
Inc. (the "Corporation") and the undersigned (the "Warrant"), hereby exercises
the Warrant for ______________ Warrant Shares, subject to the terms and
conditions of the Warrant. Accompanying this Notice is: (i) a check in the
amount of $________________ payable to the Corporation; (ii) _______________
shares of the Company's Common Stock presently owned by the undersigned and
duly endorsed or accompanied by stock transfer powers, having an aggregate Fair
Market Value (as defined in the Warrant) as of the date hereof of
$________________; (iii) authorization to withhold ___________________ shares
of Common Stock otherwise issuable upon exercise of the Warrant (which
authorization is given pursuant to my signature below); or (iv) any
combinations of (i), (ii) and (iii) of this Notice of Exercise, such amounts or
withholdings being equal, in the aggregate, to the Exercise Price set forth in
Section 2 of the Warrant multiplied by the number of shares of Common Stock
being acquired hereby (in each instance subject to appropriate adjustment
pursuant to Section 6 of the Warrant).
Very truly yours,
SYNOVUS FINANCIAL CORP.
By:
-----------------------------------------
[Name]
[Title]
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF TOWNE SERVICES INC FROM FORM 10-Q FOR THE SIX MONTHS ENDED JUNE
30, 1999 (FOR SEC USE ONLY) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 32,333,082
<SECURITIES> 0
<RECEIVABLES> 7,619,446
<ALLOWANCES> (428,792)
<INVENTORY> 0
<CURRENT-ASSETS> 40,778,000
<PP&E> 9,199,692
<DEPRECIATION> (2,092,008)
<TOTAL-ASSETS> 63,531,131
<CURRENT-LIABILITIES> 7,857,576
<BONDS> 0
0
1,880,000
<COMMON> 82,042,453
<OTHER-SE> (29,068,215)
<TOTAL-LIABILITY-AND-EQUITY> 63,531,131
<SALES> 15,427,428
<TOTAL-REVENUES> 15,427,428
<CGS> 3,115,856
<TOTAL-COSTS> 20,935,152
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (112,741)
<INCOME-PRETAX> (5,394,983)
<INCOME-TAX> (354,000)
<INCOME-CONTINUING> (5,040,983)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,040,983)
<EPS-BASIC> (.23)
<EPS-DILUTED> (.23)
</TABLE>
