<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1997
REGISTRATION NO. 333-23717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NET.B@NK, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 6712 58-2224352
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
7000 PEACHTREE DUNWOODY ROAD
BUILDING 10, SUITE 300
ATLANTA, GEORGIA 30328
(770) 392-4990
------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DONALD S. SHAPLEIGH, JR.
7000 PEACHTREE DUNWOODY ROAD
BUILDING 10, SUITE 300
ATLANTA, GEORGIA 30328
(770) 392-4990
------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
WALTER G. MOELING, IV, ESQ. ALAN J. PRINCE, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP KING & SPALDING
191 Peachtree Street, N.E. 191 Peachtree Street, N.E.
Atlanta, Georgia 30303 Atlanta, Georgia 30303
(404) 572-6600 (404) 572-4600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE:
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
3,450,000
Common Stock, $.01 par value Shares $12.00 $41,400,000 $12,546
</TABLE>
(1) Includes 450,000 shares that may be purchased pursuant to the over-allotment
option granted to the Underwriters.
(2) Estimated solely for the purpose of determining the registration fee.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NET.B@NK, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart Front of the Registration Statement and
Outside Front Cover Page of Prospectus............. Cover Page; Cross-Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information and Risk Factors Summary; Risk
Factors............................................ Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Cover Page of Prospectus; Principal Shareholders
8. Plan of Distribution................................. Underwriting
9. Description of the Securities........................ Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; Dividend Policy;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Shareholders; Underwriting; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Part II of the Registration Statement
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 24, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
[LOGO]
3,000,000 SHARES
NET.B@NK, INC.
COMMON STOCK
All of the 3,000,000 shares of Common Stock, $.01 par value ("Common
Stock"), offered hereby (the "Offering") are being sold by Net.B@nk, Inc., a
Georgia corporation (the "Company"). Prior to this Offering, there has been no
public market for the Common Stock. The initial public offering price is
estimated to be between $10.00 and $12.00 per share. See "Underwriting" for
information relating to factors to be considered in determining the initial
public offering price.
The Common Stock has been approved for listing on The Nasdaq SmallCap Market
under the symbol "NTBK."
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.................. $ $ $
Total(3)................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company and the Selling Shareholder named herein (the "Selling
Shareholder") have granted to the several Underwriters an option for 30 days
to purchase up to an additional 300,000 and 150,000 shares of Common Stock,
respectively, at the Price to Public, less Underwriting Discount, solely to
cover over-allotments, if any. If such option is exercised in full, the
Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Shareholder will be $ , $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made on or about
, 1997.
------------------------
MORGAN KEEGAN & COMPANY, INC. INTERSTATE/JOHNSON LANE
Corporation
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
Bank Customer Interfaces
Customers can access the Bank on a seven-day-a-week, 24-hour-a-day basis
from any personal computer, wherever located, by means of a secure Web browser
or by ATM, telephone, fax or U.S. mail. The chart depicts these methods of
access as well as the Bank's relationships with its primary service and
technology providers.
[FLOW CHART APPEARS HERE DESCRIBING THE VARIOUS METHODS BY WHICH CUSTOMERS
INTERFACE WITH THE BANK]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE COMMON
STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, THE
INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE 33.125-FOR-ONE
STOCK SPLIT EFFECTED AS A STOCK DIVIDEND ON MARCH 17, 1997 AND ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
Upon completion of the Offering, Net.B@nk, Inc. (the "Company") will own and
operate the Atlanta Internet Bank (the "Bank"), which provides convenient,
cost-effective and secure banking services to the growing number of consumers
utilizing the Internet for commercial and financial services. Customers can
access the Bank on a seven-day-a-week, 24-hour-a-day ("7x24") basis from any
personal computer ("PC"), wherever located, by means of a secure Web browser or
by ATM, telephone or U.S. mail. The Company has assembled a management team with
experience in both banking and technology to implement its strategy to become a
leading provider of financial services through the Internet.
The Bank commenced operations in October 1996 as a service of Carolina First
Bank ("CFB"), a Greenville, South Carolina-based bank. As of July 8, 1997, the
Bank had 2,680 accounts and approximately $43.6 million in deposits. The Bank
has operated under the trade name "Atlanta Internet Bank" pending regulatory
approval of the transactions described in "The Reorganization."
The Company's objective is to offer a broad range of banking and financial
service products through the Internet and alternative delivery channels.
Customer convenience and operating efficiency are two key components of the
Company's strategy. The Bank does not incur the cost of supporting a branch
system, which management believes will benefit customers through the Bank's
ability to offer attractive deposit rates. Management believes the Bank's lower
overhead, customer convenience and ability to provide a broad choice of products
and services cost-effectively through alternative delivery systems give the Bank
a competitive advantage over traditional banks and banks offering PC-based home
banking.
In the initial phase of the Company's operations, management concentrated
its efforts on developing, testing and implementing an Internet banking
platform. Once the platform structure was in place, management established
deposit-oriented products that include electronic bill paying, interest checking
and money market accounts and certificates of deposit. By the end of 1997,
management intends to offer a broad array of consumer loan products, such as
personal credit lines, mortgages, home equity and secured loans, credit cards
and other fee generating products. Management also plans to continue to pursue
other revenue generating opportunities through partnerships and strategic
alliances where appropriate.
Management intends to implement the following strategies in order to become
a leading provider of financial services through the Internet. No assurance can
be given, however, that the Company will be successful in implementing these
strategies or in achieving its stated objectives.
- LEVERAGE LOW COST STRUCTURE. The absence of a branch system and the
Company's low cost per transaction enable it to offer attractive deposit
rates without significantly impacting profitability.
- OUTSOURCE OPERATIONAL FUNCTIONS. The Company has entered into agreements
with companies that provide a variety of specialized services and
technologies to the Bank. In each of these relationships, the Bank
benefits from the service provider's expertise and economies of scale
while retaining the flexibility to take advantage of changes in available
technology without impacting customer service.
- PROVIDE CONVENIENT, REAL-TIME TRANSACTIONS. Management believes the Bank
provides its customers with a higher level of convenience than can be
achieved in a traditional branch or through PC-based home banking. The
Internet allows Bank customers to conduct banking activities on a
real-time 7x24 basis from any PC, wherever located, using a secure Web
browser. This technology gives
3
<PAGE>
Internet banking an advantage over PC-based home banking, which utilizes
PC-based software, requires repeated downloading and backup and limits the
user to a specific PC.
- EMPLOY ADVANCED SECURITY. The Bank uses sophisticated technology to
provide what management believes to be among the most advanced security
measures currently available in the electronic banking industry. All
banking transactions are encrypted and routed from the Internet server
through a "firewall" that limits access to the Bank server. The Bank's
systems automatically detect attempts by third parties to access other
users' accounts and feature a high degree of physical security, secure
modem access, service continuity and transaction monitoring.
- OFFER A BROAD ARRAY OF PRODUCTS AND SERVICES. Management intends to
attract customers to the Bank by offering a variety of traditional
consumer loan and deposit products. Management intends to expand the
Bank's product and service offerings to include asset management with
money market sweeps, direct purchase capability with selected Internet
"mall" venues and reloadable cash cards. The Bank will offer its products
and services in accordance with applicable state consumer protection laws,
but does not anticipate that state regulatory restrictions will hinder its
ability to market its products and services through the Internet.
- DEPLOY MULTI-FACETED MARKETING STRATEGY. The Company's target market
includes on-line users, on-line shoppers and special niche customers. In
addition to the Bank's on-line advertising relationships with AT&T Corp.'s
WorldNet Service and Digital Cities, Inc., a subsidiary of America Online
Incorporated ("Digital Cities/AOL"), several other marketing initiatives
are being employed. These initiatives include an emphasis on marketing the
Bank's products and services through alliances with selected professional
organizations, colleges, alumni associations and consumer service
providers and on targeted print advertising.
- CROSS-SELL FINANCIAL SERVICES. Management intends to market loans,
brokerage services and other income generating products to its depositors
through various direct marketing techniques, such as bank e-mail, on-line
advertising and telemarketing. Management believes that this strategy will
enable the Bank to generate additional earning assets and fee income.
Management further believes that selling multiple products will enhance
customer loyalty and strengthen customer relationships with the Bank.
The Internet is a global web of computer networks. Use of the Internet and
the World Wide Web (the "Web") has grown rapidly during the 1990s and is
expected to continue to grow. In addition, a fall 1995 Internet demographic
study by Commerce Net/Nielsen Media Research revealed that in the U.S., nearly
two-thirds of Web users have a college education, over 50% of Web users are 35
years of age or younger and 25% of Web users' households have annual incomes of
over $80,000.
Electronic banking encompasses both Internet banking, which can be conducted
on a real-time basis from any PC, wherever located, using a secure Web browser,
and PC-based home banking, which utilizes PC-based software. According to an
August 1996 report by Forrester Research, Inc., the number of electronic banking
households is expected to grow from 1.1 million in 1996 to 9.7 million in 2001.
The report further indicates that the percentage of such households utilizing
Internet banking is projected to rise to over 75% in 2001. Management believes
this growth, combined with the demographic characteristics of Internet users and
the relative flexibility and convenience of Internet banking, represents a
market opportunity for the Company because it is one of the world's first
providers of Internet banking services.
The principal executive offices of the Company and the Bank are located at
7000 Peachtree Dunwoody Road, Building 10, Suite 300, Atlanta, Georgia 30328,
and the telephone number is (770) 392-4990. The Bank can be reached on the Web
at www.atlantabank.com.
4
<PAGE>
RISK FACTORS
An investment in the Company involves a high degree of risk, including risks
relating to: (i) the Company's limited operating history and operating deficit;
(ii) the new and evolving market for Internet banking; (iii) the Company's
ability to implement its business strategy; (iv) the Company's dependence on new
products and services; (v) systems failure and security; (vi) customer
attrition; (vii) the Company's reliance on third party service providers; (viii)
the Company's dependence on and need to hire additional qualified personnel;
(ix) control of the Company by its affiliates; (x) management's discretion as to
the use of unallocated net proceeds; (xi) the need for additional capital; (xii)
potential effects of changes in interest rates; and (xiii) competition. For a
more complete discussion of these and other risk factors, see "Risk Factors"
beginning on page 7.
THE REORGANIZATION
Pending a variety of regulatory approvals (all of which had been granted as
of July 11, 1997), the Bank has been operated as a service of CFB pursuant to
the terms of an agreement among the Company, CFB and certain organizers and
investors in the Company. The Company has entered into an agreement with Premier
Bancshares, Inc. ("Premier") pursuant to which the Company will purchase all of
the issued and outstanding stock of Premier Bank, FSB ("Premier Bank"), a
federal savings bank and a wholly owned subsidiary of Premier.
Upon consummation of the Premier stock purchase, CFB will transfer the
assets and liabilities relating to the operation of the Bank to the Company's
newly acquired federal savings bank subsidiary, Atlanta Internet Bank, FSB
(formerly Premier Bank). Upon completion of the transfer of assets and
liabilities, CFB will pay to the Bank 100% of the total amount of deposits with
the Bank, less certain adjustments, and CFB will beneficially own 1,325,000
shares, or 23.5%, of the outstanding Common Stock of the Company. The agreement
also gives CFB certain rights with respect to the nomination of members of the
Company's Board of Directors. The foregoing transactions, collectively referred
to as the "Reorganization," will be consummated simultaneously with the Offering
and are more fully described in "The Reorganization."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................... 5,645,562 shares(1)
Use of Proceeds.............................. To contribute capital to the Bank, fund a
portion of the purchase price for the
outstanding capital stock of Premier Bank,
reimburse certain organizational and
operational expenses and pay bonuses to
officers and employees.
Proposed Nasdaq SmallCap Market Symbol....... NTBK
</TABLE>
- ------------------------
(1) Includes 1,269,218 shares issued and outstanding as of March 31, 1997, 9,938
shares issued subsequent to March 31, 1997, 1,366,406 shares to be issued in
the Reorganization and 3,000,000 shares to be issued in the Offering. Does
not include 354,438 shares subject to employee stock options, none of which
are presently exercisable. Of the indicated options, 140,782 will become
exercisable upon consummation of the Offering, but are not expected to be
exercised at that time.
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical financial information presented below, except for the
summary pro forma financial information, is derived from the Company's audited
financial statements as of December 31, 1996 and for the period February 20,
1996 (date of incorporation) to December 31, 1996 and the Company's unaudited
financial statements as of and for the three months ended March 31, 1997 and the
period February 20, 1996 (date of incorporation) to March 31, 1996. The summary
historical financial information and summary pro forma financial information
should be read in conjunction with the Company's financial statements and
condensed pro forma balance sheet and condensed pro forma statement of
operations and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 20, 1996 FOR THE PERIOD
(DATE OF INCORPORATION) FEBRUARY 20,
TO 1996 (DATE OF FOR THE THREE MONTHS
DECEMBER 31, 1996 INCORPORATION) ENDED MARCH 31, 1997
---------------------------- TO MARCH 31, ----------------------------
PRO FORMA 1996 PRO FORMA
FOR THE ---------------- FOR THE
ACTUAL REORGANIZATION(1) ACTUAL ACTUAL REORGANIZATION(1)
---------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(2).......................... $ 67,709 $ 67,709 $ 40,000 $ 5,775 $ 5,775
Expenses............................. 3,906,891(3) 3,919,391(3) 16,266 1,805,800(4) 1,809,550(4)
---------- ---------------- ---------------- ---------- ----------------
Net income (loss).................... $(3,839,182) $ (3,851,682) $ 23,734 $(1,800,025) $ (1,803,775)
---------- ---------------- ---------------- ---------- ----------------
---------- ---------------- ---------------- ---------- ----------------
Net income (loss) per common share... $ (1.43) $ (1.39) $ .01 $ (.67) $ (.65)
---------- ---------------- ---------------- ---------- ----------------
---------- ---------------- ---------------- ---------- ----------------
Weighted average common and common
equivalent shares outstanding...... 2,685,310 2,779,080 2,685,310 2,685,310 2,779,080
---------- ---------------- ---------------- ---------- ----------------
---------- ---------------- ---------------- ---------- ----------------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------------------------------
AS OF PRO FORMA
DECEMBER 31, FOR THE
1996 PRO FORMA REORGANIZATION
------------ FOR THE AND THE
ACTUAL ACTUAL REORGANIZATION(1) OFFERING(5)
------------ ----------- ---------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................... $ (598,423) ($1,458,559) $ (1,708,559) $ 28,031,441
Total assets....................................... 1,246,449 778,442 48,115,357 76,995,291
Long-term debt, less current portion............... -- -- -- --
Total shareholders' equity (deficit)............... (386,073) (1,278,631) (1,153,631) 28,586,369
</TABLE>
- ------------------------
(1) To give effect to the acquisition of the outstanding capital stock of
Premier Bank and consummation of the transfer of the assets and liabilities
relating to the operation of the Bank from CFB to the Company.
(2) Revenues primarily reflect management fees paid to the Company by CFB
related to certain consulting and support services performed by the Company
for CFB.
(3) Actual and pro forma expenses include $2,400,000 of amortization relating to
an agreement with CFB and pro forma expenses include $12,500 of amortization
related to the cost of the bank charter acquired with the acquisition of the
outstanding capital stock of Premier Bank.
(4) Actual and pro forma expenses include $864,000 of amortization relating to
an agreement with CFB and pro forma expenses include $3,750 of amortization
related to the cost of the bank charter acquired with the acquisition of the
outstanding capital stock of Premier Bank.
(5) Adjusted to give effect to the sale of the Common Stock offered hereby by
the Company at an assumed offering price of $11.00 per share and the
application of the net proceeds therefrom. See "Use of Proceeds." The
unaudited pro forma for the Reorganization and the Offering data includes
one-time charges of approximately $450,000 for bonuses expected to be paid
to certain officers and employees and $224,045 for non-cash compensation
related to accelerated vesting of nonqualified options to purchase Common
Stock upon consummation of the Offering, and gives effect to the receipt of
approximately $30.2 million of net proceeds from the Offering of which
$860,000 will be used to repay liabilities of the Company. See "Pro Forma
Condensed Balance Sheet" and "Certain Transactions."
RECENT DEVELOPMENTS
Based on preliminary unaudited financial statements as of June 30, 1997,
deposits held by CFB on behalf of the Company were $43.1 million and the
Company's total assets were $964,838. The Company's net loss was $3.2 million
for the six month period ended June 30, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent Developments".
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
PURCHASERS SHOULD GIVE CAREFUL CONSIDERATION TO THE SPECIFIC FACTORS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE
PURCHASING THE COMMON STOCK OFFERED HEREBY. WHEN USED IN THIS PROSPECTUS THE
WORDS "ANTICIPATE," "ESTIMATE," "PROJECT," "EXPECT" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. THE FACTORS DISCUSSED BELOW AND
OTHERS ELSEWHERE IN THIS PROSPECTUS MAY AFFECT THE COMPANY'S OPERATIONS AND THE
BANKING INDUSTRY. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS
MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, PROJECTED OR EXPECTED.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
LIMITED OPERATING HISTORY
The Company was incorporated in February 1996, and the Bank commenced
operations as a service of CFB in October 1996. Accordingly, the Company has no
history of operations as a bank or thrift holding company and the Bank has only
a limited operating history upon which an evaluation of the Company and its
prospects can be based. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in the new and rapidly
evolving market for electronic banking. To address these risks, the Company
must, among other things, build its customer base, respond to competitive
developments, continue to attract, retain and motivate qualified employees, and
continue to upgrade its technologies, products and services. There can be no
assurance that the Company will be successful in addressing such risks.
OPERATING DEFICIT; NEGATIVE WORKING CAPITAL AND NET WORTH
The Company has incurred operating losses since inception and expects to
incur operating losses through 1997 and may incur additional operating losses in
the future. As of March 31, 1997, the Company had an accumulated deficit of $5.6
million, negative working capital of $1.5 million and negative net worth of $1.3
million. There can be no assurance that the Company will achieve or continue to
sustain profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
NEW AND EVOLVING MARKET FOR INTERNET BANKING
The market for Internet banking services has only recently begun to develop,
is rapidly evolving and is characterized by an increasing number of market
entrants who have introduced or developed such services. As is typical in the
case of a new and rapidly evolving industry, demand and market acceptance for
Internet banking are subject to a high level of uncertainty. The industry is
young and has few proven competitors. Moreover, security and other critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access and quality of service) remain
unresolved and may impact the growth of Internet use. While management believes
Internet banking offers significant advantages over traditional branch and
PC-based home banking, there can be no assurance that Internet banking will
become widespread.
In addition, market acceptance of Internet banking is substantially
dependent upon the adoption of the Internet for general commerce and financial
services transactions. The adoption of the Internet for these purposes,
particularly by those individuals and enterprises that have historically relied
upon traditional banking services, requires the acceptance of a new way of
conducting business and exchanging
7
<PAGE>
information. There can be no assurance that PC users will adopt the Internet for
electronic banking or commerce.
Because the market for Internet banking is new and evolving, it is difficult
to predict the future growth rate, if any, and size of this market. There can be
no assurance that the market for Internet banking will develop or that the
Bank's services will be accepted. If the market fails to develop, develops more
slowly than expected or becomes saturated with competitors, or if Internet
banking does not achieve market acceptance, the Company's business, operating
results and financial condition could be materially adversely affected. See
"Business--Industry Background" and "--Market Opportunity."
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE
In addition, the Internet may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant growth in the number of users, its
frequency of use or an increase in its bandwith requirements, there can be no
assurance that the infrastructure for the Internet will be able to support the
demands placed upon it. In addition, the Internet could lose its viability due
to delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, or due to increased
governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet generally and the
Company in particular. If use of the Internet does not continue to grow or grows
more slowly than expected, if the infrastructure for the Internet does not
effectively support growth that may occur, or if the Internet does not become a
viable commercial marketplace, the Company's business, operating results and
financial condition could be materially adversely affected.
ABILITY TO IMPLEMENT BUSINESS STRATEGY
The Company's business strategy is dependent upon its ability to offer
secure, convenient, cost-effective and comprehensive financial services on the
Internet. The growth and expansion of the Bank's business have placed, and are
expected to continue to place, significant demands on the Company's management,
operational and financial resources. Successful implementation of the Company's
business strategy requires continued growth of the Internet banking market and
will depend on the Company's ability to: (i) increase significantly the number
of customers using the Bank for their financial service requirements; (ii)
implement an earning asset strategy; (iii) develop new strategic alliances for
products and services; (iv) implement and improve the Bank's operational,
financial and management information systems; and (v) hire and train additional
qualified personnel. There can be no assurance that the Company will be
successful in the implementation of its business strategy. See
"Business--Strategy."
DEPENDENCE UPON NEW PRODUCTS AND SERVICES
The Company's success will depend in part upon the Bank's ability to offer
new products and provide new financial services that meet changing customer
requirements. The Bank presently offers interest-bearing checking accounts,
money market accounts and certificates of deposit and provides ATM, direct
deposit, monthly statement, on-line transfer, wire transfer, bank e-mail and
electronic bill paying services. There can be no assurance that the Company can
successfully develop and bring new products and services to market in a timely
manner. Furthermore, PC-based home banking systems have been marketed in the
past by other banking companies and have not enjoyed widespread consumer demand.
Accordingly, there can be no assurance that there will be widespread consumer
acceptance of banking systems such as those offered by the Bank. See
"Business--Industry Background," "--Market Opportunity" and "--Competition."
8
<PAGE>
RAPID TECHNOLOGICAL CHANGE
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the Bank's services. The Internet
and the online commerce industry are characterized by rapid technological
change, changes in user and customer requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's existing
technology and systems obsolete. The Company's success will depend, in part, on
its ability to license leading technologies useful in its business, enhance its
existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of its prospective customers, and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of such technology entails
significant technical and business risks. There can be no assurance that the
Company will successfully use new technologies effectively or adapt its
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, its business, operating results and financial
condition could be materially adversely affected. See "Business--Operations."
RISK OF SYSTEMS FAILURE; SECURITY RISKS
The computer systems and network infrastructure utilized by the Bank could
be vulnerable to unforeseen problems. The Bank's operations are dependent upon
its ability to protect its computer equipment against damage from fire, power
loss, telecommunications failure or a similar catastrophic event. Any damage or
failure that causes an interruption in the Bank's operations could have a
material adverse effect on the Company's business, operating results and
financial condition.
In addition, the Bank's operations are dependent upon its ability to protect
the computer systems and network infrastructure utilized by the Bank against
damage from physical break-ins, security breaches and other disruptive problems
caused by the Internet or other users. Such computer break-ins and other
disruptions would jeopardize the security of information stored in and
transmitted through such computer systems and network infrastructure, which may
result in significant liability to the Bank and deter potential customers.
Depositors' funds are, however, insured by the Savings Association Insurance
Fund to a maximum of $100,000 per depositor. Although management intends to
continue to implement security technology and establish operational procedures
to prevent such damage, there can be no assurance that these security measures
will be successful. A failure of such security measures could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business-- Security."
The Bank is also part of a developing and rapidly evolving market for
Internet and Web-based electronic banking. Market acceptance of Internet banking
is substantially dependent upon the adoption of the Internet for general
commerce and financial services transactions. If another provider of financial
services through the Internet were to suffer damage from a physical break-in,
security breach or other disruptive problem caused by the Internet or other
users, such event could harm the growth and acceptance among the public of the
Internet for financial services transactions. Such an event could deter
potential customers of the Bank or cause customers to leave the Bank and thereby
have a material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
The Company has designated only limited specific uses for the net proceeds
from the sale of Common Stock described in this Prospectus. The Company expects
to use the net proceeds from the Offering as follows: (i) approximately
$25,000,000 as a contribution to capital for the Bank; (ii) $2,250,000 to fund a
portion of the purchase price for the outstanding capital stock of Premier Bank;
(iii) approximately
9
<PAGE>
$2,000,000 to reimburse CFB for expenses incurred in operating the Bank prior to
the Reorganization; (iv) approximately $490,000 to reimburse TSJ&A for expenses
incurred for management, consulting, regulatory and accounting services, as well
as office space and clerical support during the Bank's organization and its
ongoing operations prior to the Reorganization; and (v) payment of up to
$450,000 in bonuses to certain officers and employees. Consequently, the Board
of Directors and management of the Company will have broad discretion in
allocating a total of approximately $25,450,000, or 84.3% of the net proceeds of
the Offering, to the Bank, the Company and certain of their officers and
employees as described above. See "The Reorganization" and "Use of Proceeds."
CUSTOMER ATTRITION
The market for Internet banking is new and evolving. Therefore, management
is unable to predict whether customers will continue to use the Internet or the
Bank. In addition, the attractive rates offered by the Bank may attract
short-term depositors who close their accounts in pursuit of higher rates
elsewhere. Management expects that some customer attrition will occur within the
first few months after a new customer begins to use the Bank's services.
Management believes that customers who experience difficulty in accessing the
Bank or in conducting transactions early in their relationship with the Bank may
terminate the relationship. Customer attrition could have a material adverse
effect on the Company's business, operating results and financial condition.
RELIANCE ON THIRD PARTY SERVICE PROVIDERS
The Company receives essential technical and customer service support from
AT&T's Advanced Network Solutions Division through a bundled product and service
offering called "Personal Financial Services" pursuant to an agreement between
the Company and AT&T. The Bank also receives professional programming services
from Edify Corporation ("Edify") and electronic bill payment processing services
from CheckFree Corporation ("CheckFree") under this agreement. Although the AT&T
agreement expires in February 1998, it may be terminated without cause by either
party upon six months' prior written notice.
AT&T has informed the Company that AT&T may discontinue its Personal
Financial Services products and services in 1998. AT&T would, however, continue
to provide marketing and hosting services to the Company. The Company may not be
able to obtain similar products and services at an acceptable cost.
Additionally, the Company's operations could be disrupted by a change in product
and service providers. If the Company is unable to obtain similar products and
services at an acceptable cost or its operations are disrupted by a change in
providers, the Company's business, operating results and financial condition
could be materially adversely affected. See "Business--Operations--Service
Providers."
The Bank's systems processing is performed by BISYS under an agreement
between BISYS and the Company. The BISYS agreement expires in July 1999, subject
to automatic renewal for successive three-year periods absent six months' prior
written notice to the contrary by either party. If the Company were unable to
replace AT&T, Edify, CheckFree or, in particular, BISYS, with another service
provider prior to the effective termination of services under the applicable
agreement, the Company's operations would be interrupted. If such interruption
were to continue for a significant period of time, the Company's business,
operating results and financial condition could be materially adversely
affected. See "Business-- Operations."
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success will depend upon the continued service of its senior
management team, which consists of D. R. Grimes, Vice Chairman and Chief
Executive Officer of the Company and the Bank; Donald S. Shapleigh, Jr.,
President and Chief Operating Officer of the Company and the Bank; Robert E.
Bowers, Chief Financial Officer of the Company and the Bank; Belinda L. Morgan,
Operations Officer of
10
<PAGE>
the Company and the Bank; and Thomas L. Cable, Chief Technology Officer of the
Company and the Bank. The Company's success also will depend upon its ability to
attract and retain additional highly qualified technical personnel. The Bank's
employees may voluntarily terminate their employment at any time, and
competition for qualified employees is intense. The Company does not carry key
person life insurance on any of its executives. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect upon the Company's business, operating results
and financial condition. See "Management."
CONTROL BY AFFILIATES
Following the sale of the Common Stock offered hereby, the directors and
executive officers of the Company will beneficially own 2,096,252 shares,
representing 36.2% of the outstanding Common Stock of the Company. These totals
include 1,325,000 shares, representing 23.5% of the Common Stock outstanding
after the Offering, that will be beneficially owned by CFB. As a result, the
directors and executive officers of the Company and their affiliates will be
able to exercise significant control over the management and the affairs of the
Company and will have the power to block certain business combinations. In
addition, CFB has the right to nominate four directors to the Company's Board of
Directors. The right expires upon the initial appointment of the nominated
director or a director elected in opposition to the nominee. Pursuant to this
right, CFB nominated three of the Company's current directors and retains the
right to nominate one additional director in the future. Of the three CFB
nominees currently serving as directors, one has a term expiring in 1998, one
has a term expiring in 1999 and one has a term expiring in 2000. Carolina First
Corporation ("Carolina First"), the bank holding company of CFB, is deemed to
control the Company for purposes of the Bank Holding Company Act of 1956, as
amended. See "Management--Directors and Executive Officers" and "Certain
Transactions."
ADDITIONAL CAPITAL NEEDS
Management anticipates that its existing capital resources, including the
net proceeds of the sale of the Common Stock offered hereby, will adequately
satisfy the foreseeable capital requirements of the Company and the Bank. Future
capital requirements, however, depend on many factors, including the Bank's
ability to successfully attract new customers and provide additional services.
To the extent that the funds generated by the Offering are insufficient to fund
future operating requirements, it may be necessary to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, could result in dilution to the Company's
shareholders. If adequate capital is not available, the Bank will be subject to
an increased level of regulatory supervision and the Company's business,
operating results and financial condition could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Supervision and Regulation."
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest income earned on its
interest-earning assets and the interest expense paid on its interest-bearing
liabilities. Like most depository institutions, the Bank's earnings are affected
by changes in market interest rates and other economic factors beyond its
control. If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. In recent years, the assets of many financial institutions have been
negatively "gapped"--which means that the dollar amount of interest-bearing
liabilities which reprice within specific time periods, either through maturity
or rate adjustment, exceeds the dollar amount of interest-earning assets which
11
<PAGE>
reprice within such time periods. As a result, the net interest income of these
savings institutions, including the Bank, would be expected to be negatively
impacted by increases in interest rates.
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of the Bank's interest-earning assets, which are
comprised of fixed and adjustable-rate instruments, and the ability to realize
gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates.
COMPETITION
The market for electronic banking has only recently begun to develop, is
rapidly evolving and has few proven competitors. Management expects that
competition will intensify in the future. Management believes that its ability
to compete successfully depends upon a number of factors, including market
presence; customer service and satisfaction; the capacity, reliability and
security of its network infrastructure; ease of access to and navigation of the
Internet; the pricing policies of its competitors; the timing of introductions
of new products and services by the Company and its competitors; and industry
and general economic trends. In addition, the Bank faces substantial competition
for its loan and deposit products from traditional financial institutions and
will also face substantial competition for its brokerage and asset management
services from firms specializing in those services. Many of these competitors
are larger than the Bank and have greater financial and other resources. These
competitors include commercial banks, savings and loan associations, credit
unions, brokerage firms, mutual fund companies and other financial services
companies. See "Business--Competition."
GOVERNMENT REGULATION
Upon consummation of the Reorganization, the Company will be subject to
regulation by the Federal Reserve Board ("Federal Reserve") and the Georgia
Department of Banking and Finance (the "Department of Banking") and the Bank
will be regulated by the Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation ("FDIC"). In conducting various aspects of its
business, the Bank is subject to various laws and regulations relating to
commercial transactions generally, such as the Uniform Commercial Code, and is
also subject to the electronic funds transfer rules embodied in Regulation E,
promulgated by the Federal Reserve. Given the expansion of the electronic
commerce market, it is possible that any of the foregoing agencies could revise
existing regulations or adopt new regulations governing or affecting the Bank's
ability to conduct its business via the Internet. Additionally, Congress has
held hearings on whether to regulate providers of services and transactions in
the electronic commerce market, and it is possible that Congress or individual
states could enact laws regulating Internet banking. If enacted, such laws,
rules and regulations could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Supervision
and Regulation."
LIABILITY RISKS
The Company and the Bank are subject to a variety of liability risks
relating to the operation of the Bank. CFB currently provides fidelity bond
insurance for the Bank, and the Bank will have fidelity bond insurance in place
upon consummation of the Reorganization. In addition, deposits are insured to a
maximum of $100,000 per depositor by the Savings Association Insurance Fund
("SAIF") and the Bank carries a general commercial and umbrella liability policy
covering claims of up to $7.0 million. If a successful claim were brought
against the Bank in excess of any available insurance coverage, however, the
Company's business, operating results and financial condition could be
materially adversely affected.
12
<PAGE>
DIVIDEND POLICY
The Company does not intend to pay cash dividends in the foreseeable future,
as any earnings are expected to be retained for use in developing and expanding
the Bank's business. See "Dividend Policy."
ANTITAKEOVER PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS;
POTENTIAL ISSUANCE OF PREFERRED STOCK
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Bylaws may be deemed to have the effect of making more
difficult an acquisition of control of the Company in a transaction not approved
by the Company's Board of Directors. These provisions include the ability of the
Board of Directors to issue shares of preferred stock in one or more series
without further authorization of the Company's shareholders, a supermajority
shareholder approval requirement for certain transactions and provisions
requiring a classified Board of Directors.
The Company's Amended and Restated Articles of Incorporation authorize the
issuance of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by its Board of Directors.
Accordingly, the Company's Board of Directors is empowered, without shareholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of Common Stock. In the event of such issuance, the
preferred stock could also be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company.
Although management has no current intention to issue any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.
See "Description of Capital Stock."
The Amended and Restated Articles of Incorporation require the affirmative
vote of the holders of two-thirds of the voting stock to approve certain
mergers, share exchanges and dispositions of the assets of the Company unless at
least two-thirds of the members of the Board of Directors approve the proposed
transaction. If such approval by the Board of Directors is obtained, approval by
the vote of a majority of the outstanding shares entitled to vote is required.
This provision may tend to discourage attempts by third parties to acquire the
Company in a hostile takeover effort. It may also permit a minority of directors
and shareholders to prevent a business combination regardless of the terms of
the proposed transaction.
The Amended and Restated Articles of Incorporation also provide that the
Board of Directors will be divided into three classes serving staggered
three-year terms and that a director may only be removed by the vote of
two-thirds of the outstanding shares entitled to vote in an election of
directors or by the vote of at least two-thirds of the directors then in office.
These provisions could enable a minority of the Company's shareholders to
prevent the removal of a director sought to be removed by a majority of the
shareholders and may tend to enhance management's ability to retain control over
the Company's affairs and to preserve the director's present position on the
Board.
NO PRIOR MARKET; VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no market for the Common Stock, and
there can be no assurance that an active market will develop or be sustained.
The trading price of the Common Stock could be subject to significant
fluctuations in response to quarterly variations in the Company's actual or
anticipated operating results, changes in general market conditions and other
factors. In recent years, significant price and volume fluctuations have
occurred in the stock prices of companies that often have been unrelated or
disproportionate to their operating performance. There can be no assurance that
the market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price of the Common Stock will be
determined by negotiations among the Company and the Representatives of the
Underwriters. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, are the history of, and prospects for, the industry in which the
Company operates, the price earnings multiples of publicly traded common stock
of comparable companies, the cash flow and earnings of the Company and
comparable
13
<PAGE>
companies in recent periods and the Company's business potential and cash flow
and earnings prospects. There is not, nor can there be, any assurance that the
comparable company analysis will provide a satisfactory valuation of the price
of the Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, there will be 5,645,562 shares of
Common Stock outstanding. Of these shares, the 3,000,000 shares sold in this
Offering will be freely tradeable without restriction, except for any shares
purchased by an 'affiliate' of the Company. The remaining 2,645,562 shares of
Common Stock will be 'restricted securities' as that term is defined in Rule 144
promulgated under the Securities Act of 1933, as amended (the 'Securities Act').
The Company and certain of its directors, officers and existing shareholders
(including CFB) have agreed, for a period of 365 days from the date of this
Prospectus, not to sell or otherwise dispose, directly or indirectly, of any
shares of Common Stock, without the prior consent of Morgan Keegan & Company,
Inc. and Interstate/Johnson Lane Corporation, as representatives of the
Underwriters (the "Representatives"). Other directors, officers and existing
shareholders have agreed not to sell or otherwise dispose, directly or
indirectly, of any shares without prior consent of the Representatives, for a
period of 180 days after completion of this Offering. As a result, commencing 90
days after the completion of this Offering, 41,407 restricted shares of Common
Stock that are not subject to contractual restrictions on resale will be
eligible for sale in the public market pursuant to Rule 144. Commencing 180 days
after completion of the Offering, an additional 627,719 restricted shares of
Common Stock will be eligible for sale pursuant to Rule 144 in the public
market. The remaining 1,976,436 restricted shares of Common Stock will be
eligible for sale pursuant to Rule 144 in the public market 365 days from the
date of this Offering. Pursuant to OTS requirements, however, and subject to
certain limited exceptions, the Company's directors and certain of its executive
officers and shareholders may not dispose of any of their restricted shares of
Common Stock for a period of three years from the date of this Prospectus. As a
result, 2,248,064 shares held by such shareholders may not be sold until three
years from the date of this Prospectus, regardless of their eligibility for sale
pursuant to Rule 144 in the public market. The market price of the Common Stock
could be materially adversely affected by the sale or availability for sale of
shares now held by the existing shareholders of the Company or of shares which
may be issued under the Company's 1996 Stock Incentive Plan. See "Management,"
"Shares Eligible for Future Sale" and "Underwriting."
DILUTION
Purchasers in this Offering will incur an immediate and substantial dilution
in the net tangible book value of the Common Stock from the initial public
offering price. Without taking into account any changes in net tangible book
value after March 31, 1997, other than to give effect to the sale by the Company
of 3,000,000 shares of Common Stock in this Offering, based upon the assumed
initial public offering price of $11.00 per share and after deducting the
underwriting discounts and commissions and the estimated offering expenses, the
net tangible book value of the Company at March 31, 1997 would have been
approximately $28,211,369, or $5.01 per share. This represents an immediate
increase in net tangible book value of $5.59 per share to the existing
shareholders and an immediate net tangible book value dilution of $5.99 per
share, or 54.5%, to purchasers in this Offering. See "Dilution."
14
<PAGE>
THE REORGANIZATION
The Company was incorporated as a Georgia corporation on February 20, 1996.
Its primary business purpose is the operation of the Bank as a wholly owned
federal savings bank subsidiary of the Company. The transactions described below
are collectively referred to as the "Reorganization." All of the transactions
comprising the Reorganization will be consummated contemporaneously with the
consummation of the Offering.
The Company entered into a Stock Purchase Agreement on June 17, 1996, which
was amended and restated as of December 19, 1996 and which was further amended
as of February 25, 1997, and May 31, 1997, with Premier, pursuant to which the
Company will purchase all of the issued and outstanding stock of Premier Bank, a
federal savings bank and a wholly owned subsidiary of Premier. The Company
decided to purchase Premier's outstanding stock because the Company needed a
charter for the Bank and, due to a pending internal reorganization, Premier's
charter was available. In exchange for the stock of Premier Bank, Premier will
receive from the Company up to $2,250,000 in cash and 41,406 shares of Common
Stock. The consideration purchase price was negotiated at arms length by the
parties based on their respective assessments of the market value of the Premier
Bank charter.
The amendments to the Stock Purchase Agreement provided for extensions of
the termination date of the Stock Purchase Agreement and reimbursement of
documented out-of-pocket third-party expenses incurred by Premier as a result of
such extensions.
The Company's purchase of the Premier Bank stock (the "Stock Purchase") and
certain transactions contemplated thereby are subject to the approval of the
OTS, the Department of Banking and the FDIC. These agencies issued their
approvals on July 11, 1997, May 13, 1997 and April 14, 1997, respectively.
Additionally, consummation of the Stock Purchase is subject to a mandatory
waiting period of 15 to 30 days commencing on the date of OTS approval. See
"Business--Supervision and Regulation."
The Bank has been operated as a service of CFB pursuant to the terms of an
agreement dated July 15, 1996, which was amended on December 6, 1996 and which
was further amended on March 18, 1997 (the "Operation Agreement") among the
Company, CFB and certain organizers and investors in the Company. The Operation
Agreement provides that CFB will operate the Bank as a service of CFB under the
trade name "Atlanta Internet Bank" and that the Company will manage the
operations of the Bank. Under the terms of the Operation Agreement, CFB will
provide funding for the reasonable expenses of operation of the Bank up to the
amount of $1,325,985 or until July 31, 1997. As of June 30, 1997, CFB had funded
$1,283,391 for the operation of the Bank and $139,296 for net interest expense
(as discussed below) and incurred $478,653 of unreimbursed expenses from its
operation of the Bank. CFB will be reimbursed for these expenses from the net
proceeds of the Offering.
Upon consummation of the Stock Purchase, CFB will transfer the assets and
liabilities relating to the operation of the Bank to the Company's newly
acquired federal savings bank subsidiary, Atlanta Internet Bank, FSB (formerly
Premier Bank, FSB). As consideration for the transfer, and for operating the
Bank as a service of CFB, the Company will pay $1.00 to CFB and will issue to
CFB 1,325,000 shares of Common Stock. Based on the appraised fair market value
of the Common Stock on the date of the Agreement, the shares to be received by
CFB were valued at $3,840,000. Upon completion of the transfer of assets and
liabilities as contemplated by the Operation Agreement (the "CFB Transfer"), CFB
will transfer to the Bank 100% of the total amount of deposits with the Bank,
less the sum of: (i) all cash items; (ii) net interest income based upon the
Bank's cost of deposits and the interest income allocated by CFB to the Bank's
operations, which is not expected to exceed a cost of $200,000; (iii)
unreimbursed reasonable expenses (including the funding advanced by CFB under
the terms of the Operation Agreement described above) to the extent not
reflected in (ii) above, expected to be approximately $2,000,000 as of July 31,
1997; and (iv) the net book value of loans, if any, issued by the Bank. The only
unreimbursed expenses incurred or to be incurred by CFB from its operation of
the Bank consists of $31,232 in contributed services from an affiliate that the
Company recorded as additional paid-in capital in fiscal 1996. The CFB Transfer
is subject to approval by the Federal Reserve and the State of South Carolina
State Board of Financial Institutions, which approvals were received on April
30, 1997 and May 8, 1997, respectively.
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<PAGE>
The Operation Agreement gives CFB the right to nominate four directors to
the Company's Board of Directors. The right expires upon the initial appointment
of the nominated director or a director elected in opposition to the nominee.
Pursuant to this right, CFB nominated three of the Company's current directors
and retains the right to nominate one additional director in the future. Of the
three CFB nominees currently serving as directors, one has a term expiring in
1998, one has a term expiring in 1999 and one has a term expiring in 2000. Upon
completion of the Offering, CFB will beneficially own 1,325,000 shares, or
23.5%, of the outstanding Common Stock of the Company. The Company and CFB
intend to maintain a normal correspondent relationship following the
consummation of the Reorganization and the Offering. Correspondent services and
transactions, which are expected to include purchases by the Company of loans
and loan participations, will be on terms no less favorable than could be
obtained from an unaffiliated third party for comparable transactions and as a
matter of Company policy, must be approved by a majority of the Company's
directors who are not affiliated with CFB.
The following chart depicts the participants in the Reorganization and the
Company's organization structure before and after the Reorganization.
PRIOR TO THE REORGANIZATION
[CHART]
AFTER THE REORGANIZATION
[CHART]
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for financial information
regarding the Company and the Bank and "Principal Shareholders" for information
regarding the ownership of the Company's Common Stock before and after the
Reorganization and the Offering.
16
<PAGE>
USE OF PROCEEDS
The net proceeds (assuming an offering price of $11.00 per share) from the
sale of 3,000,000 shares of Common Stock offered by the Company are estimated to
be $30,190,000 ($33,259,000 if the Underwriters' over-allotment option is
exercised in full) after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company plans to use the net
proceeds of the Offering as shown in the following table:
<TABLE>
<CAPTION>
USE OF PROCEEDS AMOUNT
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Contribution of capital to the Bank................................................................ $ 25,000,000
Purchase of Premier Bank capital stock............................................................. 2,250,000
Reimbursement of CFB expenses...................................................................... 2,000,000
Reimbursement of TSJ&A expenses.................................................................... 490,000
Payment of officer and employee bonuses............................................................ 450,000
-------------
Total............................................................................................ $ 30,190,000
-------------
-------------
</TABLE>
The capital contributed to the Bank will constitute common equity capital of
the Bank for regulatory capital purposes and will be used for general corporate
purposes. The Bank's use of the portion of the net proceeds of the Offering
contributed as capital to the Bank will be subject to lending and investment
regulations promulgated by the OTS and the Home Owners' Loan Act. These
regulations specify the percentage of the Bank's assets that may be used for
various lending and investment activities and require the Bank to maintain
standards that are consistent with safety and soundness and are appropriate for
its size and condition, the nature and scope of its operations and general
market conditions. The OTS will regularly conduct extensive examinations of the
Bank's investment portfolio and lending activities to ensure compliance with
applicable regulations and safety and soundness criteria. The portion of the net
proceeds of the Offering to be paid to TSJ&A will be used to reimburse TSJ&A for
expenses incurred for management consulting, regulatory and accounting services,
as well as office space and clerical support, during the Bank's organization and
its ongoing operations prior to the Reorganization. See "Risk
Factors--Management's Discretion as to Use of Unallocated Net Proceeds," "The
Reorganization" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. In addition, OTS regulations
govern the dividends that may be paid by the Bank. See "Business--Supervision
and Regulation--Capital Distributions."
17
<PAGE>
DILUTION
As of March 31, 1997, the pro forma for the Reorganization net tangible book
value (total tangible assets less total liabilities) of the Company was
approximately $(1,528,631), or $(.58) per share of Common Stock. After giving
effect to the receipt of approximately $30.2 million of estimated net proceeds
from this Offering (net of estimated underwriting discounts and offering
expenses), the pro forma net tangible book value of the Common Stock outstanding
at March 31, 1997 would have been $5.01 per share, representing an immediate
increase in the net tangible book value of $5.59 per share to the existing
shareholders and an immediate dilution of $5.99 per share (the difference
between the assumed initial public offering price and the net tangible book
value per share after this Offering), or 54.5%, to persons purchasing Common
Stock at the initial public offering price. The following table illustrates such
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1).......... $ 11.00
---------
Pro forma for the Reorganization net tangible book value
per share before the Offering(2)........................ $ (.58)
---------
Increase in net tangible book value per share attributable
to the sale of Common Stock in the Offering(3).......... $ 5.59
---------
Pro forma net tangible book value per share after giving
effect to the Reorganization and the Offering(4).......... $ 5.01
---------
Dilution in pro forma net tangible book value to the
purchasers of Common Stock offered hereby(5).............. $ 5.99
---------
---------
</TABLE>
The foregoing computations do not include 354,438 shares of Common Stock
issuable upon exercise of outstanding stock options at an average exercise price
of $5.79 per share and 9,938 shares of Common Stock previously subscribed at a
purchase price of $.14 per share. Assuming the exercise of all such options and
stock subscriptions, the pro forma net tangible book value per share before the
Offering would be $.18, the pro forma net tangible book value per share after
the Offering would be $5.04, and the dilution per share to new investors would
be $5.96, or 54.2%.
- ------------------------
(1) Before deduction of estimated underwriting discounts and expenses to be paid
by the Company.
(2) Pro forma for the Reorganization net tangible book value per share is
determined by dividing the net tangible book value of the Company after the
Reorganization of ($1,528,631) by the number of shares of Common Stock
outstanding after the Reorganization of 2,635,624.
(3) Increase in net tangible book value per share attributable to the sale of
Common Stock in the Offering is determined by deducting the net tangible
book value per share before the Offering of $(.58) from the net tangible
book value per share after giving effect to the Reorganization and the
Offering of $5.01.
(4) Pro forma net tangible book value per share after giving effect to the
Reorganization and the Offering is determined by dividing the net tangible
book value of the Company after the Reorganization and the Offering of
$28,211,369 by the number of shares of Common Stock outstanding after the
Reorganization and the Offering of 5,635,624.
(5) Dilution is determined by subtracting the pro forma for the Reorganization
and Offering net tangible book value per share at March 31, 1997 of $5.01
from the assumed initial public offering price of $11.00 paid by a new
investor for a share of Common Stock.
18
<PAGE>
The following table sets forth on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders (including persons receiving shares of Common Stock in the
Reorganization) and by the new investors purchasing shares of Common Stock in
this Offering (assuming an initial public offering price of $11.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOU- (IN THOU-
SANDS) SANDS)
Existing Shareholders....................................... 2,636 46.8 % $ 5,062 13.3 % $ 1.92
New Investors............................................... 3,000 53.2 33,000 86.7 11.00
----- ----- --------- -----
Total................................................. 5,636 100.0 % $ 38,062 100.0 %
----- ----- --------- -----
----- ----- --------- -----
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of March 31, 1997, (ii) the pro forma capitalization of the Company
as of March 31, 1997 after giving effect to the issuance of 1,366,406 shares of
Common Stock in the Reorganization, and (iii) the pro forma capitalization of
the Company as of March 31, 1997, as adjusted to give effect to the sale by the
Company of 3,000,000 shares of Common Stock in the Offering and the application
of the net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with the Company's financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Pro Forma Condensed Balance Sheet" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------------------------------
<S> <C> <C> <C>
PRO FORMA
FOR THE
PRO FORMA REORGANIZATION
HISTORICAL FOR THE AND THE
CONSOLIDATED REORGANIZATION OFFERING(1)
------------- -------------- --------------
Long-term debt, less current portion............................... $ -- $ -- $ --
------------- -------------- --------------
------------- -------------- --------------
Shareholders' Equity (Deficit):
Preferred Stock, no par value; 10,000,000 shares authorized; none
issued and outstanding........................................... -- -- --
Common Stock, $.01 par value; 100,000,000 shares authorized; issued
and outstanding 1,269,218 shares; pro forma for the
Reorganization 2,635,624 shares; and pro forma for the
Reorganization and the Offering 5,635,624 shares................. $ 12,692 $ 26,356 $ 56,356
Additional paid-in capital......................................... 1,462,163 5,413,499 35,573,499
Common stock subscribed: 1,334,938 shares and 9,938 shares pro
forma for the Reorganization and Offering........................ 3,841,395 1,395 1,395
Stock subscriptions receivable (9,938 shares)...................... (1,395) (1,395) (1,395)
Unamortized affiliate service contract expense..................... (576,000) -- --
Unamortized stock plan expense..................................... (378,279) (378,279) (154,234)
Deficit accumulated during the development stage................... (5,639,207) (6,215,207) (6,889,252)
------------- -------------- --------------
Total shareholders' equity (deficit)......................... (1,278,631) (1,153,631) 28,586,369
------------- -------------- --------------
Total capitalization......................................... $ (1,278,631) $ (1,153,631) $ 28,586,369
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
- ------------------------
(1) The pro forma data for the Reorganization and the Offering includes one-time
charges of approximately $450,000 for bonuses expected to be paid to certain
officers and employees and $224,045 for non-cash compensation related to
accelerated vesting of nonqualified options to purchase Common Stock upon
consummation of the Offering.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial information should be read in
conjunction with the Company's financial statements and condensed pro forma
balance sheet and statement of operations and the related notes thereto included
elsewhere in this Prospectus and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial statement
data set forth below as of December 31, 1996 and with respect to the period from
February 20, 1996 (date of incorporation) to December 31, 1996 is derived from
the audited financial statements of the Company included elsewhere in this
Prospectus. The selected financial statement data set forth below as of March
31, 1997 and with respect to the period February 20, 1996 (date of
incorporation) to March 31, 1996, the three months ended March 31, 1997 and for
the period February 20, 1996 (date of incorporation) to March 31, 1997 is
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus. The pro forma statement of operations information
for the period February 20, 1996 to December 31, 1996 was derived from the
audited historical financial statements and for the three months ended March 31,
1997 was derived from the unaudited financial statements of the Company and
adjusted to give effect to the acquisition of the outstanding capital stock of
Premier Bank. The pro forma balance sheet information as of March 31, 1997 was
derived from the unaudited historical financial statements of the Company and
the unaudited statement of assets and liabilities generated by the Internet
banking operations of the Company and held and serviced by CFB, adjusted to give
effect to the Reorganization as of March 31, 1997 and further adjusted to give
effect to the Reorganization and the Offering as of March 31, 1997. The pro
forma information as of March 31, 1997 and for the period February 20, 1996 to
December 31, 1996 and for the three months ended March 31, 1997 does not purport
to represent what the Company's financial position or results of operations
would have been had the agreements been consummated at earlier dates, nor is
such information intended to be indicative of the Company's future financial
position or results of operations.
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 20, 1996 FOR THE PERIOD
(DATE OF INCORPORATION) FEBRUARY 20,
TO 1996 (DATE OF FOR THE THREE MONTHS FOR THE PERIOD
DECEMBER 31, 1996 INCORPORATION) ENDED MARCH 31, 1997 FEBRUARY 20,
---------------------------- TO MARCH 31, ----------------------------- 1996 (DATE OF
PRO FORMA 1996 PRO FORMA INCORPORATION)
FOR THE -------------- FOR THE TO MARCH 31,
ACTUAL REORGANIZATION(1) ACTUAL ACTUAL REORGANIZATION(1) 1997
---------- ---------------- -------------- ----------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues(2)........... $ 67,709 $ 67,709 $ 40,000 $ 5,775 $ 5,775 $ 73,484
Expenses.............. 3,906,891(3) 3,919,391(3) 16,266 1,805,800(4) 1,809,550(4) 5,712,691
---------- ---------------- -------------- ----------- ---------------- --------------
Net income (loss)..... $(3,839,182) $ (3,851,682) $ 23,734 ($1,800,025) $ (1,803,775) $ (5,639,207)
---------- ---------------- -------------- ----------- ---------------- --------------
---------- ---------------- -------------- ----------- ---------------- --------------
Net income (loss) per
common share........ $ (1.43) $ (1.39) $ .01 $ (.67) $ (.65)
---------- ---------------- -------------- ----------- ----------------
---------- ---------------- -------------- ----------- ----------------
Weighted average
common and common
equivalent shares
outstanding......... 2,685,310 2,779,080 2,685,310 2,685,310 2,779,080
---------- ---------------- -------------- ----------- ----------------
---------- ---------------- -------------- ----------- ----------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------------------------------
AS OF PRO FORMA
DECEMBER 31, FOR THE
1996 PRO FORMA REORGANIZATION
------------ FOR THE AND THE
ACTUAL ACTUAL REORGANIZATION(1) OFFERING(5)
------------ ----------- ---------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................... $ (598,423) ($1,458,559) $ (1,708,559) $ 28,031,441
Total assets....................................... 1,246,449 778,442 48,115,357 76,995,291
Total shareholders' equity (deficit)............... (386,073) (1,278,631) (1,153,631) 28,586,369
</TABLE>
- ------------------------
(1) To give effect to the acquisition of the outstanding capital stock of
Premier Bank and consummation of the transfer of the assets and liabilities
relating to the operation of the Bank from CFB to the Company.
(2) Revenues primarily reflect management fees paid to the Company by CFB
related to certain consulting and support services performed by the Company
for CFB.
(3) Actual and pro forma expenses include $2,400,000 of amortization relating to
an agreement with CFB and pro forma expenses include $12,500 of amortization
related to the cost of the bank charter acquired with the acquisition of the
outstanding capital stock of Premier Bank.
(4) Actual and pro forma expenses include $864,000 of amortization relating to
an agreement with CFB and pro forma expenses include $3,750 of amortization
related to the cost of the bank charter acquired with the acquisition of the
outstanding capital stock of Premier Bank.
(5) Adjusted to give effect to the sale of the Common Stock offered hereby by
the Company at an assumed offering price of $11.00 per share and the
application of the net proceeds therefrom. See "Use of Proceeds." The
unaudited pro forma data for the Reorganization and the Offering includes
one-time charges of approximately $450,000 for bonuses expected to be paid
to certain officers and employees and $224,045 for non-cash compensation
related to accelerated vesting of nonqualified options to purchase Common
Stock upon consummation of the Offering, and gives effect to the receipt of
approximately $30.2 million in net proceeds from the Offering including the
payment of approximately $860,000 in liabilities from such proceeds. See
"Pro Forma Condensed Balance Sheet" and "Certain Transactions."
22
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
The following unaudited pro forma condensed balance sheet as of March 31,
1997 gives effect to the consummation of the agreement between the Company and
CFB and the acquisition of the outstanding capital stock of Premier Bank. The
pro forma condensed balance sheet should be read in conjunction with the
Company's financial statements and related notes thereto and the statement of
assets and liabilities generated by the Internet banking operations of the
Company and held and serviced by CFB and related note thereto included elsewhere
in the Prospectus.
The unaudited pro forma condensed balance sheet presented below does not
purport to represent what the Company's balance sheet would have been had the
agreement with CFB and the acquisition of Premier Bank been consummated at an
earlier date.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------------------------------------------
STATEMENT OF
ASSETS AND
LIABILITIES
COMPANY GENERATED BY PRO FORMA PREMIER
ASSETS (HISTORICAL) BANK(1) ADJUSTMENTS BANK PRO FORMA ADJUSTMENTS
------------ ------------- -------------- ----------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ 194,668 $43,408,922 $ 2,000,000 $ (1,197,007)(2) $ (2,250,000)(3)
License agreements--current.... 133,378
Other current assets........... 270,468
Loans.......................... 5,000,000
------------ ------------- -------------- ----------- -------------- --------------
Total current assets......... 598,514 43,408,922 -- 7,000,000 (1,197,007) (2,250,000)
------------ ------------- -------------- ----------- -------------- --------------
Investment in Premier............ 2,375,000(3) (2,375,000)(4)
Bank charter..................... 375,000(4)
License agreements............... 30,306
Furniture and equipment--net..... 149,622
------------ ------------- -------------- ----------- -------------- --------------
Total assets................. $ 778,442 $43,408,922 -- $ 7,000,000 $ 1,177,993 $ (4,250,000)
------------ ------------- -------------- ----------- -------------- --------------
------------ ------------- -------------- ----------- -------------- --------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Amounts due to affiliate....... $1,197,007 $ (1,197,007)(2)
Other payables and accrued
liabilities.................. 860,066
Deposits....................... $43,408,922 $ 5,000,000
------------ ------------- -------------- ----------- -------------- --------------
Total current liabilities.... 2,057,073 43,408,922 -- 5,000,000 (1,197,007) --
------------ ------------- -------------- ----------- -------------- --------------
Shareholders' Equity (Deficit):
Preferred stock..................
Common stock..................... 12,692 $ 13,250(5) 414(3)
Additional paid-in capital....... 1,462,163 3,826,750(5) $ 2,000,000 124,586(3) (2,000,000)(4)
Common stock subscribed.......... 3,841,395 (3,840,000)(5)
Stock subscription receivable.... (1,395)
Unamortized affiliate service
contract expense............... (576,000) 576,000(5)
Unamortized stock plan expense... (378,279)
Deficit accumulated during
development stage.............. (5,639,207) (576,000)(5)
------------ ------------- -------------- ----------- -------------- --------------
Total shareholders' equity
(deficit).................. (1,278,631) -- -- 2,000,000 125,000 (2,000,000)
------------ ------------- -------------- ----------- -------------- --------------
Total liabilities and
shareholders' equity
(deficit).................. $ 778,442 $43,408,922 $ -- $ 7,000,000 $ (1,072,007) $ (2,000,000)
------------ ------------- -------------- ----------- -------------- --------------
------------ ------------- -------------- ----------- -------------- --------------
<CAPTION>
PRO FORMA
FOR THE
PRO FORMA REORGANIZATION
FOR THE PRO FORMA AND THE
ASSETS REORGANIZATION ADJUSTMENTS OFFERING
--------------- --------------- ---------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ 42,156,583 $ 30,190,000(6) $ 71,036,517
(860,066)(7)
(450,000)(8)
License agreements--current.... 133,378 133,378
Other current assets........... 270,468 270,468
Loans.......................... 5,000,000 5,000,000
--------------- --------------- ---------------
Total current assets......... 47,560,429 28,879,934 76,440,363
--------------- --------------- ---------------
Investment in Premier............
Bank charter..................... 375,000 375,000
License agreements............... 30,306 30,306
Furniture and equipment--net..... 149,622 149,622
--------------- --------------- ---------------
Total assets................. $ 48,115,357 $ 28,879,934 $ 76,995,291
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Amounts due to affiliate.......
Other payables and accrued
liabilities.................. $ 860,066 $ (860,066)(7)
Deposits....................... 48,408,922 $ 48,408,922
--------------- --------------- ---------------
Total current liabilities.... 49,268,988 (860,066) 48,408,922
--------------- --------------- ---------------
Shareholders' Equity (Deficit):
Preferred stock..................
Common stock..................... 26,356 30,000(6) 56,356
Additional paid-in capital....... 5,413,499 30,160,000(6) 35,573,499
Common stock subscribed.......... 1,395 1,395
Stock subscription receivable.... (1,395) (1,395)
Unamortized affiliate service
contract expense...............
Unamortized stock plan expense... (378,279) 224,045(9) (154,234)
Deficit accumulated during
development stage.............. (6,215,207) (224,045)(9) (6,889,252)
(450,000)(8)
--------------- --------------- ---------------
Total shareholders' equity
(deficit).................. (1,153,631) 29,740,000 28,586,369
--------------- --------------- ---------------
Total liabilities and
shareholders' equity
(deficit).................. $ 48,115,357 $ 28,879,934 $ 76,995,291
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------------------
(1) Represents assets and liabilities generated by the Company's Internet
banking operations as held and serviced by CFB.
(2) Adjustment to settle amounts due to CFB for $1,197,007.
23
<PAGE>
(3) Adjustments to reflect the investment in Premier Bank based on the estimated
purchase price of approximately $2,250,000 in cash plus 27,593 shares of
Common Stock valued at $2.81 a share and 13,813 shares of Common Stock
valued at $3.47 a share for a total purchase price of $2,375,000
representing $2,000,000 of unimpaired capital and $375,000 for the cost of
the bank charter. The $2,250,000 in cash assumes the maximum amount of
reimbursable expenses allowable under the Premier Bank purchase agreement
will be paid.
(4) Adjustment to consolidate the investment in Premier Bank by allocating the
purchase price to the fair market value of assets acquired and liabilities
assumed. The following allocation is based upon current estimates which will
be subsequently adjusted based upon final determination of the fair value of
assets acquired and liabilities assumed as of the closing date.
The purchase price has been allocated to the assets acquired and liabilities
assumed as follows:
<TABLE>
<S> <C>
Cash.................................................................................................. $ 2,000,000
Loans................................................................................................. 5,000,000
Deposits.............................................................................................. (5,000,000)
Bank charter.......................................................................................... 375,000
------------
Total estimated purchase price.................................................................. $ 2,375,000
------------
------------
</TABLE>
(5) Adjustment to reflect the issuance of 1,325,000 shares of the Company's
Common Stock in consummation of the agreement with CFB.
(6) Adjustment to give effect to the receipt of approximately $30,190,000 of net
proceeds from the Offering.
(7) Adjustment to pay off the liabilities of the Company using the net proceeds
of the Offering. See "Use of Proceeds."
(8) Adjustment to reflect one-time charge of approximately $450,000 for bonuses
expected to be paid to certain officers and employees upon the completion of
the Offering.
(9) Adjustment to reflect one-time charges of approximately $224,045 for
non-cash compensation related to accelerated vesting of nonqualified options
to purchase Common Stock upon consummation of the Offering.
24
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
The following pro forma condensed statements of operations give effect to
the consummation of the agreement between the Company and CFB and the
acquisition of the outstanding capital stock of Premier Bank. The pro forma
adjustments set forth in the notes below relate only to the Reorganization as
the Offering would not have resulted in any further adjustment to the statement
of operations for the periods disclosed except for the changes in net loss per
share as a result of the issuance of the shares proposed to be sold in the
Offering. The pro forma condensed statements of operations should be read in
conjunction with the Company's financial statements and related notes thereto,
and the statements of assets and liabilities generated by the Internet banking
operations of the Company and held and serviced by CFB and related note thereto.
The unaudited pro forma condensed statements of operations presented below
do not purport to represent what the Company's statements of operations would
have been had the agreement with CFB and the acquisition of the outstanding
capital stock of Premier Bank been consummated at an earlier date.
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 20, 1996 FOR THE THREE
(DATE OF INCORPORATION) MONTHS ENDED
TO DECEMBER 31, 1996 MARCH 31, 1997
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA FOR PRO FORMA FOR
PRO FORMA FOR THE THE
THE REORGANIZATION PRO FORMA FOR THE REORGANIZATION
ACTUAL REORGANIZATION AND THE OFFERING ACTUAL REORGANIZATION AND THE OFFERING
--------- ----------------- ----------------- --------- ----------------- -----------------
Total revenues.......... $ 67,709 $ 67,709 $ 67,709 $ 5,775 $ 5,775 $ 5,775
Total expenses.......... 3,906,891 3,919,391(1) 3,919,391(1) 1,805,800 1,809,550(2) 1,809,550(2)
--------- ----------------- ----------------- --------- ----------------- -----------------
Net loss................ $3,839,182 $ 3,851,682(1) $ 3,851,682 $1,800,025 $ 1,803,775 $ 1,803,775
--------- ----------------- ----------------- --------- ----------------- -----------------
--------- ----------------- ----------------- --------- ----------------- -----------------
Net loss per common and
common equivalent
share................. $ 1.43 $ 1.39 $ .67 $ .67 $ .65 $ .31
--------- ----------------- ----------------- --------- ----------------- -----------------
--------- ----------------- ----------------- --------- ----------------- -----------------
Weighted average common
and common equivalent
shares outstanding.... 2,685,310 2,779,080(3) 5,779,080(4) 2,685,310 2,779,080(3) 5,779,080(4)
--------- ----------------- ----------------- --------- ----------------- -----------------
--------- ----------------- ----------------- --------- ----------------- -----------------
</TABLE>
- ------------------------
(1) Includes ten months of amortization expense of $12,500 related to the
$375,000 of cost of the bank charter recorded in conjunction with the
acquisition of the outstanding capital stock of Premier Bank which is being
amortized over a 25-year period.
(2) Includes three months of amortization expense of $3,750 related to the
$375,000 of cost of the bank charter recorded in conjunction with the
acquisition of the outstanding capital stock of Premier Bank which is being
amortized over a 25-year period.
(3) A reconciliation of actual to pro forma for the Reorganization weighted
average common and common equivalent shares outstanding is as follows:
<TABLE>
<C> <C> <S>
2,685,310 -- Actual weighted average common and common equivalent shares outstanding
41,406 -- Issuance of shares to acquire all of the outstanding stock of Premier Bank
52,364 -- Incremental difference between the issuance of 1,325,000 shares of Common Stock which are subscribed as of
December 31, 1996 and March 31, 1997. Under the treasury stock method, the 1,325,000 subscribed shares
represent the equivalent of 1,272,637 shares which have already been included in the calculation of actual
weighted average common and common equivalent shares outstanding.
- ---------
2,779,080 -- Pro forma for the Reorganization weighted average common and common equivalent shares.
- ---------
- ---------
</TABLE>
(4) A reconciliation of pro forma for the Reorganization and pro forma for the
Reorganization and the Offering weighted average common and common
equivalent shares outstanding is as follows:
<TABLE>
<C> <C> <S>
2,779,080 -- Pro forma for the Reorganization weighted average common and common equivalent shares
3,000,000 -- Shares to be issued in the Offering
- ---------
5,779,080 -- Pro forma for the Reorganization and the Offering weighted average common and common equivalent shares
outstanding
- ---------
- ---------
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated as a Georgia corporation on February 20, 1996.
Its primary business purpose is to operate a bank as a wholly owned federal
savings bank subsidiary. The Company entered into a Stock Purchase Agreement
dated June 17, 1996, which was amended and restated as of December 19, 1996 and
was further amended as of February 25, 1997 and May 31, 1997, with Premier to
purchase all of the issued and outstanding stock of Premier Bank, a federal
savings bank and a wholly owned subsidiary of Premier, in exchange for
$2,250,000, comprised of $2,000,000 of unimpaired capital and $250,000 purchase
premium, and 41,406 shares of the Company's Common Stock. The transactions
contemplated by the Stock Purchase Agreement are subject to the approval of the
OTS, the Department of Banking and the FDIC. These agencies issued their
approvals on July 11, 1997, May 13, 1997 and April 14, 1997, respectively. The
Stock Purchase will take place simultaneously with the closing of the Company's
initial public offering.
Since its opening in October 1996, the Bank has operated as a service of CFB
pursuant to the terms of an agreement dated July 15, 1996. Under the agreement,
CFB operates the Bank as a service of CFB under the trade name "Atlanta Internet
Bank" and the Company manages the operations of the Bank. As part of the
agreement, CFB will receive 1,325,000 shares of Common Stock of the Company and
reimburse actual expenses up to a maximum of $1,325,985. Upon consummation of
the Premier Stock Purchase, CFB will transfer the assets (less any interim
operating loss) and liabilities relating to the operation of the Bank to the
Company's federal savings bank subsidiary, which will be renamed Atlanta
Internet Bank upon consummation of all transactions. As of December 31, 1996 and
March 31, 1997, CFB had funded $883,606 and $1,197,007, respectively, of
operating expenses. As of July 8, 1997, the Bank had 2,680 accounts and
approximately $43.6 million in deposits.
Management believes the Bank will provide convenient, cost-effective and
secure banking services utilizing the Internet as the primary channel for
delivery of its commercial and financial services to the growing number of
consumers who use the Internet. Customer convenience and operating efficiency
are two key components of the Company's strategy. Customers will be able to
access the Bank through the Internet, a telephone or an ATM on a 7x24 basis.
Management does not intend to have a traditional branch/teller system as a
delivery channel, thereby reducing typical salary and overhead occupancy costs.
It is also management's intent to limit internal operating costs for systems
processing and programming services by outsourcing as many operations as
practical. Management believes it can take advantage of the economies of scale
of large providers of these services. In August 1996, the Company entered into a
systems processing agreement with BISYS effective through July 1999, subject to
automatic renewal for three-year periods absent a six-month notice of
termination by either party. Pursuant to agreements with AT&T, the Company
receives technical, marketing and customer service support, including
professional programming services from Edify and electronic bill paying
processing services from CheckFree. See "Business--Operations--Service
Providers."
26
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the results of operations of the Company
since incorporation, February 20, 1996, to December 31, 1996, for the period
from February 20, 1996 to March 31, 1996 and for the three months ended March
31, 1997. The financial statements and related notes should be read in
conjunction with this review.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
FEBRUARY 20, 1996 FEBRUARY 20, 1996 FOR THE THREE MONTHS
(DATE OF INCORPORATION) (DATE OF INCORPORATION) ENDED
TO DECEMBER 31, 1996 TO MARCH 31, 1996 MARCH 31, 1997
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:.................................. $ 67,709 $ 40,000 $ 5,775
---------- ---------- ----------
<CAPTION>
% OF % OF % OF
EXPENSES: EXPENSES EXPENSES EXPENSES
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Amortization of service contract......... 2,400,000 61.4% 0 0.0% 864,000 47.8%
Salaries and consulting fees............. 836,962 21.4 14,353 88.2 524,971 29.1
Marketing................................ 197,111 5.0 0 0.0 60,495 3.4
Professional fees........................ 83,633 2.1 999 6.2 21,277 1.2
Logo/web site............................ 73,326 1.9 0 0.0 18,945 1.1
Monthly user fees........................ 60,452 1.6 0 0.0 52,561 2.9
Travel, meetings and entertainment....... 38,794 1.0 392 2.4 4,404 0.2
Occupancy................................ 17,850 0.5 0 0.0 29,750 1.6
Depreciation............................. 17,406 0.5 0 0.0 6,879 0.4
Other operating expenses................. 181,357 4.6 522 3.2 119,993 6.6
Interest expense......................... 0 0.0 0 0.0 102,525 5.7
---------- ----- ---------- ----- ---------- -----
Total expenses....................... 3,906,891 100.0 16,266 100.0 1,805,800 100.0
---------- ----- ---------- ----- ---------- -----
----- ----- -----
NET INCOME (LOSS).......................... $3,839,182 $ 23,734 $(1,800,025)
---------- ---------- ----------
---------- ---------- ----------
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE......................... $ (1.43) $ 0.01 $ (0.67)
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING............ 2,685,310 2,685,310 2,685,310
---------- ---------- ----------
---------- ---------- ----------
DEPOSITS (780 accounts serviced by CFB at
December 31, 1996 and 1,789 accounts
serviced by CFB at March 31, 1997 and
included in CFB Statements of Assets and
Liabilities)............................. $10,366,437 $43,408,922
---------- ----------
---------- ----------
</TABLE>
The statement of operations reflects the initial phase of the Company's
operations, including the acquisition, testing and implementation of the
Internet banking platform, marketing expenses and the accrual of CFB's expense
reimbursements. As noted above, since the Company has not received approval for
its purchase of the outstanding capital stock of Premier, deposits and related
assets resulting from the Company's marketing efforts are reflected in CFB's
financial statements. Therefore, as of December 31, 1996, CFB had recorded
$10,366,437 in deposits for the Bank, consisting of $10,164,927 in money market
deposit accounts and $201,510 in interest checking accounts. Under the Operation
Agreement, deposits and related assets resulting from the Company's marketing
efforts, which began in August 1996, are included in CFB's financial statements.
As of March 31, 1997, CFB had recorded $43,408,922 in deposits for the Bank in
1,789 accounts consisting of: $32,534,384 in money market deposit accounts;
$10,492,293 in certificates of deposit; and $382,245 in interest checking
accounts. There were no deposits as of March 31, 1996. The amount of interest
expense net of interest paid to the Bank by CFB for such deposits was not
significant for the period ended December 31, 1996. Only miscellaneous fees and
consulting revenues are included in Revenues.
27
<PAGE>
PERIOD ENDED DECEMBER 31, 1996
AMORTIZATION OF AMOUNTS DUE UNDER OPERATION AGREEMENT. The Company has
agreed to issue to CFB 1,325,000 shares of its Common Stock appraised at
$3,840,000 on the date of the Operation Agreement, July 15, 1996. This amount is
being amortized to expense over the estimated eight-month life (August 1996 to
March 1997) of the Operation Agreement.
SALARIES AND CONSULTING FEES. These expenses include $318,772 of Company
salary and benefit expenses and $170,558 of compensation expense of CFB, as well
as $347,632 of consulting service for accounting, regulatory and service
development expenses of TSJ&A.
MARKETING. These expenses primarily include advertising expenses of
$106,586 and marketing materials of $48,344.
PROFESSIONAL FEES. These expenses include legal and accounting fees.
MONTHLY USER FEES. These expenses include monthly user fees payable to AT&T
covering charges such as Edify's Electronic Banking System, CheckFree's
electronic bill paying system and ongoing customer support. Also, costs for
initial customer support and monthly fees for each customer accessing the Bank
through the Internet are included in these expenses.
OTHER EXPENSES. These expenses include copying costs, office supplies and
general office expenses, as well as monthly processing charges, including
communication charges. Other expenses also include $48,050 paid to AT&T
including amortization related to a $200,000 fee paid to AT&T for programming
services. This $200,000 is being amortized over the 18-month contract period.
STOCK OPTIONS AND OTHER COMPENSATION. The Company adopted its 1996 Stock
Incentive Plan (the "Plan") which provides that key employees, officers,
directors, and consultants of the Company may be granted nonqualified and
incentive stock options to purchase shares of Common Stock of the Company,
derivative securities related to the value of the Common Stock or cash awards.
The Plan limits the total number of shares which may be awarded to 397,500,
which have been reserved for the Plan. Awards to officers and employees under
the Plan during the period ended December 31, 1996 were 16,562 nonqualified
stock options at an exercise price of $1.21 per share. In connection with the
awards of the options, the Company will record total compensation expense of
$30,000 over the vesting period of the options. Generally, the options vest over
a three-year period; however, when the Offering is completed, all of the
nonqualified options will vest immediately.
The Company has agreed to pay certain officers and employees bonuses of up
to $450,000 when the Offering is completed. See "Certain Transactions."
THREE MONTHS ENDED MARCH 31, 1997
AMORTIZATION OF AMOUNTS DUE UNDER OPERATION AGREEMENT. The Operation
Agreement was amended on February 25, 1997 to extend the Operation Agreement
through May 31, 1997. Therefore, the unamortized balance due under the Operation
Agreement of $1,440,000 as of December 31, 1996 is being amortized in the 1997
statement of operations for the Bank over the remaining life of the Operation
Agreement.
SALARIES AND CONSULTING FEES. These expenses include $246,163 of Company
salary and benefit expenses, $176,257 of consulting and compensation expense of
CFB, and $71,408 of consulting services for accounting, regulatory and service
development expenses of TSJ&A.
INTEREST EXPENSE. Pursuant to the Operation Agreement, CFB will hold and
service the deposits generated by the Company until the Company's receipt of
regulatory approval for operations and successful completion of the Offering.
The consideration to CFB includes reimbursement for net interest
28
<PAGE>
expense, if any, on deposits generated by the Company. For the three months
ending March 31, 1997, interest expense calculated at contracted deposit rates
exceeded interest income paid to the Bank by CFB for such deposits, calculated
at Fed Funds rate, by $102,525.
STOCK OPTIONS AND OTHER COMPENSATION. Awards to officers and employees
under the Plan during the quarter ended March 31, 1997 were as follows: 124,219
nonqualified stock options at an exercise price of $1.21 per share on January 5,
1997; 39,750 incentive stock options at an exercise price of $3.62 per share on
February 25, 1997; and 173,906 incentive stock options at an exercise price of
$10.00 per share on February 25, 1997. In connection with the awards, the
Company will record total compensation expense of $390,484 over the vesting
period of the options. The options vest over a three-year period; however, when
the Offering is completed, all of the nonqualified options will vest
immediately.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
See Note 7 in the Notes to the Financial Statements included elsewhere in the
Prospectus for the pro forma effect of SFAS 128 on the operations of the
Company.
CAPITAL RESOURCES
Management believes it has sufficient capital on hand and under the
Operation Agreement with CFB to satisfy working capital needs for 1997.
Concurrent with the completion of the Offering, management intends to
immediately purchase the outstanding shares of Premier Bank and CFB will
transfer the bank assets and corresponding liabilities of the "Atlanta Internet
Bank" to the Bank. The Company anticipates that $25.0 million of the Offering
proceeds will be contributed to the Bank for general corporate purposes. The
balance of the net proceeds will be used for the Premier Bank stock purchase
($2.3 million), reimbursement of CFB expenses ($2.0 million), reimbursement of
professional and operational expenses ($490,000), and bonus payments ($450,000).
RECENT DEVELOPMENTS
Based upon preliminary unaudited financial statements as of June 30, 1997,
deposits held by CFB on behalf of the Company were $43,144,859 and the Company's
total assets were $964,838 as compared with $43,408,922 and $778,442 of deposits
and total assets, respectively, as of March 31, 1997. Management believes the
decrease in deposits during the second quarter of 1997 is primarily attributable
to a decrease in average account size, offset by an increase in the number of
deposit accounts from 1,789 at March 31, 1997 to 2,637 at June 30, 1997.
Revenues for the three-month and six-month periods ended June 30, 1997 were $841
and $6,616, respectively. Net loss and net loss per common and common equivalent
share for the three-month period ended June 30, 1997 were $1,420,105 and $.52,
respectively. Net loss and net loss per common and common equivalent share for
the six-month period ended June 30, 1997 were $3,220,130 and $1.17,
respectively. Revenues and net loss were $74,325 and $7,059,312, respectively,
for the period from February 20, 1996 (inception) to June 30, 1997.
29
<PAGE>
BUSINESS
OVERVIEW
Upon completion of the Offering, the Company will own and operate the
Atlanta Internet Bank, which provides convenient, cost-effective and secure
banking services to the growing number of consumers using the Internet for
commercial and financial services. Customers can access the Bank on a 7x24 basis
from any PC, wherever located, by means of a secure Web browser or by ATM,
telephone or U.S. mail.
The Company's objective is to offer a broad range of banking and financial
service products through the Internet and alternative delivery channels.
Customer convenience and operating efficiency are two key components of the
Company's strategy. The Bank does not incur the cost of supporting a physical
branch system, which management believes will benefit customers through the
Bank's ability to offer attractive deposit rates.
In the initial phase of the Company's operations, management concentrated
its efforts on developing, testing and implementing an Internet banking
platform. Once the platform structure was in place, management established
deposit-oriented products that include electronic bill paying, checking and
money market accounts and certificates of deposit. During 1997, management
intends to offer a broad array of consumer loan products, such as personal
credit lines, mortgages, home equity and secured loans, credit cards and other
fee generating products. Management also plans to continue to pursue other
revenue generating opportunities through partnerships and strategic alliances
where appropriate.
Customers can access the Bank through any Internet service provider by means
of an acceptable secure Web browser such as Netscape's NAVIGATOR (Version 2.0 or
higher) or Microsoft's INTERNET EXPLORER (Version 3.0 or higher). Customers can
review account activity, enter transactions into an on-line account register,
pay bills electronically and print bank statement reports, all on a real-time
basis. Unlike PC-based home banking software, which resides on a PC that stores
the data and requires manual downloading and backup, the Bank enables customers
to transact banking business on a real-time basis from any location provided
they have a secure Web browser to connect them to the Bank through the Internet.
The Bank currently offers interest-bearing checking accounts, money market
accounts and certificates of deposit and provides direct deposit, monthly
statement, on-line transfer, wire transfer, bank e-mail and electronic bill
paying services. As of July 8, 1997, the Bank had 2,680 accounts and
approximately $43.6 million in deposits, of which approximately $10.4 million
was invested in certificates of deposit, approximately $32.0 million was
invested in money market accounts and approximately $1.2 million was invested in
interest checking accounts.
The Company was incorporated as a Georgia corporation on February 20, 1996.
The Bank commenced operations in October 1996 as a service of CFB under the
trade name "Atlanta Internet Bank" pending regulatory approval of the Company's
purchase of the outstanding stock of Premier Bank and the transfer of the assets
and liabilities relating to the operation of the Bank from CFB.
INDUSTRY BACKGROUND
THE INTERNET
The Internet is a global web of computer networks. Developed more than 25
years ago, this "network of networks" allows any computer connected to the
Internet to communicate with any other computer using the Internet protocol. The
Internet historically was used by academic institutions, defense contractors and
government agencies primarily for remote access to host computers and for
sending and receiving e-mail. Before the 1990s, communication on the Internet
was conducted in an arcane language requiring a high degree of technical
knowledge. During the 1990s, however, software packages called "browsers" were
developed to allow non-technical users to find, retrieve and link information on
the Internet. Browsers allow highlighted words or icons, called hyperlinks, to
display text, video, graphics and sound on a local
30
<PAGE>
computer screen no matter where the originating resource is located. In
addition, individuals are connecting directly to the Internet through a variety
of easy-to-use software packages and Internet access gateways provided by
consumer on-line services.
Use of the Internet has grown rapidly during the 1990s and is expected to
continue to grow. According to an industry source, the number of Internet users
is expected to increase from 38 million in 1995 to 199 million in 1999. Much of
the recent growth in Internet use by businesses and individuals has been driven
by the emergence of a network of servers and information available on the
Internet called the "World Wide Web." The Web features a rapidly increasing
number of "home pages" that provide information about a wide variety of
institutions, businesses and individuals. A home page functions primarily as an
advertisement, however, and does not necessarily allow a user to transact
business on a real-time basis with the person or entity sponsoring the page. For
example, although several hundred banks have home pages on the Web, management
believes that only a few have the capability to transact banking business over
the Internet. Management believes the Bank is the only bank that operates solely
on the Internet without branch locations.
ELECTRONIC BANKING
The creation of the Web and the introduction of Web browsers with graphical
presentation and "point and click" navigation have made the Internet a
mainstream global network. A variety of security standards have been developed
to make the Internet safer for general commerce and financial services
transactions. Transactions can now be protected through secure Web servers that
are separated from general purpose Web servers and through encrypted
transmissions between servers and the user's PC.
The increasing amount of commerce transacted on the Web has prompted the
development of electronic banking delivery systems. These forms of electronic
delivery systems provide convenience for customers and allow financial
institutions to lower their overhead costs. The two types of electronic banking,
PC-based home banking and Internet banking, are very different in their
functionality, means of operations and timeliness. The characteristics of each
are described below.
PC-BASED HOME BANKING. PC-based home banking requires PC-based financial
services software products such as Intuit Inc.'s ("Intuit") QUICKEN, Microsoft's
MONEY or Meca Software, LLC's ("Meca") MANAGING YOUR MONEY. Each product carries
its own set of instructions that the customer must learn before commencing any
banking transactions. The software resides on the customer's PC along with his
or her account data and requires a dial-up modem and manual downloading.
Consequently, PC-based home banking must be conducted from the PC containing the
customer's software and account data. The customer must back up his or her
account data at frequent intervals to reduce the risk of losing data. Because
the customer must connect with the financial institution via modem and download
his or her account data, real-time transactions are not possible. The
information presented to the customer is current only as of the time it was
downloaded to the customer's PC.
INTERNET BANKING. Unlike PC-based home banking, Internet banking requires
only a secure Web browser for Internet access to the Internet and the financial
institution. No particular software is required and the customer's operations
are not restricted to a specific PC. Instead, the customer accesses the
financial institution through the Internet and deposits or transfers funds, pays
bills or transacts other business on a real-time basis. Account data remains
stored on the Bank's secure server at all times, protected by technology
designed specifically to safeguard such information. No downloading or back-up
is required, as the Bank's server backs up all data and transactions on a
continuous basis. With Internet banking, the information presented to the
customer remains current at all times.
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The following chart compares the typical features of Internet banking,
PC-based home banking and traditional branch banking:
BANKING SERVICE DELIVERY CHANNEL
<TABLE>
<CAPTION>
INTERNET BANKING PC-BASED HOME BANKING TRADITIONAL BRANCH BANKING
-------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Accessibility 7 days a week 7 days a week Traditional Banking Hours
24 hours per day 24 hours per day
Real-Time Processing (1) Batch Processing (2) Batch Processing (2)
----------------------------------------------------------------------------------------
Convenience Need Only Internet Access Banking Software and Account Branches and ATMs
and Secure Browser Data Reside on Single PC
No Customer Back-up Requires Frequent Customer
Required Back-up
----------------------------------------------------------------------------------------
Cost No Branches No Branches Full Overhead Structure
Low Personnel Cost Reduced Personnel
and Other Overhead Cost and Other Overhead
----------------------------------------------------------------------------------------
Data Security Password/ID Protected Password/ID Protected N/A
Encrypted Dial-up Modem Secure Dial-up Modem N/A
Transmission Transmission
All Data Stored on Secured Data Stored on PC All Data Stored on Secured
System System
----------------------------------------------------------------------------------------
Technology Flexibility Program Upgrades Upgrades Require New N/A
Centralized and Require no Diskettes to be Installed on
Customer Installation PC by Customer
</TABLE>
- ------------------------
(1) Customer transfers between their accounts are processed on a real-time
basis.
(2) Customer transfers between their accounts are batched and processed daily.
MARKET OPPORTUNITY
The use of electronic banking delivery systems is growing as consumers find
electronic banking to be convenient and cost-effective. According to Forrester
Research, Inc., the number of electronic banking households is expected to grow
from 1.1 million in 1996 to 9.7 million in 2001, with total assets managed
on-line expected to increase from $5.4 billion to $46.9 billion during that
period. Forrester's report further indicates that while Internet banking was
being used by less than 10% of electronic banking households in 1996, the
percentage of such households utilizing Internet banking is projected to rise to
over 75% in 2001.
A fall 1995 Internet demographic study by CommerceNet/Nielsen Media Research
revealed that in the U.S., nearly two-thirds of Web users have a college
education. The survey also indicated that in the U.S., more than 50% of Web
users are 35 years of age or younger and 25% of Web users' households have
annual household incomes of at least $80,000. Management believes that Internet
users generally carry higher bank balances and use more financial services.
Management believes the increasing number of users of the Internet and the
Web, coupled with the demographic characteristics of those users and the
relative flexibility and convenience of Internet banking, represents a market
opportunity for the Company as one of the world's first providers of Internet
banking services.
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STRATEGY
The Company's objective is to become a leading provider of financial
services through the Internet. Management intends to accomplish this objective
by implementing the following strategies. No assurance can be given, however,
that the Company will be successful in implementing these strategies or in
achieving its stated objectives.
- LEVERAGE LOW COST STRUCTURE. The Bank is not required to pay the overhead
expenses necessary to support a traditional branch operation, and
operating costs are therefore generally lower. The absence of a branch
system and the Company's low cost per transaction enable it to offer
attractive deposit rates without significantly impacting profitability.
- OUTSOURCE OPERATIONAL FUNCTIONS. The Company has entered into agreements
with companies that provide a variety of specialized services and
technologies to the Bank. For example, the Bank's Internet technology,
transaction processing, bill payment functions and other services are all
outsourced to third-party service providers. In each of these
relationships, the Bank benefits from the service provider's expertise and
economies of scale while retaining the flexibility to take advantage of
changes in available technology without impacting customer service.
- PROVIDE CONVENIENT, REAL-TIME TRANSACTIONS. Management believes the Bank
provides customers with a higher level of convenience than can be achieved
in a traditional branch or through PC-based home banking. The Internet
allows Bank customers to conduct banking activities on a real-time, 7x24
basis from any PC, wherever located, using a secure Web browser. This
technology gives Internet banking an advantage over PC-based home banking,
which utilizes PC-based software, requires repeated manual downloading and
back-up and limits the user to a specific PC.
- EMPLOY ADVANCED SECURITY. The Bank uses sophisticated technology to
provide what management believes to be among the most advanced security
measures currently available in the electronic banking industry. All
banking transactions are encrypted and all transactions are routed from
the Internet server through a "firewall" that limits access to the Bank
server. The Bank's systems automatically detect attempts by third parties
to access other users' accounts and feature a high degree of physical
security, secure modem access, service continuity and transaction
monitoring. At the Company's request, AT&T is obtaining a Statement of
Accounting Standards 70 ("SAS 70") audit by a national accounting firm. In
an SAS 70 audit, the auditors issue a report addressing whether the
computer systems are being managed and operated in a manner consistent
with accepted practices. The SAS 70 audit procedure is expected to be
completed by fall 1997. See "--Security."
- OFFER A BROAD ARRAY OF PRODUCTS AND SERVICES. The Internet provides an
opportunity for the Bank to deliver a variety of traditional consumer loan
and deposit products. Management intends to expand the Bank's product and
service offerings to include services such as asset management with money
market sweeps, direct purchase capability with selected Internet "mall"
venues and reloadable cash cards.
- DEPLOY MULTI-FACETED MARKETING STRATEGY. The Company's target market
includes on-line users, on-line shoppers and special niche customers. In
addition to the Bank's on-line advertising with AT&T's WorldNet Services
and Digital Cities/AOL, several other marketing initiatives are being
employed. These initiatives include a significant emphasis on marketing
the Bank's services through alliances with selected professional
organizations, colleges, alumni associations and consumer service
providers and on targeted print advertising.
- CROSS-SELL FINANCIAL SERVICES. Management intends to market loans,
brokerage services and other income generating products to its depositors
through various direct marketing techniques, such as bank e-mail, on-line
advertising and telemarketing. Management believes this strategy will
enable the Bank to generate additional earning assets and fee income.
Management further believes that selling multiple products will enhance
customer loyalty and strengthen customer relations with the Bank.
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<PAGE>
MARKETING
CURRENT MARKETING STRATEGIES
Prior to its October 1996 launch, the Bank embarked on a marketing campaign
to establish its presence as an Internet-only bank that offers a variety of
services and provides additional convenience and flexibility without the
overhead and operating costs associated with a physical branch system.
The Bank currently markets its services through advertising campaigns in
printed material, such as newspapers and magazines, as well as on various Web
sites through relationships with entities such as AT&T WorldNet. The Bank's
marketing, advertising and public relations campaigns focus on the following
three components:
- VALUE. The Bank's relatively low overhead and operating costs enable it to
offer higher interest rates than those normally offered by traditional
banks. The Bank entered the market in October 1996 with attractive
introductory rates on its money market and checking accounts. This pricing
structure has been successful in attracting depositors who are motivated
by the Bank's rates, as well as by the variety of services the Bank
expects to promote in the future. Consequently, management believes the
Bank's customer base will grow as new product and service offerings
provide additional incentives for banking on-line.
- CONVENIENCE AND SERVICE. Unlike traditional banks, the Bank never closes.
Its products and services are available on a 7x24 basis at the user's
convenience. Unlike depositors in traditional banks, the Bank's depositors
have complete control over when and how they access their accounts.
PC-based home banking, which utilizes PC-based software, requires repeated
manual downloading and back-up and limits the user to a specific PC. The
Bank's customers have real-time, interactive access to their accounts from
any PC, wherever located, by means of a secure Web browser. The Bank's
services offer a solution for busy people who travel, people with
disabilities, college students and their families, employees on
international assignment, and the growing population using the Internet
for a variety of services. The convenience of Internet banking becomes
increasingly valuable as new products and services are offered.
- SERVICE PROVIDERS. The Bank has carefully chosen its service providers in
an effort to ensure the highest quality service possible to its customers.
AT&T's WorldNet Service enabled the Bank to commence its on-line
operations with a well-known Internet service provider. The Bank's
relationship with AT&T also provides efficient end-user technical support
and quick response to on-line e-mail inquiries. See "--Operations--Service
Providers."
FUTURE MARKETING STRATEGIES
Management intends to continue to market the Bank's services through a
combination of special marketing alliances, advertising campaigns and public
relations activities, while expanding joint marketing programs and advertising
with AT&T WorldNet, Digital Cities/AOL and other Internet service providers.
While the key messages of value, convenience, service and reliability will
continue to play a major role in the Bank's marketing and public relations
efforts, management also intends to focus on targeted groups. The Bank's primary
goal will be to grow its account base to solidify its brand name recognition in
multiple market segments. Management intends to identify and pursue customers
through several additional channels, including, but not limited to:
- ON-LINE USERS. Management believes that current Internet users are
favorably predisposed to Internet services. This is a rapidly growing
demographic group, as increasing numbers of users go on-line every day.
The Bank currently is using AT&T WorldNet and Digital Cities/AOL as banner
sites. Management plans to register the Bank on the Internet's top search
engines, use on-line banner advertising opportunities and establish the
Bank's presence with other Internet service providers and targeted
Internet sites.
- ON-LINE SHOPPERS. The Bank has an arrangement with one of the world's
first on-line retail "malls" to pioneer an on-line shoppers account.
Management believes on-line shopping will become one of
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the fastest growing segments on the Internet over the next two years.
Management intends to actively market the Bank's services to this
population.
- MARKETING ALLIANCES. Management intends to market the Bank's services
through alliances with selected professional organizations, colleges,
alumni associations and consumer service providers. For example, the Bank
recently entered into such an alliance with the Georgia Institute of
Technology Alumni Association. In each case, management will emphasize the
uniqueness of the Bank and its exclusive offerings to a particular group.
- SPECIAL NICHE CUSTOMERS. The Bank is targeting specific market segments
such as college students, U.S. citizens living outside the United States,
disabled persons and residents of large apartment complexes. The Bank is
developing programs that are tailored to fit their demographic profiles.
One example already underway is the Corporate Call program, which offers
special incentives and services to employees of targeted companies, often
in technology-related industries. These services and special rates already
have been used successfully to attract employees of several companies to
the Bank's services.
SPECIFIC PUBLIC RELATIONS ACTIVITIES
A vital part of the Bank's marketing plan is the execution of its public
relations strategy. For each of its targeted marketing campaigns, management
will develop a public relations campaign for advertising and editorial coverage.
Many traditional public relations methods will be used in promoting Bank
services. Management intends to pursue media coverage, including general press,
industry periodicals, television, radio and other media covering banking and
finance, technology, consumer issues and special interests. Press releases,
video news releases, direct mail campaigns, media alerts and presentations will
announce new banking services as they are added, as well as new partnerships and
alliances. Additionally, management plans to develop specific "net campaigns"
for Internet advertising, forum discussions and general electronic public
relations. The Bank also will continue to work with AT&T to develop joint
promotional materials as new services are added. AT&T provided significant
marketing support for the Bank's initial launch and has indicated that it will
continue to work with the Bank to develop marketing strategies.
PRODUCTS AND SERVICES
CURRENT PRODUCTS AND SERVICES
The Bank currently offers interest-bearing checking accounts, money market
accounts and certificates of deposit. Each new Bank customer receives a
password, a checkbook and an ATM card. In addition, the Bank provides electronic
bill paying services, direct deposit, on-line transfer, wire transfer and other
services traditionally associated with checking accounts. The Bank's primary
products and services are described below.
- CHECKING AND MONEY MARKET ACCOUNTS. To attract initial deposits, the Bank
is offering attractive interest rates on checking and money market
accounts. Management expects that the Bank will be able to continue to
offer attractive rates as a result of the Bank's low overhead costs. The
Bank charges customers a service charge, currently set at $4.50 per month,
for an interest-bearing checking account. Management anticipates that the
interest-bearing checking account will be used as the primary account for
transactions and bill payment, with the money market account being used
for more stable savings balances. Overdraft protection is automatically
established between the money market account and the interest-bearing
checking account.
- CERTIFICATES OF DEPOSIT. The Bank offers certificates of deposit with
terms of six, 12 and 30 months. As in the case of checking and money
market accounts, the Bank offers attractive interest rates on its
certificates of deposit.
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- BILL PAYMENT SERVICE. Through services provided by CheckFree, customers
are able to pay their bills on-line through electronic funds transfer or a
written draft prepared and sent to the creditor by CheckFree. No
additional fee is charged for this service.
- OTHER SERVICES. The Bank also offers direct deposit, on-line transfer and
wire transfer services. Customers receive monthly bank statements by mail
and can print their bank statements at any time. Customers also can send
on-line e-mail messages to the Bank and systems administrators who can
respond to their inquiries with return e-mail messages.
FUTURE PRODUCTS AND SERVICES
Management intends to follow the Bank's initial product offerings with new
products and services. Management plans to add credit cards, loans (including
mortgage and other consumer loan products) and brokerage services over the next
several quarters. These products and services are described below. No assurance
can be given, however, that these products and services will be made available
or that, if available, they will be successful.
- CONSUMER LOAN PRODUCTS. Beginning in the third quarter of 1997, the Bank
plans to introduce loan products to current and potential customers via
the Internet and other delivery channels. These products will include
mortgages, home improvement/equity loans, credit cards, personal lines of
credit, overdraft protection and secured loans. Management plans to
utilize decision support systems that respond to inquiries on a 7x24
basis. While the Bank will set credit criteria, terms and conditions and
rates, much of the closing process and servicing will be provided by
contracted third parties. The Bank also intends to purchase loans as well
as participations in loans.
- CREDIT CARDS. In 1997, the Bank plans to offer credit cards to its most
creditworthy customers. Although the interest rate and other terms have
not yet been determined, management believes its customers will be less
sensitive to the interest rate offered than to the convenience of using
the card along with the other services provided by the Bank. The Bank will
be solely responsible for the credit criteria, pricing, terms, conditions
and funding of credit card accounts, but likely will enter into an
agreement with a third party to process the Bank's credit card accounts.
- BROKERAGE SERVICES. The Bank plans to offer brokerage services to its
customers by the end of 1997. Customers will be able to view their account
balances and conduct banking and brokerage transactions from a single
screen. Management anticipates that combined brokerage and deposit account
statements will eventually be available. Management has not yet identified
specific products or providers or sought regulatory approval for brokerage
services.
- OTHER PRODUCTS AND SERVICES. The Bank plans to offer Individual Retirement
Accounts ("IRAs") and debit cards to its existing and future customers.
Management has not selected specific IRA or debit card products or
providers.
Management estimates the Bank will incur an aggregate of approximately
$500,000 in costs relating to the introduction of the foregoing products and
services in 1997. Management believes these costs will relate primarily to the
development and integration of the technology needed to provide these products
and services in conjunction with those currently provided by the Bank.
Management does not expect to incur significant marketing or advertising expense
in connection with the introduction of new products and services.
LENDING AND INVESTMENT ACTIVITIES
The Bank intends to generate interest income by making consumer loans and
investing in various fixed income securities, loan participations and whole loan
packages. Management's core lending philosophy is to focus on providing its
customer base with convenient access to consumer loan products. Customers will
be able to apply for loan products via the Internet, telephone or U.S. mail.
Through the use
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of automated credit scoring and decision-making technologies, management
believes it can respond quickly to customer requests for loan products.
The Bank will establish a credit committee to set underwriting standards and
criteria for the issuance of loan products and to monitor on an ongoing basis
the Bank's loan portfolio. Management's general philosophy is to focus on credit
quality. In addition, management believes the demographic profile of Internet
users will positively impact the Bank's loan portfolio with respect to net
losses and charge-offs.
While the Bank builds its customer base and loan portfolio, it will invest
excess funds in various fixed income securities, loan participations and whole
loan packages. Management's philosophy of high credit quality will guide its
investment decisions. The Bank's fixed income securities portfolio will be
concentrated primarily in U.S. Treasury obligations and mortgage-backed
securities issued by agencies such as Fannie Mae and Freddie Mac. The Bank may
also invest in loan participations offered from commercial banks that syndicate
loans and invest in packages of whole loans offered by commercial banks and
other financial intermediaries.
COMPETITION
The market for electronic banking has only recently begun to develop, is
rapidly evolving and has few proven competitors. With the expected continued
development of the Internet as an avenue for providing financial services,
management expects competition to intensify. Because of the diverse and changing
competitive marketplace in the financial services industry and for
Internet-related products and services, there can be no assurance that
management has identified or considered all possible present and future
competitors. Many of the Company's known competitors have substantially greater
financial resources than the Company.
Several significant competitors currently offer on-line banking services.
These competitors include financial institutions offering PC-based home banking
and Internet banking services and software companies offering PC-based home
banking services. Management believes the following constitute the Bank's major
competitors:
- Security First Network Bank, FSB ("SFNB"), Atlanta, Georgia, is the first
bank to offer banking services predominantly on the Internet. SFNB opened
for operation in October 1995 and offers deposit and bill payment services
and loan products.
- IBM is teaming up with 18 large banks to offer a full service home banking
package called INTEGRION. The joint venture will connect a customer's PC
with the bank through the IBM Global Communications Network, a private
communications network. The banks that are included in this consortium
will not be limited in the type of financial management software they
offer to their customers, but INTEGRION will control the channels
connecting the financial institution to their customers.
- Management also views the major financial software companies, Intuit and
Microsoft, as competitors. Intuit's QUICKEN software is the most popular
home banking software on the market today. Microsoft's MONEY is also a
well-known home banking software package. These applications enable
customers to access one of the network member banks and download their
account information, transfer funds between accounts and automatically
reconcile account balances.
- Meca Software, LLC is jointly owned by NationsBank, Bank of America
Corporation, Fleet Financial Group, Inc., First Bank Systems, Inc., and
Royal Bank of Canada. Meca is the maker of the financial software,
MANAGING YOUR MONEY. This software will offer home banking as well as
other financial services via the Internet this year.
All of these competitors are larger and have greater financial and other
resources than the Company. Nevertheless, management believes the Bank will be
able to compete effectively with the foregoing
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competitors. Although SFNB is also an Internet bank, management believes the
Bank will be able to compete effectively with SFNB based primarily on the Bank's
sole focus of providing banking services.
Management views the Bank's principal competitive advantages over PC-based
home banking software providers to be, in approximately equal proportions,
speed, simplicity and flexibility. Management believes that the real-time
interface between customers and their account activity, as well as the relative
simplicity of the steps required to transact business with the Bank,
distinguishes the Bank from PC-based home banking providers. Additionally,
customers of the Bank are not restricted to the location of a single PC, as is
the case with PC-based financial services software.
The Bank also competes with traditional banks. Management believes that the
Bank's competitive advantage with respect to these banks is based primarily on
price and secondarily on speed, flexibility and convenience. Because the Bank
does not have the overhead expenses inherent in operating a traditional branch,
it is able to attract new customers by passing its savings on to them. The
growth of the Internet and the speed, flexibility and convenience it offers also
provide the Bank with a competitive advantage over traditional banks.
OPERATIONS
ACCOUNT ACTIVITY
Customers can access the Bank through any Internet service provider,
including but not limited to AT&T's WorldNet Service and Digital Cities/AOL, by
means of an acceptable secure Web browser such as Netscape's NAVIGATOR (Version
2.0 or higher) or Microsoft's INTERNET EXPLORER (Version 3.0 or higher). When
customers access the Bank's service menu, they can open a new account, review
the status of an existing account or engage in a transaction.
To open a new account, the customer can either (i) print out the account
application displayed on the screen, fill it out and send it to the Bank; or
(ii) apply by calling the Bank's toll-free telephone number, 1-888-BKONWEB. The
Bank then establishes an account for the customer through its direct interface
with BISYS, the Bank's systems processor. It also sends a "welcome kit" to the
customer containing AT&T WorldNet software (if requested), a preliminary
password and some basic information about the Bank. The customer is instructed
to deposit funds to his or her account at the Bank by direct deposit, wire
transfer, mail or other means. The Bank then accesses the BISYS network and
records the initial deposit.
Deposits into an open account at the Bank can be made via direct deposit
programs, by transferring funds between accounts at the Bank, by wire transfer,
by mail or in person at the Bank's principal executive offices; however, no
teller line is maintained and the Bank does not intend to establish a physical
branch system. Customers can also make withdrawals and have access to their
accounts at ATMs that are affiliated with the Cirrus Network, which operated
nearly 315,000 ATMs worldwide as of February 27, 1997. Other networks may be
added in the future. On-line customers currently are able to review account
activity, enter transactions into an on-line account register, pay bills
electronically, receive statements by mail and print bank statement reports. In
the future, customers will be able to take advantage of additional product
offerings by the Bank.
GEOGRAPHIC SCOPE
The Bank can accept customers regardless of their residence or location as
long as they have a PC with a secure Web browser. Because the Bank lacks a
physical branch presence, regulatory restrictions based solely on geographic
location will not apply to the Bank. In addition, because the Bank transacts
business only by means of the Internet, ATMs, telephone and U.S. mail, bank
personnel cannot meet with customers to obtain identification or other relevant
information. Consequently, the Bank employs a variety of methods to verify its
customers' identities and the data presented in their account applications. For
example, the Bank verifies the name and address on the account application,
performs a credit check on
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the applicant and verifies the applicant's employment before it accepts a new
account. If the Bank cannot confirm an applicant's identity, determines that the
applicant presents a risk to the Bank or is unable to provide services that will
conform to the particular requirements of a foreign jurisdiction, the Bank will
decline the application.
PRODUCT DELIVERY
Management believes the widespread acceptance of graphical computer
interfaces and Web browsers presents a unique and rapidly growing opportunity to
offer a variety of traditional as well as non-traditional banking and bank
related services via the Internet. To this end, the Company has pursued a
strategy of acquiring and utilizing proven banking systems and technologies
rather than developing new technologies and systems. This enables the Company to
focus on marketing a variety of services in attractive packages to the consumer
while reducing the Company's dependence on one supplier or on the uncertainties
of new technologies.
SERVICE PROVIDERS
Management has negotiated agreements with a select group of service
providers who not only provide the Bank with significant quality, security,
reliability, performance and marketing capabilities, but also play an integral
role in the implementation of the Bank's full financial services strategy.
Moreover, the Company has preserved a degree of flexibility that will enable it
to continually assess and evaluate its product offerings and delivery structure
and incorporate other alliance opportunities as they present themselves. Should
any of these relationships terminate, however, management believes the Company
could secure the required services from an alternative source without material
interruption of the Bank's operations.
- AT&T ADVANCED NETWORK SOLUTIONS DIVISION. Pursuant to an agreement between
the Company and AT&T dated August 16, 1996 (the "AT&T Agreement"), AT&T's
Advanced Network Solutions Division provides technical, marketing and
customer service through a bundled product and service offering called
"Personal Financial Services." Specifically, AT&T provides the Bank with a
secure Internet Web site on AT&T's Easy World Wide Web ("EW3"), computer
software that performs services related to the operation and maintenance
of the Bank's infrastructure and other electronic banking services. AT&T
also provides a toll-free touch-tone voice response service for technical
and bill payment customer support, banking customer service and inbound
telemarketing.
Under the AT&T Agreement, AT&T also provides and maintains the software
products of two other banking software companies--Edify and CheckFree. It
provides the interface necessary to link the Bank's servers with the
servers used by BISYS and CheckFree. Pursuant to a license granted by
Edify, AT&T provides Edify's Electronic Banking System and Electronic
Workforce software applications to the Bank. This software enables the
Bank to offer a variety of automated banking and e-mail services on the
Internet. In addition, pursuant to a separate agreement between AT&T and
CheckFree, the Bank receives bill payment processing services performed by
CheckFree.
The AT&T Agreement required an initial consulting payment and also
requires additional payments for initial customer support, or
"on-boarding." In addition, the Bank pays a monthly fee for each customer
accessing the Bank via the Internet. The AT&T Agreement expires on
February 19, 1998, but may be terminated by either party upon six months'
prior written notice. AT&T has informed the Company that AT&T may
discontinue its Personal Financial Services offering in 1998. AT&T would,
however, continue to provide marketing and hosting services to the
Company. Based upon discussions with a number of alternative data
processing providers and the fact that the necessary computer hardware and
software are non-proprietary and commercially available, management
believes that the Company can obtain services that are equal to or
superior to those provided as part of the Personal Financial Services
package at reasonable expense. Management anticipates that such a change
in service providers would be virturally seamless to the Bank's
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customers and would not materially disrupt the Bank's operations. See
"Risk Factors--Reliance on Third Party Service Providers."
- AT&T WORLDNET. AT&T's WorldNet Services Group provides the Bank with
advertising and marketing services. The Bank was initially part of a
select group known as Charter Advertisers. This program provided
advantageous banner advertising and directory listings throughout the
WorldNet site, including the Home Page. Management continues to work
closely with AT&T on additional advertising programs. See "--Marketing."
- BISYS. The Bank receives core systems processing services, such as deposit
account, loan processing and year-end processing services, pursuant to an
agreement between the Company and BISYS dated August 22, 1996 (the "BISYS
Agreement"). For these standard services, the Bank pays BISYS a monthly
fee calculated by multiplying the number of customer accounts by a per
account charge. The monthly fee is reviewed on a quarterly basis and
adjusted so that as the number of accounts rises, the per account charge
is reduced. Non-standard services, such as ATM services and the production
of certain reports, are subject to additional monthly charges. In
addition, the Bank paid BISYS an initial conversion fee. The BISYS
Agreement expires on August 22, 1999, but will renew automatically for
successive three-year terms absent six months' prior written notice to the
contrary by either party.
The following chart summarizes the services provided by AT&T, BISYS, Edify
and CheckFree:
<TABLE>
<CAPTION>
COMPANY KEY SERVICES
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
AT&T
- - Advanced Network - Secure hosting of Edify's Electronic Banking System
Solutions Division - CheckFree bill paying services
- Customer care--technical and bill paying support
- Connectivity to banking and bill paying host computers
- - WorldNet - Rotating banner ads on Welcome Page (Main Page)
- Banner advertisements in various WorldNet locations
- - Easy World Wide Web (EW3) - Hosting of the Bank's marketing web site
- - Marketing Advantage - Co-Branded WorldNet Navigator disks provided to Atlanta Internet Bank customers
and used for direct marketing purposes. Displays Atlanta Internet Bank's logo
on WorldNet screen using special registration.
- - Network Voice Response TouchTone voice response service for toll-free inbound routing to:
- Technical and bill paying customer support
- Banking customer service
- Inbound telemarketing
- -----------------------------------------------------------------------------------------------------------------------------------
BISYS - Bank systems processing
- Interface to secure server hosting at AT&T
- Online customer ID/password verification
- ATM and debit card systems
- Items capture/inclearings, other services
- -----------------------------------------------------------------------------------------------------------------------------------
Edify - Electronic Banking System--Licensed to AT&T and run on secure server
- -----------------------------------------------------------------------------------------------------------------------------------
CheckFree - Bill paying services under contract with AT&T Advanced Network Solutions
</TABLE>
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<PAGE>
SECURITY
The Bank's ability to provide its customers with secure financial services
over the Internet is of paramount importance. Management has reviewed the
Internet systems, services and software used in the Bank's operations to ensure
that they meet the highest standards of security. The following are among the
security measures that are in place:
ENCRYPTED TRANSACTIONS. All banking transactions and Internet
communications are encrypted so that sensitive information is not available on
the Internet in a form that can be read or easily deciphered. Encryption of
Internet communications is accomplished through the use of the Netscape SSL
(Secure Sockets Layer) technology. SSL is the standard for encryption on the
Internet and is currently used by Netscape's NAVIGATOR (Version 2.0 or higher)
and Microsoft's INTERNET EXPLORER (Version 3.0 or higher). Messages between the
Bank server and BISYS are encrypted using DES encryption, which is described in
the section entitled "--Isolated Bank Server" below.
SECURE LOGON. To eliminate the possibility of downloading the Bank's or a
customer's password file, user identification and passwords are not stored on
the Internet, the Web server or the customer's PC. Furthermore, passwords are
variable length strings of six to eight alpha-numeric characters, which makes
the chance that a password can be randomly guessed less than one in one
trillion.
ISOLATED BANK SERVER. The computer that is used to provide the Bank's
services cannot be accessed directly through the Internet. It is on a private
connection, or intranet, that provides two-way communication between the
isolated Bank server and the AT&T EW3 Internet Server. Consequently, an Internet
user cannot directly access the computer that actually provides the Bank's
services.
All banking services are routed from the AT&T EW3 server through a firewall.
The firewall is a combined software and hardware product that precisely defines,
controls and limits the access to "internal" computers from "outside" computers
across a network. Use of this firewall means that only authenticated bank
customers or administrators may send or receive transactions through it, and the
firewall itself is immune to penetration from the network. In other words, the
firewall is a mechanism used to protect the Bank server from the freely
accessible Internet.
Furthermore, all messages sent or received between the AT&T EW3 server and
the Bank server are encrypted using DES encryption. This is a symmetric key
algorithm and is highly secure because it is not susceptible to standard
ciphertext attacks. Thus, even if a perpetrator were able to route a message to
the Bank server through the firewall, the message could not be encrypted in a
way that would be considered valid by the server. As a result, the message would
be rejected.
The following diagram illustrates the layers of security that exist between
a customer's PC and the Bank's server:
[DIAGRAM APPEARS HERE ILLUSTRATING THE SECURITY MEASURES THE BANK USES TO
PROTECT ITS BANKING PLATFORM AND THE INFORMATION FLOWING THROUGH THE BANK FROM
OUTSIDE INTRUSION.]
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<PAGE>
AUTHENTICATED SESSION INTEGRITY. An authenticated user is any user who
signs onto the Bank site with a valid user ID and password. Although the vast
majority of authenticated users will be legitimate Bank customers, the Bank
server is programmed to limit exposure to an authenticated user who is
attempting to defraud the Bank. If the authenticated user alters the URL (the
command or request that is sent from the browser to the server) in any way in an
attempt to gain access to other users' accounts, the Bank server immediately
detects that the session integrity variables have been violated. The Bank server
will immediately stop the session and record the attempt in a log so that Bank
staff can investigate.
PHYSICAL SECURITY. All servers and network computers reside in secure AT&T
facilities. Currently, computer operations supporting the Bank's Internet access
are based in New Jersey. Only employees with proper photographic identification
may enter the primary building. The computer operations are located underground,
with admission only by key card. Access to the Bank server console requires
further password identification.
During the summer of 1997, computer operations will be moved to AT&T's
specialized operations center in rural Virginia. The facility is protected by a
perimeter fence employing electronic surveillance and after-hours security
staff. Secured admission to computer operations and the Bank server are tightly
monitored, as is the case in New Jersey.
SECURE MODEM ACCESS. The Bank server and BISYS are connected by a private
line that is not accessible from the public network. The Bank server is
connected to CheckFree by a one-way modem that permits the server to call
CheckFree, but will not accept incoming calls to the Bank server. A dial-up
maintenance port also permits access to the Bank server. The modem that provides
the only access to this port is specially protected. A person dialing into this
modem must use a device called a "SecureID" card to generate a one-time
password. This SecureID card-protected modem is impenetrable by random dialers
and hackers.
SERVICE CONTINUITY. AT&T and BISYS each provide a fully redundant network
with no single point of failure. The Bank server will also be "mirrored" so that
hardware failures or software bugs should cause no more than a few minutes of
service outage. "Mirroring" means that the Bank server is backed up continuously
so that all data is stored in two physical locations. This network and server
redundancy ensures that access to the Bank will be reliable. However, in case of
any circumstance that results in customers not being able to access the Bank
over the Internet, customers will retain access to their funds through several
means, including checks, ATM cards, customer service and an automated telephone
response system.
MONITORING. All customer transactions on the Bank server in BISYS and in
CheckFree produce one or more entries into transactional logs. AT&T and the Bank
recognize that it is critical to monitor these logs for unusual or fraudulent
activity. As mentioned previously, any attempt by an authenticated user to
modify the command or request that is sent from the browser to the server will
be logged. Additionally, all financial transactions will be logged. Bank
personnel review these logs regularly, and any abnormal or unusual activity will
be noted and appropriate action will be taken either by the Bank, AT&T or both.
Ultimately, vigilant monitoring is the best defense against fraud.
The preceding security measures ensure that the Bank is set up in a secure
manner. However, over the long term, the security of the Bank depends upon the
procedures and standards used for administration of the Internet site. The
Company has asked AT&T to obtain an SAS 70 audit by a national accounting firm.
In an SAS 70 audit, the auditors issue a report addressing whether the computer
systems are being managed and operated in a manner consistent with accepted
practices. The AT&T report is expected by fall 1997. Management expects BISYS to
continue its practice of obtaining an SAS 70 audit.
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<PAGE>
Although the Internet allows a relatively large number of users (i.e.,
anyone, anywhere, who has access to a computer and the Internet) to access the
Bank's Web site, further access to the Bank requires a secure Web browser, user
identification number and password. Management therefore believes the risk of
fraud presented by Internet banking is not materially different from the risk of
fraud inherent in any banking relationship. Management believes the three
principal reasons for a breach in bank security are: (i) misappropriation from
the user of the user's account number or password; (ii) penetration of the
bank's server by an outside "hacker"; and (iii) fraud committed by an employee
of the bank or one of its service providers. Both traditional banks and Internet
banks are vulnerable to these types of fraud. By establishing the security
measures described above, management believes the Bank has minimized its
vulnerability to the first two types of fraud. To counteract fraud by employees,
associates and consultants, management has established internal procedures and
policies designed to ensure that, as in any bank, proper control and supervision
is exercised over employees, associates and consultants. The Bank also
counteracts all three types of fraud through daily examination of the Bank's
transactional logs.
SUPERVISION AND REGULATION
Savings and loan holding companies and federal savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that will affect the Company and the
Bank upon consummation of the Reorganization. This summary is qualified in its
entirety by reference to the particular statute and regulatory provision
referred to below and is not intended to be an exhaustive description of the
statutes or regulations that will be applicable to the business of the Company
and the Bank. Supervision, regulation and examination of the Company and the
Bank by the regulatory agencies are intended primarily for the protection of
depositors rather than shareholders of the Company. The terms "savings
association," "federal savings bank" and "thrift" are used interchangeably in
the section.
REQUIRED REGULATORY APPROVALS
The Company's purchase of the outstanding stock of Premier Bank and related
transactions necessary to complete the Premier stock purchase are subject to
approval by the OTS, the Department of Banking and the FDIC. These agencies
issued their approvals on July 11, 1997, May 13, 1997 and May 14, 1997,
respectively. As part of the OTS approval, the Company made certain commitments
with respect to its operations. Such commitments include, but are not limited
to, commitments: (i) to receive prior OTS approval of any proposed senior
management or directors for a period of three years; (ii) to operate within the
parameters of the Company's business plan as submitted to the OTS; (iii) to
obtain from an independent computer security specialist an independent review of
the implementation, operation and effectiveness of the Internet banking security
measures employed by the Company, including attempts to gain unauthorized and/or
undetected access to its operations and a written report confirming, with
reasonable certainty, that the system does not allow unauthorized or undetected
access to customer accounts; (iv) to comply with the OTS policy statement
regarding on-line PC banking; (v) that the Company's directors and certain
executive officers and shareholders refrain from disposing of their restricted
shares of Common Stock for a period of three years from the date of this
Prospectus; (vi) to obtain the approval of the Regional Director of the OTS with
respect to any changes in the Company's stock benefit plans during the
three-year period commencing on the date of this Prospectus; (vii) to comply
with OTS directives, if any, to require the exercise or forfeiture of
participants' rights under the Company's stock benefit plans in the event the
Bank's capital falls below minimum OTS requirements; (viii) to initially
capitalize the Bank with a minimum of $25.0 million unless the Regional Director
of the OTS approves a lesser amount; and (ix) to submit to the OTS a structured
project plan describing the steps and timing required to replace the services
currently provided by AT&T. Management believes that these commitments will not
materially affect its ability to operate the Bank. The transfer from CFB to the
Bank of the assets and liabilities relating to the operation of the Bank is
subject to approval by the Federal Reserve and the State of South Carolina State
Board of Financial Institutions, which approvals were issued on April 30,
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<PAGE>
1997 and May 8, 1997, respectively. The Reorganization may not be consummated
until the thirtieth day after approval of the Reorganization by the OTS, during
which time the United States Department of Justice and other interested parties
have the opportunity to file suit seeking to enjoin consummation of the
Reorganization on antitrust grounds. The 30-day period referred to above may be
reduced to 15 days if the OTS receives no adverse comments from the United
States Department of Justice regarding the competitive aspects of the
Reorganization. See "The Reorganization."
HOLDING COMPANY REGULATION
Upon consummation of the Reorganization, Carolina First Corporation will be
deemed to be the bank holding company of the Company and consequently, the
Company will be a registered holding company under both the Bank Holding Company
Act of 1956, as amended (the "BHC Act") and the Georgia Bank Holding Company
Act. The Company will be regulated under such acts by the Federal Reserve and by
the Department of Banking, respectively. As a bank holding company, the Company
will be required to file with the Federal Reserve an annual report and such
additional information as the Federal Reserve may require pursuant to the BHC
Act. The Federal Reserve may also conduct examinations of the Company and each
of its subsidiaries.
The BHC Act makes it unlawful for any bank holding company, directly or
indirectly, or through one or more subsidiaries or one or more transactions, to
acquire control of another bank or another bank holding company without prior
approval from the Federal Reserve. An acquisition by merger, consolidation or
purchase of assets of such an institution or holding company or of substantially
all of the assets of such an institution or holding company is also prohibited
without prior Federal Reserve approval. When considering an application for such
an acquisition, the Federal Reserve takes into consideration the financial and
managerial resources and future prospects of the prospective acquiring company
and the institution involved. This includes consideration of the competence,
experience and integrity of the officers, directors and principal shareholders
of the acquiring company and savings institution. In addition, the Federal
Reserve considers the effect of the acquisition on the institution and the
convenience and needs of the community to be served.
Bank holding companies are allowed to acquire or to retain as much as 5% of
the voting shares of a bank or bank holding company without regulatory approval.
Because Carolina First is deemed to control the Company under the BHC Act,
the Company has agreed with Carolina First that the Company will not engage in
any activities other than activities which are permissible banking or
non-banking activities under applicable regulations of the Federal Reserve
Board, which in general terms limits the activities of bank holding companies
and their affiliates to those which are determined to be "so closely related to
banking or managing or controlling banks as to be a proper incident thereto."
The Company does not believe that these limitations will impose any material
constraints on its proposed activities.
As of the date of this Prospectus, management believes the Company is in
compliance with all applicable statutes, regulations and rules promulgated or
enforced by the Federal Reserve and the Department of Banking. Upon the
consummation of the Reorganization, the Company believes it will continue to be
in compliance with all statutes, regulations and rules promulgated or enforced
by the Federal Reserve and the Department of Banking.
BANK REGULATION
GENERAL. Upon consummation of the Reorganization, the Bank will be a
federal savings bank organized under the laws of the United States subject to
examination by the OTS. The OTS will regulate all areas of the Bank's banking
operations including reserves, loans, mergers, payment of dividends, interest
rates, establishment of branches, and other aspects of operations. OTS
regulations generally provide that federal savings banks must be examined no
less frequently than every 12 months, unless the
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<PAGE>
federal savings bank (i) has assets of less than $250 million; (ii) is well
capitalized; (iii) was found to be well managed and its composite condition was
found to be outstanding (or good, if the bank had total assets of not more than
$100,000) during its last examination; (iv) is not subject to a formal
enforcement proceeding or an order from the FDIC or another banking agency; and
(v) has not undergone a change of control during the previous 12-month period,
in which event it must be examined no less frequently than every 18 months. The
Bank will also be subject to assessments by the OTS to cover the costs of such
examinations.
The Bank will also be insured and regulated by the FDIC. The major functions
of the FDIC with respect to insured federal savings banks include paying
depositors to the extent provided by law in the event an insured bank is closed
without adequately providing for payment of the claims of depositors and
preventing the continuance or development of unsound and unsafe banking
practices.
Subsidiary institutions of a savings and loan holding company, such as the
Bank upon consummation of the Reorganization, are subject to certain
restrictions imposed by the Federal Reserve Act on any extension of credit to
the holding company or any of its subsidiaries, on investment in the stock or
other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. In addition, a holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit or provision of any property or
services.
CAPITAL REQUIREMENTS. OTS regulations require that federal savings banks
maintain (i) "tangible capital" in an amount of not less than 1.5% of total
assets, (ii) "core capital" in an amount not less than 3.0% of total assets, and
(iii) a level of risk-based capital equal to 8% of risk-weighted assets. Under
OTS regulations, the term "core capital" generally includes common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated subsidiaries less
unidentifiable intangible assets (other than certain amounts of supervisory
goodwill) and certain investments in certain subsidiaries plus 90% of the fair
market value of readily marketable purchased mortgage servicing rights ("PMSRs")
and purchased credit card relationships (subject to certain conditions).
"Tangible capital" generally is defined as core capital minus intangible assets
and investments in certain subsidiaries, except PMSRs.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 200% (again depending upon the nature of the asset) and (iii)
the resulting amounts are added together and constitute total risk-weighted
assets. "Total capital," for purposes of the risk-based capital requirement
equals the sum of core capital plus supplementary capital (which, as defined,
includes the sum of, among other items, perpetual preferred stock not counted as
core capital, limited life preferred stock, subordinated debt, and general loan
and lease loss allowances up to 1.25% of risk-weighted assets) less certain
deductions. The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital, and OTS regulations require the maintenance of a minimum ratio of core
capital to total risk-weighted assets of 4%.
OTS regulations have been amended to include an interest-rate risk component
to the risk-based capital requirement. Under this regulation, an institution is
considered to have excess interest rate-risk if, based upon a 200-basis point
change in market interest rates, the market value of an institution's capital
changes by more than 2%. This new requirement, application of which has been
delayed indefinitely by the OTS, is not expected to have any material effect on
the ability of the Bank to meet the risk-based capital requirement. The OTS also
revised its risk-based capital standards to ensure that its standards provide
adequately for concentration of credit risk, risk from nontraditional activities
and actual performance and expected risk of loss on multi-family mortgages.
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Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances.
Additionally, the Department of Banking requires that savings and loan
holding companies, such as the Company, must maintain a 5% Tier 1 leverage ratio
on a consolidated basis.
Upon consummation of the Reorganization, Management expects that the Company
will have a 35% Tier I leverage ratio on a consolidated basis and will be "well
capitalized."
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDIC Act") imposes a regulatory matrix which
requires the federal banking agencies, which include the OTS, the FDIC, the
Office of the Comptroller of Currency (the "OCC"), and the Federal Reserve
Board, to take prompt corrective action to deal with depository institutions
that fail to meet their minimum capital requirements or are otherwise in a
troubled condition. The prompt corrective action provisions require
undercapitalized institutions to become subject to an increasingly stringent
array of restrictions, requirements and prohibitions, as their capital levels
deteriorate and supervisory problems mount. Should these corrective measures
prove unsuccessful in recapitalizing the institution and correcting its
problems, the FDIC Act mandates that the institution be placed in receivership.
Pursuant to regulations promulgated under the FDIC Act, the corrective
actions that the banking agencies either must or may take are tied primarily to
an institution's capital levels. In accordance with the framework adopted by the
FDIC Act, the banking agencies have developed a classification system, pursuant
to which all banks and thrifts will be placed into one of five categories:
well-capitalized institutions, adequately capitalized institutions,
undercapitalized institutions, significantly undercapitalized institutions and
critically undercapitalized institutions. The capital thresholds established for
each of the categories are as follows:
<TABLE>
<CAPTION>
TIER 1
RISK-BASED RISK-BASED
CAPITAL CATEGORY TIER 1 CAPITAL CAPITAL CAPITAL OTHER
- --------------------------------- ----------------- ---------------- ---------------- ------------------------
<S> <C> <C> <C> <C>
Well-Capitalized 5% or more 10% or more 6% or more Not subject to a capital
directive
Adequately Capitalized 4% or more 8% or more 4% or more --
Undercapitalized less than 4% less than 8% less than 4% --
Significantly Undercapitalized less than 3% less than 6% less than 3% --
Critically Undercapitalized 2% or less -- -- --
tangible equity
</TABLE>
The undercapitalized, significantly undercapitalized and critically
undercapitalized categories overlap; therefore, a critically undercapitalized
institution would also be an undercapitalized institution and a significantly
undercapitalized institution. This overlap ensures that the remedies and
restrictions prescribed for undercapitalized institutions will also apply to
institutions in the lowest two categories.
The down-grading of an institution's category is automatic in two
situations: (i) whenever an otherwise well-capitalized institution is subject to
any written capital order or directive, and (ii) where an undercapitalized
institution fails to submit or implement a capital restoration plan or has its
plan disapproved. The federal banking agencies may treat institutions in the
well-capitalized, adequately capitalized and undercapitalized categories as if
they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels.
The FDIC Act prohibits all insured institutions regardless of their level of
capitalization from paying any dividend or making any other kind of capital
distribution or paying any management fee to any controlling person if following
the payment or distribution the institution would be undercapitalized. While the
prompt corrective action provisions of the FDIC Act contain no requirements or
restrictions aimed specifically at adequately capitalized institutions, other
provisions of the FDIC Act and the agencies' regulations relating to deposit
insurance assessments, brokered deposits and interbank liabilities treat
adequately capitalized institutions less favorably than those that are
well-capitalized.
A depository institution that is not well capitalized is prohibited from
accepting deposits through a deposit broker. However, an adequately capitalized
institution can apply for a waiver to accept brokered deposits. Institutions
that receive a waiver are subject to limits on the rates of interest they may
pay on brokered deposits.
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Undercapitalized institutions are prohibited from offering rates of interest
on insured deposits that significantly exceed the prevailing rate in their
normal market area or the area in which the deposits would otherwise be
accepted. Institutions classified as undercapitalized are precluded from
increasing their assets, acquiring other institutions, establishing additional
branches, or engaging in new lines of business without an approved capital plan
and an agency determination that such actions are consistent with the plan.
Savings associations that are significantly undercapitalized may be required
to take one or more of the following actions: (i) raise additional capital so
that the institution will be adequately capitalized; (ii) be acquired by, or
combined with, another institution if grounds exist for appointing a receiver;
(iii) refrain from affiliate transactions; (iv) limit the amount of interest
paid on deposits to the prevailing rates of interest in the region where the
institution is located; (v) further restrict asset growth; (vi) hold a new
election for directors, dismiss any director or senior executive officer who
held office for more than 180 days immediately before the institution became
undercapitalized, or employ qualified senior executive officers; (vii) stop
accepting deposits from correspondent depository institutions; and (viii) divest
or liquidate any subsidiary which the OTS determines poses a significant risk to
the institution.
Significantly undercapitalized institutions are subject to the same
mandatory sanctions and discretionary actions applicable to all undercapitalized
institutions. In addition, a significantly undercapitalized institution is
prohibited from paying any bonus or giving a raise to any senior executive
officer without prior agency approval. A significantly undercapitalized
institution will be required to (i) sell sufficient shares or obligations to
restore its capital compliance or be acquired by another institution, (ii)
restrict the institution's transactions with affiliates, and (iii) limit the
interest rates paid by the institution on its deposits. The banking agencies are
also given the option to impose one or more of the activities restrictions that
are applicable to critically undercapitalized institutions.
Critically undercapitalized institutions must be placed in conservatorship
or receivership within ninety (90) days unless both the institution's regulator
and the FDIC agree that some other course of action ultimately would result in a
lower cost solution. If the regulators decide to keep a critically
undercapitalized institution open, they must reassess their decision every
ninety (90) days and document the reasons why they elected not to appoint a
conservator or receiver. Further, if an institution continues to be critically
undercapitalized on average for four quarters after falling below two percent
(2%) tangible capital, the regulatory agencies are required to place the
institution in receivership, unless it (i) has positive net worth, (ii) is in
substantial compliance with an approved capital restoration plan, (iii) is
profitable or has a sustainable upward trend in earnings, and (iv) has reduced
its ratio of non-performing loans to total loans. In addition, the institution's
regulator and the FDIC must certify that the institution is viable and is not
expected to fail.
Critically undercapitalized institutions that are allowed to remain open are
subject to all the requirements and restrictions discussed above that either
automatically apply to or may be imposed on undercapitalized and significantly
undercapitalized institutions. In addition, beginning sixty (60) days after it
becomes critically undercapitalized, an institution is generally prohibited from
paying any interest or principal on its subordinated debt. Critically
undercapitalized institutions are also required to obtain prior FDIC approval
for a number of activities, including (i) entering into any material transaction
other than in the usual course of business, (ii) extending credit for any highly
leveraged transaction, (iii) amending their charter or bylaws, (iv) making any
material change in accounting methods, (v) engaging in any affiliate
transactions under Section 23A of the Federal Reserve Act, (vi) paying
"excessive" compensation or bonuses, and (vii) paying interest on new or renewed
liabilities so as to increase the institution's weighted average cost of funds
significantly above the prevailing interest rates for deposits in the
institution's normal market.
CAPITAL DISTRIBUTIONS. An OTS rule imposes limitations on all capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers). Under the current rule, a savings
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association is classified as a Tier 1 institution, a Tier 2 institution or a
Tier 3 institution, depending on its level of regulatory capital both before and
after giving effect to a proposed capital distribution. Under a proposed rule,
the OTS would conform its three classifications to the five capital
classifications set forth under the prompt corrective action regulations. Under
the proposal, institutions that are at least adequately capitalized would still
be required to provide prior notice. Well capitalized institutions could make
capital distributions without prior regulatory approval in specified amounts in
any calendar year.
A Tier 1 institution (I.E., one that both before and after a proposed
capital distribution has net capital equal to or in excess of its capital
requirements) may, subject to any otherwise applicable statutory or regulatory
requirements or agreements entered into with the regulators, make capital
distributions in any calendar year up to 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (I.E., the percentage by which the association's capital-to-
assets ratio exceeds the ratio of its fully phased-in capital requirement to its
assets) at the beginning of the calendar year. No regulatory approval of the
capital distribution is required, but prior notice must be given to the OTS.
A Tier 2 institution (I.E., one that both before and after a proposed
capital distribution has net capital equal to its then-applicable minimum
capital requirement but which fails to meet its fully phased-in capital
requirement either before or after the distribution) may, after prior notice but
without the approval of the OTS, make capital distributions of up to: (i) 75% of
its net income over the most recent four quarter period if it satisfies the
applicable risk-based capital standard; or (ii) 50% of its net income over the
most recent four quarter period if it satisfies the applicable risk-based
capital standard. In calculating an institution's permissible percentage of
capital distributions, previous distributions made during the previous four
quarter period must be included. Tier 2 institutions may not make capital
distributions in excess of the above limitations without the prior written
approval of the OTS.
A Tier 3 institution (I.E., one that either before or after a proposed
capital distribution fails to meet its then applicable minimum capital
requirement) may not make any capital distributions without the prior written
approval of the OTS. In addition, the OTS may prohibit a proposed capital
distribution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. Also, an institution meeting the Tier 1 criteria which has been
notified that it needs more than normal supervision will be treated as a Tier 2
or Tier 3 institution, unless the OTS deems otherwise.
LIQUIDITY. Under applicable federal regulations, savings associations are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers' acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual funds
and specified United States government, state or federal agency obligations)
equal to a monthly average of not less than a specified percentage of the
average daily balance of the savings association's net withdrawable deposits
plus short-term borrowings. Under HOLA, this liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the deposit flows of member institutions,
and currently is 5%. Savings institutions also are required to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of the average daily balance of its net withdrawable
deposits and short-term borrowings. After the Reorganization, the Bank will be
in compliance with these liquidity requirements.
EQUITY INVESTMENTS. The OTS has revised its risk-based capital regulation
to modify the treatment of certain equity investments and to clarify the
treatment of other equity investments. Equity investments that are permissible
for both savings banks and national banks will no longer be deducted from
savings associations' calculations of total capital over a five-year period.
Instead, permissible equity investments will be placed in the 100% risk-weight
category, mirroring the capital treatment prescribed for those investments when
made by national banks under the regulations of the OCC. Equity investments held
by
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<PAGE>
savings associations that are not permissible for national banks must still be
deducted from assets and total capital.
QUALIFIED THRIFT LENDER REQUIREMENT. A federal savings bank is deemed to be
a "qualified thrift lender" ("QTL") as long as its "qualified thrift
investments" equal or exceed 65% of its "portfolio assets" on a monthly average
basis in nine out of every 12 months. Qualified thrift investments generally
consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile home
loans, home equity loans and mortgage-backed securities), (ii) certain
obligations of the FDIC (including the Federal Savings and Loan Insurance
Corporation) and (iii) shares of stock issued by any FHLB, the FHLMC or the
FNMA. In addition, the following assets may be categorized as qualified thrift
investments in an amount not to exceed 20% in the aggregate of portfolio assets:
(i) 50% of the dollar amount of residential mortgage loans originated and sold
within 90 days of origination; (ii) investments in securities of a service
corporation that derives at least 80% of its income from residential housing
finance; (iii) 200% of loans and investments made to acquire, develop or
construct starter homes or homes in credit needy areas (subject to certain
conditions); (iv) loans for the purchase or construction of churches, schools,
nursing homes and hospitals; and (v) consumer loans (in an amount up to 20% of
portfolio assets). For purposes of the QTL test, the term "portfolio assets"
means the savings institution's total assets minus goodwill and other intangible
assets, the value of property used by the savings institution to conduct its
business, and liquid assets held by the savings institution in an amount up to
20% of its total assets.
OTS regulations provide that any savings association that fails to meet the
definition of a QTL must either convert to a national bank charter or limit its
future investments and activities (including branching and payments of
dividends) to those permitted for both savings associations and national banks.
Further, within one year of the loss of QTL status, a holding company of a
savings association that does not convert to a bank charter must register as a
bank holding company and will be subject to all statutes applicable to bank
holding companies. In order to exercise the powers granted to federally
chartered savings associations and maintain full access to FHLB advances, the
Bank must meet the definition of a QTL. After the Reorganization, the Bank will
qualify as a QTL under the current test.
LOANS TO ONE BORROWER LIMITATIONS. HOLA generally requires savings
associations to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make loans to a single borrower in
amounts up to 15% of their unimpaired capital and surplus, plus an additional
10% of capital and surplus for loans secured by readily marketable collateral.
HOLA provides exceptions under which a savings association may make loans to one
borrower in excess of the generally applicable national bank limits. A savings
association may make loans to one borrower in excess of such limits under one of
the following circumstances: (i) for any purpose, in any amount not to exceed
$500,000; or (ii) to develop domestic residential housing units, in an amount
not to exceed the lesser of $30 million or 30% of the savings association's
unimpaired capital and unimpaired surplus, provided other conditions are
satisfied. The Federal Institutions Reform, Recovery, and Enforcement Act of
1989 provided that a savings association could make loans to one borrower to
finance the sale of real property acquired in satisfaction of debts previously
contracted in good faith in amounts up to 50% of the savings association's
unimpaired capital and unimpaired surplus. The OTS, however, has modified the
third standard by limiting loans to one borrower to finance the sale of real
property acquired in satisfaction of debts to 15% of unimpaired capital and
surplus. That rule provides, however, that purchase money mortgages received by
a savings association to finance the sale of such real property do not
constitute "loans" (provided no new funds are advanced and the savings
association is not placed in a more detrimental position holding the note than
holding the real estate) and, therefore, are not subject to the loans to one
borrower limitations.
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COMMERCIAL REAL PROPERTY LOANS
HOLA limits the aggregate amount of commercial real estate loans that a
federal savings association may make to an amount not in excess of 400% of the
savings association's capital. The Bank does not intend to make loans in excess
of this limit.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA")
and the implementing OTS regulations, federal savings banks have a continuing
and affirmative obligation to help meet the credit needs of its local community,
including low and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The CRA requires the board of directors of
financial institutions, such as the Bank, to adopt a CRA statement for each
assessment area that, among other things, describes its efforts to help meet
community credit needs and the specific types of credit that the institution is
willing to extend. The regulations promulgated pursuant to CRA, contain three
evaluation tests: (i) a lending test which will compare the institution's market
share of loans in low-and moderate-income areas to its market share of loans in
its entire service area and the percentage of a bank's outstanding loans to low-
and moderate-income areas or individuals, (ii) a services test which will
evaluate the provision of services that promote the availability of credit to
low- and moderate-income areas, and (iii) an investment test, which will
evaluate an institution's record of investments in organizations designed to
foster community development, small- and minority-owned businesses and
affordable housing lending, including state and local government housing or
revenue bonds. The regulation is designed to reduce the paperwork requirements
of the current regulations and provide regulators, institutions and community
groups with a more objective and predictable manner with which to evaluate the
CRA performance of financial institutions.
Traditional approaches to compliance with the CRA, as well as the applicable
regulations, are premised upon the establishment of geocentrically-established
physical locations and the provision of banking services to those locations. As
presently written, the regulations provide no clear guidance for the
establishment of CRA compliance by a bank such as the Bank, which focuses on
alternative delivery systems. The CRA does contain provisions which contemplate
the adoption of a strategic CRA plan by banks who desire to establish their own
specified approach to serving their community. The Bank intends to establish a
CRA Strategic Plan which takes into account its unique physical structure and
the delivery mechanisms it intends to utilize, and the Bank anticipates that its
Strategic Plan, as adopted will be approved by OTS.
FAIR LENDING. Congress and various federal agencies (including, in addition
to the bank regulatory agencies, the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice)
(collectively the "Federal Agencies") responsible for implementing the nation's
fair lending laws have been increasingly concerned that prospective home buyers
and other borrowers are experiencing discrimination in their efforts to obtain
loans. In recent years, the Department of Justice has filed suit against
financial institutions that it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory practices.
Most, if not all, of these suits have been settled (some for substantial sums)
without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies will
consider in determining if lending discrimination exits, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified: (i)
overt evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person, and (iii) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory
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effect, even where such practices are neutral on their face and are applied
equally, unless the practice can be justified on the basis of business
necessity.
SAFETY AND SOUNDNESS GUIDELINES. The federal banking agencies have adopted
safety and soundness regulations relating to (i) internal controls, information
systems, and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. Subsequent legislation, however, required that the
agencies adopt guidelines in lieu of the regulations. Such guidelines impose
standards based upon an institution's asset quality and earnings. The guidelines
are intended to set out standards that the agencies will use to identify and
address problems at institutions before capital becomes impaired. Institutions
are required to establish and maintain a system to identify problem assets and
prevent deterioration of those assets in a manner commensurate with its size and
the nature and scope of their operations. Furthermore, institutions must
establish and maintain a system to evaluate and monitor earnings and ensure that
earnings are sufficient to maintain adequate capital and reserves in a manner
commensurate with their size and the nature and scope of its operation.
Under the guidelines, an institution not meeting one or more of the safety
and soundness standards would be required to file a compliance plan with the
appropriate federal banking agency. Nonetheless, in the event that an
institution, such as the Bank, were to fail to submit an acceptable compliance
plan or fail in any material respect to implement an accepted compliance plan
within the time allowed by the agency, the institution would be required to
correct the deficiency and the appropriate federal agency would also be
authorized to: (i) restrict asset growth; (ii) require the institution to
increase its ratio of tangible equity to assets; (iii) restrict the rates of
interest that the institution may pay; or (iv) take any other action that would
better carry out the purpose of the corrective action.
POLICY ON GROWTH. It is the general policy of the OTS to ensure that asset
and liability growth of federal savings banks is prudent, adequately capitalized
and conducted in a manner that is consistent with safety and soundness and the
interests of the insurance fund. Excessive asset growth by any institution, as
determined by the OTS on the basis of the institution's management and asset
quality, capital adequacy, interest rate risk profile and operating controls and
procedures, is an unsafe and unsound practice. As a general rule, institutions
"requiring more than normal supervision" or "subject to greater restrictions"
will be permitted little to no growth under OTS policy, subject to OTS
discretion and waiver authority. In addition, all institutions except those
whose regulatory capital already exceeds the "fully phased-in" requirement must
increase their tangible, core and total capital by the capital requirements
applicable at the time to support the growth at the time the assets are
increased. Institutions that meet the "fully phased-in" capital requirements
must ensure that proposed growth will not cause them to fall below those
requirements in the future. On a case-by-case basis, where appropriate, the OTS
retains the authority and flexibility to impose more stringent growth
restrictions.
Furthermore, without the prior written approval of the OTS, any institution
requiring more than normal supervision is not permitted to increase its total
assets during any quarter in excess of an amount equal to net interest credited
on deposit liabilities (or earnings credited on share accounts) during the
quarter. Also, under HOLA growth is prohibited by any institution not in
compliance with its capital standards.
FDIC INSURANCE OF DEPOSITS. Federal deposit insurance is required for all
federally chartered savings associations. Deposits at the Bank are insured to a
maximum of $100,000 for each depositor by Savings Association Insurance Fund
(the "SAIF"). As a SAIF-insured institution, the Bank will be subject to
regulation and supervision by the FDIC, to the extent deemed necessary by the
FDIC to ensure the safety and soundness of the SAIF. The FDIC is entitled to
have access to reports of examination of the Bank made by the OTS and all
reports of condition filed by the Bank with the OTS. The FDIC also may require
the Bank to file such additional reports as it determines to be advisable for
insurance purposes.
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Additionally, the FDIC may determine by regulation or order that any specific
activity poses a serious threat to the SAIF and that no SAIF member may engage
in the activity directly.
Insurance premiums are paid in semiannual assessments. Under a risk-based
assessment system, the FDIC is required to calculate a savings association's
semiannual assessment based on (i) the probability that the insurance fund will
incur a loss with respect to the institution (taking into account the
institution's asset and liability concentration), (ii) the potential magnitude
of any such loss, and (iii) the revenue and reserve needs of the insurance fund.
The semiannual assessment imposed on the Bank may be higher depending on the
SAIF revenue and expense levels, and the risk classification applied to the
Bank. Effective January 1, 1998, the FDIC is required to set SAIF semiannual
assessments rates in an amount sufficient to increase the reserve ratio of the
SAIF to 1.25% of insured deposits over no more than a 15-year period. The FDIC
also has the authority to establish a higher reserve ratio.
The deposit insurance assessment rate was increased from 23 cents per one
hundred dollars of SAIF assessable deposits (generally all insured accounts
subject to certain adjustments) to an assessment rate within the range of 23
cents to 31 cents, depending on the assessment risk classification assigned to
each institution. Under the risk-classification system, each SAIF member is
assigned to one of three capital groups: "well capitalized," "adequately
capitalized," or "less than adequately capitalized," as such terms are defined
under the OTS's prompt corrective action regulation (discussed above), except
that "less than adequately capitalized" includes any institution that is not
well capitalized or adequately capitalized. Within each capital group,
institutions are assigned to one of three supervisory subgroups--"healthy"
(institutions that are financially sound with only a few minor weaknesses),
"supervisory concern" (institutions with weaknesses which, if not corrected
could result in significant deterioration of the institution and increased risk
to the SAIF) or "substantial supervisory concern" (institutions that pose a
substantial probability of loss to the SAIF unless corrective action is taken).
The FDIC will place each institution into one of nine assessment risk
classifications based on the institution's capital group and supervisory
subgroup classification.
Until recently, SAIF premiums had been equivalent to deposit insurance
premiums paid by banks on deposits to the Bank Insurance Fund ("BIF"). Deposit
insurance premiums were set to facilitate each fund's achieving its designated
reserve ratios. As each fund achieves its designated reserve ratio, however, the
FDIC has the authority to lower the premium assessments for that fund to a rate
that would be sufficient to maintain the designated reserve ratio. In August
1995, the FDIC determined that the BIF had achieved its designated reserve ratio
and approved lower BIF premium rates for deposit insurance by the BIF for all
but the riskiest institutions. On November 14, 1995, the FDIC determined that
BIF deposit insurance premiums for well capitalized banks would be further
reduced to the statutory minimum of $2,000 per institution per year, effective
January 1, 1996. Because the SAIF remained significantly below its designated
reserve ratio, insurance premiums for assessable SAIF deposits were not reduced
in either FDIC action.
The current financial condition of the SAIF resulted in the adoption of the
Deposit Insurance Funds Act of 1996 ("DIFA"), which was enacted on September 30,
1996 as part of the Omnibus Consolidated Appropriations Act. Under DIFA, a
special one-time assessment of 65.7 cents per $100 of assessable SAIF deposits
was collected on November 27, 1996 and applied retroactively to SAIF deposits as
of March 31, 1995. DIFA provides that special assessments will be deductible
under Section 162 of the Internal Revenue Code in the year in which the
assessment is paid. After collection of the special assessment, it is expected
that the SAIF would achieve its designated reserve ratio and SAIF premium rates
would then become the same as BIF rates. DIFA further provides that BIF and SAIF
are to be merged, creating the "Deposit Insurance Fund," on January 1, 1999,
provided that bank and savings association charters are combined by that date.
The Treasury Department is required to prepare a report to be submitted to
Congress by March 31, 1997 on the development of a common charter for all
insured depository institutions. See
"--Supervision and Regulation--Elimination of Federal Savings Charter."
53
<PAGE>
DIFA further assesses premiums for Financing Corporation Bond debt service
("FICO"). Beginning January 1, 1997, FICO premiums for BIF and SAIF were set at
1.3 and 6.4 basis points, respectively. Full pro rata sharing of FICO will begin
no later than January 1, 2000.
Effective January 1, 1997, SAIF members have the same risk-based assessment
schedule as BIF members, which is 0 to 27 cents per $100 of deposits. FICO
assessments of 1.3 cents for BIF deposits and 6.4 cents for SAIF deposits will
be added to the BIF-assessable base and SAIF-assessable base, respectively,
until December 31, 1999. Thereafter, approximately 2.4 cents would be added to
each regular assessment for all insured depositors, thereby achieving full pro
rata FICO sharing.
The SAIF-assessable base previously was assessed at a rate of 23 to 31 basis
points for the fourth quarter as part of the regular annual deposit insurance
assessment. Following the adoption of DIFA, the special assessment was booked as
an asset by the FDIC effective October 1, 1996, fully capitalizing SAIF as of
that date. Consequently, the proposed regular assessment rate for SAIF-member
savings associations has been lowered retroactively to 18 to 27 basis points
effective October 1, 1996, which represents the amount necessary to cover FICO
obligations.
Until January 1, 1997, under the FDIC's interpretation of existing law, FICO
payments could be met only from assessments on SAIF-member savings associations.
Any overpayment of fourth quarter assessments from such institutions, estimated
at approximately 1.25 cents per $100 of deposits, was refunded or credited, with
interest, using regular quarterly payment procedures.
The federal banking agencies are required to take action to prevent insured
institutions from facilitating or encouraging the shifting of SAIF deposits to
BIF deposits for purposes of evading the assessments imposed on SAIF-assessable
deposits.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that the savings association has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings association,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System consists of 12 regional
FHLBs, each subject to supervision and regulation by the Federal Housing Finance
Board (the "FHFB"). The FHLBs provide a central credit facility for member
savings associations. After the Reorganization, the Bank will be a member of the
FHLB of Atlanta and will be required to own shares of capital stock in the FHLB
of Atlanta in an amount at least equal to 1% of the aggregate principal amount
of unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of their advances
(borrowings) from the FHLB, whichever is greater. The maximum amount that the
FHLB of Atlanta will advance fluctuates from time to time in accordance with
changes in policies of the FHFB and the FHLB of Atlanta, and the maximum amount
generally is reduced by borrowings from any other source. In addition, the
amount of FHLB advances that a savings association may obtain will be restricted
in the event the institution fails to constitute a QTL.
FEDERAL RESERVE SYSTEM. The Federal Reserve has adopted regulations that
require savings associations to maintain nonearning reserves against their
transaction accounts (primarily NOW and regular checking accounts). After the
Reorganization, the Bank will be in compliance with these requirements. These
reserves may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the Bank's interest-earning
assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve regulations, however, require savings
associations to exhaust all FHLB sources before borrowing from a Federal Reserve
bank.
54
<PAGE>
The Federal Reserve also has adopted regulations to implement the Electronic
Funds Transfer Act ("EFTA"), the basic framework establishing rights,
liabilities and responsibilities of participants in electronic funds transfer
systems. The Bank's proposed banking activities over the Internet would be as
electronic funds transfers. The Federal Reserve has proposed amending its
regulations implementing the EFTA in order to simplify the burdens that the EFTA
places on financial institutions. Although most of the regulatory provisions
remain unchanged, the Federal Reserve Board has proposed raising the asset-size
test for the small-institution exemption from $25 million to $100 million in
assets. Under the small institution exemption pre-authorized transfers are
exempt from the EFTA and the regulations promulgated thereunder. All other
electronic fund transfers, however, remain subject to the EFTA. The Bank will
qualify as a small institution under the proposed amendment and will remain
eligible for the small institution exemption until one-year from the end of the
calendar year in which its assets exceeded $100 million.
RESTRICTIONS ON MANAGEMENT INTERLOCKS. The Bank will also be subject to the
restrictions of the Depository Institution Management Interlocks Act ("DIMIA"),
which is intended to foster competition among depository institutions by
prohibiting a management official from serving two nonaffiliated depository
organizations (holding companies or institutions) in situations where the
management interlock likely would have an anticompetitive effect. Under DIMIA,
management officials, including directors and executive officers, are precluded
from serving as a management official of a depository organization at the same
time they are serving as a management official of an unaffiliated organization,
if the depository organizations (or institution subsidiary thereof) are in the
same community or have offices in the same relevant metropolitan statistical
area ("RMSA") and each depository organization has total assets of $20 million
or more. A management official of a depository organization with assets
exceeding $2.5 billion may not serve at the same time as a management official
of an unaffiliated depository organization with total assets exceeding $1.5
billion, regardless of the location of the two depository organizations.
Interlocking relationships permitted by DIMIA include institutions under
receivership, conservatorship, liquidation, or which are to be closed or in
danger of being closed, for the 5-year period following the acquisition of a
failed institution, organizations that do not conduct business within the United
States except as incident to activities outside of the United States and for
management officials of diversified savings and loan holding companies. Other
interlocking relationships are permitted for specified time periods by agency
order, if one of the organizations is located or is to be located in a
low-income or other economically depressed area, or is controlled or managed by
persons who are members of minority groups or by women, or is a newly-chartered
organization and the interlocking relationship is necessary to provide
management or operating expertise to the newly created organization, or if one
of the organizations faces conditions endangering the organizations safety and
soundness.
The OTS, along with the other federal banking agencies, recently amended the
regulations implementing DIMIA that narrow the circumstances under which an
exception could be granted by agency order. Such changes were required to
implement changes to DIMIA that were adopted in the Riegle Community Development
and Regulatory Improvement Act of 1994, and require that persons seeking an
exemption meet either a "regulatory standards exemption" or a "management
consignment exemption." Agency approval under the regulatory standards exemption
will require that an institution certify that it has undertaken reasonable
efforts to locate any other qualified candidates who are not prohibited from
service under DIMIA. Agencies will not object to such an interlock if it
involves institutions that, if merged, would not trigger a challenge from the
agencies on anticompetitive grounds, as measured under the Herfindahl-Hirschman
Index. The management consignment exemption is permissible if the management
official will strengthen either a newly chartered institution (defined as
charted for less than two years from the date of filing for the exemption) or an
institution that is an unsafe or unsound condition.
Mack I. Whittle, Jr. is the President and Chief Executive Officer of
Carolina First and is a director of Carolina First and CFB. Mr. Whittle will
serve as a director of the Company upon consummation of this
55
<PAGE>
Offering. The Company, Carolina First and CFB believe that no violation of DIMIA
exists since CFB is deemed to control the Bank for federal regulatory purposes.
TRANSACTIONS WITH AFFILIATES RESTRICTIONS. Transactions engaged in by a
savings association or one of its subsidiaries with affiliates of the savings
association generally are subject to the affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act in the same manner
and to the same extent as such restrictions apply to transactions engaged in by
a member bank or one of its subsidiaries with affiliates of the member bank.
Section 23A of the Federal Reserve Act imposes both quantitative and qualitative
restrictions on transactions engaged in by a member bank or one of its
subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act
requires, among other things that all transactions with affiliates be on terms
substantially the same, and at least as favorable to the member bank or its
subsidiary, as the terms that would apply to, or would be offered in, a
comparable transaction with an unaffiliated party. Exemptions from, and waivers
of, the provisions of Sections 23A and 23B of the Federal Reserve Act may be
granted only by the Federal Reserve. The HOLA and OTS regulations promulgated
thereunder contain other restrictions on loans and extension of credit to
affiliates, and the OTS is authorized to impose additional restrictions on
transactions with affiliates if it determines such restrictions are necessary to
ensure the safety and soundness of any savings association. Current OTS
regulations are similar to Sections 23A and 23B of the Federal Reserve Act.
The Company anticipates that CFB will continue to provide the Company with
various resources on an arms-length basis. In addition to purchasing various
services from CFB from time to time, the Company may also purchase selected
loans from CFB as well as other financial institutions. As a matter of Company
policy, any transaction with CFB must be approved by a majority of the directors
of the Company not affiliated with CFB.
FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ELIMINATION OF FEDERAL SAVINGS ASSOCIATION CHARTER
Legislation has been introduced that would eliminate the federal savings
association charter. If such legislation is enacted, the Bank would be required
to convert its federal savings bank charter to either a national bank charter or
to a state depository institution charter. Various legislative proposals also
may result in the restructuring of federal regulatory oversight, including, for
example, consolidation of the OTS into another agency, or creation of a new
Federal banking agency to replace the various agencies which presently exist.
The Bank is unable to predict whether such legislation will be enacted or, if
enacted, whether it will contain relief as to bad debt deductions previously
taken.
PROPERTY
The Company entered into a Lease Agreement (the "Lease"), dated as of June
18, 1996, amended as of December 12, 1996, with The Griffin Company (the
"Landlord"), pursuant to which the Company leases approximately 2,100 square
feet of office space for its principal executive offices in Atlanta, Georgia.
The monthly rental rate is $2,975, subject to annual adjustment in accordance
with the CONSUMER PRICE INDEX FOR THE UNITED STATES FOR ALL CONSUMERS. The
monthly rental rate cannot be increased by less than 4% or more than 10% from
the prior year's rental rate.
The Lease expires on June 30, 1999. The Company has the right to renew the
lease for an additional two-year term under the same terms and at the then
current rental rate, as adjusted in accordance with the terms of the Lease.
Additionally, the Company has the right to terminate the lease on December 31,
1997 by giving notice to the Landlord and paying a penalty in the amount of
eight times the then current monthly rental rate.
56
<PAGE>
EMPLOYEES
As of June 24, 1997, the Company had 15 full-time employees and no part-time
employees. Management intends to hire additional personnel at a rate
commensurate with the Company's growth following completion of the
Reorganization and the Offering. The Company's employees are not parties to a
collective bargaining agreement, and management believes its relationship with
employees is good.
LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal
proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company. T. Stephen Johnson and Donald S.
Shapleigh, Jr. have served as directors since the Company's inception in
February 1996. The other directors listed below were elected to the Board on
April 23, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
T. Stephen Johnson............................. 47 Chairman of the Board
D. R. Grimes................................... 50 Vice Chairman, Chief Executive Officer and Director
Donald S. Shapleigh, Jr........................ 49 President, Chief Operating Officer and Director
Robert E. Bowers............................... 40 Chief Financial Officer and Director
Thomas L. Cable................................ 41 Chief Technology Officer
Belinda L. Morgan.............................. 50 Operations Officer
Ward H. Clegg.................................. 45 Director
J. Stephen Heard............................... 54 Director
Robin C. Kelton................................ 62 Director
John T. Moore.................................. 47 Director
Thomas H. Muller, Jr........................... 55 Director
W. James Stokes................................ 38 Director
Mack I. Whittle, Jr............................ 48 Director
</TABLE>
The Board of Directors is divided into three classes. Class I directors
(Messrs. Grimes, Johnson and Whittle) will serve an initial term expiring at the
1998 Annual Meeting of Shareholders; Class II directors (Messrs. Bowers, Clegg,
Heard and Stokes) will serve an initial term expiring at the 1999 Annual Meeting
of Shareholders; and Class III directors (Messrs. Kelton, Moore, Muller and
Shapleigh) will serve an initial term expiring at the 2000 Annual Meeting of
Shareholders. Thereafter, the members of each class will be elected for a
three-year term. In addition, CFB has the right to nominate four directors. The
right expires upon the initial appointment of the nominated director or a
director elected in opposition to the nominee. Pursuant to this right, CFB
nominated Messrs. Clegg, Moore and Whittle as directors and retains the right to
nominate one additional director in the future.
T. STEPHEN JOHNSON is President of TSJ&A, a bank consulting firm located in
Roswell, Georgia. The firm specializes in mergers, acquisitions and regulatory
consulting. TSJ&A has served as advisor and consultant in the formation of
approximately 70 banks in the southeastern United States. Mr. Johnson served in
a management capacity for two large Atlanta banks before forming TSJ&A in 1987.
Mr. Johnson also serves as Chairman and Founder of the Southeast Bank Fund,
Inc., a privately held corporation that invests in the stock of banks located in
the Southeast ("Southeast Bank Fund"). In addition, he is principal owner of
Bank Assets Inc., a provider of benefit programs for directors and officers of
banks.
D. R. GRIMES has served as Vice Chairman and Chief Executive Officer of the
Company since January 1997. From March 1996 to January 1997, he was an
independent management consultant, and from 1978 to March 1996, he served in
various capacities with Servantis Systems, Inc. ("SSI"), which provides
electronic funds transfer and home banking software to the financial services
industry, including Executive Vice President of Technology and Chief Information
Officer (1995-1996); Executive Vice President of Technology and Marketing
(1993-1995); President, Treasury Products Division (1994); and President,
Financial Products Division (1988-1993).
DONALD S. SHAPLEIGH, JR. has served as President of the Company and the Bank
since January 1996. He has also served as a director of the Company since its
incorporation. Mr. Shapleigh has been involved in banking since 1971, having
spent 23 years in various senior positions with Bank South, N.A. and SouthTrust
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<PAGE>
Bank. From November 1994 to December 1995, Mr. Shapleigh served as Director of
Sales for Creative Solutions Group/A BISYS Company, an Atlanta-based company
that sells its patented automated voice response technology to retail financial
service companies.
ROBERT E. BOWERS has served as Chief Financial Officer of the Company since
February 1997. Prior to joining the Company, Mr. Bowers was the Chief Financial
Officer of CheckFree Corporation, which provides electronic bill payment
processing for the financial services industry, from January 1996 through August
1996. From September 1984 until January 1996, he served as the Chief Financial
Officer and a director of SSI. His experience includes initial public offerings,
strategic business planning and investor relations.
THOMAS L. CABLE has served as Chief Technology Officer of the Company and
the Bank since May 1997. From May 1996 to May 1997, he served as Vice President,
Retail Financial Services of CheckFree Corporation, and from February 1996 to
May 1996, he was responsible for CheckFree's retail direct bank products. From
1985 to February 1996, Mr. Cable served in various capacities with SSI,
including Senior Vice President and Business Unit Manager from Home Banking
Products and Services, Vice President and Product Manager for Delivery Systems
and Associate and Product Manager for SSI's licensed bill payment software
product. From 1978 to 1985, he was employed by First National Bank, Louisville,
Kentucky as a programmer and programming team leader responsible for the
implementation and support of SSI's bill payment product and other bank
application systems.
BELINDA L. MORGAN has served as Operations Officer of the Company and the
Bank since June 1996. From 1965 to 1995, she was employed by Bank South,
Atlanta, Georgia, and its predecessors in various management capacities,
including Programming and Product Development Manager, Operations Director and
General Manager of Operations and Technology. From June 1995 to May 1996, she
served as an independent consultant in the area of bank operations.
WARD H. CLEGG has served as a director of Resource BancShares Corporation
("Resource Bancshares") since September 1986. Resource Bancshares is the owner
of specialty assets companies that engage in commercial mortgage banking, credit
card transaction processing and origination and small ticket equipment leasing.
He also works with Carolina First (the holding company for CFB) on a consulting
basis.
J. STEPHEN HEARD has served as President of Heard Systems, Inc., which
provides information systems consulting services and Scrip ATM Services to the
retail industry, since January 1, 1994. In 1995 he retired from IBM after a
30-year career in marketing, sales and systems engineering.
ROBIN C. KELTON is Chairman of Kelton International Ltd. ("Kelton
International"), an investment banking firm formed in January 1996 specializing
in the banking and insurance industries. Mr. Kelton is a founder and former
Chairman and Chief Executive Officer of Fox-Pitt, Kelton Ltd. and the Fox-Pitt,
Kelton Group, and President of Fox-Pitt, Kelton, Inc. These companies were
formed in 1970 and comprise an international investment banking and brokerage
group based in London and New York.
JOHN T. MOORE has practiced law in Columbia, South Carolina since 1975 and
has been a partner in the law firm of Nelson Mullins Riley & Scarborough, LLP
since 1982. His practice is concentrated in the area of debtor and creditor
rights and creditor regulatory compliance issues.
THOMAS H. MULLER, JR. has served as the Chief Financial Officer of SpectRx,
Inc., a medical device company, since December 1996. Mr. Muller has also served
as President of Muller & Associates, a firm providing financial management
services to entrepreneurial enterprises, since 1992 and Chief Financial Officer
of Nurse On Call, Inc., a healthcare software company, from 1993 to 1996. From
1993 to 1995, Mr. Muller also served as Chief Financial Officer of Amstell,
Inc., a beverage manufacturing and marketing company. From 1991 to 1992, Mr.
Muller served as Chief Financial Officer of HBO & Company, a leading healthcare
information systems company.
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<PAGE>
W. JAMES STOKES has served as Senior Vice President of TSJ&A since 1987. He
serves as Head of Analysis, with a focus on mergers and acquisitions, stock
valuations, fairness opinions and regulatory assistance. Mr. Stokes also serves
as the Chief Analyst for Southeast Bank Fund.
MACK I. WHITTLE, JR. has served as President and Chief Executive Officer of
Carolina First since 1986. Mr. Whittle is also a director of Carolina First and
CFB. Mr. Whittle began his banking career in 1969 with Bankers Trust of South
Carolina. From 1969 to 1986, he served in several capacities including Trust
Officer, Vice President of Commercial Business Development, City Executive for
Myrtle Beach, and Senior Vice President and Regional Officer. In January 1986,
Bankers Trust of South Carolina merged with NCNB Corp. Mr. Whittle resigned from
NCNB Corp. in May 1986 to form Carolina First.
On November 4, 1996, a derivative shareholder action was filed in the
Greenville County Court of Common Pleas against Carolina First. The complaint,
as most recently amended, adds as additional defendants the majority of the
directors of Carolina First and CFB, including Mack I. Whittle, Jr. The named
plaintiffs in the amended complaints are Carolina First, by and through its
minority shareholders, Emory Lester, Beatrice Hutchinson and John Wesley Purdie,
Jr. Plaintiffs allege as causes of action the following: conversion of corporate
opportunity; breach of fiduciary duty and "constructive fiduciary fraud"; civil
conspiracy; and mutual mistake. The factual basis upon which these claims are
made generally involves the payment to Mr. Whittle and other members of Carolina
First management of a bonus in Affinity Technology Group, Inc. ("Affinity")
stock held by Carolina First, allegedly excessive compensation to executive
officers, transactions between Carolina First and entities affiliated with one
of its directors, alleged concealment of financial problems and alleged
mismanagement involving financial matters and employee matters. The complaint
seeks actual and punitive damages aggregating $50 million and recission of the
Affinity bonuses. Management of Carolina First has stated that it believes the
lawsuit is without merit and expects to defend it vigorously. A motion to
dismiss this action has been filed but has not yet been heard by the court.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors established a Compensation Committee in April 1997.
The Compensation Committee establishes remuneration levels for officers of the
Company, reviews management organization and development, reviews significant
employee benefit programs and establishes and administers executive compensation
programs. The Compensation Committee consists of T. Stephen Johnson, J. Stephen
Heard and John T. Moore.
The Board of Directors also established an Audit Committee in April 1997.
The Audit Committee recommends to the Board of Directors the independent public
accountants to be selected to audit the Company's annual financial statements
and approves any special assignments given to such accountants. The Audit
Committee also reviews the planned scope of the annual audit, any changes in
accounting principles and the effectiveness and efficiency of the Company's
internal accounting staff. The Audit Committee currently consists of Thomas H.
Muller, Jr. and W. James Stokes, with one additional member to be named in the
future.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
DIRECTOR COMPENSATION
Directors of the Company do not receive any fees or other compensation for
their services as directors. The Company may reimburse directors for reasonable
expenses incurred in connection with attending meetings of the Board of
Directors.
The Company has paid $67,032 in consulting fees to Mr. Clegg for
technological consulting services. Mr. Clegg will continue to perform these
services in the future and will be paid on a project-by-project
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<PAGE>
basis. Management believes the Company has obtained Mr. Clegg's consulting
services on terms that are no less favorable than those that could have been
obtained from an unaffiliated third party.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation awarded to, earned by or paid to the Company's Chief Executive
Officer from the Company's incorporation on February 20, 1996 through December
31, 1996. D. R. Grimes became Chief Executive Officer of the Company on January
5, 1997. Prior to that time Donald S. Shapleigh, Jr. served as Chief Executive
Officer of the Company. No other officer of the Company received annual
compensation in excess of $100,000. Mr. Shapleigh did not receive or hold any
stock options or other long-term incentives during that period. In November
1996, Mr. Grimes received nonqualified stock options to purchase 16,563 shares
of Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(2)
ANNUAL COMPENSATION(1) ----------------
SECURITIES
NAME AND ---------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) OPTIONS/SARS(#) COMPENSATION($)
- ----------------------------------------------------- ----------- ---------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Donald S. Shapleigh, Jr.............................. 1996 82,284 -- -- --
President and Chief Executive Officer(3)
</TABLE>
- ------------------------
(1) Information with respect to certain perquisites and other personal benefits
has been omitted because the aggregate value of such items does not meet the
minimum amount required for disclosure under SEC regulations.
(2) The Company has not awarded any restricted stock or long-term incentives
other than stock options. Accordingly, columns relating to such awards have
been omitted.
(3) Mr. Shapleigh, the Company's President and Chief Operating Officer, also
served as Chief Executive Officer until January 1997.
STOCK INCENTIVE PLAN
The Board of Directors has reserved 397,500 shares of Common Stock for
issuance pursuant to awards that may be made under the Company's 1996 Stock
Incentive Plan. The term of the Plan is indefinite.
Awards under the Plan are determined by a committee of no less than two
members of the Board of Directors (the "Committee"), the members of which are
selected by the Board of Directors. Committee members satisfy the criteria
required for "non-employee directors" set forth in Rule 16b-3, under the
Securities Exchange Act of 1934, as amended, and "outside directors" within the
meaning of Section 162(m) of the Internal Revenue Code. Rules, regulations and
interpretations necessary for the ongoing administration of the Plan are made by
the Committee.
Key employees, officers, directors and consultants of the Company or an
affiliate are eligible for awards under the Plan. The Plan permits the Committee
to make awards of shares of Common Stock, awards of derivative securities
related to the value of the Common Stock and certain cash awards to eligible
persons. These discretionary awards may be made on an individual basis, or
pursuant to a program approved by the Committee for the benefit of a group of
eligible persons. The Plan permits the Committee to make awards of a variety of
equity-based incentives, including (but not limited to) stock awards, options to
purchase shares of Common Stock and to sell shares of Common Stock back to the
Company, stock
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<PAGE>
appreciation rights, so-called "cash-out" or "limited stock appreciation rights"
(which the Committee may make exercisable in the event of certain changes in
control of the Company or other events), phantom shares, performance incentive
rights, dividend equivalent rights and similar rights (hereinafter, "Stock
Incentives"). The number of shares of Common Stock as to which a Stock Incentive
is granted and to whom any Stock Incentive is granted is determined by the
Committee, subject to the provisions of the Plan. Stock Incentives issuable may
be made exercisable or settled at such prices and may be made terminable under
such terms as are established by the Committee, to the extent not otherwise
inconsistent with the terms of the Plan.
The Committee has the discretion to allow a Stock Incentive to be settled in
various ways, depending upon the type of Stock Incentive, including payment in
cash, payment by the delivery of previously-owned shares of Common Stock,
payment through a cashless exercise executed through a broker or payment by
having withheld a number of shares of Common Stock otherwise issuable pursuant
to the Stock Incentive. The terms of particular Stock Incentives may provide
that they terminate, among other reasons, upon the holder's termination of
employment or other status with respect to the Company and any affiliate, upon a
specified date, upon the holder's death or disability, or upon the occurrence of
a change in control of the Company. Stock Incentives may also include exercise,
conversion or settlement rights to a holder's estate or personal representative
in the event of the holder's death or disability. At the Committee's discretion,
Stock Incentives that are held by an employee who suffers a termination of
employment may be cancelled, accelerated, paid or continued, subject to the
terms of the applicable Stock Incentive agreement and to the provisions of the
Plan. Stock Incentives generally shall not be transferable or assignable during
a holder's lifetime. The Committee may make cash awards designed to cover tax
obligations of employees that result from the receipt or exercise of a Stock
Incentive. Delivery of any shares of Common Stock issuable pursuant to the Plan
may be conditioned upon compliance with available exemptions from registration
under applicable federal and state securities laws.
The maximum number of shares of Common Stock with respect to which options
or stock appreciation rights may be granted during any fiscal year of the
Company as to any eligible employee shall not exceed 100,000, to the extent
required by Section 162(m) of the Internal Revenue Code for the grant to qualify
as qualified performance-based compensation.
The number of shares of Common Stock reserved for issuance in connection
with the grant or settlement of Stock Incentives or to which a Stock Incentive
is subject, as the case may be, and the exercise price of each option are
subject to adjustment in the event of any recapitalization of the Company or
similar event, effected without the receipt of consideration. In the event of
certain corporate reorganizations and similar events, Stock Incentives may be
substituted, cancelled, accelerated, cashed-out or otherwise adjusted by the
Committee, provided such adjustment is not inconsistent with the express terms
of the Plan or the applicable Stock Incentive agreement.
Although the Plan may be amended or terminated by the Board of Directors
without shareholder approval, the Board of Directors also may condition any such
amendment or termination upon shareholder approval if shareholder approval is
deemed necessary or appropriate in consideration of tax, securities or other
laws.
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<PAGE>
A total of 354,438 options have been granted under the Plan. The following
directors and executive officers of the Company have been granted options with
the following terms:
<TABLE>
<CAPTION>
TYPE OF SHARES SUBJECT EXERCISE
NAME OPTION(1) TO OPTION PRICE
- ---------------------------------------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
D. R. Grimes.................................................... Nonqualified 82,812 $ 1.21
D. R. Grimes.................................................... Incentive 66,250 $ 10.00
Robert E. Bowers................................................ Nonqualified 57,969 $ 1.21
Robert E. Bowers................................................ Incentive 57,969 $ 10.00
Donald S. Shapleigh, Jr......................................... Incentive 49,687 $ 10.00
Belinda L. Morgan............................................... Incentive 16,563 $ 3.62
</TABLE>
- ------------------------
(1) Incentive stock options vest in equal one-third annual increments beginning
on the first anniversary of the grant date, provided, however, that vesting
accelerates on certain profitability conditions. Nonqualified stock options
vest in equal one-third annual increments beginning on the first anniversary
of the grant date, the completion of a recapitalization (including a public
offering) or a change in control of the Company, whichever is first to
occur.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors set the compensation of the Company's
executive officers from the Company's inception until April 22, 1997, when the
Board delegated that function to the Compensation Committee of the Board of
Directors. Until that time, the Company's Board of Directors consisted of
Messrs. Johnson and Shapleigh and Mary E. Johnson.
T. Stephen Johnson is the Chairman of the Board of Directors of the Company
and the President of TSJ&A. W. James Stokes is a director of the Company and a
Senior Vice President of TSJ&A. TSJ&A provides certain operating services to the
Company such as management, consulting, regulatory and accounting services, as
well as office space and clerical support. TSJ&A expects to incur approximately
$500,000 in expenses as a result of providing such operating services.
Management believes the Company has obtained these services on terms no less
favorable than could be obtained from an unaffiliated third party. The Company
intends to reimburse TSJ&A with a portion of the net proceeds of the Offering
and plans to continue to utilize TSJ&A's services on the same terms after the
Offering.
Mr. Shapleigh has served as President of the Company since February 1996.
63
<PAGE>
CERTAIN TRANSACTIONS
The Bank has been operated as a service of CFB pursuant to the terms of the
Operation Agreement. The Operation Agreement provides that CFB will operate the
Bank as a service of CFB under the trade name "Atlanta Internet Bank" and that
the operations of the Bank will be managed by the Company. CFB agreed to provide
funding for the reasonable expenses and operations of the Bank up to the amount
of $1,325,985 or until July 31, 1997, whichever is first to occur. CFB will be
reimbursed for these expenses from the net proceeds of the Offering.
Simultaneously with the consummation of the Offering, CFB will transfer the
assets and liabilities relating to the operations of the Bank to the Company's
newly acquired federal savings bank subsidiary. In consideration for the
transfer and for operating the Bank as a service of CFB, the Company will pay
$1.00 to CFB and will issue 1,325,000 shares of the Company's Common Stock to
CFB. The Common Stock issued to CFB has been valued at $3,840,000 based on the
appraised fair market value of the Common Stock on the date of the Agreement.
Upon completion of the transfer of the assets and liabilities of the Bank as
contemplated by the Operation Agreement, CFB will pay to the Bank 100% of the
total amount of deposits with the Bank, less the sum of: (i) all cash items;
(ii) net interest income based upon the Bank's cost of deposits and interest
income allocated by CFB to the Bank's operations, which is not expected to
exceed a cost of $200,000; (iii) unreimbursed reasonable expenses (including the
funding advanced by CFB) under the terms of the Operation Agreement to the
extent not reflected in (ii) above, expected to be $2,000,000 as of July 31,
1997; and (iv) the net book value of loans issued by the Bank. The only
unreimbursed expenses incurred or to be incurred by CFB from its operation of
the Bank consist of $31,232 in contributed services from an affiliate that the
Company recorded as additional paid-in capital in fiscal 1996.
The Operation Agreement gives CFB the right to nominate four directors to
the Company's Board of Directors. The right expires upon the initial appointment
of the nominated director or a director elected in opposition to the nominee.
Pursuant to this right, CFB nominated three of the Company's current directors
and retains the right to nominate one additional director in the future. Of the
three CFB nominees currently serving as directors, one has a term expiring in
1998, one has a term expiring in 1999 and one has a term expiring in 2000. Upon
completion of the Offering, CFB will beneficially own 1,325,000 shares, or
23.5%, of the outstanding Common Stock of the Company. The Company and CFB
intend to maintain a normal correspondent relationship following the
consummation of the Reorganization and the Offering. Correspondent services and
transactions, which are expected to include purchases by the Company of loans
and loan participations, will be on terms no less favorable than could be
obtained from an unaffiliated third party for comparable transactions and
approved by a majority of the Company's directors who are not affiliated with
CFB.
The Company intends to pay up to $450,000 of the net proceeds of the
Offering as bonuses to certain officers and employees upon completion of the
Offering. Mr. Grimes will receive a bonus of $250,000 and Mr. Bowers will
receive a bonus of $100,000. Other bonus payments have not yet been determined.
The bonuses are not part of a formal compensation program adopted by the
Company, but are instead being issued based on the Board's subjective evaluation
of each individual's experience in the banking and technology industries and his
or her contributions to the Company's performance.
Management believes the terms of the transactions described above are fair
to the Company and are no less favorable than could be obtained from
unaffiliated third parties. See "Management--Compensation Committee Interlocks
and Insider Participation" and "--Director Compensation" for a description of
other transactions between the Company and its affiliates.
64
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of June 24, 1997 and
adjusted to reflect the sale of the shares offered hereby, by (i) each director
and director nominee; (ii) each executive officer; (iii) each person known to
the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock of the Company; and (iv) all of the directors and
executive officers as a group. Unless otherwise specified, each shareholder has
sole voting and investment power with respect to the indicated shares and the
address of each shareholder is the same as the address of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------
PERCENT (1)
----------------------
PRIOR TO AFTER
NAME OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
- ------------------------------------------------------------------------------------- ---------- --------- -----------
<C> <S> <C> <C> <C>
(i) Directors and Director Nominees
Robert E. Bowers(2)(3).................................................... 57,969 4.3% 1.0%
Ward H. Clegg............................................................. 49,688 3.9% 0.9%
D. R. Grimes(2)(3)........................................................ 82,812 6.1% 1.4%
J. Stephen Heard.......................................................... 9,938 0.8% 0.2%
T. Stephen Johnson(4)..................................................... 292,593 22.9% 5.2%
Robin C. Kelton........................................................... 142,438 11.1% 2.5%
John T. Moore............................................................. 9,938 0.8% 0.2%
Thomas H. Muller, Jr...................................................... 9,938 0.8% 0.2%
Donald S. Shapleigh, Jr.(2)............................................... 66,250 5.2% 1.2%
W. James Stokes........................................................... 33,125 2.6% 0.6%
Mack I. Whittle(5)........................................................ 0 0.0% 23.5%
(ii) Non-Directors, Executive Officers
Thomas L. Cable........................................................... 0 0.0% 0.0%
Belinda L. Morgan......................................................... 16,563 1.3% 0.3%
(iii) Non-Directors, 5% Beneficial Owners
Carolina First(6)......................................................... 0 0.0% 23.5%
Mary E. Johnson(7)........................................................ 292,593 22.9% 5.2%
Edward J. Sebastian(8).................................................... 292,593 22.9% 5.2%
(iv) All Executive Officers and Directors as a Group (13 persons).............. 771,252 54.3% 36.2%
</TABLE>
- ------------------------
(1) The percentages prior to the Offering are calculated based on 1,279,156
shares issued and outstanding as of the date hereof. Percentages after the
closing of the Offering are based on 5,645,562 shares to be issued and
outstanding upon consumation of the Reorganization and the Offering.
(2) Mr. Bowers, Mr. Grimes and Mr. Shapleigh are also executive officers of the
Company.
(3) Includes outstanding options for executive officers as follows:
Robert E. Bowers 57,969
D. R. Grimes 82,812
(4) Includes 146,280 shares owned of record by Mr. Johnson's spouse, Mary E.
Johnson.
(5) Mr. Whittle serves as Chairman of the Board of CFB. As a result, he may be
deemed to beneficially own any shares owned by CFB. See Note (6).
(6) Carolina First is located at 102 South Main Street, Greenville, South
Carolina 29601. Although neither CFB nor Carolina First presently owns any
shares of Common Stock, CFB will own 1,325,000 shares (representing 23.5%)
of the Common Stock outstanding after the Offering and the Reorganization.
CFB intends to transfer such shares to Carolina First as a dividend
immediately following the consummation of the Offering. If the Underwriters'
over-allotment option is exercised, Carolina First (the "Selling
Shareholder") will sell up to 150,000 shares of Common Stock in the
Offering. In such event, Carolina First will beneficially own a maximum of
1,175,000 shares of Common Stock after the Offering, representing
approximately 19.3% of the then-outstanding Common Stock.
(7) Includes 146,313 shares owned of record by Ms. Johnson's spouse, T. Stephen
Johnson.
(8) Includes 146,280 shares owned of record by Mr. Sebastian's spouse. Mr.
Sebastian disclaims beneficial ownership of such shares. Mr. Sebastian's
address is 1901 Main Street, Suite 620, Columbia, South Carolina 29201.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
common stock, $.01 par value, and 10,000,000 shares of preferred stock, no par
value. As of June 24, 1997, there were 1,279,156 shares of Common Stock
outstanding held by 29 holders of record. The following summary is qualified by
reference to the Amended and Restated Articles of Incorporation (the "Articles")
and Bylaws (the "Bylaws") of the Company, which are filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of the holders of
Common Stock and do not have cumulative voting rights. The holders of Common
Stock are entitled to receive dividends, if any, as may be declared from time to
time by the Board of Directors out of funds legally available therefor, and in
the event of liquidation, dissolution or winding-up of the Company, to share
ratably in all assets available for distribution.
PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. The Board of Directors, without approval of
the shareholders, is authorized to establish the voting, dividend, redemption,
conversion, liquidation and other relative provisions as may be provided in a
particular series or class. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present intention to issue any series or class of Preferred Stock.
SPECIAL MEETINGS OF SHAREHOLDERS
The Bylaws of the Company provide that special meetings of the shareholders
may be called at any time for any purpose by the Chief Executive Officer or by
the presiding officer of the Board. Either the Chief Executive Officer or the
Secretary of the Company is required to call a special meeting when (i)
requested in writing by any two or more of the directors; or (ii) requested in
writing by shareholders owning shares representing at least twenty-five percent
(25%) of all the votes entitled to be cast on any issue proposed to be
considered at such meeting.
SUPERMAJORITY APPROVAL OF CERTAIN TRANSACTIONS
The Articles require the affirmative vote of the holders of two-thirds of
the voting stock to approve certain mergers, share exchanges and dispositions of
the assets of the Company unless at least two-thirds of the members of the Board
of Directors approve the proposed transaction. If such approval by the Board of
Directors is obtained, approval by the vote of a majority of the outstanding
shares entitled to vote is required. This provision may tend to discourage
attempts by third parties to acquire the Company in a hostile takeover effort.
It may also permit a minority of directors and shareholders to prevent a
business combination regardless of the terms of the proposed transaction.
CLASSIFIED BOARD AND REMOVAL OF DIRECTORS
The Articles also provide that the Board of Directors will be divided into
three classes serving staggered three-year terms and that a director may only be
removed by the vote of two-thirds of the outstanding shares entitled to vote in
an election of directors. These provisions could enable a minority of the
Company's shareholders to prevent the removal of a director sought to be removed
by a majority of the
66
<PAGE>
shareholders and may tend to enhance management's ability to retain control over
the Company's affairs and to preserve the director's present position on the
Board.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company contain certain indemnification provisions
providing that directors, officers, and employees or agents of the Company will
be indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (I.E., it
is settled), the indemnification provisions provide that the Company will
indemnify directors when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the director acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to an employee benefit plan, for a
purpose the director believed in good faith to be in the interests of the
participants and beneficiaries of the plan. The standard of conduct with respect
to any criminal action or proceeding is met if the director had no reasonable
cause to believe his or her conduct was unlawful. Whether the applicable
standard of conduct has been met is determined by the Board of Directors, the
shareholders or independent legal counsel in each specific case.
The Company can also provide for greater indemnification than that set forth
in the Bylaws if it chooses to do so, subject to approval by the Company's
shareholders. The Company may not, however, indemnify a director for liability
arising out of circumstances which constitute exceptions to limitation of a
director's liability for monetary damages. See "--Limitation of Liability".
The indemnification provisions of the Bylaws specifically provide that the
Company may purchase and maintain insurance on behalf of any director against
any liability asserted against such person and incurred by him or her in any
such capacity, whether or not the Company would have had the power to indemnify
against such liability.
Management is not aware of any pending or threatened action, suit or
proceeding involving any of its directors or officers for which indemnification
from the Company may be sought.
LIMITATION OF LIABILITY
Article X of the Company's Articles, subject to certain exceptions,
eliminates the potential personal liability of a director for monetary damages
to the Company and to the shareholders of the Company for breach of a duty as a
director. There is no elimination of liability for (a) a breach of duty
involving appropriation of a business opportunity of the Company, (b) an act or
omission not in good faith or involving intentional misconduct or a knowing
violation of law, (c) a transaction from which the director derives an improper
material tangible personal benefit, or (d) as to any payment of a dividend or
approval of a stock repurchase that is illegal under the Georgia Business
Corporation Code. The Articles do not eliminate or limit the right of the
Company or its shareholders to seek injunctive or other equitable relief not
involving monetary damages.
Article X was adopted by the Company pursuant to the Georgia Business
Corporation Code which allows Georgia corporations, with the approval of their
shareholders, to include in their Articles of Incorporation a provision
eliminating or limiting the liability of directors, except in the circumstances
described above. Article X was included in the Company's Articles to encourage
qualified individuals to serve and remain as directors of the Company. Article X
was also included to enhance the Company's ability to secure liability insurance
for its directors at a reasonable cost. The Company intends to obtain liability
insurance covering actions taken by its directors in their capacities as
directors. The Board of Directors believes that Article X will enable the
Company to secure such insurance on terms more favorable than if such a
provision were not included in the Articles.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is SunTrust Bank,
N.A., Atlanta, Georgia.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,645,562 shares of
Common Stock outstanding. The shares sold in this Offering will be freely
tradeable without restriction or further registration, except for shares owned
by "affiliates" of the Company (as such term is defined under the Securities
Act) which may be sold subject to the resale limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). The remaining 2,645,562 outstanding
shares constitute "restricted securities" within the meaning of Rule 144. Such
shares must be held for one year before they may be resold pursuant to Rule 144,
unless the resale of such shares is made pursuant to an effective registration
statement under the Securities Act or another exemption from registration is
available.
Generally, Rule 144 provides that beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned "restricted" securities for at least one year, including a
person who may be deemed an "affiliate" of the Company, as the term "affiliate"
is defined under the Securities Act, is entitled to sell in "broker's
transactions" or in transactions directly with a "market maker," within any
three-month period, a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of the Common Stock on any national securities exchange and/or
over-the-counter market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain notice requirements and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company would be entitled to sell such shares under Rule 144 without regard to
the volume, public information, manner of sale or notice provisions and
limitations described above, once a period of at least two years had elapsed
since the later of the date the shares were acquired from the Company or from an
"affiliate" of the Company.
Pursuant to OTS requirements and subject to certain limited exceptions, the
Company's directors and certain of its executive officers and shareholders may
not dispose of their restricted shares of Common Stock for a period of three
years from the date of this Prospectus. As a result, 2,248,064 shares held by
such shareholders may not be sold until three years from the date of this
Prospectus, regardless of their eligibility for sale pursuant to Rule 144 in the
public market.
There are currently outstanding options to purchase 354,438 shares of Common
Stock under the Company's 1996 Stock Incentive Plan. After this Offering, the
Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock issuable upon exercise of
such options. Accordingly, such shares will be freely tradeable by holders who
are not affiliates of the Company and, subject to the volume and manner of sale
limitations of Rule 144, by holders who are affiliates of the Company.
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on the
market price for Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception of the
availability of shares for sale, could adversely affect the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. See "Risk Factors--Shares
Eligible for Future Sale" and "--No Prior Market; Volatility of Stock Price."
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, the Selling Shareholder and the Underwriters named below (the
"Underwriting Agreement"), the Company has agreed to sell to each of such
Underwriters named below, and each of such Underwriters, for whom Morgan Keegan
& Company, Inc. and Interstate/Johnson Lane Corporation are acting as
representatives, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITER COMMON STOCK
- ------------------------------------------------------------------------- -------------------
<S> <C>
Morgan Keegan & Company, Inc.............................................
Interstate/Johnson Lane Corporation......................................
----------
Total................................................................ 3,000,000
----------
----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Common Stock
offered hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may allow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company and the Selling Shareholder have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase up
to an aggregate of 300,000 and 150,000 additional shares of Common Stock,
respectively, solely to cover over-allotments, if any. If the Underwriters
exercise their overallotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the table above, bears to the 3,000,000 shares of Common
Stock.
The Company and certain of its officers, directors and existing shareholders
(including Carolina First and CFB) have agreed, during the period beginning from
the date of this Prospectus and continuing to and including the date 365 days
after the date of the Prospectus, not to offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than, with respect to
the Company, pursuant to employee stock option plans existing, or on the
conversion or exchange of convertible or exchangeable securities outstanding, on
the date of this Prospectus) which are substantially similar to the shares of
Common Stock or which are convertible or exchangeable into securities which are
substantially similar to the shares of Common Stock without the prior consent of
the representatives. Other existing shareholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any securities of the Company beginning
from the date of this Prospectus and continuing to and including the date 180
days after the date of the Prospectus.
The representatives of the Underwriters have informed the Company that the
Underwriters do not expect sales to accounts over which the Underwriters
exercise discretionary authority to exceed five percent of the total number of
shares of Common Stock offered by them.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be negotiated
between the Company and the representatives of the Underwriters. Among the
factors to be considered in determining the initial public offering price of the
Common Stock, in addition to prevailing market conditions, are the history of,
and prospects for, the industry in which the Company operates, the price
earnings multiples of publicly traded common stocks of
69
<PAGE>
comparable companies, the cash flow and earnings of the Company and comparable
companies in recent periods and the Company's business potential and cash flow
and earnings prospects.
To facilitate the offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with the Offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
representatives, on behalf of the syndicate of Underwriters, also may reclaim
selling concessions allowed to an Underwriter or dealer, if the syndicate
repurchases shares distributed by that Underwriter or dealer.
The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Powell, Goldstein, Frazer & Murphy LLP, Atlanta,
Georgia. The validity of the shares of Common Stock offered hereby will be
passed upon for the Underwriters by King & Spalding, Atlanta, Georgia.
EXPERTS
The financial statements as of December 31, 1996 and for the period February
20, 1996 (Date of Incorporation) to December 31, 1996 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein in this Registration Statement, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed with the
Commission a Registration Statement on Form S-1 (the "Registration Statement")
under the Securities Act, with respect to the offer and sale of Common Stock
pursuant to this Prospectus. This Prospectus, filed as a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement or the exhibits and schedules thereto in accordance with
the rules and regulations of the Commission and reference is hereby made to such
omitted information. Statements made in this Prospectus concerning the contents
of any contract, agreement or other document filed as an exhibit to the
Registration Statement are summaries of the terms of such contract, agreement or
document. Reference is made to each such exhibit for a more complete description
of the matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed with the Commission may be inspected, without charge,
and copies may be obtained at prescribed rates, at the public reference facility
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. This Registration
Statement was filed with the Commission electronically. The Commission maintains
a site on the World Wide Web that contains documents filed with the Commission
electronically. The address of such site is http://www.sec.gov, and the
Registration Statement may be inspected at such site. For further information
pertaining to the Common Stock offered by this Prospectus and the Company,
reference is made to the Registration Statement.
70
<PAGE>
The Company and its organizers have filed or will file various applications
with the OTS and the Federal Reserve. Prospective investors should rely only on
information contained in this Prospectus and in the Company's related
Registration Statement in making an investment decision. To the extent that
other available information not presented in this Prospectus, including
information available from the Company and information in public files and
records maintained by the OTS and the Federal Reserve, is inconsistent with
information presented in this Prospectus or provides additional information,
such other information is superseded by the information presented in this
Prospectus and should not be relied on. Projections appearing in the
applications are based on assumptions that the organizers believe are
reasonable, but as to which no assurances can be made. The Company specifically
disaffirms those projections for purposes of this Prospectus and cautions
prospective investors against placing reliance on them for purposes of making an
investment decision.
The Company will furnish its shareholders with annual reports containing
audited financial information for each fiscal year on or before the date of the
annual meeting of shareholders as required by the Commission and by the
Department of Banking. The Company also intends to furnish its shareholders with
quarterly reports containing unaudited consolidated financial statements for the
first three quarters of each fiscal year. The Company's fiscal year ends on
December 31. Additionally, the Company will also furnish such other reports as
it may determine to be appropriate or as otherwise may be required by law.
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Net.B@nk, Inc.:
We have audited the accompanying balance sheet of Net.B@nk, Inc. (the
"Company") (a development stage enterprise) as of December 31, 1996 and the
related statements of operations, shareholders' deficit, and cash flows for the
period from February 20, 1996 (date of incorporation) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and the
results of its operations and its cash flows for the period from February 20,
1996 (date of incorporation) to December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 18, 1997
F-1
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------- MARCH 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 768,666 $ 194,668
License agreements--current....................................................... 155,600 133,378
Other assets--current............................................................. 109,833 270,468
------------- -------------
Total current assets............................................................ 1,034,099 598,514
LICENSE AGREEMENTS.................................................................. 46,366 30,306
FURNITURE AND EQUIPMENT--Net........................................................ 165,984 149,622
------------- -------------
$ 1,246,449 $ 778,442
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Amounts due to affiliate.......................................................... $ 883,606 $ 1,197,007
Other payables and accrued liabilities............................................ 748,916 860,066
------------- -------------
Total current liabilities....................................................... 1,632,522 2,057,073
------------- -------------
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock, no par (10,000,000 shares authorized, none outstanding).......... -- --
Common stock, $.01 par (100,000,000 shares authorized, 1,249,342 and 1,269,218
shares issued and outstanding).................................................. 12,493 12,692
Additional paid-in capital........................................................ 1,069,088 1,462,163
Common stock subscribed (1,354,814 and 1,334,938 shares).......................... 3,844,185 3,841,395
Stock subscriptions receivable (29,814 and 9,938 shares).......................... (4,185) (1,395)
Unamortized affiliate service contract expense.................................... (1,440,000) (576,000)
Unamortized stock plan expense.................................................... (28,472) (378,279)
Deficit accumulated during the development stage.................................. (3,839,182) (5,639,207)
------------- -------------
Total shareholders' deficit..................................................... (386,073) (1,278,631)
------------- -------------
$ 1,246,449 $ 778,442
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20, 1996
(DATE OF
INCORPORATION) TO
DECEMBER 31, 1996
--------------------- PERIOD FROM THREE MONTHS PERIOD FROM
FEBRUARY 20, 1996 ENDED FEBRUARY 20, 1996
(DATE OF MARCH 31, (DATE OF
INCORPORATION) TO 1997 INCORPORATION) TO
MARCH 31, 1996 ------------- MARCH 31, 1997
--------------------- (UNAUDITED) ---------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Management fees from affiliate....... $ 60,000 $ 40,000 $ -- $ 60,000
Interest income...................... 7,709 -- 5,775 13,484
----------- ----------- ------------- -----------
Total revenues..................... 67,709 40,000 5,775 73,484
EXPENSES:
Amortization of service contract with
affiliate.......................... 2,400,000 -- 864,000 3,264,000
Salaries and consulting fees......... 836,962 14,353 524,971 1,361,933
Marketing............................ 197,111 -- 60,495 257,606
Professional fees.................... 83,633 999 21,277 104,910
Logo/web site........................ 73,326 -- 18,945 92,271
Monthly user fees.................... 60,452 -- 52,561 113,013
Travel, meetings, and
entertainment...................... 38,794 392 4,404 43,198
Occupancy............................ 17,850 -- 29,750 47,600
Depreciation......................... 17,406 -- 6,879 24,285
Other operating expenses............. 181,357 522 119,993 301,350
Interest expense..................... 102,525 102,525
----------- ----------- ------------- -----------
Total expenses..................... 3,906,891 16,266 1,805,800 5,712,691
----------- ----------- ------------- -----------
NET INCOME (LOSS)...................... $ (3,839,182) $ 23,734 $(1,800,025) $ (5,639,207)
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE..................... $ (1.43) $ .01 $ (.67)
----------- ----------- -------------
----------- ----------- -------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT
SHARES OUTSTANDING................... 2,685,310 2,685,310 2,685,310
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
UNAMORTIZED
AFFILIATE
COMMON PREFERRED ADDITIONAL COMMON STOCK SERVICE
COMMON STOCK STOCK PAID-IN STOCK SUBSCRIPTIONS CONTRACT
SHARES ($.01 PAR) (NO PAR) CAPITAL SUBSCRIBED RECEIVABLE EXPENSE
----------- ----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE-- February 19, 1996........ $ -- $ -- $ -- $ -- $ -- $ --
Proceeds from issuance of common
stock:
Incorporation, February 20,
1996......................... 759,094 7,591 (7,362)
March 15, 1996,................ 49,688 497 (482)
April 1, 1996,................. 142,438 1,424 18,571
September 17, 1996,............ 298,122 2,981 997,129
Contribution of services from
affiliate.................... 31,232
Issuance of 1,354,814 shares of
common stock subscriptions..... 3,844,185 (4,185) (3,840,000)
Issuance of 16,562 compensatory
stock options.................. 30,000
Amortization of stock plan
expense........................
Net loss, including amortization
of service contract............ 2,400,000
----------- ----------- ----------- ----------- ----------- ------------- ------------
BALANCE--December 31, 1996......... 1,249,342 $ 12,493 $ -- $ 1,069,088 $ 3,844,185 $ (4,185) $(1,440,000)
----------- ----------- ----------- ----------- ----------- ------------- ------------
Proceeds from issuance of common
stock March 31, 1997
(unaudited)...................... 19,876 199 2,591 (2,790) 2,790
Issuance of 163,976 compensatory
stock options (unaudited)........ 390,484
Amortization of service contract
(unaudited)...................... 864,000
Amortization of stock plan expense
(unaudited)......................
Net loss for the three months ended
March 31, 1997 (unaudited).......
----------- ----------- ----------- ----------- ----------- ------------- ------------
BALANCE--March 31, 1997
(unaudited)...................... 1,269,218 $ 12,692 $ -- $ 1,462,163 $ 3,841,395 $ (1,395) $ (576,000)
----------- ----------- ----------- ----------- ----------- ------------- ------------
----------- ----------- ----------- ----------- ----------- ------------- ------------
<CAPTION>
DEFICIT
ACCUMULATED
UNAMORTIZED DURING THE
STOCK PLAN DEVELOPMENT
EXPENSE STAGE TOTAL
------------ ------------ -----------
<S> <C> <C> <C>
BALANCE-- February 19, 1996........ $ -- $ -- $ --
Proceeds from issuance of common
stock:
Incorporation, February 20,
1996......................... 229
March 15, 1996,................ 15
April 1, 1996,................. 19,995
September 17, 1996,............ 1,000,110
Contribution of services from
affiliate.................... 31,232
Issuance of 1,354,814 shares of
common stock subscriptions..... --
Issuance of 16,562 compensatory
stock options.................. (30,000) --
Amortization of stock plan
expense........................ 1,528 1,528
Net loss, including amortization
of service contract............ (3,839,182) (1,439,182)
------------ ------------ -----------
BALANCE--December 31, 1996......... $ (28,472) $(3,839,182) $ (386,073)
------------ ------------ -----------
Proceeds from issuance of common
stock March 31, 1997
(unaudited)...................... 2,790
Issuance of 163,976 compensatory
stock options (unaudited)........ (390,484) --
Amortization of service contract
(unaudited)...................... 864,000
Amortization of stock plan expense
(unaudited)...................... 40,677 40,677
Net loss for the three months ended
March 31, 1997 (unaudited)....... (1,800,025) (1,800,025)
------------ ------------ -----------
BALANCE--March 31, 1997
(unaudited)...................... $ (378,279) $(5,639,207) $(1,278,631)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20, 1996
(DATE OF
INCORPORATION) TO
DECEMBER 31, 1996
----------------- PERIOD FROM THREE MONTHS PERIOD FROM
FEBRUARY 20, ENDED MARCH FEBRUARY 20, 1996
1996 (DATE OF 31, 1997 (DATE OF
INCORPORATION) ------------- INCORPORATION) TO
TO MARCH 31, MARCH 31, 1997
1996 (UNAUDITED) -------------------
---------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................... $ (3,839,182) $ 23,734 $(1,800,025) $ (5,639,207)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation......................... 17,406 6,879 24,285
Amortization of service contract..... 2,400,000 864,000 3,264,000
Contribution of services from
affiliate.......................... 31,232 -- 31,232
Amortization of stock plan expense... 1,528 40,677 42,205
Changes in assets and liabilities
which provide (use) cash:
Other assets, current.............. (265,433) (138,413) (403,846)
License agreements-- noncurrent.... (46,366) 16,060 (30,306)
Payables and accrued liabilities... 748,916 100 111,150 860,066
----------------- ------- ------------- -------------------
Net cash provided by (used in)
operating activities........... (951,899) 23,834 (899,672) (1,851,571)
----------------- ------- ------------- -------------------
INVESTING ACTIVITIES:
Capital expenditures................... (183,390) (8,255) (191,645)
Proceeds from return of equipment...... 17,738 17,738
----------------- ------- ------------- -------------------
Net cash, provided by (used in)
investing activities........... (183,390) 9,483 (173,907)
----------------- ------- ------------- -------------------
FINANCING ACTIVITIES:
Advances from affiliate................ 883,606 313,401 1,197,007
Proceeds from the sale of stock........ 1,020,349 2,790 1,023,139
----------------- ------- ------------- -------------------
Net cash provided by financing
activities..................... 1,903,955 316,191 2,220,146
----------------- ------- ------------- -------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS............................ 768,666 23,834 (573,998) 194,668
CASH AND CASH EQUIVALENTS:
Beginning of Period.................... -- -- 768,666 --
----------------- ------- ------------- -------------------
End of Period.......................... $ 768,666 $ 23,834 $ 194,668 $ 194,668
----------------- ------- ------------- -------------------
----------------- ------- ------------- -------------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 1997, FOR THE PERIOD FEBRUARY 20, 1996 TO
MARCH 31, 1996, FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND FOR THE PERIOD
FEBRUARY 20, 1996 TO MARCH 31, 1997 IS UNAUDITED
1. ORGANIZATION AND BASIS OF PRESENTATION
Net.B@nk, Inc. (the "Company") was incorporated on February 20, 1996 as a
Georgia corporation. Its primary business purpose is the formation and,
ultimately, the operation of Atlanta Internet Bank ("AIB"). The Company expects
to operate AIB as a federal savings bank and a wholly owned subsidiary, pending
its purchase of the charter and certain assets and liabilities of Premier Bank,
FSB ("Premier Bank") and obtaining regulatory approvals from the Office of
Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation (the
"FDIC"), and the Federal Reserve Board.
The Company entered into an agreement as of July 15, 1996 with Carolina
First Bank ("CFB") in which CFB would hold and service the deposit accounts
generated by the Internet banking operations which are managed by the Company.
The original term of the Agreement was to expire on March 31, 1997. The
Agreement has been extended to July 31, 1997 by an amendment dated March 18,
1997. Also, CFB has agreed to provide funding for reasonable expenses of the
Company up to an amount of $1,325,985. Upon AIB obtaining the regulatory
approvals necessary to operate a federal savings bank, the deposit accounts
generated will be transferred to AIB. As of December 31, 1996 and March 31,
1997, CFB held and serviced deposit accounts totaling $10,366,437 and
$43,408,922, respectively, that were generated by the Internet banking
operations and managed by the Company.
For the services contract with CFB, the Company has agreed to issue CFB
1,325,000 shares of its common stock valued at $3,840,000. Such amount is being
amortized to expense over the life of the contract which is expected to be in
effect until May 31, 1997. Since the common stock is not expected to be issued
until the second quarter of 1997, the Company has credited subscriptions for
common stock.
The Company has entered into an agreement dated June 17, 1996, as amended
and restated December 19, 1996, February 25, 1997, and May 31, 1997 with First
Alliance/Premier Bancshares, Inc. ("First Alliance") pursuant to which the
Company will purchase the charter of First Alliance's subsidiary, Premier Bank,
and a minimum amount of assets and liabilities. The purchase price will be equal
to the amount of Premier Bank's unimpaired capital of $2,000,000 plus $150,000
of purchase premium and 41,406 shares of the Company's common stock valued at
$125,000. In addition, as a condition to the May 31, 1997 amendment, Net.B@nk,
Inc. has agreed to increase the purchase price for direct out-of-pocket expenses
incurred as a result of extending the agreement to acquire the Premier charter.
Such aggregate reimbursements shall not exceed $50,000, $25,000, and $25,000 for
the months of June, July and August, respectively, and will be recorded as
additional purchase premium. The Company's purchase is subject to the approval
of the OTS. The Company and First Alliance have filed applications for approval
of the purchase with the OTS. The transaction is expected to be accounted for as
a purchase.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles. The following is a summary of the more
significant accounting policies.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997, FOR THE PERIOD FEBRUARY 20, 1996 TO
MARCH 31, 1996, FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND FOR THE PERIOD
FEBRUARY 20, 1996 TO MARCH 31, 1997 IS UNAUDITED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--Cash equivalents include money market instruments
and time deposits with an original maturity of 90 days or less. Interest bearing
certificates of deposit and money market accounts totaled $500,000 and $242,103,
respectively, at December 31, 1996. At March 31, 1997, cash and cash equivalents
primarily consisted of money market accounts.
FURNITURE AND EQUIPMENT--Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally five to seven
years.
ORGANIZATIONAL COSTS--Organizational costs are included in other assets and
are stated at cost, net of accumulated amortization and are being amortized over
a 60-month period using the straight-line method.
LICENSE AGREEMENTS--The costs of license agreements to utilize certain
distribution channels and processors are amortized over the term of such
agreements ranging from 18 months to 36 months using the straight-line method.
INCOME TAXES--Provisions for income taxes are based upon amounts reported in
the statement of operations and include deferred taxes on temporary differences
between financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is provided for deferred tax assets when it is
more likely than not that such assets will not be realized.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE--Net loss per common and
common equivalent share is computed based on the weighted average number of
common and common equivalent shares outstanding during the period. All common
and common equivalent shares issued have been considered to be outstanding for
all periods in accordance with Staff Accounting Bulletin No. 83.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The financial statements as of March
31, 1997, for the period February 20, 1996 (Date of Incorporation) to March 31,
1996, for the three months ended March 31, 1997, and for the period February 20,
1996 to March 31, 1997 were prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for these
periods. Operating results for the interim periods included herein are not
necessarily indicative of the results that may be expected for the entire year.
3. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1996 is summarized as follows:
<TABLE>
<S> <C>
Furniture and fixtures.................................................... $ 40,741
Equipment................................................................. 142,649
---------
Furniture and equipment................................................... 183,390
Less accumulated depreciation............................................. 17,406
---------
Furniture and equipment--net............................................ $ 165,984
---------
---------
</TABLE>
F-7
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997, FOR THE PERIOD FEBRUARY 20, 1996 TO
MARCH 31, 1996, FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND FOR THE PERIOD
FEBRUARY 20, 1996 TO MARCH 31, 1997 IS UNAUDITED
4. LEASES
The Company leases its facilities and certain other equipment under
operating lease agreements. Future minimum payments as of December 31, 1996
under these leases follow:
<TABLE>
<S> <C>
1997...................................................................... $ 73,500
1998...................................................................... 73,500
1999...................................................................... 36,750
---------
$ 183,750
---------
---------
</TABLE>
Rent expense for the period from February 20, 1996 (date of incorporation)
to December 31, 1996 was $17,850.
5. COMMITMENTS
The Company is a party to an agreement with AT&T Corporation ("AT&T"), which
provides the Company with technical, marketing, and customer services. The
Company also received professional programming services from Edify Corporation
and electronic bill paying processing services from CheckFree Corporation under
this agreement. Under the terms of the agreement, the Company has paid or agreed
to pay an initial payment of $200,000 and ongoing (monthly) payments for
customer support. The implementation fees paid have been capitalized as other
assets and are being amortized over the 18-month term of the agreement. Although
the agreement expires in February 1998, the agreement is terminable at will by
either party upon six months' written notice.
AT&T's WorldNet Service division provides the Company with advertising and
marketing services under AT&T's "Charter Membership" program. The Company pays
AT&T monthly user fees and has the right to continue this relationship
indefinitely.
The Company is a party to an agreement with BISYS to receive core bank
processing services. Under the terms of the agreement, the Company paid an
initial conversion fee of $66,800 and must pay a monthly service fee. The
service fee is adjusted on a quarterly basis based on the number of customer
accounts serviced. Although the agreement expires in July 1999, the agreement
renews automatically for successive three-year terms absent six months' prior
written notice to the contrary by either party.
The Company entered into an agreement with a provider of on-line services
effective January 31, 1997 for certain Internet advertising services. Under the
terms of the agreement, which expires on the earlier of May 17, 1997 or upon the
Company securing 1,250 applicants, the Company has agreed to pay approximately
$31,000 over the term of the agreement.
The Company has agreed to pay officers and employees bonuses of up to
$450,000 when the initial public offering of the Company's Common Stock is
completed.
6. INCOME TAXES
As of December 31, 1996, the Company had state and federal net operating
loss carryforwards of approximately $837,591 which will expire in 2011 if not
utilized.
F-8
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997, FOR THE PERIOD FEBRUARY 20, 1996 TO
MARCH 31, 1996, FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND FOR THE PERIOD
FEBRUARY 20, 1996 TO MARCH 31, 1997 IS UNAUDITED
6. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had deferred tax assets as follows:
<TABLE>
<S> <C>
Net operating loss carryforward......................................... $ 318,285
Service contract expense................................................ 912,000
Start-up costs.......................................................... 216,297
Other--net.............................................................. 12,308
---------
Total................................................................. 1,458,890
Less valuation allowance................................................ 1,458,890
---------
Total................................................................. $ --
---------
---------
</TABLE>
7. SHAREHOLDERS' DEFICIT
The Company's authorized capital stock consists of 100,000,000 shares of
common stock, $.01 par value and 10,000,000 shares of preferred stock, no par
value. As of December 31, 1996, there were 1,249,342 shares of common stock
outstanding and no shares of preferred stock outstanding. Both the authorized
common and preferred stock may be issued from time to time in one or more
designated series or classes. The Board of Directors, without approval of the
shareholders, is authorized to establish the voting, dividend, redemption,
conversion, liquidation, and other relative provisions as may be provided in a
particular series or class of stock.
On March 17, 1997, the Company declared a 33.125 for 1 stock split of its
common stock effected in the form of a stock dividend payable on the effective
date of the initial public offering. All references to share and per share
amounts have been retroactively adjusted to reflect the split. Also, additional
paid-in capital has been charged and common stock has been credited
retroactively with $12,116 to reflect the stock split.
Effective November 25, 1996, the shareholders of the Company approved the
1996 Stock Incentive Plan (the "Plan"), which provides that key employees,
officers, directors, and consultants of the Company may be granted nonqualified
and incentive stock options to purchase shares of common stock of the Company,
derivative securities related to the value of the common stock, or cash awards.
The Plan limits the total number of shares which may be awarded under the Plan
to 397,500, which have been reserved for the Plan. Generally, the options expire
ten years from the date of grant. On November 25, 1996, 16,562 nonqualified
stock options were granted at an exercise price of $1.21 per share. The options
vest one-third on the first anniversary of the date of issuance, one-third on
the second anniversary of the date of issuance and one-third on the third
anniversary of the date of issuance. In connection with the 16,562 options
granted, $30,000 of stock plan expense is being amortized over the vesting
period. The option agreement contains a provision for accelerating vesting if
certain events occur. As of December 31, 1996, none of the options are
exercisable.
On January 5, 1997, the Company granted under the Plan 124,219 nonqualified
stock options to officers of the Company at an exercise price of $1.21 per
share. Also on February 25, 1997, the Company granted under the Plan 39,751
incentive stock options to officers and employees of the Company at an exercise
price of $3.62 per share and 173,906 incentive stock options to officers of the
Company at an
F-9
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997, FOR THE PERIOD FEBRUARY 20, 1996 TO
MARCH 31, 1996, FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND FOR THE PERIOD
FEBRUARY 20, 1996 TO MARCH 31, 1997 IS UNAUDITED
7. SHAREHOLDERS' DEFICIT (CONTINUED)
exercise price of $10.00 per share. The options vest one-third on the first
anniversary of the date of issuance, one-third on the second anniversary of the
date of issuance, and one-third on the third anniversary of the date of
issuance. In connection with the January 5th and February 25th options, $390,484
of stock plan expense is being amortized over the vesting period. The vesting of
the options accelerate if certain events occur.
As of March 31, 1997, the Company had 354,438 options to purchase common
stock outstanding at a weighted average exercise price of $5.79, and none of the
options are exercisable.
The Company accounts for its stock-based compensation plan under APB No. 25.
The Company has adopted SFAS No. 123 for disclosure purposes. For SFAS No. 123
purposes, the fair value of each option grant of $.97 has been estimated as of
the date of the grant using the Black-Scholes option pricing model with the
weighted average assumptions:
<TABLE>
<S> <C>
Expected life (years)................................................ 5
Risk-free interest rate.............................................. 6.2%
Dividend rate........................................................ 0.0%
Expected volatility.................................................. 0.0%
</TABLE>
Had compensation cost for the Company's stock options granted been
determined based on the fair value at the grant dates for awards under those
plans consistent with a method prescribed in SFAS No. 123 utilizing the
assumptions described above and assuming that such stock options had been
outstanding for the entire period of February 20, 1996 to December 31, 1996 in
accordance with Staff Accounting Bulletin No. 83 ("SAB 83"), the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<S> <C>
Net loss:
As reported........................................................... $3,839,182
Pro forma............................................................. 4,014,062
Net loss per share:
As reported........................................................... $ 1.43
Pro forma............................................................. 1.49
</TABLE>
F-10
<PAGE>
NET.B@NK, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 1997, FOR THE PERIOD FEBRUARY 20, 1996 TO
MARCH 31, 1996, FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND FOR THE PERIOD
FEBRUARY 20, 1996 TO MARCH 31, 1997 IS UNAUDITED
7. SHAREHOLDERS' DEFICIT (CONTINUED)
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") was issued. Included below are pro forma
disclosures related to earnings per share as if SFAS 128 had been effective for
all periods presented and in compliance with SAB 83:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD FOR THE THREE-
FEBRUARY 20, 1996 FEBRUARY 20, 1996 MONTH PERIOD ENDED
TO DECEMBER 31, 1996 TO MARCH 31, 1996 MARCH 31, 1997
-------------------------- -------------------------- --------------------------
SHARES NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
(DENOMINATOR) (NUMERATOR) AMOUNT (NUMERATOR) AMOUNT (NUMERATOR) AMOUNT
------------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic income (loss) per
share.................... 1,279,156 $ (3,839,182) $ (3.00) $ 23,734 $ .02 $ (1,800,025) $ (1.41)
------------- ----------- ------------- ----------- ------------- -----------
------------- ----------- ------------- ----------- ------------- -----------
Effect of dilutive
securities:
Common stock
subscriptions......... 1,272,636
Stock options
outstanding........... 133,518
-------------
Diluted income (loss) per
share.................... 2,685,310 $ (3,839,182) $ (1.43) $ 23,734 $ .01 $ (1,800,025) $ (.67)
------------- ------------- ----------- ------------- ----------- ------------- -----------
------------- ------------- ----------- ------------- ----------- ------------- -----------
</TABLE>
8. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CFB--Certain of the Company's cash accounts and time
deposits are on deposit with CFB. The Company received $7,709 in interest income
related to these accounts during the period from February 20, 1996 to December
31, 1996. For the period from February 20, 1996 (date of incorporation) to
December 31, 1996, the Company received $60,000 in management fees from CFB. The
Company expensed $883,606 for the period from February 20, 1996 to December 31,
1996 and $313,401 for the three months ended March 31, 1997 for fees paid to CFB
for various advisory, consulting, custodial services, and net interest expense
which were included in accrued expenses. In addition, the Company recorded
$31,232 in consulting expense and contributed capital for consulting services
contributed by CFB during the period ended December 31, 1996.
OTHER TRANSACTIONS--The Company paid $67,032 and $30,102 for the period from
February 20, 1996 to December 31, 1996 and for the three months ended March 31,
1997, respectively, in consulting fees to an advisory director. In addition, as
of December 31, 1996, the Company had expensed and included in accrued expenses,
$278,418 for amounts due to a company owned by the Chairman of the Board of the
Company for accounting and management services provided to the Company during
the period from February 20, 1996 to December 31, 1996. For the three months
ended March 31, 1997, an additional $71,407 relating to the same type services
was expensed bringing the total accrued liability to $349,825.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Net.B@nk, Inc.:
We have audited the accompanying Statement of Assets and Liabilities
Generated by the Internet banking operations of Net.B@nk, Inc. (the "Company")
and Held and Serviced by Carolina First Bank as of December 31, 1996. This
statement of assets and liabilities is the responsibility of the Company's
management. Our responsibility is to express an opinion on this statement of
assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement of assets and liabilities. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying statement of assets and liabilities was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-1 of
Net.B@nk, Inc. as described in the Note to such statement and is not intended to
be a complete presentation of Carolina First Bank's assets and liabilities.
In our opinion, such statement of assets and liabilities referred to above
presents fairly, in all material respects, the assets and liabilities generated
by the Internet banking operations of the Company as of December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 18, 1997
F-12
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
GENERATED BY THE INTERNET BANKING OPERATIONS OF NET.B@NK, INC.
AND HELD AND SERVICED BY CAROLINA FIRST BANK
<TABLE>
<CAPTION>
MARCH 31,
1997
DECEMBER 31, -------------
1996
------------- (UNAUDITED)
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS............................................................ $ 10,366,437 $ 43,408,922
------------- -------------
------------- -------------
LIABILITIES
DEPOSITS:
Demand deposits.................................................................. $ -- $ 10,945
Interest checking................................................................ 201,510 371,300
Money Market deposit accounts.................................................... 10,164,927 32,534,384
Time Deposits.................................................................... -- 10,492,293
------------- -------------
Total.......................................................................... $ 10,366,437 $ 43,408,922
------------- -------------
------------- -------------
</TABLE>
NOTE:
BASIS OF PRESENTATION
The above statements have been prepared to comply with Rule 3-05 of the
Securities and Exchange Commission.
Carolina First Bank ("CFB") entered into an agreement dated July 15, 1996
with Net.B@nk, Inc. (the "Company") to hold and service the deposit accounts
generated by the Internet banking operations of Atlanta Internet Bank ("AIB").
AIB began accepting deposits on August 1, 1996 and the original agreement with
CFB expires on March 31, 1997. The Agreement has been extended to July 31, 1997
by an amendment dated March 18, 1997. Also, under the agreement CFB has agreed
to provide funding for reasonable expenses of the Company up to an amount of
$1,325,985. Upon the Company obtaining the regulatory approvals necessary to
operate a Federal Savings Bank, the deposit accounts will be transferred to AIB,
which will become a wholly owned subsidiary of the Company.
Funds related to customer deposits serviced for AIB are combined with the
general funds of CFB for investment purposes. The interest income paid to the
Company by CFB on such deposits approximates interest expense related to the
deposit accounts for the period ended December 31, 1996. The interest expense on
such deposits exceeded the interest paid to the Company by CFB on such deposits
by $102,525 (unaudited) for the three months ended March 31, 1997, and such
amount has been recorded as a payable by the Company as of March 31, 1997.
F-13
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREBY SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 7
The Reorganization........................................................ 15
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Dilution.................................................................. 18
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Pro Forma Condensed Balance Sheet......................................... 23
Pro Forma Condensed Statements of Operations.............................. 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 30
Management................................................................ 58
Certain Transactions...................................................... 64
Principal Shareholders.................................................... 65
Description of Capital Stock.............................................. 66
Shares Eligible for Future Sale........................................... 68
Underwriting.............................................................. 69
Legal Matters............................................................. 70
Experts................................................................... 70
Available Information..................................................... 70
Financial Statements...................................................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
NET.B@NK, INC.
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
MORGAN KEEGAN & COMPANY, INC.
INTERSTATE/JOHNSON LANE
Corporation
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses, other than underwriting discounts
and commissions, to be borne by the Company in connection with the issuance and
distribution of the Common Stock being registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 12,546
National Association of Securities Dealers, Inc. Filing Fee....... 10,000
Nasdaq Stock Market Listing Fee................................... 10,646
Blue Sky Fees and Expenses........................................ 55,000
Legal Fees and Expenses........................................... 150,000
Accounting Fees and Expenses...................................... 125,000
Printing and Engraving Expenses................................... 120,000
Transfer Agent and Registrar Fee.................................. 15,000
Miscellaneous..................................................... 1,808
---------
TOTAL......................................................... $ 500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws contain certain indemnification provisions providing
that directors, officers, and employees or agents of the Company will be
indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (i.e., it
is settled), the indemnification provisions provide that the Company will
indemnify directors when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the director acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to an employee benefit plan, for a
purpose the director believed in good faith to be in the interests of the
participants and beneficiaries of the plan. The standard of conduct with respect
to any criminal action or proceeding is met if the director had no reasonable
cause to believe his or her conduct was unlawful. Whether the applicable
standard of conduct has been met is determined by the Board of Directors, the
shareholders or independent legal counsel in each specific case.
The Company can also provide for greater indemnification than that set forth
in the Bylaws if it chooses to do so, subject to approval by the Company's
shareholders. The Company may not, however, indemnify a director for liability
arising out of circumstances which constitute exceptions to limitation of a
director's liability for monetary damages. See "Description of Capital
Stock--Limitation of Liability".
The indemnification provisions of the Bylaws specifically provide that the
Company may purchase and maintain insurance on behalf of any director against
any liability asserted against such person and incurred by him or her in any
such capacity, whether or not the Company would have had the power to indemnify
against such liability.
In addition, Article X of the Company's Amended and Restated Articles of
Incorporation (the "Articles"), subject to certain exceptions, eliminates the
potential personal liability of a director for monetary damages to the Company
and to the shareholders of the Company for breach of a duty as a director. There
is no elimination of liability for (a) a breach of duty involving appropriation
of a business opportunity of the Company, (b) an act or omission not in good
faith or involving intentional misconduct or a knowing violation of law, (c) a
transaction from which the director derives an improper material
II-1
<PAGE>
tangible personal benefit, or (d) as to any payment of a dividend or approval of
a stock repurchase that is illegal under the Georgia Business Corporation Code.
The Articles do not eliminate or limit the right of the Company or its
shareholders to seek injunctive or other equitable relief not involving monetary
damages.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception in February 1996, the Registrant has issued and sold
(without payment of any selling commission to any person) the following
unregistered securities. The share figures and prices reflect retroactively the
effect of the Company's March 17, 1997 33.125-for-one stock split effected as a
stock dividend.
On February 20, 1996, the Registrant issued to the organizers of the Company
(11 persons), in a private placement exempt from registration under Section 4(2)
of the Securities Act of 1993, as amended (the "Securities Act"), an aggregate
of 808,780 shares of the Registrant's Common Stock, for an aggregate purchase
price of $244.16 in connection with the organization of the Company.
On April 1, 1996, the Registrant issued to foreign investors, in a
transaction exempt from registration as an offshore private placement, 142,438
shares of the Registrant's Common Stock for an aggregate purchase price of
$19,995.
On May 20, 1996, the Registrant issued to three director nominees, in a
transaction exempt from registration under Section 4(2) of the Securities Act,
29,813 shares of the Registrant's Common Stock for an aggregate purchase price
of $4,185.
On September 17, 1996, the Registrant issued to foreign investors, in a
transaction exempt from registration as an offshore private placement, 298,125
shares of the Registrant's Common Stock for an aggregate purchase price of
$1,080,000.
The Registrant is contractually obligated to issue to Carolina First Bank,
1,325,000 shares of the Registrant's Common Stock for consideration valued at
$3,840,000. Such issuance will be made contemporaneously with the Offering
pursuant to an exemption provided by Section 4(2) of the Securities Act.
The Registrant is contractually obligated to issue 41,406 shares of its
Common Stock to Premier Bancshares, Inc. for consideration valued at $125,000.
Such issuance will be made pursuant to the exemption provided by Section 4(2) of
the Securities Act.
All of the securities were acquired by the recipients for investment and
with no view toward the resale or distribution thereof. In each instance, the
recipient was either an organizer of the Registrant or a sophisticated investor,
the offers and sales were made without any public solicitation and the stock
certificates bear restrictive legends. No underwriter was involved in the
transactions and no commissions were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of the
Registrant*
3.2 Bylaws of the Registrant*
3.3 Amendments to Bylaws of the Registrant adopted April 22,
1997*
4.1 Specimen Stock Certificate of the Registrant*
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the
Registrant's Articles of Incorporation and Bylaws governing
the rights of holders of securities of the Registrant*
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<C> <S>
10.1 Amended and Restated Stock Purchase Agreement among the
Registrant and First Alliance/ Premier Bancshares, Inc.
dated as of December 19, 1996, as amended by Amendment No. 1
dated as of February 25, 1997, and by Amendment No. 2 dated
as of May 31, 1997*.
10.2 Operation Agreement among the Registrant and Carolina First
Bank dated July 15, 1996, as amended December 6, 1996 and
March 18, 1997.*
10.3 1996 Stock Incentive Plan of the Registrant*
10.4 Lease Agreement dated as of June 18, 1996 by and between The
Griffin Company and the Registrant, as amended on December
12, 1996*
10.5 Memorandum dated June 11, 1996 from T. Stephen Johnson, T.
Stephen Johnson & Associates, Inc., to Don Shapleigh,
Internet Organizing Group, Inc.*
10.6 Trial Agreement, dated August 19, 1996 by and between the
Registrant and AT&T Corp., with attachments and letter dated
August 6, 1996++*
10.7 Services Agreement, dated as of August 21, 1996 by and
between the Registrant and BISYS, Inc. with related
addenda++*
10.8 BISYS Standard Services Price list and Special Services
Price List, dated December 1, 1991++*
11.1 Schedule Regarding Computation of Per Share Loss
23.1 Consent of Deloitte & Touche, LLP
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in its opinion filed as Exhibit 5.1)*
24.1 Power of Attorney (appears on the signature page to this
Registration Statement)*
27.1 Financial Data Schedule (for SEC use only)*
</TABLE>
- ------------------------
* Previously Filed.
++ Confidential portions have been omitted pursuant to the rules and
regulations under the Securities Act of 1933, as amended.
(b) Financial Statement Schedules
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable and have therefore been
omitted.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia on July 21, 1997.
NET.B@NK, INC.
By: /s/ D. R. GRIMES
-----------------------------------------
D. R. Grimes
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME POSITION DATE
- ------------------------------ --------------------------- -------------------
/s/ D. R. GRIMES Chief Executive Officer
- ------------------------------ (Principal executive July 21, 1997
D. R. Grimes officer) and Director
Chief Financial Officer
/s/ ROBERT E. BOWERS* (Principal financial and
- ------------------------------ accounting officer) and July 21, 1997
Robert E. Bowers Director
/s/ T. STEPHEN JOHNSON* Chairman of the Board
- ------------------------------ July 21, 1997
T. Stephen Johnson
/s/ DONALD S. SHAPLEIGH, President, Chief Operating
JR.* Officer and Director
- ------------------------------ July 21, 1997
Donald S. Shapleigh, Jr.
/s/ WARD H. CLEGG* Director
- ------------------------------ July 21, 1997
Ward H. Clegg
/s/ J. STEPHEN HEARD* Director
- ------------------------------ July 21, 1997
J. Stephen Heard
/s/ ROBIN C. KELTON* Director
- ------------------------------ July 21, 1997
Robin C. Kelton
/s/ JOHN T. MOORE* Director
- ------------------------------ July 21, 1997
John T. Moore
II-5
<PAGE>
NAME POSITION DATE
- ------------------------------ --------------------------- -------------------
/s/ THOMAS H. MULLER, JR.* Director
- ------------------------------ July 21, 1997
Thomas H. Muller, Jr.
/s/ W. JAMES STOKES* Director
- ------------------------------ July 21, 1997
W. James Stokes
/s/ MACK I. WHITTLE, JR.* Director
- ------------------------------ July 21, 1997
Mack I. Whittle, Jr.
*By: /s/ D. R. GRIMES
- ------------------------------
D. R. Grimes
ATTORNEY-IN-FACT
II-6
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.3 Amendments to the Bylaws of the Registrant adopted April 22, 1997*
4.1 Specimen Stock Certificate of the Registrant*
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Registrant's Articles of Incorporation and Bylaws
governing the rights of holders of securities of the Registrant*
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP*
10.1 Amended and Restated Stock Purchase Agreement among the Registrant and First Alliance/ Premier
Bancshares, Inc. dated as of December 18, 1996, as amended by Amendment No. 1 dated as of February 25,
1997 and by Amendment No. 2 dated as of May 31, 1997.*
10.2 Operation Agreement among the Registrant and Carolina First Bank dated July 17, 1996 as amended December
6, 1996 and March 19, 1997*
10.3 1996 Stock Incentive Plan of the Registrant*
10.4 Lease Agreement dated as of June 18, 1996 by and between The Griffin Company and the Registrant, as
amended on December 12, 1996*
10.5 Memorandum dated June 11, 1996 from T. Stephen Johnson, T. Stephen Johnson & Associates, Inc., to Don
Shapleigh, Internet Organizing Group, Inc.*
10.6 Trial Agreement, dated August 19, 1996 by and between the Registrant and AT&T Corp., with attachments
and letter dated August 6, 1996++*
10.7 Services Agreement, dated as of August 21, 1996 by and between the Registrant and BISYS, Inc. with
related addenda++*
10.8 BISYS Standard Services Price List and Special Services Price List, dated December 1, 1991++*
11.1 Schedule Regarding Computation of Per Share Loss
23.1 Consent of Deloitte & Touche, LLP
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (included in its opinion filed as Exhibit 5.1)*
24.1 Power of Attorney (appears on the signature page to this Registration Statement)*
27.1 Financial Data Schedule (for SEC use only)*
</TABLE>
- ------------------------
* Previously Filed.
++ Confidential portions have been omitted pursuant to the rules and
regulations under the Securities Act of 1933, as amended.
<PAGE>
Exhibit 11.1
NET B@NK, INC.
Schedule Regarding Computation of Per Share Loss
<TABLE>
<CAPTION>
For The Period For the period
February 20, 1996 February 20, 1996 For the Three
(Date of Incorporation) (Date of Incorporation) Months Ended
ACTUAL To December 31, 1996 to March 31, 1996 March 31, 1997
- ------ ---------------------- ---------------------- --------------
<S> <C> <C> <C>
Net income (loss) $(3,839,182) $ 23,734 $(1,800,025)
---------- ---------- ----------
---------- ---------- ----------
Shares issued and outstanding 1,269,218 1,269,218 1,269,218
Additional shares issued
April 2, 1997 9,938 9,938 9,938
Incremental shares applicable to
common stock subscriptions 1,272,636 1,272,636 1,272,636
Incremental shares applicable to
stock options 133,518 133,518 133,518
---------- ---------- ----------
Weighted average common and
common equivalent shares
outstanding 2,685,310 2,685,310 2,685,310
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common
and common equivalent share $(1.43) $.01 $(.67)
---------- ---------- ----------
---------- ---------- ----------
PROFORMA FOR REORGANIZATION
- ---------------------------
Pro forma net loss $3,851,682 $1,803,775
---------- ----------
---------- ----------
Shares issued and outstanding-actual 1,269,218 1,269,218
Shares issued in the Reorganization 1,366,406 1,366,406
---------- ----------
Pro forma shares issued and outstanding 2,635,624 2,635,624
Incremental shares applicable to
common stock subscriptions 9,938 9,938
Incremental shares applicable to stock
options 133,518 133,518
---------- ----------
Weighted average common and common
equivalent shares outstanding 2,779,080 2,779,080
---------- ----------
---------- ----------
Pro forma net loss per common and
common equivalent share $1.39 $.65
---------- ----------
---------- ----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 4 to Registration
Statement No. 333-23717 of Net.B@nk, Inc. on Form S-1 of our reports dated March
18, 1997, appearing in the Prospectus, which is part of such Registration
Statement and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
July 24, 1997
