As filed with the Securities and Exchange Commission on August 21, 1998
Registration No. 333-56181
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SECURITY FIRST TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
7379
(Primary Standard Industrial Classification Code Number)
(58-2395199)
(I.R.S. Employer Identification No.)
------------------------
Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
(404) 812-6300
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
------------------------
Robert F. Stockwell
Chief Financial Officer
Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
(404) 812-6780
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copy to:
Stuart G. Stein, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-8575
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
--------------------
CALCULATION OF ADDITIONAL REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
=====================================================================================================================
Title of each class of Proposed maximum Proposed maximum Amount of
securities to be registered Amount to be offering price per aggregate offering registration fee
registered unit price
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, par value 4,475,054 $14.1875* $63,489,829* $18,730*
$0.01 per share
=====================================================================================================================
</TABLE>
* Estimated pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities
Act of 1933 based upon the average of the high and low prices for shares of
common stock of Security First Network Bank as reported on The Nasdaq Stock
Market's National Market Tier calculated on the basis of August 17, 1998.
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>
SECURITY FIRST NETWORK BANK
3390 PEACHTREE ROAD, NE, SUITE 1700
ATLANTA, GEORGIA 30326
August __, 1998
TO THE SHAREHOLDERS OF
SECURITY FIRST NETWORK BANK:
You are cordially invited to attend a special meeting of shareholders
(the "Special Meeting") of Security First Network Bank ("SFNB") to be held on
September 25, 1998, at 9:00 a.m. at SFNB's Atlanta City Office, 3390 Peachtree
Road, NE, Atlanta, Georgia 30326. Please note that if the proposals presented at
the Special Meeting are approved, there will not be an annual meeting of SFNB's
shareholders in 1998. The next annual meeting will be that of the newly formed
holding company in 1999. The current directors of SFNB, who also currently serve
as the directors of the holding company, and Dorsey R. Gardner, will continue as
directors of the holding company until that meeting.
Upon completion of the holding company reorganization, your shares of
SFNB common stock will be converted into holding company common stock, and
traded on the Nasdaq Stock Market under the symbol "SONE."
As described in the enclosed Proxy Statement/Prospectus, at the Special
Meeting you are being asked to approve the proposed holding company
reorganization (the "Reorganization") of SFNB and its wholly owned subsidiary,
Security First Technologies, Inc. ("S1"). Although not a condition to the
Reorganization, you also are being asked to approve provisions of the proposed
holding company's certificate of incorporation that provide for an increase in
the number of authorized shares of common and preferred stock of the holding
company and the elimination except in specified circumstances of the monetary
liabilities of directors under Delaware law, as described in the Proxy
Statement/Prospectus. In addition, you will be asked to approve the proposed
sale (the "Sale") of SFNB's banking business to RBC Holdings (Delaware) Inc.
("RBC Holdings"), a U.S. subsidiary of Royal Bank of Canada ("Royal Bank"), a
Canadian chartered banking institution.
The Reorganization is being undertaken to separate the banking
activities of SFNB from the computer software activities of S1. If the
Reorganization and the Sale are approved, immediately following the
Reorganization, SFNB's banking business will be sold to RBC Holdings. After the
Sale, S1, as a wholly owned subsidiary of the newly formed holding company,
would continue to engage in computer software activities, and neither S1 nor the
holding company would have an ownership interest in SFNB's banking business.
The sale price of SFNB's banking business is $13 million, subject to
adjustment of up to an additional $300,000, as described in the Proxy
Statement/Prospectus. At June 30, 1998, the banking business included $59.0
million of loans and other assets, and an equivalent amount of deposits and
other liabilities. However, in transferring the banking business to RBC
Holdings, SFNB has agreed to include $10.0 million of assets which qualify as
regulatory capital in excess of the liabilities, thereby making the net
equivalent purchase price $3.0 million. SFNB has received an opinion from its
financial advisor, Friedman, Billings, Ramsey & Co., Inc., that the sale price
for SFNB's banking business is fair, from a financial point of view, to the
holders of SFNB common stock. The opinion of Friedman, Billings, dated March 9,
1998, is reproduced in full as Appendix A to the accompanying Proxy
Statement/Prospectus.
Each share of SFNB common stock will entitle its holder to one vote on
each of the matters before the Special Meeting. Consummation of the
Reorganization is subject to certain conditions, including approval by the
holders of at least two-thirds of the outstanding shares of SFNB common
<PAGE>
stock and SFNB preferred stock. Consummation of the Sale also is subject to
certain conditions, including approval by the holders of at least a majority of
the outstanding shares of SFNB common stock and two-thirds of the outstanding
shares of SFNB preferred stock. Each of the proposed additional provisions of
the holding company's certificate of incorporation is subject to approval by a
majority of the outstanding shares of SFNB common stock.
YOUR BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION, THE
SALE AND THE TRANSACTIONS CONTEMPLATED THEREBY AND THE ADDITIONAL PROVISIONS OF
THE HOLDING COMPANY'S CERTIFICATE OF INCORPORATION AND RECOMMENDS THAT YOU VOTE
"FOR" APPROVAL OF THESE PROPOSALS AT THE SPECIAL MEETING.
THE REQUIRED VOTES OF HOLDERS OF SFNB COMMON STOCK ARE BASED UPON THE
TOTAL NUMBER OF OUTSTANDING SHARES OF SFNB COMMON STOCK AND NOT UPON THE NUMBER
OF SHARES WHICH ACTUALLY ARE VOTED. ACCORDINGLY, THE FAILURE TO SUBMIT A PROXY
CARD OR TO VOTE IN PERSON AT THE SPECIAL MEETING OR THE ABSTENTION FROM VOTING
BY A SHAREHOLDER WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE PROPOSALS.
IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL
MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE
REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS
SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PAID ENVELOPE.
Sincerely,
James S. Mahan, III
Chief Executive Officer
<PAGE>
SECURITY FIRST NETWORK BANK
3390 PEACHTREE ROAD, NE, SUITE 1700
ATLANTA, GEORGIA 30326
(404) 812-6300
-------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 25, 1998
-------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Special Meeting") of Security First Network Bank ("SFNB") will be held on
September 25, 1998, at 9:00 a.m. at SFNB's Atlanta City Office, 3390 Peachtree
Road, NE, Atlanta, Georgia 30326 for the following purposes:
1. Holding Company Reorganization. To consider and vote
upon the proposed holding company reorganization of
SFNB and its wholly owned subsidiary, Security First
Technologies, Inc. ("S1"), by approving the Second
Amended and Restated Plan of Reorganization, dated as
of March 9, 1998, by and among SFNB, Security First
Technologies Corporation (the "Holding Company") and
upon organization, New Security First Network Bank
("New Bank"), as amended (the "Plan"), pursuant to
which (i) New Bank and S1 will, subject to necessary
approvals, become wholly owned subsidiaries of a
newly formed holding company known as Security First
Technologies Corporation, and (ii) each issued and
outstanding share of SFNB common stock and SFNB
preferred stock will be converted, respectively, into
one share of Holding Company common stock and one
share of Holding Company preferred stock (Proposal
1).
2. Sale of SFNB's Banking Business. To consider and vote
upon the proposed sale of SFNB's banking business to
RBC Holdings (Delaware) Inc. ("RBC Holdings"), a U.S.
subsidiary of Royal Bank of Canada ("Royal Bank"), a
Canadian chartered banking institution, by approving
the Stock Purchase Agreement, dated as of March 9,
1998, by and among Royal Bank, RBC Holdings, SFNB and
the Holding Company, as amended (the "Agreement"),
pursuant to which SFNB's banking business would be
sold to RBC Holdings immediately following the
holding company reorganization. Pursuant to the
Agreement, RBC Holdings will purchase the stock of
New Bank for $13.0 million. However, the Agreement
also provides that New Bank shall have $10.0 million
of assets that qualify as regulatory capital in
excess of the liabilities, thereby making the net
equivalent purchase price $3.0 million. In addition,
upon the closing of the sale, RBC Holdings shall pay
to the Holding Company an additional sum equal to
$1,250 per day for each day beginning on the date of
receipt of shareholder approval by SFNB of the Plan
and the Agreement and ending on the day before the
closing date, up to an aggregate maximum of $300,000
(Proposal 2).
3. Approval of Increase in Authorized Capital Stock. To
consider and vote upon the proposed increase in the
number of shares of common stock that the Holding
Company is authorized to issue from 25,000,000 to
60,000,000 and the proposed increase in the number of
shares of serial preferred stock that the Holding
Company is authorized to issue from 2,500,000 to
5,000,000 (Proposal 3).
4. Approval of Elimination of Monetary Liabilities for
Damages. To eliminate except in specified
circumstances the monetary liabilities of Holding
Company directors under applicable Delaware law
(Proposal 4).
5. Other Business. To transact such other business as
may properly come before the Special Meeting, or any
adjournments thereof, including, without limitation,
a motion to adjourn the Special Meeting to another
time and/or place for the purpose of soliciting
additional proxies in order to approve the Plan, the
Agreement or otherwise.
The Board of Directors of SFNB has fixed the close of business on
August 3, 1998 as the record date for the determination of the holders of SFNB
common stock entitled to notice of and to vote at the Special Meeting. Only
holders of record of SFNB common stock at the close of business on that date
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof. The Plan and the Agreement will be submitted separately to
the holders of SFNB preferred stock for approval by written consent.
By Order of the Board of Directors
James S. Mahan, III
Chief Executive Officer
Atlanta, Georgia
August ___, 1998
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE DATE,
SIGN AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES POSTAGE IF MAILED IN THE UNITED STATES. YOUR PROXY MAY BE REVOKED
IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AT ANY
TIME BEFORE IT IS VOTED AT THE SPECIAL MEETING.
<PAGE>
SECURITY FIRST TECHNOLOGIES CORPORATION SECURITY FIRST NETWORK BANK
3390 PEACHTREE ROAD, NE, SUITE 1700 3390 PEACHTREE ROAD, NE, SUITE 1700
ATLANTA, GEORGIA 30326 ATLANTA, GEORGIA 30326
SECURITY FIRST TECHNOLOGIES CORPORATION
PROSPECTUS
----------------------
SECURITY FIRST NETWORK BANK
PROXY STATEMENT
----------------------
15,289,269 SHARES OF COMMON STOCK
----------------------
This proxy statement/prospectus ("Proxy Statement/Prospectus") is being
furnished to shareholders of Security First Network Bank ("SFNB") in relation to
the special meeting of SFNB shareholders (the "Special Meeting") to be held on
September 25, 1998, at 9:00 a.m. at SFNB's Atlanta City Office, 3390 Peachtree
Road, NE, Suite 1700, Atlanta, Georgia 30326, and any adjournments of the
Special Meeting. It also serves as the prospectus of Security First Technologies
Corporation (the "Holding Company"). This Proxy Statement/Prospectus is first
being mailed to SFNB shareholders on or around August ___, 1998.
At the Special Meeting, the principal items of business for the holders
of the common stock, without par value, of SFNB ("SFNB Common Stock") will be to
consider and vote upon (i) the proposed holding company reorganization (the
"Reorganization") of SFNB and its wholly owned subsidiary, Security First
Technologies, Inc. ("S1"), by approving the Second Amended and Restated Plan of
Reorganization, dated as of March 9, 1998, by and among SFNB, the Holding
Company and upon organization, New Security First Network Bank ("New Bank"), as
amended (the "Plan"); (ii) the proposed sale (the "Sale") of SFNB's Banking
Business (defined below) to RBC Holdings (Delaware) Inc. ("RBC Holdings"), a
U.S. subsidiary of Royal Bank of Canada ("Royal Bank"), a Canadian chartered
banking institution, by approving the Stock Purchase Agreement, dated as of
March 9, 1998, by and among Royal Bank, RBC Holdings, SFNB and the Holding
Company, as amended (the "Agreement"); and (iii) two provisions of the Holding
Company's Certificate of Incorporation which will be effective upon the
Reorganization only if approved at the Special Meeting (the "Contingent
Certificate Provisions") that provide for (a) an increase in the number of
shares of common stock, par value $0.01 per share, of the Holding Company
("Holding Company Common Stock"), that the Holding Company is authorized to
issue from 25,000,000 to 60,000,000 shares and an increase in the number of
shares of serial preferred stock, par value $0.01 per share, of the Holding
Company that the Holding Company is authorized to issue from 2,500,000 to
5,000,000 shares; and (b) the elimination except in specified circumstances of
the monetary liabilities of Holding Company directors under Delaware law. The
Plan and the Agreement are reproduced in full as Appendix B and Appendix C to
this Proxy Statement/Prospectus, and are incorporated herein by reference. The
Plan and the Agreement also will be submitted separately to the holders of the
Class A Preferred Stock, without par value, of SFNB ("SFNB Preferred Stock") for
approval by written consent. The Holding Company's Certificate of Incorporation,
excluding the Contingent Certificate Provisions, and the Contingent Certificate
Provisions are reproduced in full as Appendix D and Appendix E to this Proxy
Statement/Prospectus, and are incorporated herein by reference. The Contingent
Certificate Provisions will not be submitted for a vote separately to the
holders of the SFNB Preferred Stock. As of August 3, 1998 (the "Record Date"),
there were 11,191,117 shares of SFNB Common Stock and 1,174,110 shares of SFNB
Preferred Stock outstanding. Approval of the Agreement is not a condition to
approval of the Plan, but the Sale of the Banking Business to RBC Holdings under
the
Cover page continued . . .
i
<PAGE>
Cover page continued . . .
Agreement cannot occur unless the Plan is approved.
Pursuant to the Plan (i) New Bank and S1 will, subject to necessary
shareholder and regulatory approvals, become wholly owned subsidiaries of the
Holding Company, and (ii) each issued and outstanding share of SFNB Common Stock
and SFNB Preferred Stock will be converted, respectively, into one share of
Holding Company Common Stock and Holding Company Series A Convertible Preferred
Stock, par value $0.01 per share ("Holding Company Preferred Stock"). SFNB
Common Stock and SFNB Preferred Stock sometimes are jointly referred to herein
as "SFNB Stock," and Holding Company Common Stock and Holding Company Preferred
Stock sometimes are jointly referred to herein as "Holding Company Stock."
The sale price of SFNB's Banking Business is $13.0 million. However,
the Agreement also provides that SFNB include $10.0 million of assets that
qualify as regulatory capital in excess of the liabilities, thereby making the
net equivalent purchase price $3.0 million. In addition, upon the Closing of the
Sale, RBC Holdings shall pay to the Holding Company an additional sum equal to
$1,250 per day for each day beginning on the date of receipt of shareholder
approval by SFNB of the Plan and the Agreement and ending on the day before the
Closing Date, up to an aggregate maximum of $300,000. As of June 30, 1998, the
Banking Business included $59.5 million of loans and other assets, and an
equivalent amount of deposits and other liabilities.
The principal steps in the Reorganization will include the contribution
by SFNB of all its Banking Business (including at least $10.0 million of assets
in excess of the liabilities) to New Bank, the purchase and assumption by the
Holding Company of all of SFNB's remaining assets and liabilities in exchange
for the issuance of Holding Company Stock to SFNB, the declaration by SFNB of a
distribution of the Holding Company Stock to holders of SFNB Stock, and the
subsequent voluntary dissolution of SFNB pursuant to the rules and regulations
of the Office of Thrift Supervision (the "OTS"). Subject to shareholder and
regulatory approvals, the Reorganization was a condition to the approval by the
OTS of SFNB's 1996 acquisition of SecureWare, Inc. ("SecureWare"). After the
Reorganization, the activities of S1 no longer will be limited to those
permissible for a federal savings bank. Because S1 is deemed to be controlled by
bank holding companies, S1's activities will be limited to those permissible to
bank holding companies, but this restriction will not apply to other
subsidiaries that may be established by the Holding Company.
If the Agreement is approved, immediately after the Reorganization, New
Bank, which will then own SFNB's Banking Business, will be sold to RBC Holdings
and New Bank will become a wholly owned subsidiary of RBC Holdings. If the
Agreement is not approved, the Holding Company still intends to discontinue all
banking operations. No determination has been made as to how the Holding Company
would implement the discontinuation of banking operations if the Agreement is
not consummated. If the Agreement is approved but the Plan is not, the Agreement
will not be consummated, as completion of the Plan is a condition to
consummation of the Agreement.
After the Reorganization and the Sale, the Holding Company will
continue as the publicly owned and traded company and will be the parent of S1.
The Holding Company will apply to change the listing of SFNB Common Stock on The
Nasdaq Stock Market's National Market Tier (the "Nasdaq Stock Market") to
Holding Company Common Stock under the symbol "SONE," subject to consummation of
the Reorganization.
The Plan and the Sale are subject to various conditions, including the
approvals of regulatory authorities. SFNB expects that the Reorganization and
the Sale will be consummated in the summer of 1998, or as soon as possible after
the receipt of the requisite shareholder and regulatory approvals and the
expiration of any regulatory waiting periods. For a more detailed description of
the proposed Reorganization, see "The Holding Company Reorganization." For a
more detailed description of the proposed Sale, see "The Sale of SFNB's Banking
Business." For a more detailed
ii
<PAGE>
Cover page continued . . .
description of the Contingent Certificate Provisions, see "Proposed Increase in
Authorized Capital Stock of the Holding Company" and "Proposed Elimination of
Monetary Liabilities of Holding Company Directors."
THE HOLDING COMPANY COMMON STOCK OFFERED HEREBY INVOLVES RISK. SFNB
SHAREHOLDERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCLOSED UNDER "RISK
FACTORS" BEGINNING AT PAGE 14 RELATING TO CERTAIN FACTORS RELEVANT TO AN
ASSESSMENT OF SFNB, THE HOLDING COMPANY AND THE HOLDING COMPANY COMMON STOCK.
THE HOLDING COMPANY COMMON STOCK HAS NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), ANY STATE SECURITIES
COMMISSION, THE OTS OR THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION, THE OTS, OR THE FDIC PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF HOLDING
COMPANY COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED BY THE FDIC, THE BANK INSURANCE FUND ("BIF"), THE SAVINGS
ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENTAL AGENCY.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS, OR
INCORPORATED BY REFERENCE HEREIN, IN CONNECTION WITH THE SOLICITATION OF PROXIES
BY SFNB OR THE OFFERING OF HOLDING COMPANY COMMON STOCK MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY SFNB OR THE HOLDING COMPANY. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY HOLDING COMPANY COMMON STOCK OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN
OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF THE HOLDING COMPANY COMMON
STOCK OFFERED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF SFNB OR THE HOLDING COMPANY OR THE INFORMATION HEREIN OR THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
----------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS AUGUST __, 1998.
iii
<PAGE>
AVAILABLE INFORMATION
Under the rules and regulations of the OTS, SFNB is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations thereunder, and in
accordance therewith files reports, proxy statements and other information with
the OTS. Such reports, proxy statements and other information filed by SFNB can
be obtained at prescribed rates from the Public Reference Section of the OTS at
1700 G Street, N.W., Washington, D.C. 20552. In addition, such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the OTS at 1700 G Street, N.W., Washington,
D.C. 20552, and at the Regional Office of the OTS at 1475 Peachtree Street,
N.E., Atlanta, Georgia 30309. SFNB Common Stock is traded on the Nasdaq Stock
Market. Reports, proxy statements and other information concerning SFNB can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
The Holding Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the SEC under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the Holding Company Common Stock to
be issued to the holders of SFNB Common Stock in connection with the
Reorganization pursuant to the Plan. As permitted by the rules and regulations
of the SEC, this Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement.
The Registration Statement and the exhibits forming a part thereof
filed by the Holding Company (Security First Technologies Corporation) with the
SEC can be inspected and copies can be obtained at the public reference
facilities maintained by the Securities and Exchange Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the SEC: 7 World Trade Center, Suite 1300, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the SEC's Web site is http://www.sec.gov.
FORWARD LOOKING INFORMATION
Certain information contained in this Proxy Statement/Prospectus
constitutes "forward-looking statements." Sections 27A(b)(2)(D) of the
Securities Act and 21E(b)(2)(D) of the Exchange Act expressly state that the
safe harbor for forward-looking statements does not apply to statements made in
connection with an initial public offering such as the offering of Holding
Company Common Stock made hereby. Such information can be identified by the use
of forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "estimate," "intend," "continue," or "believes" or the negatives
thereof or other variations thereon or comparable terminology. The statements in
"Risk Factors" in this Proxy Statement/Prospectus constitute cautionary
statements identifying important factors, including certain risks and
uncertainties, with respect to such forward-looking statements that could cause
the actual results, performance or achievements of the Holding Company to differ
materially from those reflected in such forward-looking statements. Statements
in the sections of "Information about SFNB -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" are forward-looking
statements. The Holding Company also may provide projections, forecasts or
estimates of future performance or cash flows of the Holding Company.
Projections, forecasts and estimates are forward-looking statements and will be
based upon certain assumptions. Actual events are difficult to predict and may
be beyond the Holding Company's control. Actual events may differ from those
assumed. Some important factors that would cause actual results that differ
materially from those in any forward-looking statements include those discussed
under "Risk Factors," as well as changes in business, market and financial or
legal conditions of the Holding Company from those assumed, among others.
Accordingly, there can be no assurance that any estimated returns, projections,
forecasts or estimates can be realized or that actual returns or results will
not be materially lower than those that may be estimated.
iv
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION....................................................... iv
FORWARD LOOKING INFORMATION................................................. iv
SUMMARY..................................................................... 1
The Special Meeting...................................................... 1
Consent of the Holders of SFNB Preferred Stock........................... 2
The Companies............................................................ 2
The Holding Company Reorganization....................................... 4
The Sale of SFNB's Banking Business...................................... 6
The Increase in Authorized Capital Stock of the Holding Company.......... 7
The Elimination of Monetary Liabilities of the Holding Company Directors. 7
Other Matters............................................................ 8
Selected Financial and Other Data........................................ 10
RECENT DEVELOPMENTS......................................................... 14
RISK FACTORS................................................................ 14
History of, and Anticipated Future, Operating Losses and Resulting
Additional Capital Needs................................................ 14
S1 Limited Operating History............................................. 15
Fluctuations in Quarterly Operating Results.............................. 15
Dependence on Banking Industry........................................... 16
Dependence upon Uncertain Market......................................... 16
Product Concentration.................................................... 17
Risk of Product Defects; Product Liability............................... 17
Customer Project Risks and Lengthy Implementation and Sales Cycles....... 17
Termination of Contracts................................................. 18
Ability to Manage Growth................................................. 18
Risk of System Failure; Security Risks................................... 19
Year 2000................................................................ 19
Intense Competition...................................................... 19
Dependence on Proprietary Technology; Risk of Infringement............... 20
Government Regulation.................................................... 20
Control by Officers, Directors and Principal Shareholders................ 20
Need to Expand Board of Directors and Continuity of Management........... 20
Dividend Policy.......................................................... 21
THE SPECIAL MEETING......................................................... 22
Matters to be Considered at the Special Meeting.......................... 22
Record Date and Voting................................................... 22
Vote Required; Revocability of Proxies................................... 23
Solicitation of Proxies.................................................. 24
THE HOLDING COMPANY REORGANIZATION.......................................... 24
The Companies Involved in the Reorganization............................. 24
Description of the Reorganization........................................ 24
Recommendation of the SFNB Board of Directors and Reasons for the
Reorganization.......................................................... 26
Treatment of Stock Certificates.......................................... 28
Regulatory Approvals..................................................... 29
Conditions to the Plan................................................... 29
Abandonment and Amendment of the Plan.................................... 29
Accounting Treatment..................................................... 29
No Dissenters' Rights.................................................... 30
Federal Income Tax Consequences.......................................... 30
Comparison of Shareholders' Rights....................................... 30
Takeover Defense Provisions.............................................. 34
THE SALE OF SFNB'S BANKING BUSINESS......................................... 35
The Companies Involved in the Sale of SFNB's Banking Business............ 35
The SFNB/Royal Bank Transactions......................................... 35
Background of the Sale................................................... 35
Recommendation of the SFNB Board of Directors and Reasons for the Sale... 36
Purpose and Effects of the Sale.......................................... 37
Description of SFNB's Banking Business................................... 37
Structure of the Sale.................................................... 38
Purchase Price and Holdback Amount....................................... 38
Regulatory Approvals..................................................... 39
Conditions to the Agreement.............................................. 40
v
<PAGE>
Conduct of Banking Business pending the Sale............................. 41
Third Party Proposals.................................................... 42
Expenses and Operating Losses............................................ 42
Non-Compete and Employee Matters......................................... 43
Other Provisions of the Agreement........................................ 43
Termination and Amendment of the Agreement............................... 44
Opinion of SFNB's Financial Advisor...................................... 44
Accounting Treatment..................................................... 48
Federal Income Tax Consequences.......................................... 48
No Dissenters' Rights.................................................... 48
Indemnification.......................................................... 48
Other Related Agreements................................................. 49
PROPOSED INCREASE IN AUTHORIZED CAPITAL STOCK
OF THE HOLDING COMPANY................................................... 51
PROPOSED ELIMINATION OF MONETARY LIABILITIES
OF HOLDING COMPANY DIRECTORS............................................. 53
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS................................. 54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 61
ADDITIONAL INFORMATION ABOUT THE HOLDING COMPANY............................ 63
Business of the Holding Company.......................................... 63
Financial Resources of the Holding Company............................... 64
Description of the Capital Stock of the Holding Company.................. 64
Management and Compensation Information.................................. 66
Stock Owned by Management and Principal Holders of Voting Securities..... 67
Market for Holding Company Common Stock and Dividends.................... 67
Regulation of the Holding Company........................................ 68
Capitalization........................................................... 69
INFORMATION ABOUT SFNB...................................................... 70
Description of Business.................................................. 70
Description of Property.................................................. 88
Legal Proceedings........................................................ 89
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 89
Market for SFNB Common Stock and Dividends............................... 112
Management............................................................... 113
Executive and Director Compensation...................................... 114
Employment Contracts..................................................... 115
Option Grants............................................................ 115
Aggregated Option Exercises in 1997 and Year-End
Option Values ......................................................... 116
Certain Transactions..................................................... 116
Stock Owned by Management................................................ 117
Principal Holders of Voting Securities of SFNB........................... 118
ADJOURNMENT OF THE SPECIAL MEETING.......................................... 119
SHAREHOLDER PROPOSALS....................................................... 119
OTHER MATTERS............................................................... 120
EXPERTS..................................................................... 120
LEGAL MATTERS............................................................... 120
Appendices
Appendix A Opinion of Friedman, Billings, Ramsey & Co., Inc............... A-1
Appendix B Second Amended and Restated Plan of Reorganization,
as amended.................................................. B-1
Appendix C Stock Purchase Agreement, as amended........................... C-1
Appendix D Certificate of Incorporation of the Holding Company
(without the Contingent Certificate Provisions).............. D-1
Appendix E Contingent Certificate Provisions.............................. E-1
Appendix F Bylaws of the Holding Company.................................. F-1
Appendix G Financial Statements .......................................... G-1
vi
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Proxy Statement/Prospectus.
THE SPECIAL MEETING
Matters to be Considered at the
Special Meeting......................... Holders of SFNB Common Stock will be
asked to approve (i) the proposed
Reorganization of SFNB and S1 by
approving the Plan and the
transactions contemplated thereby,
(ii) the proposed Sale of SFNB's
Banking Business by approving the
Agreement and the transactions
contemplated thereby, (iii) the
proposed increase in the number of
shares of Holding Company Common Stock
that the Holding Company is authorized
to issue from 25,000,000 to 60,000,000
shares and the proposed increase in
the number of shares of serial
preferred stock that the Holding
Company is authorized to issue from
2,500,000 to 5,000,000 shares, (iv)
the proposed elimination except in
specified circumstances of monetary
liabilities of the Holding Company
directors under Delaware law, and (v)
such other business as may properly
come before the Special Meeting,
including, if necessary, approval of
an adjournment of the Special Meeting
to permit further solicitation of
proxies.
Required Shareholder Vote................ The affirmative vote of the holders of
at least two-thirds of the outstanding
shares of SFNB Common Stock is
required to approve the Plan. The
affirmative vote of the holders of at
least a majority of the outstanding
shares of SFNB Common Stock is
required to approve the Agreement and
each of the Contingent Certificate
Provisions. Approval of an adjournment
requires the affirmative vote of a
majority of the shares represented in
person or by proxy at the Special
Meeting.
Date, Time and Place of the
Special Meeting.......................... The Special Meeting will be held on
September 25, 1998, at 9:00 a.m. at
SFNB's Atlanta City Office, 3390
Peachtree Road, NE, Atlanta, Georgia
30326.
Record Date.............................. Only holders of record of SFNB Common
Stock at the close of business on
August 3, 1998 are entitled to notice
of and to vote at the Special Meeting
and at any adjournments thereof.
1
<PAGE>
Additional Information................... For additional information, you may
contact Lisa Wilkie, Assistant
Secretary and Controller of SFNB at
(404) 812-6300.
CONSENT OF THE HOLDERS OF SFNB PREFERRED STOCK
Matters to be Considered................. The holders of SFNB Preferred Stock
will be asked to approve separately by
written consent the Plan, the
Agreement, and the transactions
contemplated thereby. The two holders
of SFNB Preferred Stock are Huntington
Bancshares, Incorporated("Huntington")
and Wachovia Corporation ("Wachovia").
Required Shareholder Vote................ The affirmative vote of at least
two-thirds of the outstanding shares
of SFNB Preferred Stock is required to
approve the Plan and the Agreement.
Each holder of SFNB Preferred Stock
will be entitled to one vote for each
share held of record on the Record
Date.
Record Date.............................. Only holders of record of SFNB
Preferred Stock on the Record Date are
entitled to notice of and to vote on
the matters described above.
THE COMPANIES
Security First Network Bank.............. SFNB is a federal savings bank. The
deposit accounts in SFNB are insured
by the FDIC. SFNB was the first
FDIC-insured financial institution to
execute traditional banking services
over the Internet. SFNB operates from
its City Office in Atlanta, Georgia.
SFNB has three subsidiaries, S1, the
Holding Company and SFNB Investment,
Inc., which never has conducted
business. If the Reorganization is
consummated, SFNB will be dissolved
pursuant to the rules and regulations
of the OTS and the shareholders of
SFNB will become shareholders of the
Holding Company. If the Sale is
approved and consummated, immediately
after the Reorganization, New Bank,
which will acquire SFNB's Banking
Business in the Reorganization, will
be sold to RBC Holdings. The principal
executive office of SFNB is located at
3390 Peachtree Road, NE, Suite 1700,
Atlanta, Georgia 30326, and its
telephone number is (404) 812-6300.
SFNB can be found on the World Wide
Web at http://www.sfnb.com. For
additional information about SFNB, see
"Information about SFNB" and Appendix
G.
Security First Technologies Corporation.. The Holding Company was organized by
SFNB as a Delaware corporation in May
1998 for the purpose of becoming the
holding company of S1 and, pending the
Sale, New Bank. The Holding
2
<PAGE>
Company currently is a wholly owned
subsidiary of SFNB that conducts no
business. If the Reorganization is
consummated, S1 and New Bank will
become wholly owned subsidiaries of
the Holding Company, the Holding
Company will continue as the publicly
owned and traded company and the
current shareholders of SFNB will
become shareholders of the Holding
Company. Shares of Holding Company
stock are expected to trade on the
Nasdaq Stock Market under the symbol
"SONE." If the Sale is consummated,
New Bank will be sold to RBC Holdings
and the primary business activities of
the Holding Company initially will
consist of the operation of S1 as a
wholly owned subsidiary. The principal
executive office of the Holding
Company is located at 3390 Peachtree
Road, NE, Suite 1700, Atlanta, Georgia
30326 and its telephone number is
(404) 812-6300. The Holding Company
can be found on the World Wide Web at
http://www.s1.com.
New Security First Network Bank.......... If the Reorganization is consummated,
New Bank will be a federal savings
bank organized by SFNB on the Closing
Date (defined below). In connection
with its organization, 1,000 shares,
of the common stock, par value $0.01
per share, of New Bank (the "New Bank
Shares") will be issued to SFNB. In
the Reorganization, SFNB will
contribute its Banking Business to New
Bank prior to the dissolution of SFNB.
If the Sale is consummated,
immediately after the Reorganization,
RBC Holdings will purchase the New
Bank Shares and New Bank will become a
wholly owned subsidiary of RBC
Holdings and will continue SFNB's
Banking Business as a federal savings
bank then known as "Security First
Network Bank." The deposit accounts in
New Bank will continue to be insured
by the FDIC to the fullest extent
permitted by law.
Security First Technologies, Inc......... S1 presently is a wholly owned
subsidiary of SFNB. S1 developed the
Virtual Bank Manager ("VBM") software
product used by SFNB and 32 other
financial institutions at June 30,
1998 to offer banking services over
the Internet. S1 also is developing
the related suite of financial
software known as Virtual Financial
Manager ("VFM"), and is primarily in
the business of developing and
marketing software products and
services to both domestic and
international financial services
companies. These financial companies
can in turn offer their financial
services over the Internet. S1 also
operates and markets a data center to
process Internet financial
transactions for any financial
institution
3
<PAGE>
which desires to outsource such
activities. If the Reorganization is
consummated, S1 will become a wholly
owned subsidiary of the Holding
Company and the primary business of
the Holding Company initially will be
the business of S1. S1's executive
offices are located at 3390 Peachtree
Road, NE, Suite 1700, Atlanta, Georgia
30326 and its telephone number is
(404) 812-6200. S1 can be found on the
World Wide Web at http://www.s1.com.
Royal Bank of Canada..................... Royal Bank is a Canadian chartered
banking institution with banking
operations located throughout Canada
and 36 other countries. At October 31,
1997, Royal Bank reported total assets
of $171 billion (U.S.), total deposits
of $121 billion (U.S.) and total
stockholders' equity of $7.3 billion
(U.S.). Royal Bank's principal
executive office is located at 1 Place
Ville Marie, Montreal, Quebec H3C 3A9,
Canada, and its telephone number is
(514) 874-2110.
RBC Holdings (Delaware) Inc.............. RBC Holdings is a Delaware corporation
and a wholly owned subsidiary of Royal
Bank. If the Reorganization and the
Sale are consummated, RBC Holdings
would acquire SFNB's Banking Business
by purchasing the New Bank Shares
immediately subsequent to the
Reorganization. The executive offices
of RBC Holdings are located at
Wilmington Trust Center, 1100 North
Market Street, Wilmington, Delaware
19801, and its telephone number is
(302) 658-0289.
THE HOLDING COMPANY REORGANIZATION
Description of the Reorganization........ As part of the Reorganization, the
Holding Company has been organized as
a wholly owned subsidiary of SFNB. If
the Reorganization is consummated, in
the Reorganization (1) New Bank will
be organized as a wholly owned
subsidiary of SFNB, (2) SFNB will
contribute its Banking Business to New
Bank, (3) the Holding Company will
purchase and assume all of SFNB's
other assets and liabilities in
exchange for the issuance of Holding
Company Stock to SFNB, (4) SFNB will
declare a distribution of its Holding
Company Stock to SFNB shareholders,
and (5) SFNB will dissolve
voluntarily. After the Reorganization
is consummated, the Holding Company
will wholly own New Bank and S1, and
the holders of SFNB Stock will own
Holding Company Stock to the same
extent they owned SFNB Stock prior to
the Reorganization. For more
information, see "The Holding Company
Reorganization -- Description of the
Reorganization."
4
<PAGE>
Reasons for the Reorganization........... The Reorganization is being undertaken
to separate the banking activities of
SFNB from the computer software
activities of S1. Subject to
shareholder and regulatory approvals,
the Reorganization also was a
condition to the approval of the OTS
of SFNB's 1996 acquisition of
SecureWare. In addition, the
Reorganization will facilitate the
Sale of SFNB's Banking Business. See
"The Holding Company Reorganization --
Recommendation of the SFNB Board of
Directors and Reasons for the
Reorganization."
Regulatory Approvals..................... Applications to the OTS, the FDIC and
the Georgia Department of Banking and
Finance (the "Georgia Department") for
the Reorganization were approved. The
Holding Company will apply to change
the listing of SFNB Common Stock on
the Nasdaq Stock Market to Holding
Company Common Stock under the symbol
"SONE" subject to consummation of the
Reorganization. See "The Holding
Company Reorganization -- Regulatory
Approvals."
Stock Owned by Management................ The directors and executive officers
of SFNB and their affiliates, as well
as Dorsey R. Gardner and his
affiliates, a director of the Holding
Company, beneficially own 2,871,023
shares of SFNB Common Stock (23.2% of
the outstanding SFNB Common Stock as
of the Record Date). All of such
persons and affiliates are anticipated
to vote in favor of the proposals to
come before the Special Meeting. SFNB
is not aware of the voting intentions
of any other shareholders, including
holders of SFNB Preferred Stock. The
affirmative vote of the holders of at
least two-thirds of the outstanding
shares of SFNB Common Stock is
required to approve the Plan. All of
the 1,000 shares of Holding Company
Common Stock that presently are
outstanding are owned by SFNB. SFNB,
as the sole shareholder of the Holding
Company, has voted all of these shares
in favor of approval of the Plan.
Management............................... The directors and officers of the
Holding Company initially will consist
of the persons serving as directors
and officers of the Holding Company
immediately prior to the Effective
Time (defined below) of the
Reorganization. The four directors of
SFNB, along with Dorsey R. Gardner,
serve as the members of the Holding
Company's Board of Directors. Each of
the executive officers of the Holding
Company currently serves as an officer
of SFNB and S1. If the Reorganization
is consummated, as a result of the new
holding company formation and the
dissolution of SFNB, the first annual
meeting of shareholders of the
5
<PAGE>
Holding Company is expected to be held
in the second quarter of 1999.
Comparison of Shareholders' Rights
and Limitation of Director Liability..... SFNB is subject to federal statutes
and regulations applicable to
FDIC-insured federal savings banks.
The Holding Company, as a Delaware
corporation, is governed by the
Delaware General Corporation Law (the
"DGCL"). The governing instruments of
the Holding Company differ in certain
respects from those of SFNB. See "The
Holding Company Reorganization --
Comparison of Shareholders' Rights"
and "Proposed Limitation of Monetary
Liabilities of Holding Company
Directors."
THE SALE OF SFNB'S BANKING BUSINESS
Description of the Sale.................. If the Plan and the Agreement are
approved, immediately after
consummation of the Reorganization,
the Holding Company will sell the New
Bank Shares to RBC Holdings. As a
result of the contribution of SFNB's
Banking Business to New Bank in the
Reorganization and the purchase by RBC
Holdings of the New Bank Shares, New
Bank will become a wholly owned
subsidiary of RBC Holdings and RBC
Holdings will acquire SFNB's Banking
Business. For more information, see
"The Sale of SFNB's Banking Business."
The Purchase Price....................... Pursuant to the Agreement, RBC
Holdings will purchase the stock of
New Bank for $13.0 million. However,
the Agreement also provides that SFNB
include $10.0 million of assets which
qualify as regulatory capital in
excess of the liabilities, thereby
making the net equivalent purchase
price $3.0 million. In addition, upon
the Closing of the Sale, RBC Holdings
shall pay to the Holding Company an
additional sum equal to $1,250 per day
for each day beginning on the date of
receipt of shareholder approval by
SFNB of the Plan and the Agreement and
ending on the day before the Closing
Date, up to an aggregate maximum of
$300,000. See "The Sale of SFNB's
Banking Business."
Reasons for the Sale..................... In the third quarter of 1997, SFNB
adopted a formal plan to sell its
banking assets and related liabilities
in order to concentrate its efforts on
the rapidly growing Internet software
development and data processing
segment of its business. This
strategic shift reflects the Board's
determination (i) that the Holding
Company's capital, which is not an
unlimited amount, can better be
deployed in the technology business
than the banking business, (ii) that
the Holding Company would be
6
<PAGE>
better served by eliminating the cost,
burden and limitations of the bank
regulatory environment, (iii) that to
an increasing degree, SFNB is viewed
by potential S1 customers as a
competitor, and (iv) that there is no
longer a need to have SFNB as a
testing platform for VBM since the
basic application is now operational.
See "The Sale of SFNB's Banking
Business -- Background of the Sale."
Regulatory Approvals..................... Applications are pending to obtain the
required regulatory approvals for the
proposed Sale from the OTS and the
Office of the Superintendent of
Financial Institutions of Canada (the
"Superintendent"). The Board of
Governors of the Federal Reserve
System (the "Federal Reserve Board")
and the Georgia Department already
have approved the acquisition of the
New Bank Shares by Royal Bank. See
"The Sale of SFNB's Banking Business
-- Regulatory Approvals."
Fairness Opinion......................... Friedman, Billings, Ramsey & Co., Inc.
("FBR"), SFNB's financial advisor, has
rendered an opinion to SFNB dated
March 9, 1998, that the sale price for
SFNB's Banking Business is fair, from
a financial point of view, to the
holders of SFNB Common Stock. The FBR
opinion is reproduced in full as
Appendix A to this Proxy Statement/
Prospectus. See also "The Sale of
SFNB's Banking Business -- Opinion of
SFNB's Financial Advisor."
THE INCREASE IN AUTHORIZED CAPITAL STOCK OF THE HOLDING COMPANY
Description of the Proposed Increase..... The increase in authorized capital
stock would permit the Holding Company
to issue up to 60,000,000 shares of
Holding Company Common Stock and up to
5,000,000 shares of serial preferred
stock. SFNB is currently authorized to
issue up to 25,000,000 shares of SFNB
Common Stock and 2,500,000 shares of
preferred stock. For more information,
see "Proposed Increase in Authorized
Capital Stock of the Holding Company."
Reasons for the Proposed Increase........ The Board of Directors believes that
the increase in the authorized capital
stock of the Holding Company as
compared to SFNB is necessary to
provide a sufficient number of shares
available in the future for use in
connection with possible stock
dividends or splits, raising
additional capital through public
offerings or private placements,
possible future mergers or
acquisitions, or under employee option
or stock ownership plans.
THE ELIMINATION OF MONETARY LIABILITIES OF HOLDING COMPANY DIRECTORS
7
<PAGE>
Description of the Proposal.............. The inclusion of this provision in the
Certificate of Incorporation of the
Holding Company would eliminate,
except in specified circumstances, the
personal liability of Holding Company
directors for monetary damages for
breach of certain fiduciary duties to
the Holding Company and its
shareholders. For more information,
see "Proposed Elimination of Monetary
Liabilities of the Holding Company
Directors."
Reasons for the Proposal................. The Board of Directors believes that
the limitation of liability for
monetary damages is necessary to
attract and retain qualified directors
for the Holding Company.
OTHER MATTERS
Tax Consequences......................... A tax opinion of KPMG Peat Marwick LLP
("KPMG") has been received to the
effect that certain steps in the
Reorganization will constitute a
"reorganization" that qualifies for
nonrecognition treatment for federal
income tax purposes, and that none of
SFNB, S1, the Holding Company, New
Bank nor the shareholders of SFNB will
recognize gain or loss for federal
income tax purposes as a result of
those steps. The Sale of SFNB's
Banking Business pursuant to the
Agreement, however, is a fully taxable
transaction for federal income tax
purposes, and the SFNB consolidated
group (or as successor, the Holding
Company consolidated group) will
recognize gain for federal income tax
purposes as a result of the Sale. See
"Certain Federal Income Tax
Consequences."
No Dissenters' Rights.................... No dissenters' rights are available to
holders of SFNB Stock in connection
with the Plan or the Agreement. See
"The Holding Company Reorganization --
No Dissenters' Rights" and "The Sale
of SFNB's Banking Business -- No
Dissenter's Rights."
Market Prices of Common Stock............ The Holding Company will apply to
change the listing of SFNB Common
Stock on the Nasdaq Stock Market to
Holding Company Common Stock under the
symbol "SONE," subject to consummation
of the Reorganization. At the present
time, SFNB owns all of the Holding
Company Common Stock, and there is no
public market for Holding Company
Common Stock.
8
<PAGE>
SFNB Common Stock is traded on the
Nasdaq Stock Market under the symbol
"SFNB." The following table sets forth
the per share closing price of SFNB
Common Stock on the Nasdaq Stock
Market as of the dates specified:
Last Reported Sale Price
<TABLE>
<CAPTION>
SFNB
Common
Date Stock
---- ------
<S> <C>
December 31, 1996........... $10.25
December 31, 1997........... 7.25
March 6, 1998 (a)........... 13.63
August __, 1998 (b).........
</TABLE>
---------------------------------
(a) Last trading date prior to
announcement of execution of the
Plan and the Agreement.
(b) The most recent practicable date
prior to the date of this Proxy
Statement/Prospectus.
For additional information about SFNB
Common Stock, see "Information about
SFNB -- Market for SFNB Common Stock
and Dividends."
9
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth financial information for SFNB and pro
forma financial information for the Holding Company. The historical financial
information set forth below should be read in conjunction with the historical
consolidated financial statements and notes thereto of SFNB and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. See Appendix G and "Information about SFNB." The pro
forma financial information set forth below should be read in conjunction with
"Pro Forma Consolidated Financial Statements" appearing elsewhere herein. The
results of operations for the interim period ended June 30, 1998 are not
necessarily indicative of results expected to be obtained for the full fiscal
year. Dollars are in thousands except share and per share data.
The selected financial data for Five Paces and SecureWare are derived from the
unaudited statements of operations included in Appendix G. This information is
presented for the periods prior to their acquisition by SFNB for purposes of
understanding the continuing operations of SFNB.
STATEMENT OF OPERATIONS DATA - CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------------ --------------------------------------
1998 1997 1997 1996 1995
------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees.....................$ 1,439 $ 1,860 $ 4,142 $ 512 $ --
Professional services..................... 5,634 2,578 6,277 699 --
Data center fees.......................... 904 114 411 56 --
----------- ----------- ----------- ----------- -----------
Total revenues.......................... 7,977 4,552 10,830 1,267 --
----------- ----------- ----------- ----------- -----------
Direct costs:
Software license fees..................... 40 974 1,605 796 --
Professional services..................... 3,800 2,670 5,346 535 --
Data center fees.......................... 3,648 3,224 6,947 2,266 --
----------- ----------- ----------- ----------- -----------
Total direct costs...................... 7,488 6,868 13,898 3,597 --
----------- ----------- ----------- ----------- -----------
Gross margin............................ 489 (2,316) (3,068) (2,330) --
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing..................... 2,208 2,171 4,305 2,154 --
Product development....................... 6,990 4,899 10,507 4,048 --
General and administrative................ 2,440 2,467 4,637 3,635 46
Depreciation and amortization............. 1,289 680 1,741 256 --
Amortization of goodwill and acquisition
charges.................................. 4,171 687 4,525 7,072 --
----------- ----------- ----------- ----------- -----------
Total operating expenses................ 17,098 10,904 25,715 17,165 46
----------- ----------- ----------- ----------- -----------
Operating loss.......................... (16,609) (13,220) (28,783) (19,495) (46)
Interest income............................. 390 770 1,481 1,672 101
----------- ----------- ----------- ----------- -----------
Loss from continuing operations.............$ (16,219) $ (12,450) $ (27,302) $ (17,823) $ 55
=========== =========== =========== =========== ===========
Basic and diluted net loss per common
share from continuing operations..........$ (1.52) $ (1.49) $ (3.06) $ (3.03) $ --
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding............................... 10,644,196 8,360,660 8,922,762 5,874,000 9,451,000
Cash dividends declared.....................$ -- $ -- $ -- $ 3,000 $ 300
</TABLE>
10
<PAGE>
BALANCE SHEET DATA - CONTINUING OPERATIONS
<TABLE>
<CAPTION>
June 30, December 31, December 31, December 31,
1998 1997 1996 1995
---------------- --------------- ----------------- -----------
<S> <C> <C> <C> <C>
Cash and investment
securities.................... $ 8,971 $ 19,951 $ 36,155 $ 3,710
Accounts receivable, net....... 4,447 4,297 1,216 --
Other current assets........... 1,297 1,141 567 --
Noncurrent assets.............. 7,804 10,803 8,003 238
Total assets................... 22,519 36,192 45,941 3,948
Current liabilities............ 15,082 12,654 6,028 581
Stockholders' equity........... 7,437 23,538 39,913 3,367
Book value per
common share................. 0.45 1.99 4.58 1.40
</TABLE>
STATEMENT OF OPERATIONS DATA - BANKING OPERATIONS
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------------ --------------------------------------
1998 1997 1997 1996 1995
------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income.................................. $ 1,906 $ 1,881 $ 3,548 $ 3,374 $ 4,294
Interest expense................................. 1,053 1,120 2,020 2,221 2,367
----------- ----------- ----------- ----------- -----------
Net interest income.......................... 853 761 1,528 1,153 1,927
Provisions for loan losses....................... 84 33 133 -- --
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses................... 769 728 1,395 1,153 1,927
----------- ----------- ----------- ----------- -----------
Noninterest income............................... 291 216 725 238 196
Gain on sale of branch .......................... -- 1,500 1,500 -- --
Noninterest expense ............................. (2,387) (2,395) (4,309) (6,003) (4,161)
Income tax benefit............................... -- -- -- 376 503
----------- ----------- ----------- ----------- -----------
Income (loss) from discontinued
operations.................................. (1,327) 49 (689) (4,236) (1,535)
----------- ----------- ----------- ----------- -----------
Basic and diluted net income
(loss) per common share from
discontinued operations........................ $ (0.13) $ 0.01 $ (0.08) $ (0.73) $ (0.16)
---------- ---------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA - BANKING OPERATIONS
June 30, December 31, December 31, December 31,
1998 1997 1996 1995
---------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
Cash and investment
securities.................... $ 41,858 $ 36,051 $ 35,808 $ 11,183
Loans.......................... 14,792 14,247 23,654 21,109
Total assets................... 59,456 52,488 62,850 36,571
Deposits....................... 57,562 50,329 60,863 34,812
Advances from the Federal
Home Loan Bank................ 948 1,019 1,154 1,282
Allowances for loan
losses........................ 122 163 303 293
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA - PRO FORMA
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
Revenues:
Software license fees................. $ 1,679 $ 4,622
Professional services................. 6,134 7,277
Data center fees...................... 1,217 1,034
-------- -----------
Total revenues...................... 9,030 12,933
-------- -----------
Direct costs:
Software license fees................. 215 1,605
Professional services................. 3,800 5,346
Data center fees...................... 3,648 6,947
-------- -----------
Total direct costs.................. 7,663 13,898
-------- -----------
Gross margin........................ 1,367 (965)
-------- -----------
Operating expenses:
Selling and marketing................. 2,208 4,305
Product development................... 6,990 10,507
General and administrative............ 2,440 4,637
Depreciation and amortization......... 1,289 1,741
Amortization of goodwill and
acquisition charges.................. 4,171 4,525
-------- -----------
Total operating expenses............ 17,098 25,715
-------- -----------
Operating loss...................... (15,731) (26,680)
Interest income......................... 186 1,073
-------- -----------
Loss from continuing operations......... $ (15,545) $ (25,607)
========== ===========
Basic and diluted net loss per common
share from continuing operations...... $ (1.45) $ (2.84)
======= ===========
Weighted average common shares
outstanding.......................... 10,713,126 9,015,355
========== =========
<CAPTION>
June 30,
BALANCE SHEET DATA - PRO FORMA 1998
------------
<S> <C>
Cash and investment
securities........................................ $ 15,421
Accounts receivable, net........................... 4,447
Other current assets............................... 1,297
Noncurrent assets.................................. 10,354
Total assets....................................... 31,519
Current liabilities................................ 21,432
Stockholders' equity............................... 10,087
Book value per common share........................ 0.69
</TABLE>
12
<PAGE>
STATEMENT OF OPERATIONS DATA - FIVE PACES, INC.
<TABLE>
<CAPTION>
Period Ended Year Ended
May 23, 1996 December 31,1995
----------------------------------
<S> <C> <C>
Revenues.................................... $ 848 $ 143
Operating expenses.......................... 2,343 428
Net loss.................................... (1,495) (285)
<CAPTION>
STATEMENT OF OPERATIONS DATA - SECUREWARE, INC.
Period Ended Year Ended
November 4, 1996 December 31,1995
------------------------------------
<S> <C> <C>
Revenues.................................... $ 2,349 $ 1,662
Operating expenses.......................... 3,668 1,676
Net loss.................................... (1,319) (14)
</TABLE>
13
<PAGE>
RECENT DEVELOPMENTS
On June 29, 1998, SFNB, the Holding Company and State Farm Mutual
Automobile Insurance Company ("State Farm") entered into a Stock Purchase
Agreement and other technology and license agreements. Pursuant to the Stock
Purchase Agreement, State Farm agreed to purchase from the Holding Company $10.0
million of Holding Company non-voting zero coupon preferred stock, at a per
share price based upon the average closing asking price per share of SFNB Common
Stock (or Holding Company Common Stock, if applicable) for each of the 10
trading days preceding the business day before the closing date (occurring
immediately after the Reorganization). Such non-voting preferred stock is
convertible after two years into shares of Holding Company Common Stock at a 40%
premium to the per share price paid for the preferred stock. For example, if the
Holding Company preferred stock were purchased at a per share price of $23.23
(the average closing asking price per share of SFNB Common Stock for each of the
10 trading days preceding August 3, 1998), State Farm would purchase a total of
430,478 shares of such preferred stock, and those shares would be convertible
into 307,484 shares of Holding Company Common Stock. The preferred stock will be
redeemable by the Holding Company for up to two years following the purchase by
State Farm. The redemption price will be equal to the per share purchase price
paid by State Farm, adjusted to provide a return to the holder equivalent to the
two-year U.S. Treasury Bill rate at the time of the preferred stock purchase.
Pursuant to the technology and license agreements, State Farm will offer to its
customers through a newly chartered banking organization S1's VFM suite of
on-line financial software products through the S1 Data Center, and S1 will
provide to State Farm implementation, integration, training and consulting
services related to the software's operation.
On June 30, 1998, SFNB and the Holding Company entered into a
relationship with BroadVision, Inc., of Redwood City, California under a Common
Stock Purchase Agreement and other technology and licensing agreements. Pursuant
to the Common Stock Purchase Agreement, BroadVision purchased on July 15, 1998,
181,610 shares of SFNB Common Stock by granting to SFNB the license agreement
valued by the parties at $2.0 million (the per share price being determined by
the average closing price of SFNB Common Stock during the 10 trading days ended
June 29, 1998). The BroadVision license agreement grants SFNB (and by
assignment, the Holding Company) the right to use and resell BroadVision's
"One-to-One" marketing suite of software products which provide intelligent
cross-selling, relationship management and content management capabilities.
Under the Common Stock Purchase Agreement, the Holding Company and BroadVision
also will exchange $3.0 million of each company's common stock after the
Reorganization (129,702 shares of Holding Company Common Stock for 123,001
shares of BroadVision common stock). For the Holding Company Common Stock, the
per share purchase price will be $23.13, and for the BroadVision common stock,
the per share purchase price will be $24.39. The per share price of each
company's respective stock was determined based upon the average of the closing
price of such stock for the ten business days preceding July 31, 1998. Pursuant
to the agreement between BroadVision and SFNB (and by assignment, the Holding
Company), the companies will participate in joint development and integration
efforts relating to each of their respective proprietary software products to be
marketed to financial institutions, brokerage firms, insurance companies and
other financial service providers.
RISK FACTORS
SFNB shareholders should consider, among other matters, the following
factors in voting upon the proposal to approve the Plan and the transactions
contemplated thereby, consummation of which will result in holders of SFNB Stock
receiving shares of Holding Company Stock.
HISTORY OF, AND ANTICIPATED FUTURE, OPERATING LOSSES AND RESULTING ADDITIONAL
CAPITAL NEEDS
SFNB has incurred net losses since its spin-off from Cardinal
Bancshares, Inc. ("Cardinal") in 1996 and its acquisition of S1 immediately
thereafter. At June 30, 1998, SFNB had an
14
<PAGE>
accumulated deficit of $69.6 million. The Holding Company intends to continue
making a significant investment in S1's sales, marketing, research and
development, customer support and administrative infrastructure over the near
term. As a result, the Holding Company expects to continue to incur net losses.
However, management has stated its belief that the Holding Company should be at
a break-even status on a cash flow basis by the end of 1999. Further, management
believes that, upon receipt of the proceeds of the Sale of the Banking Business,
the Holding Company will have adequate cash resources available until break-even
cash flow is achieved. If the Sale of the Banking Business is not consummated,
the Holding Company will need to raise additional capital to meet its
operational expenses and regulatory capital requirements for SFNB. If SFNB
continues to incur operating losses, and SFNB or the Holding Company cannot
raise such additional funds, SFNB will fail to meet its regulatory capital
requirements, and will be subject to the prompt corrective action provisions of
applicable federal banking laws and regulations. See "Information about
SFNB-Description of Business -- Regulation."
In addition to its operating losses, the Holding Company's future
capital needs will depend on many factors, including S1's ability to
successfully market and sell its products. Although the Holding Company does not
currently believe that it will require additional cash resources prior to
break-even cash flow, SFNB is, and the Holding Company will continue to explore
other opportunities to raise capital, taking into consideration capital needs
and market conditions. In the event that SFNB before the Reorganization, or the
Holding Company after the Reorganization, raises additional funds, through
public or private financings or otherwise, any equity or debt financings, if
available at all, may be on terms which are not favorable to the Holding Company
and, in the case of equity financings, could result in dilution to the Holding
Company's shareholders. Also, as additional capital is needed, the Holding
Company intends to continue to pursue capital raising opportunities similar to
the Strategic Tactical Advisory Relationship program, through which SFNB has
raised capital. If adequate capital is not available, the Holding Company may be
required to curtail its operations significantly.
S1 LIMITED OPERATING HISTORY
Although SFNB commenced its banking operations over 50 years ago, it
acquired S1 and commenced its current technology operations in May 1996. The
Holding Company is newly formed, solely to facilitate the Reorganization.
Accordingly, the Holding Company will have only a limited operating history upon
which to base an evaluation of its business and prospects. Operating results for
future periods are subject to numerous uncertainties, and there can be no
assurance that the Holding Company will achieve or sustain profitability on an
annual or quarterly basis. The Holding Company's prospects must be considered in
light of the risks encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. Future operating
results will depend upon many factors, including the demand for S1's software
products, the level of product and price competition, the Holding Company's
success in attracting and retaining motivated and qualified personnel, and in
particular, the growth of activity on the Internet World Wide Web as it relates
to the financial services industry.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
SFNB has experienced in the past, and the Holding Company expects to
experience in the future, significant fluctuations in quarterly operating
results. Such fluctuations may be caused by many factors, including but not
limited to the extent and timing of revenues recognized and costs incurred, the
degree of customer acceptance of new technology, the introduction of new or
enhanced products by S1 or its competitors, budget concerns of customers,
competitive conditions in the industry, bank purchasing cycles, timing of
consolidation decisions by banks and general economic conditions. See "--
Customer Project Risks and Lengthy Implementation and Sales Cycles." In
addition, the volume and timing of contract signings during a quarter are
difficult to forecast. It is possible that the Holding Company's future
quarterly results of operations from time to time will not meet the expectations
of securities analysts or investors, which could have a material adverse effect
on the market price of the Holding Company Common Stock.
15
<PAGE>
DEPENDENCE ON BANKING INDUSTRY
For the foreseeable future, the Holding Company expects to derive
substantially all of its revenues from products and services provided to banks
and other participants in the banking industry, and to a lesser extent, other
financial services firms such as insurance companies. Accordingly, the Holding
Company's future success significantly depends upon the continued demand for
S1's solutions within this industry. The Holding Company believes that an
important factor in its growth will be the willingness of the banking industry
to pursue technological innovation and customer demand and acceptance of such
innovation. If this environment of change were to slow, the Holding Company
could experience reduced demand for S1's products and services. In addition,
changes in economic conditions and unforeseen events, such as recession,
inflation or other adverse occurrences, may result in a significant decline in
the utilization of bank services or demand for S1's products and services. Any
event that results in decreased consumer or corporate use of bank services, or
increased pressures on banks toward the in-house development and implementation
of revenue enhancement or cost reduction measures, could have a material adverse
effect on the Holding Company's business, financial condition and results of
operations.
DEPENDENCE UPON UNCERTAIN MARKET
The market for Internet-based financial services only has recently
begun to develop and market demand for S1's products and services is uncertain.
Critical issues concerning commercial use of the Internet for financial
services, including security, reliability, ease and cost of access, and quality
of service are evolving and may impact the growth of Internet use. The Holding
Company cannot predict the size of the market for Internet-based financial
services or the rate at which such market will grow. If the market for
Internet-based financial services fails to grow, grows more slowly than
anticipated, or becomes saturated with competitors, the Holding Company's
business, financial condition and results of operations would be materially
adversely affected.
The Holding Company's future success will depend on S1's ability to
design, develop, test, sell and support enhancements of current products and new
software products on a timely basis in response to changing customer needs,
competition, technological developments and emerging industry standards. The
current version of S1's VFM suite of financial software products is based upon a
two-tier architecture. The Holding Company believes that some potential
customers will not license S1's product until the entire VFM suite is a
fully-integrated three-tier architecture. The two-tier architecture has a
software component that combines the presentation logic for the user interface
with the business logic for the application and a separate software component
for the data access that is in a relational data base or in a legacy mainframe
system on the backend. A three-tier architecture separates the presentation
logic from the business logic into two separate software components. Separating
these software components results in a more efficient and scalable system.
S1 is devoting significant engineering and research and development
resources to design and develop a three-tier architecture version of VFM. This
project is intended to expand market acceptance of the product and to limit the
market and technical risks associated with the S1's current version of VFM. It
is possible that S1's intention to develop a three-tier architecture VFM will
cause potential customers to defer or forego purchases of current or future
versions of VFM, which could have a material adverse effect on the Holding
Company's business, financial condition and results of operations.
The market for S1's products and services is characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new product and service introductions. Such developments could limit
the marketability of S1's products and services. There can be no assurance that
S1 can successfully identify new product opportunities and develop and bring new
products and services to market in a timely manner. Furthermore, telephone and
personal computer 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
sophisticated banking systems such as that of S1.
16
<PAGE>
PRODUCT CONCENTRATION
Substantially all of SFNB's revenue has been attributable to licenses
of VFM and fees for services related thereto. This product and related services
currently are expected to account for most of the Holding Company's total
revenue for the foreseeable future. As a result, a decline in demand for, or
failure to achieve broad market acceptance of, VFM, as a result of competition,
technological change or otherwise, would have a material adverse effect on the
Holding Company's business, financial condition and results of operations. A
decline in sales of VFM also would have a material adverse effect on the amount
of service revenues that S1 generates. The Holding Company's future financial
performance will depend in part on the successful development, introduction and
customer acceptance of new and enhanced versions of VFM and other products.
There can be no assurance that S1 will continue to be successful in marketing
VFM or any new or enhanced products.
S1's products involve integration with products and systems developed
by third parties. If any of these third-party products should become unavailable
for any reason, fail under operation with S1's products or fail to be supported
by their respective vendors, it would be necessary for S1 to redesign its
products. There can be no assurance that any redesign could be accomplished in a
cost-effective or timely manner. S1 or its customers also could experience
difficulties integrating S1's products with other hardware and software.
Furthermore, should new releases of products and systems occur before S1
develops products compatible with such new releases, any resulting decline in
demand for S1's products could have a material adverse effect on the Holding
Company's business, financial condition and results of operations.
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by S1 and testing and
use by current and potential customers, errors will not be found in new products
after commencement of commercial shipments. The occurrence of such errors could
result in loss of or delay in market acceptance of S1's products, which could
have a material adverse effect on the Holding Company's business, financial
condition and results of operations. S1's product also may be vulnerable to
break-ins and similar disruptive problems caused by Internet or other users.
Such computer break-ins and other disruptions would jeopardize the security of
information stored in and transmitted through the computer systems of S1's
customers, which may result in significant liability to the Holding Company and
deter potential customers. S1's license agreements with its customers typically
contain provisions designed to limit its exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in S1's license agreements may not be effective under the laws of all
jurisdictions. Although S1 has not experienced any product liability claims to
date, the sale and support of S1's products may entail the risk of such claims.
A product liability claim brought against the Holding Company or S1 could have a
material adverse effect on the Holding Company's business, financial condition
and results of operations.
CUSTOMER PROJECT RISKS AND LENGTHY IMPLEMENTATION AND SALES CYCLES
The licensing of VFM is often an enterprise-wide decision by
prospective customers and generally requires S1 to engage in a lengthy sales
cycle and to provide a significant level of education to prospective customers
regarding the use and benefits of VFM. During the course of the initial bank
implementations, S1 has experienced significant delays in integrating its
software with the financial institution's legacy mainframe systems, resulting in
delays in bringing banks on-line. This has resulted in an increase in the cost
of implementation as well as a delay in the recognition of revenues associated
with the implementation effort. Management anticipates that as it gains more
experience in implementing VFM, the complex implementation process will become
more efficient and therefore, less costly. S1 could experience integration
delays on future implementations which could have a material adverse effect on
the Holding Company's operating results for subsequent periods. Due in part to
the mission-critical nature of the VFM applications and the associated hardware,
software and consulting expenditures, potential customers tend to be cautious in
making
17
<PAGE>
product acquisition decisions. In addition, the licensing of VFM involves a
significant commitment of capital and the attendant delays frequently associated
with approving large capital expenditures and reviewing new technologies that
affect key operations. For these and other reasons, the sales cycle for products
can vary and is subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, over which the Holding
Company has little or no control. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Holding Company is unlikely to be able to generate revenue from alternate
sources in time to compensate for the shortfall. As a result, and due to the
relatively large size of a typical order, a lost or delayed sale could have a
material adverse effect on the Holding Company's quarterly operating results.
Moreover, to the extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected.
TERMINATION OF CONTRACTS
As a result of the mergers and acquisitions occurring in the banking
industry environment today, there is a potential risk of some of the existing S1
customers terminating their technology and/or data center agreements with S1. An
existing S1 customer may be acquired by or merged with another financial
institution that already has its own financial Internet software solution or
does not desire to continue the relationship with S1 for some other reason,
which could result in the new entity terminating the relationship with S1.
In addition, there is a risk of an existing S1 Data Center customer
terminating its technology and/or data center agreements with S1 as a result of
the implementation cost associated with upgrading to new versions of the S1
software. Although the cost of implementing a new upgrade may decrease in the
future, this is not a certainty and it may be difficult for smaller financial
institutions to continue upgrading to the current version of the S1 software
because of the implementation cost associated with such upgrades. Related to
this risk is the risk that an existing S1 customer may terminate its technology
and/or data center agreements with S1 as a result of the cost associated with
implementing a year 2000 compliant version of the S1 software. S1 has
communicated with its existing customer base that it intends to have all
customers implemented onto a year 2000 version of the S1 software by June 1999;
however, there is the possibility of slippage in the implementation schedule
that may result in the customer terminating its agreement with S1. There is also
the risk that an existing S1 customer may be forced to terminate its agreement
with S1 prematurely as a result of internal year 2000 issues or deadlines that
would require them to be implemented on a year 2000 version prior to the
scheduled date for such implementation.
Although S1 has included financial penalties in its contracts for early
termination without cause, such financial penalties would not be sufficient to
replace the ongoing revenues that S1 would receive if the financial institution
had continued as an S1 Data Center customer. Therefore, there are potential
adverse financial risks associated with each of the above-stated events.
ABILITY TO MANAGE GROWTH
S1 has experienced significant growth in operations since 1996, and
anticipates that additional expansion may be required in order to continue its
product development. Any expansion of S1's business would place further demands
on S1's management, operational capacity and financial resources. S1 anticipates
that it will need to recruit qualified personnel in all areas of its operations,
including management, sales, marketing, delivery and software development. There
can be no assurance that S1 will be effective in attracting and retaining
additional qualified personnel, expanding its operational capacity or otherwise
managing growth. In addition, there can be no assurance that S1's systems,
procedures or controls will be adequate to support any expansion of S1's
operations. The failure to manage growth effectively could have a material
adverse effect on the Holding Company's business, financial condition and
results of operations.
18
<PAGE>
RISK OF SYSTEM FAILURE; SECURITY RISKS
Despite the implementation of security measures, the core of S1's
network infrastructure could be vulnerable to unforeseen computer problems.
Although the Holding Company believes S1 has taken steps to mitigate much of the
risk, S1 may in the future experience interruptions in service as a result of
the accidental or intentional actions of Internet users, current and former
employees or others. Unknown security risks may result in liability to the
Holding Company and also may deter financial institutions from licensing S1's
software and services, and individuals from conducting transactions with S1.
Although S1 intends to continue to implement and establish security measures,
there can be no assurance that measures implemented by S1 will not be
circumvented in the future, which could have a material adverse effect on the
Holding Company's business, financial condition and results of operations.
YEAR 2000
The Year 2000 issue relates to the use by many existing computer
programs of only two digits to identify a year in the date field. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Holding Company recognizes the need to ensure that the
potential Year 2000 software failures will not adversely impact its operations.
In 1997, S1 established a task force, with representation from all major
business units, to evaluate and manage the risks, solutions and cost associated
with addressing the year 2000 issue which affects both the internal computer
systems at S1, as well as the software applications that S1 markets to
customers. The task force is in the process of identifying all business systems,
products and services, including third-party software used by S1 and in
conjunction with VBM, and determining whether they are Year 2000 compliant. In
addition, S1 is developing plans of action for the systems and products which
are not Year 2000 compliant. The Holding Company believes that, based on the
assessments completed to date, critical Year 2000 issues can be corrected. The
failure of S1 or third party software which is used by S1 or in conjunction with
VBM to be Year 2000 compliant could have a material adverse impact on the
Holding Company's financial position and results of operations.
Management has determined that S1's newest version of VBM, scheduled
for release in the third quarter of 1998, will be Year 2000 compliant. Complete
"end to end" testing is anticipated to occur as part of the VBM implementation
process. Due to the near-term release of this version, prior releases will not
be Year 2000 compliant. Management anticipates that all S1 financial institution
customers will be converted to the new version by the third quarter of 1999.
These conversions will require a significant portion of S1's implementation
resources. Management is currently evaluating the potential impact on
professional services margins due to the deployment of such resources, and the
potential discounting of services related to these implementations.
The costs incurred in addressing the Year 2000 problem are being
expensed as incurred in compliance with generally accepted accounting
principles. None of these costs are expected to materially impact the results of
operations in any one period. A significant portion of the costs to be incurred
are not expected to be incremental but rather are related to current development
efforts.
INTENSE COMPETITION
The market for Internet-based financial software applications and
banking services is extremely competitive and the Holding Company expects that
competition will intensify in the future. The Holding Company believes that S1's
ability to compete successfully depends upon a number of factors, including
market presence; the capacity, reliability and security of S1's network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of S1's competitors and suppliers; the timing of introductions of new
products and services by S1 and its competitors; S1's ability to support
industry standards; and industry and general economic trends. Many of S1's
competitors are larger than S1 and have greater financial and other resources.
19
<PAGE>
In addition to competing with a variety of third parties, the Holding
Company will experience competition from its customers and potential customers.
From time to time, these potential customers develop, implement and maintain
their own services and applications for revenue enhancements, cost reductions
and/or enhanced customer services, rather than purchasing services and related
products from third parties. As a result, S1 must continuously educate existing
and prospective customers about the advantages of purchasing its solutions.
There can be no assurance that these customers or other potential customers will
perceive sufficient value in S1's solutions to justify investing in them. In
addition, customers or potential customers could enter into strategic
relationships with one or more of S1's competitors to develop, market and sell
competing services or products.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Holding Company's success will depend significantly upon its
proprietary technology and information. S1 relies upon a combination of
copyright, trademark and trade secret laws and confidentiality procedures to
protect its proprietary technology and information. There can be no assurance
that the steps taken by S1 to protect its services and products are adequate to
prevent misappropriation of its technology or that S1's competitors
independently will not develop technologies that are substantially equivalent or
superior to S1's technology. Further, it is very difficult to police
unauthorized use of S1's software due to the nature of software. Any such
misappropriation of S1's proprietary technology or information or the
development of competitive technologies could have a material adverse effect on
the Holding Company's business, financial condition and results of operations.
It may also be necessary or desirable in the future to obtain additional
licenses for use of third-party products in S1's solutions and there can be no
assurance that S1 will be able to do so on commercially reasonable terms, if at
all.
GOVERNMENT REGULATION
S1's primary customers are banks. Although the products and services
currently offered by S1 will not be subject to any material, specific government
regulation if the Plan and the Agreement are approved and consummated, the
banking industry, including electronic banking, is regulated heavily, and the
Holding Company expects that such regulation will affect the relative demand for
S1's products and services. There can be no assurance that federal, state or
foreign governmental authorities will not adopt new regulations addressing
electronic banking or banking operations generally which could require S1 to
modify its current or future solutions. The adoption of laws or regulations
affecting S1's or its customers' business could reduce the Holding Company's
growth rate or could otherwise have a material adverse effect on the Holding
Company's business, financial condition and results of operations.
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
After consummation of the Reorganization, as of the Record Date, the
Holding Company's directors, executive officers and 5% shareholders (and their
affiliates) will, in the aggregate, beneficially own approximately 17.3% of the
outstanding Common Stock (giving effect to the exercise of outstanding options
under SFNB's stock option plans and agreements, the Holding Company's directors'
srock option plan and the conversion of outstanding SFNB Preferred Stock). Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Holding Company, impede a merger,
consolidation, takeover or other business combination involving the Holding
Company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Holding Company.
NEED TO EXPAND BOARD OF DIRECTORS AND CONTINUITY OF MANAGEMENT
The Holding Company currently has five directors, one of whom also is
an executive officer. The Holding Company believes that it is important to
expand the size of its Board of Directors to include people with experience in
the technology industry. There can be no assurance of the Holding Company's
ability to attract and retain new directors with the requisite experience.
20
<PAGE>
Provisions of the Certificate of Incorporation and Bylaws of the
Holding Company may be deemed to have the effect of making difficult an
acquisition of control of the Holding Company in a transaction not approved by
the Holding Company's Board of Directors. These provisions include the ability
of the Holding Company's Board of Directors to issue shares of preferred stock
in one or more series without further authorization of the Holding Company
shareholders. The Holding Company's Certificate of Incorporation authorizes 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 Holding 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 Holding Company Common Stock. In the event of
such issuance, the preferred stock could also be utilized as a method of
discouraging, delaying or preventing a change in control of the Holding Company.
This provision also may have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of the Holding
Company even though such a transaction might be economically beneficial to the
Holding Company and its shareholders.
DIVIDEND POLICY
The Holding Company does not presently intend to pay cash dividends in
the foreseeable future, as any earnings are expected to be retained for use in
developing and expanding its business. However, the actual amount of dividends
received from the Holding Company will remain subject to the discretion of the
Holding Company's Board of Directors and will depend on results of operations,
cash requirements and future prospects of the Holding Company and other factors.
21
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
This Proxy Statement/Prospectus is first being mailed to the holders of
SFNB Common Stock on or about August ___, 1998, and is accompanied by a proxy
card furnished in connection with the solicitation of proxies by the SFNB Board
of Directors for use at the Special Meeting. The Special Meeting is scheduled to
be held on September 25, 1998, at 9:00 a.m., at SFNB's Atlanta City Office, 3390
Peachtree Road, NE, Atlanta, Georgia 30326. At the Special Meeting, the holders
of SFNB Common Stock will consider and vote upon: (i) the proposed
Reorganization of SFNB and S1 by approving the Plan and the transactions
contemplated thereby (Proposal 1), (ii) the proposed Sale of SFNB's Banking
Business by approving the Agreement and the transactions contemplated thereby
(Proposal 2), (iii) the proposed increase in the number of shares of Holding
Company Common Stock that the Holding Company is authorized to issue from
25,000,000 to 60,000,000 shares and the proposed increase in the number of
shares of serial preferred stock that the Holding Company is authorized to issue
from 2,500,000 to 5,000,000 shares, (iv) the proposed elimination except in
specified circumstances of monetary liabilities of the Holding Company directors
under Delaware law, and (v) such other business as may properly come before the
Special Meeting, or any adjournments thereof, including, without limitation, a
motion to adjourn the Special Meeting to another time and/or place for the
purpose of soliciting additional proxies in order to approve the Plan, the
Agreement or otherwise.
RECORD DATE AND VOTING
The Board of Directors of SFNB has fixed the close of business on
August 3, 1998, as the Record Date for the determination of the holders of SFNB
Common Stock entitled to receive notice of and to vote at the Special Meeting.
Only holders of record of SFNB Common Stock at the close of business on that
date will be entitled to vote at the Special Meeting or at any adjournment
thereof. At the close of business on the Record Date, there were 11,191,117
shares of SFNB Common Stock outstanding and entitled to vote at the Special
Meeting, held by approximately 409 shareholders of record.
Each holder of SFNB Common Stock on the Record Date will be entitled to
one vote for each share held of record upon each matter properly submitted at
the Special Meeting or any adjournment thereof. The presence of the holders of
at least a majority of the outstanding shares of SFNB Common Stock entitled to
vote at the Special Meeting, in person or by proxy, is necessary to constitute a
quorum. Abstentions and broker non-votes will be included in the calculation of
the number of shares represented at the Special Meeting for purposes of
determining whether a quorum has been achieved. Abstentions will have the same
effect as a vote against the Plan and the Agreement. Holders of SFNB Preferred
Stock will be asked separately to approve the Plan, the Agreement and the
transactions contemplated thereby by written consent.
The Plan is conditioned on approval by the holders of at least
two-thirds of the outstanding shares of SFNB Common Stock and SFNB Preferred
Stock. The Agreement is conditioned on approval by the holders of at least a
majority of the outstanding shares of SFNB Common Stock and the holders of at
least two-thirds of the outstanding shares of SFNB Preferred Stock. Approval of
each of the Contingent Certificate Provisions requires approval by the holders
of at least a majority of the outstanding shares of SFNB Common Stock. If the
Reorganization is consummated, as of the Record Date, 11,191,117 shares of
Holding Company Common Stock would be issued to the holders of the 11,191,117
outstanding shares of SFNB Common Stock, 4,098,152 shares of Holding Company
Common Stock would be reserved for issuance with respect to the exercise of
stock options for 4,098,152 shares of SFNB Common Stock pursuant to SFNB's stock
option plans and agreements, 150,000 shares of Holding Company Common Stock
would be reserved for issuance with respect to the directors' stock option plan
of the Holding Company, 1,174,110 shares of
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<PAGE>
Holding Company Common Stock would be reserved for issuance in the event of the
conversion of all of the outstanding Holding Company Preferred Stock, and
1,174,110 shares of Holding Company Preferred Stock would be issued to the
holders of the 1,174,110 outstanding shares of SFNB Preferred Stock. If the Sale
is consummated, an additional 733,818 shares of Holding Company Common Stock
would be reserved for issuance with respect to the Options (defined below)
granted to RBC Holdings effective upon the Closing (defined below) to purchase
733,818 shares of Holding Company Common Stock.
If a quorum is not obtained, or if fewer shares of SFNB Common Stock
are voted in favor of the Plan or the Agreement than the number required for
approval (but not necessarily the Contingent Certificate Provisions), it is
expected that the Special Meeting will be adjourned for the purpose of allowing
additional time for obtaining additional proxies. In such event, proxies will be
voted to approve an adjournment, except for proxies as to which instructions
have been given to vote against the Plan or the Agreement. The affirmative vote
of the holders of a majority of the voting shares represented in person or by
proxy at the Special Meeting would be required to approve any adjournment of the
Special Meeting.
If the enclosed proxy card is properly executed and received by SFNB in
time to be voted at the Special Meeting, the shares represented thereby will be
voted in accordance with the instructions marked thereon. EXECUTED PROXIES WITH
NO INSTRUCTIONS INDICATED THEREON WILL BE VOTED "FOR" APPROVAL OF THE PLAN AND
THE TRANSACTIONS CONTEMPLATED THEREBY, "FOR" APPROVAL OF THE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, "FOR" APPROVAL OF THE PROPOSED INCREASE IN
THE NUMBER OF AUTHORIZED SHARES OF HOLDING COMPANY COMMON STOCK AND SERIAL
PREFERRED STOCK, AND "FOR" THE PROPOSED ELIMINATION OF MONETARY LIABILITIES FOR
THE HOLDING COMPANY DIRECTORS.
The Board of Directors of SFNB is not aware of any matters other than
approval of the Plan, the Agreement and the Contingent Certificate Provisions
(or a proposal to adjourn the Special Meeting as necessary) that may be properly
brought before the Special Meeting. If any other matters properly come before
the Special Meeting, the persons named in the accompanying proxy will vote the
shares represented by all properly executed proxies on such matters in such
manner as shall be determined by a majority of the Board of Directors of SFNB.
VOTE REQUIRED; REVOCABILITY OF PROXIES
The affirmative vote of two-thirds of the holders of the outstanding
shares of SFNB Common Stock is required to approve the Plan and the transactions
contemplated thereby.
The affirmative vote of a majority of the holders of the outstanding
shares of SFNB Common Stock is required to approve the Agreement and the
transactions contemplated thereby.
The affirmative vote of a majority of the holders of the outstanding
shares of SFNB Common Stock is required to approve each of the Contingent
Certificate Provisions.
THE REQUIRED VOTE OF THE HOLDERS OF SFNB COMMON STOCK WITH RESPECT TO
THE APPROVAL OF THE PLAN, THE AGREEMENT AND EACH OF THE CONTINGENT CERTIFICATE
PROVISIONS IS BASED UPON THE TOTAL NUMBER OF OUTSTANDING SHARES OF SFNB COMMON
STOCK AND NOT UPON THE NUMBER OF SHARES WHICH ARE ACTUALLY VOTED. ACCORDINGLY,
THE FAILURE TO SUBMIT A PROXY CARD OR TO VOTE IN PERSON AT THE SPECIAL MEETING
OR THE ABSTENTION FROM VOTING BY A SHAREHOLDER WILL HAVE THE SAME EFFECT AS A
VOTE "AGAINST" THE PLAN, THE AGREEMENT AND THE CONTINGENT CERTIFICATE
PROVISIONS.
The presence of a shareholder at the Special Meeting will not
automatically revoke such shareholder's proxy. However, a shareholder may revoke
a proxy at any time prior to its exercise by (i) filing with Lisa Wilkie,
Assistant Secretary, Security First Network Bank, 3390 Peachtree Road, NE, Suite
1700, Atlanta, Georgia 30326, a written notice of revocation prior to the
Special Meeting,
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(ii) delivering to SFNB prior to the Special Meeting a duly executed proxy
bearing a later date, or (iii) attending the Special Meeting and voting in
person.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees
of SFNB may solicit proxies for the Special Meeting from shareholders personally
or by telephone or telegram without additional remuneration therefor. SFNB also
will make arrangements with brokerage firms and other custodians, nominees and
fiduciaries to send proxy materials to their principals and will reimburse such
parties for their expenses in doing so. The cost of soliciting proxies will be
paid by SFNB.
THE HOLDING COMPANY REORGANIZATION
(PROPOSAL 1)
The following description should be read in conjunction with the Plan
and the Certificate of Incorporation and Bylaws of the Holding Company, which
are attached as Appendices B, D and F, respectively, to this Proxy
Statement/Prospectus.
THE COMPANIES INVOLVED IN THE REORGANIZATION
For information about SFNB, the Holding Company, New Bank and S1, see
"Summary -- The Companies," "Information about SFNB" and "Additional Information
about the Holding Company."
DESCRIPTION OF THE REORGANIZATION
The Plan was entered into on March 9, 1998 among SFNB, and upon
organization, the Holding Company and New Bank. The Plan was amended on June 4,
1998. After its organization, the Holding Company became a party to the Plan.
The following summary diagrams SFNB's existing structure and the
resulting holding company structure:
The current corporate structure of SFNB is as follows:
<TABLE>
<S> <C> <C>
*********************************
* Security First Network Bank *
* (a federal savings bank) *
**********************************
*
**************************************************************************************
* * *
*********************************** ***************************************** *****************************
*Security First Technologies, Inc.* *Security First Technologies Corporation* *SFNB Investment, Inc. *
* (a Kentucky corporation) * * (a Delaware corporation) * *(a Kentucky corporation) *
*********************************** ***************************************** *****************************
</TABLE>
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<PAGE>
Immediately upon the Reorganization, the corporate structure will be as follows:
<TABLE>
<S> <C>
*****************************************
*Security First Technologies Corporation*
* (a Delaware corporation) *
*****************************************
*
*****************************************
* *
********************************** ***********************************
* Security First Network Bank * * Security First Technologies, Inc.*
* (a federal savings bank) * * (a Kentucky corporation) *
********************************** ***********************************
</TABLE>
* After the dissolution of SFNB described in Step 5 below, New Bank will change
its corporate title to and then be known as "Security First Network Bank" and
will continue SFNB's Banking Business.
If the Agreement providing for the Sale of SFNB's Banking Business to
RBC Holdings is approved, upon the Sale, New Bank will become a wholly owned
subsidiary of RBC Holdings and the corporate structure of the Holding Company
will be as follows:
*****************************************
*Security First Technologies Corporation*
* (a Delaware corporation) *
*****************************************
*
*
***********************************
*Security First Technologies, Inc.*
* (a Kentucky corporation) *
***********************************
For more information about the Sale, see "The Sale of SFNB's Banking Business."
SFNB has organized the Holding Company as a Delaware corporation and a
wholly owned subsidiary of SFNB. The remaining steps to the Reorganization are
as follows:
Step 1. Immediately prior to the Reorganization, New Bank will be organized
by SFNB as a federal savings bank and a wholly owned subsidiary of
SFNB. In connection with its organization, New Bank will issue the
New Bank Stock (1,000 shares of common stock) to SFNB.
Step 2. At the Effective Time, SFNB will contribute its Banking Business
(including at least $10.0 million of assets which qualify as
regulatory capital in excess of liabilities) to New Bank. The
Banking Business will include the Acquired Assets and Acquired
Liabilities (each defined below) and will not include, among other
things, the stock of S1 and cash or cash equivalent assets of SFNB
that would result in New Bank initially having regulatory capital in
excess of $10.0 million.
Step 3. The Holding Company will purchase all of SFNB's other assets
(including the stock of S1 and the New Bank Shares) and assume all
of SFNB's other liabilities (such assets and liabilities
collectively, the "Non-Banking Business") in exchange for the
issuance by the Holding Company to SFNB of that number of shares of
Holding Company Common Stock and Holding Company Preferred Stock
equal to the number of outstanding shares of SFNB Common Stock and
SFNB Preferred Stock immediately prior to the Effective Time. The
1,000 shares of Holding Company Common Stock presently owned by SFNB
will be canceled in the Reorganization.
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<PAGE>
Step 4. SFNB will declare a distribution of the Holding Company Stock issued
in Step 3 pro rata to holders of SFNB Stock.
Step 5. SFNB will dissolve voluntarily pursuant to the regulations of the
OTS by filing a certificate of dissolution with the OTS and
surrendering its charter for cancellation.
Immediately following the steps described above, New Bank will change
its corporate title to and then be known as "Security First Network Bank." After
the Reorganization is consummated, the Holding Company will own all of the
outstanding stock of two subsidiaries, New Bank (then known as Security First
Network Bank) and S1. The holders of SFNB Stock will own Holding Company Stock
to the same extent that they owned SFNB Stock prior to the Reorganization.
The Boards of Directors of SFNB and the Holding Company each have
approved and adopted the Plan. SFNB also has approved the Plan as sole
shareholder of the Holding Company. Upon its organization, SFNB will cause the
Board of Directors of New Bank to approve and adopt the Plan and SFNB will
approve the Plan as sole shareholder of New Bank.
The directors and officers of the Holding Company after the Effective
Time will consist of the persons serving as directors and officers of the
Holding Company immediately prior to the Effective Time. The four directors of
SFNB, along with Dorsey R. Gardner, serve as the members of the Holding
Company's Board of Directors. Each of the executive officers of the Holding
Company currently serves as an officer of SFNB and S1. If the Agreement is not
approved, the Holding Company still intends to discontinue all banking
operations. No determination has been made as to how the Holding Company would
implement the discontinuation of banking operations if the Agreement is not
consummated.
The Reorganization will become effective (the "Effective Time") when
all of the conditions set forth in the Plan are satisfied, including, but not
limited to, receipt of all shareholder and regulatory approvals and the
expiration of any applicable waiting periods. The Effective Time will not occur
until the moment immediately prior to the Closing under the Agreement, unless
the Agreement is not consummated, in which case the Effective Time will occur at
the later of the satisfaction of all conditions set forth in the Plan or the
termination of the Agreement.
Under the terms of the Plan, the stock option plans and agreements of
SFNB will become the stock option plans and agreements of the Holding Company.
At the Effective Time, the unexercised portion of the options outstanding under
SFNB's existing stock option plans and agreements will be assumed by the Holding
Company and thereafter will be exercisable only for shares of Holding Company
Common Stock, with each option being exercisable for a number of shares of
Holding Company Common Stock equal to the number of shares of SFNB Common Stock
that were available thereunder immediately prior to the Effective Time, with no
change in the option exercise price or any other term or condition of such
option. The Holding Company and SFNB will make appropriate amendments to SFNB's
existing stock option plans and agreements to reflect the adoption of those
plans and agreements as the stock option plans and agreements of the Holding
Company without adverse effect upon the options outstanding under such plans and
agreements. Upon the Closing under the Agreement, the Options granted by SFNB to
RBC Holdings effective upon the Closing shall be deemed to be options to acquire
Holding Company Stock.
Whether or not the Reorganization is consummated, all expenses that are
incurred in connection with the Reorganization, including the cost of organizing
the Holding Company and New Bank, will be paid by SFNB.
RECOMMENDATION OF THE SFNB BOARD OF DIRECTORS AND REASONS FOR THE REORGANIZATION
The Reorganization is being undertaken to separate the banking
activities of SFNB from the computer software activities of S1. Subject to
shareholder and regulatory approvals, the
26
<PAGE>
Reorganization also was a condition to the approval by the OTS of SFNB's 1996
acquisition of SecureWare.
On November 4, 1996, the OTS approved the merger of SecureWare into S1
(then known as Five Paces, Inc.), subject to SFNB commencing, within 60 days,
such steps as may be necessary to form a holding company with separate banking
and computer software and security software technology subsidiaries. The OTS
condition required that the Reorganization be accomplished by March 4, 1997,
unless (i) an extension was granted by the Regional Director of the OTS or his
designee, or (ii) any regulatory or shareholder approvals remained pending and
SFNB was using commercially reasonable efforts to pursue such approvals in good
faith, in which case the Reorganization was required to be accomplished as soon
as reasonably possible upon the receipt of all required regulatory and
shareholder approvals, and the expiration of any statutory waiting periods. The
OTS subsequently allowed SFNB additional time to complete the Reorganization.
Presently, as a subsidiary of SFNB, the activities of S1 are limited to
those permissible for a federal savings bank, and S1 is subject to supervision
and regulation by the OTS. Because Huntington, Wachovia and Area Bancshares,
Inc. ("Area"), the original holders of SFNB Preferred Stock, are deemed to
control S1 for purposes of the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), the activities of S1 are limited to those permissible for a bank
holding company.
SFNB currently operates S1 as an operating subsidiary to segregate S1's
software development activities from the banking operations of SFNB. The
operating subsidiary structure, however, does not grant S1 any greater authority
to engage in activities than SFNB is permitted. Moreover, operating subsidiaries
remain subject to the supervisory and examination authority of the OTS, and as a
result, new activities of S1 are subject to the prior review and possible
limitation by both the OTS and the FDIC. SFNB's and S1's current ability to
diversify their operations therefore are limited by regulatory restrictions.
If the Sale is not approved, but S1 becomes a wholly owned subsidiary
of the Holding Company in the Reorganization, the Holding Company's and S1's
activities will not be regulated or restricted by the OTS provided that the
Holding Company remains a unitary savings and loan holding company and New Bank
is a "qualified thrift lender" ("QTL") under the Home Owners' Loan Act of 1933,
as amended (the "HOLA"). If the OTS determines that there is reasonable cause to
believe that the continuation of any of the activities of the Holding Company or
S1 constitutes a serious risk to the financial safety, soundness, or stability
of New Bank, the OTS may impose restrictions on the payment of dividends by New
Bank or restrictions on transactions between New Bank and the Holding Company or
S1. Since Huntington, Wachovia and Area still will be deemed to control S1, the
activities of S1 (but not necessarily any other subsidiary which the Holding
Company can organize) will be limited to those permissible for a bank holding
company under the BHC Act and new activities will be subject to approval of the
Federal Reserve Board. The Holding Company and S1 will be subject to OTS
regulations, examination, supervision and reporting requirements pursuant to
certain provisions of the HOLA and the Federal Deposit Insurance Act if the
Reorganization but not the Sale is consummated. In that event, the Holding
Company also will be subject to regulation as a "bank holding company" under the
Financial Institutions Code of Georgia (the "Georgia Code"). See "Additional
Information about the Holding Company -- Regulation of the Holding Company."
After the Reorganization, New Bank, like SFNB, will be subject to extensive
regulation, supervision and examination by the OTS, including the OTS prompt
corrective action regulations which require the OTS to take certain actions if a
federal savings bank is not adequately capitalized. See "Information about SFNB
- -- Description of Business -- Regulation."
If the Sale is approved and consummated, the Holding Company and S1
will be free from regulation by the OTS, the Georgia Department and the FDIC,
and New Bank, as a subsidiary of RBC Holdings, will remain subject to regulatory
restrictions. Huntington, Wachovia and Area still will be deemed to control S1,
and thus activities of S1 (but not necessarily any other subsidiary which the
Holding Company can organize) will be limited to those permissible for a bank
holding
27
<PAGE>
company under the BHC Act and new activities will be subject to approval of the
Federal Reserve Board.
For the reasons set forth above in this section, the Board of Directors
of SFNB believes that there are substantial advantages to SFNB and its
shareholders as a result of the Reorganization and the Sale. In addition, even
if only the Reorganization is consummated, there will be benefits to SFNB and
its shareholders because new activities of S1 will no longer be subject to prior
review and possible limitation by the OTS and the FDIC, and S1 will not be
subject to extensive OTS supervision and examination as an operating subsidiary
of a federal savings bank.
SFNB's Board of Directors chose Delaware as the state of incorporation
of the Holding Company for several reasons. Delaware has a substantial body of
corporate laws which are periodically updated and revised to meet changing
business needs. Many major corporations are incorporated in that state. The
Delaware courts have developed considerable expertise in dealing with corporate
issues, and a substantial body of case law has developed construing Delaware law
and establishing public policies with respect to Delaware corporations, thereby
providing greater predictability with respect to corporate legal affairs. The
organization of the Holding Company in Delaware also allows the Holding Company
to make use of protective features permitted by Delaware law. See "-- Comparison
of Shareholders' Rights" and "-- Takeover Defense Provisions." In addition, if
the proposed limitation on director liability is approved, the Holding Company's
Certificate of Incorporation, as authorized by Delaware law, will eliminate,
except in specified circumstances, the personal liability of directors for
breach of certain fiduciary duties to the Holding Company and its shareholders.
See "Proposed Elimination of Monetary Liabilities of Holding Company Directors."
TREATMENT OF STOCK CERTIFICATES
At the Effective Time, all previously issued and outstanding
certificates representing shares of SFNB Stock automatically and by operation of
law will be canceled and cease to represent shares of SFNB Stock and any
interest therein. After SFNB's declaration of a distribution of the Holding
Company Stock to holders of SFNB Stock, the former holders of SFNB Stock shall
have full and exclusive power to vote such shares of Holding Company Stock, to
receive dividends thereon and to exercise all rights of an owner thereof as
provided by the terms of the Holding Company Stock. As soon as practicable and
in any event not more than 30 days after the Effective Time, the Holding Company
shall make available a certificate or certificates for the aggregate number of
shares of Holding Company stock to which such holders are entitled. Shareholders
will be entitled to surrender their present stock certificates for new
certificates for an equal number of shares of Holding Company Common Stock
and/or Holding Company Preferred Stock, as applicable. Until so surrendered,
their present stock certificates will for all corporate purposes represent the
same number of shares of Holding Company Common Stock and Holding Company
Preferred Stock which the holders would be entitled to receive upon surrender. A
letter of transmittal and instructions with respect to the exchange of stock
certificates will be sent to all holders of record of shares of SFNB Stock at
the Effective Time as soon as practicable after the consummation of the
Reorganization. After the Effective Time, no holder of a certificate for SFNB
Stock shall be entitled to vote the shares of SFNB Stock formerly represented by
such certificate, or to receive dividends thereon or to exercise any other
rights of ownership. Wachovia Bank, N.A., the transfer agent and registrar for
SFNB Stock, will act in the same capacity for the Holding Company Stock.
CERTIFICATES FOR SHARES OF SFNB STOCK SHOULD NOT BE SENT TO THE
TRANSFER AGENT UNTIL THE LETTER OF TRANSMITTAL AND INSTRUCTIONS HAVE BEEN
RECEIVED. THE LETTER OF TRANSMITTAL MUST BE COMPLETED AS INSTRUCTED AND MUST
ACCOMPANY THE CERTIFICATE(S).
REGULATORY APPROVALS
Applications to obtain the required regulatory approvals for the
Reorganization from the OTS, the FDIC and the Georgia Department have been
approved. The Holding Company will apply
28
<PAGE>
to Nasdaq to change the listing of SFNB Common Stock on the Nasdaq Stock Market
to Holding Company Common Stock under the symbol "SONE" subject to consummation
of the Reorganization.
The FDIC approval requires New Bank to have beginning paid-in capital
funds of not less than $10 million and a Tier 1 capital to total assets ratio of
not less than 8 percent, in addition to a fully funded loan loss reserve, for
the first 3 years of operations. In addition, during the first three years of
operations, New Bank will be able to pay cash dividends only from net operating
profits after an appropriate allowance for loan and lease losses has been
established. If the Sale is not consummated, New Bank will be required to have
beginning paid-in capital funds of not less than $12 million.
CONDITIONS TO THE PLAN
The Plan and the transactions provided for therein will not become
effective unless all of the following conditions have occurred: (i) the Plan is
approved by the holders of at least two-thirds of the outstanding shares of SFNB
Common Stock and SFNB Preferred Stock; (ii) the required approvals of the OTS
have been received and all waiting periods have expired; (iii) the shares of
Holding Company Common Stock to be issued to the holders of SFNB Common Stock
pursuant to the Plan have been registered or qualified for issuance under the
Securities Act and all applicable state securities laws or are exempt therefrom;
(iv) the Holding Company Common Stock is approved for listing on the Nasdaq
Stock Market; and (v) SFNB and the Holding Company have obtained all other
consents, permissions and approvals and taken all actions required by law or
agreement deemed necessary for the consummation of the transactions provided for
in the Plan.
If the Plan is approved by the holders of SFNB Stock, the
Reorganization is expected to become effective as soon as possible thereafter
upon satisfaction of all the conditions to the Plan and the expiration of any
applicable waiting periods, and, if the Agreement is approved, immediately prior
to the Sale unless the Agreement is terminated or the conditions to the
Agreement are not satisfied. See "The Sale of SFNB's Banking Business --
Conditions to the Agreement." If the Plan is not approved by the holders of SFNB
Common Stock or SFNB Preferred Stock or if the required regulatory approvals are
not received, SFNB will continue to operate without a holding company structure.
Approval of the Agreement is not a condition to approval of the Plan, but
approval of the Plan is a condition to consummation of the Sale pursuant to the
Agreement.
ABANDONMENT AND AMENDMENT OF THE PLAN
The Plan may be abandoned by any of the parties at any time before the
Effective Time in the event that: (i) any action, suit, proceeding or claim has
been instituted, made or threatened relating to the Plan, which makes
consummation of the actions contemplated by the Plan inadvisable in the opinion
of the parties, or (ii) for any reason, consummation of the actions contemplated
by the Plan is inadvisable in the opinion of the parties. In the event of such
abandonment, SFNB will pay the fees and expenses incurred in connection with the
Plan and the proposed Reorganization.
The Plan may be amended or modified in any respect at any time prior to
the approval of the Plan by SFNB's shareholders by the mutual agreement of the
Boards of Directors of the parties.
ACCOUNTING TREATMENT
The Reorganization will be accounted for in a manner similar to a
"pooling of interests" in accordance with generally accepted accounting
principles and accordingly, the historical consolidated financial statements of
SFNB will become the historical consolidated financial statements of the Holding
Company.
29
<PAGE>
NO DISSENTERS' RIGHTS
Under the rules and regulations of the OTS as set forth in Section
552.14 of Title 12 of the Code of Federal Regulations, the holders of SFNB
Common Stock will not be entitled to dissenters' rights in connection with the
Reorganization.
FEDERAL INCOME TAX CONSEQUENCES
For a discussion of the material federal income tax consequences of the
Reorganization, see "Certain Federal Income Tax Consequences."
COMPARISON OF SHAREHOLDERS' RIGHTS
Set forth below is a summary of the material differences between the
rights of holders of SFNB Stock and their prospective rights as holders of
Holding Company Stock. If the Reorganization is consummated, the holders of SFNB
Stock will become holders of Holding Company Stock. As a result, the Holding
Company's Certificate of Incorporation and Bylaws and the applicable provisions
of the DGCL will govern the rights of current holders of SFNB Stock, which
presently are governed by SFNB's Amended and Restated Charter ("Charter") and
SFNB's Amended and Restated Bylaws ("Bylaws") and federal law. The following
comparison is based on the current terms of the governing documents of SFNB and
the terms of the Holding Company Certificate of Incorporation, without giving
effect to the Contingent Certificate Provisions, discussed in detail below, and
on the provisions of federal law and the DGCL. Each of the Contingent
Certificate Provisions will be effective upon the Reorganization only if
approved at the Special Meeting. See "Proposed Increase in Authorized Capital
Stock of the Holding Company" and "Proposed Elimination of Monetary Liabilities
of Holding Company Directors." The Holding Company's Certificate of
Incorporation without the Contingent Certificate Provisions and the Holding
Company's Bylaws are attached as Appendix D and Appendix F to this Proxy
Statement/Prospectus. The Contingent Certificate Provisions are attached as
Appendix E to this Proxy Statement/Prospectus.
DIRECTORS. SFNB's Charter provides that the number of directors shall
be as stated in the bylaws within a range of five to 15 unless a greater number
is approved by the OTS. SFNB's Bylaws provide that the Board of Directors shall
be divided into three classes and shall consist of six directors. The Holding
Company's Certificate of Incorporation provides that the Board of Directors
shall be divided into three classes and that the number of directors shall be
fixed by or in the manner provided in the Bylaws. The Holding Company's Bylaws
provide that the number of directors shall be between four and 15. As of the
date of this Proxy Statement/Prospectus, the initial Board of Directors upon the
Reorganization will consist of five members.
SFNB's Bylaws provide that a vacancy on the Board of Directors may be
filled by the affirmative vote of a majority of the remaining directors,
however, a director elected to fill a vacancy or by reason of an increase in the
number of directors may serve only until the next election of directors by
shareholders. The Holding Company's Certificate of Incorporation and Bylaws
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, may be filled for the
remainder of the unexpired term. The Holding Company's Bylaws provide that
vacancies may be filled by a majority vote of the directors then in office or by
shareholders.
SFNB's Bylaws generally provide that a director may be removed for
cause by a vote of the holders of a majority of the shares entitled to vote in
an election of directors at a meeting of shareholders called expressly for that
purpose. SFNB's Bylaws also provide that more than three consecutive absences
from regular meetings of the Board of Directors shall constitute a resignation
unless excused by a Board resolution. The Holding Company's Certificate of
Incorporation provides that a director may be removed only for cause, and then
only by the affirmative vote of at least two-thirds of the total votes eligible
to be voted at a duly constituted meeting of the shareholders called
30
<PAGE>
for that purpose and requires that at least 30 days' written notice be provided
to any director or directors whose removal is to be considered at such a
meeting.
SFNB's Charter generally provides that no shares of SFNB Common Stock
or shares issuable from conversion, exchange or exercise of other securities may
be issued to officers, directors and controlling persons of SFNB other than as
part of a general public offering or as qualifying shares to a director, unless
the issuance or the plan pursuant to which they would be issued has been
approved by a majority of the total votes eligible to be cast at a legal
meeting. SFNB's Bylaws provide that each director of SFNB must beneficially own
at least 100 shares of capital stock of SFNB unless SFNB is a wholly owned
subsidiary of a holding company. The Holding Company's Bylaws provide that
directors need not be shareholders.
PURPOSE. Under SFNB's Charter, SFNB is permitted to pursue any or all
of the lawful objectives of a federal savings bank chartered under Section 5 of
the HOLA. The Holding Company's Certificate of Incorporation provides that the
Holding Company may engage in any lawful act or activity for which corporations
may be organized under the DGCL.
AUTHORIZED SHARES. Under SFNB's Charter, SFNB is authorized to issue
25,000,000 shares of SFNB Common Stock and 2,500,000 shares of preferred stock.
The Holding Company's Certificate of Incorporation authorizes the Holding
Company to issue 25,000,000 shares of Holding Company Common Stock and 2,500,000
shares of serial preferred stock. SFNB Common Stock and preferred stock is
without par value. Holding Company Common Stock and preferred stock has a par
value of $0.01 per share.
CALL OF SPECIAL MEETINGS. SFNB's Bylaws provide that special meetings
of shareholders may be called at any time by the Chairman of the Board, the
President or the Board of Directors, and shall be called upon written request of
the holders of not less than one-tenth of all of the outstanding capital stock
of SFNB entitled to vote at the meeting. However, SFNB's Charter provides that
special meetings related to changes in control of SFNB or amendments to its
charter may only be called by the Board of Directors. The Holding Company's
Bylaws and Certificate of Incorporation contain similar provisions.
LIMITATION OF LIABILITY. SFNB's Bylaws provide that directors, officers
and employees shall be indemnified to the fullest extent permitted by 12 C.F.R.
ss. 545.121. The Holding Company's Certificate of Incorporation provides that
the Holding Company generally shall fully indemnify directors, officers,
employees and agents to the extent permitted by law with respect to expenses,
judgments, fines and amounts paid in settlement. The Holding Company's Bylaws
provide that the Holding Company may purchase or maintain insurance on behalf of
a person who is or was a director, officer, employee or agent of the Holding
Company or a person serving in such capacities with other entities at the
Holding Company's request against liability incurred by such person in such
capacity or arising from such status whether or not the Holding Company would
have the power to indemnify such person against the same liability.
NOTICE OF SHAREHOLDER MEETINGS. SFNB's Bylaws provide that written
notice must be delivered not less than 20 nor more than 50 days before the date
of a meeting. The Holding Company's Bylaws provide that notice of shareholder
meetings must be given not less than 10 nor more than 60 days before the date of
a meeting.
QUORUM AND GENERAL VOTE. SFNB's Bylaws provide that a majority of the
outstanding shares of SFNB stock entitled to vote, represented in person or by
proxy, shall constitute a quorum. The Holding Company's Bylaws provide that the
holders of one-third of the outstanding shares entitled to vote, present in
person or by proxy, constitutes a quorum unless otherwise provided by statute or
the Certificate of Incorporation. The Holding Company's Bylaws provide that
action on a matter (other than the election of directors) is approved if the
votes cast favoring the action exceed the votes cast opposing the action, unless
the Certificate of Incorporation or the DGCL requires a greater number of
affirmative votes. The Holding Company's Bylaws further provide that directors
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shall be elected by a plurality of the votes cast by the shares entitled to vote
in the election of directors. SFNB's Charter and Bylaws do not contain a general
vote provision.
SHAREHOLDER ACTION WITHOUT A MEETING. SFNB's Bylaws provide that
shareholders may take action if written consent is given by all of the
shareholders entitled to vote with respect to the matter. The Holding Company's
Bylaws provide that shareholders may take action by written consent if the
action is taken by persons who would be entitled to vote at a meeting and who
hold shares having the voting power to cast not less than the minimum number of
votes that would be necessary to authorize the action at a meeting.
SHAREHOLDER NOMINATIONS AND PROPOSALS. SFNB's Bylaws provide that
shareholders may nominate directors or make proposals to be taken up at an
annual meeting provided that such proposal is stated in writing and filed with
the Secretary of SFNB at least five days prior to the meeting. The Holding
Company's Bylaws provide that a shareholder entitled to vote for the election of
directors at a meeting may nominate candidates for election as a director if the
shareholder complies with the written notice procedures set forth in the Bylaws.
The Holding Company's Bylaws also provide that a shareholder may bring business
before an annual meeting if the shareholder complies with the written notice
procedures set forth in the Bylaws. Each of these provisions of the Holding
Company's Bylaws requires a shareholder to give notice not less than 30 nor more
than 90 days prior to the meeting unless less than 45 days' notice or public
disclosure of the date of the meeting is given, in which case the shareholder's
notice must be received within 15 days of the date of such notice or public
disclosure.
LIQUIDATION ACCOUNT. SFNB's Charter requires SFNB to maintain a
liquidation account for the benefit of its saving account holders in connection
with SFNB's conversion from mutual to stock form in 1992. If the Agreement is
approved and the Sale is consummated, SFNB's liquidation account will be
transferred to New Bank.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. SFNB's Charter
requires that a charter amendment be proposed by SFNB's Board of Directors,
receive preliminary approval from the OTS and then be approved by shareholders
by a majority of the total votes eligible to be cast at a legal meeting.
Amendments to the Holding Company's Certificate of Incorporation must be
proposed by the Board of Directors at a duly called meeting and thereafter
approved by the affirmative vote of the holders of at least a majority of the
shares entitled to vote thereon at a duly called meeting.
SFNB's Bylaws provide that the Bylaws may be amended in a manner
consistent with the regulations of the OTS by a majority vote of the full Board
of Directors or a majority vote of the votes cast by shareholders at a legal
meeting. The Holding Company's Certificate of Incorporation provides that the
Bylaws of the Holding Company may be amended by the Board of Directors or
shareholders as permitted under the DGCL, which requires, generally either a
majority vote of the Board of Directors or a majority vote of the votes cast by
shareholders at a duly called meeting of shareholders.
DISSENTERS' RIGHTS. In general, any SFNB shareholder has the right to
demand payment of the fair or appraised value of his or her stock, unless such
shareholder's stock is listed on a national securities exchange or quoted on the
Nasdaq Stock Market on the date of the meeting at which the merger or
consolidation is acted upon, or no shareholder authorization is required for the
merger or consolidation, and such shareholder is required under an agreement of
merger or consolidation to accept only (A) cash, (B) shares of stock of any
association or corporation which at the effective date of the merger or
consolidation will be listed on a national securities exchange or quoted on the
Nasdaq Stock Market, or (C) any combination of such shares of stock and cash. In
addition, such SFNB shareholder must not have voted in favor of the merger or
consolidation and must comply with the procedures set forth in the OTS
regulations. Under the DGCL, a Holding Company shareholder who has not voted in
favor of a merger or consolidation, nor consented thereto in writing, will have
the right to an appraisal by the Court of Chancery of the fair market value of
such shareholder's shares, other than in connection with a merger which does not
require
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shareholder authorization. No appraisal rights are available for (i) shares of
any stock listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., (ii) shares of stock held of record by
more than 2,000 holders or (iii) shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the vote of
the shareholders of the surviving corporation. Notwithstanding the above,
appraisal rights will be available if the Holding Company shareholders are
required by the terms of an agreement of merger or consolidation to accept for
such stock anything other than (i) shares of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof, (ii) shares of stock (or depository receipts in respect thereof) of any
corporation listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or held of record by more than 2,000
holders, (iii) cash in lieu of fractional shares or depository receipts
described above, or (iv) any combination of the above. In the event that all of
the stock of a subsidiary corporation party to a merger is not owned by the
parent corporation immediately prior to the merger, appraisal rights will be
available to the shares of the subsidiary corporation. Any corporation may
provide in its certificate of incorporation that appraisal rights shall be
available as a result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent corporation or
the sale of all or substantially all of the assets of the corporation.
RIGHT TO OBTAIN SHAREHOLDERS' LISTS AND CORPORATE RECORDS. Any SFNB
shareholder or group of shareholders holding voting shares having a cost of no
less than $100,000 or constituting not less than one percent of the total
outstanding voting shares, provided that such shares have been held of record
for a period of at least six months prior to the making of a written demand, and
any SFNB shareholder or group of shareholders holding not less than five percent
of the total outstanding voting shares, upon making a written demand stating a
proper purpose, has the right to examine nonconfidential portions of SFNB's
books and records of account, minutes and records of shareholders and to make
extracts therefrom. This right to examination may be denied if an SFNB
shareholder or group of shareholders refuses to furnish an affidavit that the
examination is not desired for any purpose which is in the interest of a
business or purpose other than the business of SFNB, that such shareholder has
not within the five years preceding the date of the affidavit sold or offered
for sale, and does not now intend to sell or offer for sale, any list of
shareholders of SFNB or of any other corporation, and that such shareholder has
not within said five-year period aided or abetted any other person in procuring
any list of shareholders for purposes of selling or offering for sale such list.
No SFNB shareholder has the right to obtain or inspect a list of borrowers or
depositors, their addresses, individual deposit or loan balances, or any data
from which such information could be reasonably constructed.
Any Holding Company shareholder, upon making a written demand under
oath stating the purpose thereof, will have the right to inspect for any proper
purpose the corporation's stock ledger, a list of its shareholders and its other
books and records, and to make copies or extracts therefrom. A proper purpose is
defined as a purpose reasonably related to such person's interest as a
shareholder. If the Holding Company refuses to permit the inspection, the
shareholder may apply to the Court of Chancery for an order to compel
inspection. Any Holding Company director also has the right to examine the
corporation's stock ledger, a list of its shareholders and its other books and
records for a purpose reasonably related to the director's position as a
director.
DIVIDENDS. The OTS regulations place limits on capital distributions
which may be made by SFNB, based on whether SFNB is classified as a Tier 1, Tier
2 or Tier 3 association. SFNB must provide the OTS with 30 days' prior written
notice of all proposed capital distributions, whether or not OTS approval is
required under the OTS regulations.
Dividends may not be paid on SFNB common stock unless there shall have
been paid, or funds set aside for payment, to the holders of any outstanding
stock having preference over the common stock as to the payment of dividends,
the full amount of dividends, and of sinking fund, retirement fund, or any other
retirement payments, if any, to which such holder are entitled. SFNB
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shareholders are entitled to distributions in the event of liquidation,
dissolution or winding up of the association only after payment of SFNB's
outstanding debts, settlement of its liquidation account, and payment to holders
of preferred shares.
Under Delaware corporation law, if a dividend, other than a dividend
being distributed pursuant to a stock split, is to be paid in shares of
theretofore unissued capital stock, the Board of Directors of the Holding
Company will be required to direct that there be designated as capital in
respect of such shares an amount not less than the aggregate par value of par
value shares being declared as a dividend, and in the case of shares without par
value being declared as a dividend, such amount as is determined by the Board of
Directors.
The Holding Company will not be permitted to (i) redeem or repurchase
its own shares of capital stock when the capital of the corporation is impaired
or would be impaired by such redemption or repurchase, except when such shares
are entitled to a preference over another class or series of stock, or if there
are no such preferred shares, when such shares shall be retired, (ii) purchase
shares redeemable at the Holding Company's option at a price higher than the
redemption price, or (iii) redeem any shares unless duly authorized and in
accordance with the DGCL and the Holding Company's Certificate of Incorporation.
TAKEOVER DEFENSE PROVISIONS
Section 203 of the DGCL is intended to discourage hostile takeovers by
impeding the ability of a hostile acquirer to consummate a merger with the
target company. In general, Section 203 provides that a person who owns 15% or
more of the outstanding voting stock of a Delaware corporation (an "Interested
Stockholder") may not consummate a merger or other business combination
transaction with the company at any time during the three-year period following
the date such person became an Interested Stockholder. The term "business
combination" is defined broadly to cover a wide range of corporate transactions
including mergers, sales of assets, issuances of stock, transactions with
subsidiaries and the receipt of disproportionate financial benefits. The statute
exempts the following transactions from the requirements of Section 203: (1) any
business combination if, prior to the date a person became an Interested
Stockholder, the board of directors approved either the business combination or
the transaction in which such person became an Interested Stockholder; (2) any
business combination involving a person who acquired at least 85% of the
outstanding voting stock in the transaction in which he became an Interested
Stockholder; (3) any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of the shares not
owned by the Interested Stockholder; and (4) business combinations that are
proposed after the company has received other acquisition proposals and which
are approved or not opposed by a majority of the unaffiliated members of the
board of directors.
Federal law provides that in general, no person acting directly or
indirectly or through or in concert with one or more other persons may acquire
"control" of a savings institution or the holding company thereof without giving
at least 60 days prior written notice providing specified information to the
OTS. This law would apply to the acquisition of "control" of SFNB or the Holding
Company. "Control" is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25% of any class of voting stock of the
institution or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or of more than 25% of any class of stock, where
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit the acquisition of control if the agency finds, among other things,
that (i) the acquisition would result in a monopoly or substantially lessen
competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or (iii) the competence,
experience or integrity of any acquiring person or any of the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
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The Georgia Code provides that, in general, no person acting directly
or indirectly or through or in concert with one or more persons, may acquire the
power to direct the management or policies of a bank holding company, which
definition in the Georgia Code includes a holding company of a federal savings
bank, or to vote 25% or more of any class of voting securities of a bank holding
company, without giving at least 60 days prior written notice providing
specified information to the Georgia Department. The Georgia Department may
prohibit the acquisition of control for the same reasons that an acquisition of
control of a savings and loan holding company or a savings institution may be
prohibited by the OTS.
THE BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PLAN AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
THE SALE OF SFNB'S BANKING BUSINESS
(PROPOSAL 2)
The following description should be read in conjunction with the
Agreement, which is attached as Appendix C to this Proxy Statement/Prospectus.
THE COMPANIES INVOLVED IN THE SALE OF SFNB'S BANKING BUSINESS
For information about SFNB, the Holding Company, New Bank, S1, Royal
Bank and RBC Holdings, see "Summary -- The Companies," "Information about SFNB,"
"The Holding Company Reorganization" and "Additional Information about the
Holding Company."
THE SFNB/ROYAL BANK TRANSACTIONS
In March 1998, SFNB and S1 entered into several agreements with Royal
Bank and RBC Holdings, including the Agreement. The Agreement was entered into
on March 9, 1998 among Royal Bank, RBC Holdings and SFNB. The Agreement was
amended on June 5, 1998. After its organization, the Holding Company became a
party to the Agreement. The Agreement provides for, among other things, the Sale
of SFNB's Banking Business to RBC Holdings. For information about the other
agreements entered into among SFNB, S1 and RBC Holdings in March 1998, see "--
Other Related Agreements" below.
BACKGROUND OF THE SALE
In May 1997, management of SFNB began discussions with both its Board
of Directors and the OTS regarding a variety of strategic alternatives,
including the sale of its banking operations. In June 1997, SFNB began
discussions with a major financial institution regarding the licensing of S1's
technology. As part of these discussions, SFNB proposed to sell its Internet
banking operations with the existing technology fully operating. The major
financial institution considered the offer for nearly two months.
Following the initial discussions to sell the banking operations,
SFNB's Board of Directors adopted a formal plan to sell its banking assets and
related liabilities in order to concentrate its efforts on the rapidly growing
Internet software development and data processing segment of its business. As a
result, SFNB's banking assets held for sale are presented net of the related
liabilities in the consolidated balance sheets that form a part of the financial
statements of SFNB attached to this Proxy Statement/Prospectus as Appendix G,
and the losses from the banking operations are reflected in the consolidated
statements of operations as discontinued operations. SFNB also entered into a
formal engagement with FBR as financial advisor to solicit bids for the sale of
the banking operations. In October, FBR sent out 75 marketing packages relating
to the sale of the banking operations, and SFNB publicly disclosed its intention
to sell its banking operations. In response, FBR received approximately 7
indications of interest and set up 4 meetings to discuss the sale with these
interested parties.
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In December 1997, SFNB's management solicited, through personal
contacts, interest in the banking operations sale from a major regional
financial institution, which proposed to acquire the banking operations,
including the purchased technology held by SFNB for VBM and Virtual Credit Card
Manager ("VCCM"), for a price of $15 million, and $5 million of SFNB Common
Stock. During that same time period, SFNB's management approached a senior
official of Royal Bank to discuss a sale of the banking operations to Royal
Bank.
In January 1998, SFNB and Royal Bank began to outline general terms and
conditions relating to sale of the banking operations. During these discussions,
Royal Bank officials expressed an interest in S1's Strategic Tactical Advisory
Relationship ("STAR") partnership program, including the related technology
agreements and purchase of $1 million of SFNB Common Stock.
The Board of Directors considered the proposed terms of transactions
with both the regional bank and Royal Bank. Based upon the potential future
revenues for S1 associated with the larger customer base of Royal Bank, the
Board authorized management to proceed with discussions with Royal Bank.
Subsequently, in February 1998, SFNB and Royal Bank refined the terms and
conditions of the proposed transactions and agreements. At Royal Bank's request,
SFNB proposed to Royal Bank a $10 million equity investment in S1 which was
structured as an option for Holding Company Common Stock, with tiered pricing.
On March 6, 1998, the SFNB Board of Directors reviewed with management,
outside counsel and FBR, the preliminary proposed transaction between Royal Bank
and SFNB. On March 9, 1998, the SFNB Board of Directors approved the Sale, the
Options and the Other Agreements (defined below).
RECOMMENDATION OF THE SFNB BOARD OF DIRECTORS AND REASONS FOR THE SALE
The Board of Directors of SFNB has approved the Agreement and has
determined that the Sale is fair to, and in the best interests of, SFNB and its
shareholders. THE SFNB BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF SFNB
STOCK VOTE TO APPROVE AND ADOPT THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. If the Agreement is not approved, the Holding Company still intends to
discontinue all banking operations. No determination has been made as to how the
Holding Company would implement the discontinuation of banking operations if the
Agreement is not consummated. This strategic shift from the banking business
reflects the Board's determination (i) that the Holding Company's capital, which
is not an unlimited amount, can better be deployed in the technology business
than the banking business, (ii) that the Holding Company would be better served
by eliminating the cost, burden and limitations of the bank regulatory
environment, (iii) that to an increasing degree, SFNB is viewed by potential S1
customers as a competitor; and (iv) that there is no longer a need to have SFNB
as a testing platform for VBM since the basic application is now operational.
In reaching its decision to approve the Agreement, the SFNB Board of
Directors consulted with its outside legal counsel regarding the legal terms of
the proposed Sale and the Board's fiduciary obligations in its consideration of
the proposed Sale, its financial advisor, FBR, regarding the financial aspects
and fairness of the proposed Agreement, as well as with the management of SFNB
and, without assigning any relative or specific weight, considered the
following, which are all of the material factors considered, both from a
short-term and a long-term perspective:
(i) The SFNB Board of Directors' familiarity with, and
review of the business, financial condition, results
of operations and prospects of SFNB and S1,
including, but not limited to, their potential
growth, development, productivity and profitability
and the business risks associated therewith.
Accordingly, the Board determined that the Holding
Company's capital, which is not an unlimited amount,
can better and more profitably be deployed in the
technology business than the banking business.
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(ii) The current and prospective environment in which SFNB
operates, including national and local economic
conditions, the highly competitive environment for
financial institutions generally, the increased
regulatory burden on financial institutions, and the
trend toward consolidation in the financial services
industry. Accordingly, the Board determined that the
prospects for building a profitable banking
franchise, in light of the various regulatory and
capital requirements, was not likely without
significantly adversely impacting the ability of S1
to continue to develop its technology business.
(iii) Information concerning the business, financial
condition, results of operations, asset quality and
prospects of Royal Bank, including the future growth
prospects of Royal Bank after the acquisition of
SFNB's Banking Business by RBC Holdings, the
potential benefits expected from the Sale, the other
agreements entered into among SFNB, S1 and RBC
Holdings and the business risks associated therewith.
In particular, the Board determined that given the
business, financial condition and prospects of Royal
Bank, the potential benefits to S1 with Royal Bank as
a major customer outweigh the potential benefits of
operating SFNB as a stand-alone bank.
(iv) The fact that the Sale would not result in any
significant current taxes payable.
(v) The potential for appreciation and growth in the
market and book value of the Holding Company Stock
after the Reorganization and the Sale.
(vi) The oral presentation and opinion of FBR that the
sale price of SFNB's Banking Business is fair to
SFNB's common shareholders from a financial point of
view. The oral presentation of FBR reviewed the
opinion, and the methodology used to arrive at that
opinion. See "--Opinion of SFNB's Financial Advisor."
(vii) The advantages and disadvantages of SFNB retaining
its Banking Business, as referred to above.
On the basis of these considerations, the Agreement was approved, and
the Board of Directors recommends that the SFNB shareholders vote "FOR" approval
of the Agreement and the transactions contemplated thereby.
PURPOSE AND EFFECTS OF THE SALE
The purpose of the Agreement is to sell SFNB's Banking Business to RBC
Holdings. The Banking Business will consist of the Acquired Assets and Assumed
Liabilities and all operations related thereto that will be transferred to New
Bank in the Reorganization. After the Sale is consummated, RBC Holdings will own
New Bank, then known as "Security First Network Bank." After the Sale, S1 will
provide services to and have an ongoing relationship with New Bank and RBC
Holdings through the other agreements among S1, SFNB and RBC Holdings, but
neither S1 nor the Holding Company will have an ownership interest in New Bank
or SFNB's Banking Business.
DESCRIPTION OF SFNB'S BANKING BUSINESS
The Banking Business to be contributed to New Bank pursuant to the Plan
and then sold to RBC Holdings pursuant to the Agreement will consist only of the
Acquired Assets, the Assumed Liabilities and any and all operations related
thereto. The "Acquired Assets" will consist of the stock of SFNB Investment,
Inc. and the other banking-related assets listed in schedules to the Agreement
plus or minus, as the case may be, all assets acquired or disposed of until the
Closing in the ordinary course consistent with past practice and in accordance
with the Agreement, to be
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reflected in an updated list of such assets to be delivered to RBC Holdings
prior to the Closing. The "Assumed Liabilities" will consist of all deposit
liabilities of SFNB, the liabilities listed in schedules to the Agreement and
such deposits or liabilities of the type listed incurred in the ordinary course
of business consistent with past practice and in accordance with the Agreement,
to be reflected in an updated schedule of such liabilities delivered to RBC
Holdings prior to the Closing. The Agreement provides that the Assumed
Liabilities will not include any liabilities of SFNB or the Holding Company that
are not included in the initial or updated schedule to the Agreement, including
but not limited to litigation and environmental matters. As of the date of the
Agreement, the Acquired Assets and Assumed Liabilities consisted of all of the
assets and liabilities used in the Banking Business except for certain loans of
SFNB related to the former Pineville, Kentucky operations. The Agreement also
provides that notwithstanding any losses incurred by the Banking Business, as of
the Closing, SFNB and the Holding Company shall cause the Banking Business to
have a minimum of $10 million of total regulatory capital (as calculated in
accordance with Part 567 of the regulations of the OTS) (the "Transferred
Capital"). Accordingly, SFNB will include with the Acquired Assets $10.0 million
of assets that qualify as regulatory capital in excess of the Assumed
Liabilities, thereby making the net equivalent purchase price $3.0 million. As
of June 30, 1998, the Banking Business included $59.5 million each of Acquired
Assets and Assumed Liabilities, before giving effect to the additional $10.0
million of Transferred Capital. The Agreement also provides that the Banking
Business will not include (i) any capital stock of S1, (ii) inter-company
accounts payable from S1 to SFNB or (iii) the amount of cash or cash equivalent
assets on the books of SFNB immediately prior to the Sale in excess of the
Transferred Capital. Also, the New Bank Shares will not be included in the
Banking Business. In addition, upon the Closing of the Sale, RBC Holdings shall
pay to the Holding Company an additional sum equal to $1,250 per day for each
day beginning on the date of receipt of shareholder approval by SFNB of the Plan
and the Agreement and ending on the day before the Closing Date, up to an
aggregate maximum of $300,000.
STRUCTURE OF THE SALE
On the Closing Date, New Bank will be organized with SFNB as its sole
shareholder. At that time, New Bank will have 1,000 shares of common stock, par
value $0.01 per share (the New Bank Shares) outstanding. As part of the
Reorganization, SFNB will contribute its Banking Business to New Bank and the
Holding Company will acquire the New Bank Shares. Immediately following the
Reorganization, the Holding Company will sell the New Bank Shares to RBC
Holdings for the Purchase Price (defined below). As a result of the purchase of
the New Bank Shares by RBC Holdings, New Bank, then known as "Security First
Network Bank," will become a wholly owned subsidiary of RBC Holdings.
The closing of the purchase and sale of the New Bank Shares shall occur
at that moment (the "Closing") immediately subsequent to the consummation of the
Reorganization pursuant to the Plan. The date upon which the Closing occurs is
referred to as the "Closing Date." The Agreement provides that the Closing shall
take place no later than 10 business days following receipt of all shareholder
and regulatory approvals necessary to consummate the transactions contemplated
by the Plan and the Agreement.
PURCHASE PRICE AND HOLDBACK AMOUNT
Pursuant to the Agreement, RBC Holdings will purchase the New Bank
Shares from the Holding Company for an aggregate amount of $13 million (the
"Purchase Price"), subject to increase as described below. However, the
Agreement also provides that New Bank must have $10.0 million of assets that
qualify as regulatory capital in excess of liabilities, thereby making the net
equivalent purchase price $3.0 million. In addition, upon the Closing of the
Sale, RBC Holdings shall pay to the Holding Company an additional sum equal to
$1,250 per day for each day beginning on the date of receipt of shareholder
approval by SFNB of the Plan and the Agreement and ending on the day before the
Closing Date, up to an aggregate maximum of $300,000. On the Closing Date, RBC
Holdings shall pay the Holding Company $11.5 million in immediately available
funds. Furthermore, 18 months after the Closing Date, RBC Holdings shall pay the
Holding Company an
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amount equal to $1.5 million (plus accrued interest), less the amount of any
claims that have been asserted against the Holding Company in connection with
the Holding Company's indemnification obligations under the Agreement and any
breach of contract claim under the Agreement.
REGULATORY APPROVALS
Consummation of the Sale is conditioned on receipt of the required
regulatory approvals of the OTS, the Federal Reserve Board, the Georgia
Department and the Minister of Finance. SFNB and Royal Bank have agreed to
cooperate and use their commercially reasonable efforts to obtain all required
regulatory approvals. Applications for approvals from the OTS and the Minister
of Finance have been filed and are pending. The Federal Reserve Board and the
Georgia Department already have approved the sale of the New Bank Shares to RBC
Holdings. Neither SFNB nor Royal Bank is aware of any reason why all regulatory
approvals required in connection with the Sale should not be obtained.
Royal Bank, RBC Holdings (USA) Inc. (a wholly owned direct subsidiary
of Royal Bank and the direct owner of all of the outstanding stock of RBC
Holdings), and RBC Holdings have filed with the OTS an application under the
HOLA, and the regulations promulgated thereunder, for approval to acquire New
Bank and thereby become savings and loan holding companies. In reviewing the
application, the OTS will review and consider the financial and managerial
resources and future prospects of the applicants and New Bank, the effect of the
acquisition on New Bank, the risk to the federal deposit insurance fund, the
competitive effects of the transaction, and the convenience and needs of the
community to be served. Consideration of the managerial resources of the
applicants and New Bank entails a consideration of the competence, experience,
and integrity of the officers, directors and controlling shareholders of the
applicants and New Bank. Since Royal Bank is a foreign bank, the review by the
OTS will consider whether Royal Bank is subject to comprehensive supervision or
regulation on a consolidated basis in Canada. In deciding whether to approve
this type of application, the OTS also considers the records of performance of
the relevant insured depository institutions under the Community Reinvestment
Act of 1977, as amended (the "CRA"), in meeting the credit needs of the
communities they serve, including low- and moderate-income neighborhoods.
Neither Royal Bank nor the other applicants or their respective affiliates
currently are subject to the CRA. The application process of the OTS requires
the publication of notice of, and an opportunity for public comment with respect
to, the application filed under the HOLA, and the OTS is authorized to hold
informal and formal meetings in connection therewith if the OTS, after reviewing
the application and other materials, determines it is desirable to do so or
receives a request for an informal meeting. The OTS has received a CRA-related
comment and a request for a meeting on the Royal Bank application from a
community group. The group has raised certain procedural questions about the
filing of the application, and has requested that the OTS dismiss or deny the
application, or delay taking action on the application until the OTS holds a
meeting with the group to discuss the application and Royal Bank's CRA plan for
New Bank. Royal Bank responded to the comment and maintained that there was no
basis for the group's requests. Subsequently, the OTS has deemed the application
to be complete and has denied the community group's request for a meeting on the
application.
In connection with the proposed acquisition of New Bank by RBC
Holdings, SFNB filed a request with the OTS under the HOLA and the regulations
promulgated thereunder with regard to the designated home and branch offices of
New Bank. In response, the OTS has indicated that it would not object to the
proposed temporary relocation of New Bank's home office in connection with the
Sale.
Royal Bank has filed an application with the Superintendent for
approval, upon the recommendation of the Superintendent, of the Minister of
Finance under the Bank Act (Canada) to indirectly acquire all of the New Bank
Shares. The Minister of Finance may delegate the power to grant such approval to
any Minister of State for Canada appointed to assist the Minister of Finance.
Upon acquiring control of New Bank, Royal Bank must obtain from New Bank an
undertaking to
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provide the Superintendent with reasonable access to its records. Also, the
Superintendent may require that Royal Bank provide it with undertakings
concerning New Bank and its activities.
Royal Bank and SFNB are not aware of any other material governmental
approvals that are required for consummation of the Sale except as described
above. Should any other approval or action be required, it is contemplated
presently that such approval would be sought.
THE ACQUISITION OF SFNB'S BANKING BUSINESS BY RBC HOLDINGS CANNOT
PROCEED IN THE ABSENCE OF THE REQUIRED REGULATORY APPROVALS FROM THE OTS AND THE
MINISTER OF FINANCE. THERE CAN BE NO ASSURANCE THAT SUCH APPROVALS WILL BE
OBTAINED OR AS TO THE DATE OF SUCH APPROVALS.
CONDITIONS TO THE AGREEMENT
The purchase and sale of the New Bank Shares pursuant to the Agreement
is subject to the consummation of the Reorganization pursuant to the Plan.
The obligations of RBC Holdings under the Agreement to consummate the
purchase of SFNB's Banking Business are subject further to the satisfaction or
waiver as of the Closing Date of the following conditions:
(i) the representations and warranties of the Holding
Company and SFNB contained in the Agreement or any
documents delivered to RBC Holdings in connection
therewith shall be true and correct in all material
respects as of the Closing Date;
(ii) the Holding Company, SFNB and New Bank shall have
performed and complied with all covenants and
agreements required to be performed by such parties
pursuant to the Agreement at or prior to the Closing;
(iii) all regulatory approvals shall have been obtained and
shall be in full force and effect, no proceedings
shall have been instituted or threatened by a
governmental entity related thereto, all applicable
waiting periods with respect to such approvals shall
have expired or been terminated, all conditions
prescribed by such regulatory approvals to be
satisfied by the Closing Date shall have been
satisfied and no regulatory approval shall have
imposed any condition or requirement, including
without limitation with respect to capital
requirements, that is or would become applicable
after the Closing Date to RBC Holdings, New Bank or
Royal Bank or any affiliate thereof which RBC
Holdings or Royal Bank, in good faith, determines
would be unduly burdensome upon RBC Holdings, New
Bank or Royal Bank or any affiliate thereof or the
conduct of the business of such entities after the
Closing, in each case as such business was conducted
prior to the Closing Date or as such business is
anticipated to be conducted after the Closing Date as
described in the applications for regulatory
approvals;
(iv) the Holding Company, SFNB and New Bank shall have
obtained all consents, approvals, waivers and other
actions necessary in connection with the Sale of the
New Bank Shares and the consummation of the
transactions contemplated by the Plan or the
Agreement or to enable New Bank to continue the
Banking Business after the Closing in all material
respects in the same manner as such business is
conducted by SFNB prior to the Closing;
(v) no governmental entity or regulatory authority as a
result of any examination or investigation shall have
imposed any condition or requirement, including
without limitation with respect to regulatory capital
requirements, that is or
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would become applicable to RBC Holdings, New Bank or
Royal Bank or any affiliate thereof after the Closing
Date which RBC Holdings or Royal Bank, in good faith,
determines would be unduly burdensome on such
entities or the conduct of the business after Closing
of such entities, in each case as such business was
conducted prior to the Closing Date;
(vi) no governmental entity shall have deemed RBC Holdings
or Royal Bank to have a controlling influence over
S1;
(vii) no action, suit or proceeding shall be pending or
threatened that would prevent the consummation of any
of the transactions contemplated by the Plan or the
Agreement or impose damages or restrict the
consummation of the transactions contemplated by the
Plan and the Agreement;
(viii) at least two-thirds of the outstanding shares of SFNB
Common Stock and SFNB Preferred Stock shall have
approved the Plan and the transactions contemplated
thereby, and at least a majority of the outstanding
shares of SFNB Common Stock and at least two-thirds
of the outstanding shares of SFNB Preferred Stock
shall have approved the Agreement and the
transactions contemplated thereby;
(ix) RBC Holdings shall have received an opinion of SFNB's
counsel in a form reasonably satisfactory to the
counsel of RBC Holdings;
(x) the Holding Company shall have delivered to RBC
Holdings a certificate for the New Bank Shares;
(xi) there shall not have been any material adverse change
in the business, financial condition or results of
operations of the Banking Business, SFNB or S1 at the
Closing Date from December 31, 1997;
(xii) notes payable, accounts receivable, advances, loans
and amounts owing to New Bank by the Holding Company,
SFNB, or S1 by any officer, employee, director,
insider or certain persons formerly serving in such
capacities generally shall have been repaid in full
to New Bank; and
(xiii) a general banking moratorium or suspension of
payments in respect of banks shall not have occurred
and be continuing in the United States and Canada.
The obligations of the Holding Company under the Agreement to
consummate the Sale are subject further to the satisfaction or waiver as of the
Closing Date of the following conditions: (i) the representations and warranties
of Royal Bank and RBC Holdings contained in the Agreement or any documents
delivered in connection therewith shall be true and correct in all respects as
of the Closing Date; (ii) RBC Holdings shall have performed and complied with
all covenants and agreements required to be performed by it pursuant to the
Agreement at or prior to the Closing Date; (iii) the Holding Company shall have
received an opinion of counsel for RBC Holdings reasonably satisfactory to the
counsel of the Holding Company; (iv) RBC Holdings shall have paid $11.5 million
to the Holding Company; and (v) no action, suit or proceeding shall be pending
or threatened that would challenge the transactions contemplated by the
Agreement or otherwise seek damages or seek to restrain the transactions
contemplated by the Agreement.
CONDUCT OF BANKING BUSINESS PENDING THE SALE
The Agreement contains various restrictions on the operations of SFNB
though the Closing Date. In general, the Agreement obligates SFNB to use
reasonable efforts to preserve and continue the operation of the Banking
Business in the ordinary course, with certain specific limitations on the
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lending activities of SFNB and other practices. SFNB is prohibited by the
Agreement from voluntarily making any changes in any of its methods of
accounting or accounting principles and practices or reclassifying or changing
in any manner the outstanding shares of capital stock of SFNB or issuing or
agreeing to issue, sell, transfer, pledge, encumber or deliver any stock, bond,
debenture or other security of SFNB other than as contemplated pursuant to the
Plan, the Agreement or in accordance with the terms of such stock. Also, under
the terms of the Agreement, SFNB may not, among other things, grant any increase
in the compensation payable to any officer, director, consultant, employee or
agent of SFNB that is to be employed by New Bank except compensation increases
in the ordinary course consistent with past practice; enter into or agree to
enter into any bonus, profit-sharing, retirement, stock purchase, stock option,
deferred compensation, incentive compensation or similar plan, contract or
understanding providing for employee benefits; enter into any contract except in
the ordinary course of business or make, amend or terminate any material
agreement; or amend the Charter or the Bylaws of SFNB.
THIRD PARTY PROPOSALS
The Agreement provides that none of the Holding Company, SFNB or New
Bank may directly or indirectly solicit, initiate or encourage or participate
in, or cooperate with, any negotiation for any third party takeover proposal and
it obligates the Holding Company, SFNB and New Bank to immediately notify Royal
Bank and RBC Holdings if any such inquiry is made. The Agreement also provides
that the Boards of Directors of SFNB and the Holding Company shall not accept,
approve, adopt or recommend a third party takeover proposal, and that the
Holding Company, SFNB and New Bank shall not assist in the preparation of or
file a regulatory application related to a third party takeover proposal unless
otherwise required by a government agency. In agreeing to these provisions, the
Board of Directors considered that SFNB had publicly announced in the third
quarter of 1997 its desire to sell its banking operations and that SFNB, through
FBR and its own contacts in the financial institutions industry, had widely
marketed the banking operations. Furthermore, the Board of Directors considered
that there could be a significant period of time from execution of the Agreement
until the Closing Date, and that the Board of Directors, as well as RBC
Holdings, desired that the agreement be consummated. Given the marketing of the
sale of banking operations, the Board of Directors does not consider these
provisions to be material in recommending the Agreement and the transactions
contemplated thereby. See "-- Background of the Sale."
EXPENSES AND OPERATING LOSSES
The Agreement provides that the Holding Company or SFNB shall pay the
following expenses, taxes and liabilities: (i) the fees and expenses of any
person retained by the Holding Company, SFNB or, prior to the Closing Date, New
Bank, for brokerage, financial advisory, investment banking or finder's services
in connection with the Sale of the New Bank Shares; (ii) fees and expenses of
legal counsel, auditors and accountants of the Holding Company, SFNB or, prior
to the Closing Date, New Bank, for services in connection with the Sale of the
New Bank Shares; and (iii) any income, capital gains or other tax incurred by
the Holding Company, SFNB or New Bank as a result of the consummation of the
transactions contemplated by the Plan and the Agreement. The Agreement also
provides that SFNB shall bear the costs of preparing and mailing this Proxy
Statement/Prospectus and obtaining the necessary approvals for the Proxy
Statement/Prospectus. The Agreement further provides that each party shall pay
all costs, fees and expenses incurred in connection with obtaining all
regulatory approvals relating to such party. The Company's expenses, taxes, and
liabilities associated with the Sale (exclusive of the acceleration of vesting
of stock options) are expected to be approximately $350,000, which primarily
consists of investment banking, legal, and accounting fees. The Holding Company
does not expect to incur any material income tax liabilities on the Sale because
of net operating loss carryforwards available to offset any gain.
Pursuant to the Agreement, in consideration of operating losses that
the Banking Business is expected to incur in the ordinary course of business
prior to the Closing, beginning on the date of receipt of shareholder approval
by SFNB of the Plan, the Agreement and the transactions contemplated thereby,
RBC Holdings shall pay to the Holding Company $1,250 per day, up to but
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excluding the Closing Date, to an aggregate maximum of $300,000. The Agreement
further provides that RBC Holdings must make such a payment in the event that
the Agreement is terminated prior to Closing and that neither this obligation
nor SFNB's incurrence of operating or other losses shall affect the amount of
Transferred Capital to be included in the Acquired Assets.
NON-COMPETE AND EMPLOYEE MATTERS
Pursuant to the Agreement, the Holding Company has agreed that for the
three year period commencing on the Closing Date, the Holding Company, or any
company controlled directly or indirectly by the Holding Company (including S1)
will not directly or indirectly (i) engage in business as a depository
institution, trust company or similar entity or engage in the business of
providing insurance, securities brokerage, lending or investment products or
services directly or as agent to consumers (other than providing financial
software and support services to such institutions) within the United States; or
(ii) solicit for the employment of employees, officers or directors, either as
of the Closing Date or thereafter, of New Bank, RBC Holdings or Royal Bank or
any affiliate or successor and assign of such entities other than through a
general solicitation for employment to which such persons may be exposed. The
Agreement provides that ownership of less than 1% of the outstanding shares of
any class of capital stock of a publicly held corporation shall not be
prohibited by such limitation. The Agreement further provides that New Bank
shall own specified trade names as of the Closing Date and that such trade names
may not be used in a competing business by the Holding Company, SFNB or their
affiliates.
The Agreement also provides that SFNB shall not prohibit Royal Bank and
RBC Holdings from making employment offers on behalf of New Bank for certain
employees and that SFNB shall cause all contributions by SFNB to SFNB's 401(k)
plan to fully vest with respect to each SFNB employee who is retained by New
Bank after the Closing Date. The Board of Directors of SFNB has approved the
vesting of all non-vested options of officers and employees who are anticipated
to be retained by New Bank after the Closing Date. As a result, SFNB has
incurred a charge to income of approximately $450,000 which is computed as the
difference between the market value of SFNB Common Stock on the measurement date
and the per share exercise price for all options in which vesting was
accelerated. The charge will be reflected in the Company's results of operations
for three months ended June 30, 1998.
OTHER PROVISIONS OF THE AGREEMENT
Under the Agreement, SFNB and the Holding Company have made
representations and warranties to RBC Holdings. The material representations and
warranties are those with regard to (i) the power and capacity of SFNB and the
Holding Company; (ii) the capitalization of New Bank; (iii) the organization,
insurance of deposits and corporate records of New Bank; (iv) the ownership and
title to the New Bank Shares; (v) the Acquired Assets and Assumed Liabilities;
(vi) conflicting instruments, consents and regulatory approvals; (vii)
subsidiaries; (viii) financial statements; (ix) real property; (x) personnel;
(xi) labor matters; (xii) environmental matters; (xiii) ERISA and non-ERISA
plans of New Bank; (xiv) compliance with law; (xv) activities comprising the
Banking Business; (xvi) litigation; (xvii) regulatory matters; (xviii) material
contracts; (xix) conduct of business; (xx) tax matters; (xxi) insurance; (xxii)
trade names and intellectual property; (xxiii) related party transactions;
(xxiv) permits; (xxv) proxy statement/prospectus, regulatory applications and
other documents; (xxvi) site locations; (xxvii) loans; (xxviii) allowance for
losses; (xxix) derivatives and risk management instruments; (xxx) technology
systems (including Year 2000 functionality); and (xxxi) brokers' and finders'
fees.
Under the Agreement, RBC Holdings has made representations and
warranties to SFNB and the Holding Company. The material representations and
warranties of RBC Holdings are those with regard to (i) organization and
authority; (ii) conflicting instruments; (iii) litigation; (iv) regulatory
approvals; (v) statements in the proxy statement/prospectus; and (vi) regulatory
matters.
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TERMINATION AND AMENDMENT OF THE AGREEMENT
The Agreement may be terminated as summarized below:
(i) by mutual written consent of SFNB and the Holding
Company on the one hand and RBC Holdings and Royal
Bank on the other, at any time whether or not
approved by SFNB's shareholders;
(ii) by any of the parties if the Closing has not occurred
by September 30, 1998;
(iii) by SFNB and the Holding Company on the one hand and
RBC Holdings and Royal Bank on the other upon written
notice if an applicable law is enacted or becomes
applicable that makes the consummation of the actions
contemplated by the Plan or the Agreement illegal or
otherwise prohibited, or if any judgment enjoining
any party from consummating such transactions is
entered and becomes final and nonappealable;
(iv) by SFNB and the Holding Company on the one hand and
RBC Holdings and Royal Bank on the other (x) upon the
expiration of 15 calendar days after a denial or
refusal to grant a required regulatory approval by a
governmental authority; (y) if a regulatory approval
shall have imposed any condition or requirement,
including without limitation with respect to
regulatory capital requirements, that is or would
become applicable to RBC Holdings, New Bank or Royal
Bank or any affiliate thereof after the Closing Date
which RBC Holdings or Royal Bank, in good faith,
determines would be unduly burdensome upon such
entities or the conduct of the business of such
entities after the Closing, in each case as such
business was conducted prior to the Closing Date or
as such business is anticipated to be conducted after
the Closing Date as described in the regulatory
applications; or (z) if any regulatory authority
indicates to the parties that any regulatory
application should be withdrawn or will be returned;
(v) by Royal Bank and RBC Holdings, in the event of a
material breach or inaccuracy of a representation or
warranty of the Holding Company or SFNB contained in
the Agreement or any document delivered pursuant to
it by SFNB or the Holding Company, or a breach of a
covenant or failure of any condition to which the
obligations of RBC Holdings are subject; or
(vi) by SFNB and the Holding Company, in the event of a
material breach or inaccuracy of a representation or
warranty contained in the Agreement or any document
delivered pursuant to it by RBC Holdings or Royal
Bank or a breach of a covenant or failure of any
condition to which the obligations of SFNB and the
Holding Company are subject;
The Agreement may be amended in writing by the parties.
OPINION OF SFNB'S FINANCIAL ADVISOR
The Board of Directors of SFNB retained the services of FBR as
financial advisor to SFNB and FBR agreed to render a fairness opinion regarding
the consideration to be received in a sale transaction involving SFNB's banking
assets. SFNB has received an opinion from FBR that the sale price for SFNB's
Banking Business is fair, from a financial point of view, to the holders of SFNB
Common Stock. In connection with the Sale and contingent upon consummation of
the Sale, FBR will receive a fee of $90,000.
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Pursuant to the terms of its engagement, FBR agreed to assist SFNB in
analyzing, structuring, negotiating and effecting the Sale. FBR represents
itself as a nationally recognized investment banking firm with substantial
experience in transactions similar to the Sale, and is familiar with SFNB and
its business. As part of its investment banking business, FBR is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions.
As part of its engagement, representatives of FBR, via teleconference,
attended the meeting of the SFNB Board of Directors held on March 9, 1998 at
which the SFNB Board of Directors considered the Agreement. On March 9, 1998,
FBR rendered a written opinion that, as of such date, the Purchase Price
pursuant to the Agreement was fair to the stockholders of SFNB from a financial
point of view. The full text of FBR's written opinion dated March 9, 1998, is
attached at Appendix A to this Proxy Statement/Prospectus and is incorporated
herein by reference. Shareholders are urged to read the FBR opinion in its
entirety.
FBR'S OPINION IS DIRECTED TO THE SFNB BOARD AND ADDRESSES ONLY THE
PURCHASE PRICE. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO PROCEED
WITH THE SALE AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SFNB SHAREHOLDER
AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SFNB MEETING OR ANY OTHER MATTER
IN CONNECTION THEREWITH.
FBR has informed SFNB that in arriving at its written opinion, FBR,
among other things: (i) reviewed the SFNB Annual Report to Stockholders for the
fiscal year ended December 31, 1996 and the Annual Report on Form 10-KSB filed
with the OTS for the fiscal year ended December 31, 1996; reviewed the SFNB
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997 filed with the OTS; (ii) reviewed SFNB's
unaudited financial statements for the twelve months ended December 31, 1997;
(iii) reviewed the reported market prices and trading activity for the Royal
Bank common stock for the period January 1994 through March 5, 1998; (iv)
discussed the financial condition, results of operations, business and prospects
of SFNB and Royal Bank with the managements of SFNB and Royal Bank; (v) compared
the results of operations and financial condition of SFNB and Royal Bank with
those of certain publicly-traded financial institutions (or their holding
companies) that FBR deemed to be reasonably comparable to SFNB or Royal Bank, as
the case may be; (vi) reviewed the financial terms, to the extent publicly
available, of certain acquisition transactions that FBR deemed to be reasonably
comparable to the Sale; (vii) reviewed the financial terms, to the extent
publicly available, of certain acquisition transactions entered into by Royal
Bank; (viii) reviewed a copy of the Agreement; and (ix) performed such other
analyses and reviewed and analyzed such other information as FBR deemed
appropriate.
In rendering this opinion, FBR did not assume responsibility for
independently verifying, and did not independently verify, any financial or
other information concerning SFNB and Royal Bank furnished to it by SFNB or
Royal Bank, or the publicly-available financial and other information regarding
SFNB, Royal Bank and other financial institutions (or their holding companies).
FBR has assumed that all such information is accurate and complete. FBR has
further relied on the assurances of management of SFNB and Royal Bank that they
are not aware of any facts that would make such financial or other information
relating to such entities inaccurate or misleading. With respect to financial
forecasts for SFNB provided to FBR by its management, FBR has assumed, for
purposes of this opinion, that the forecasts have been reasonably prepared on
bases reflecting the best available estimates and judgments of such managements
at the time of preparation as to the future financial performance of SFNB. FBR
has assumed that there has been no material change in SFNB's assets, financial
condition, results of operations, business or prospects since December 31, 1997.
FBR did not undertake an independent appraisal of the assets or liabilities of
SFNB nor was FBR furnished with any such appraisal. FBR is not an expert in the
evaluation of allowances for loan losses, was not requested to and did not
review such allowances, and was not requested to and did not review any
individual credit files of SFNB. FBR's conclusions and opinion are necessarily
based upon economic, market and other conditions and the information made
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available to FBR as of the date of this opinion. FBR expresses no opinion on
matters of a legal, regulatory, tax or accounting nature related to the Sale.
In connection with rendering its opinion dated March 9, 1998, FBR
performed a variety of financial analyses, consisting of those summarized below.
The summary set forth below does not purport to be a complete description of the
analyses performed by FBR in this regard, although it describes all material
analyses performed by FBR The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to a partial analysis
or summary description. Accordingly, notwithstanding the separate factors
summarized below, FBR believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors considered by it,
without considering all analyses and factors, or attempting to ascribe relative
weights to some or all such analyses and factors, could create an incomplete
view of the evaluation process underlying FBR's opinion.
In performing its analyses, FBR made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of SFNB and Royal Bank. The
analyses performed by FBR are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of FBR's analysis
of the fairness to the shareholders of SFNB of the Purchase Price and were
provided to the SFNB Board in connection with the delivery of FBR's opinion. FBR
gave the various analyses described below approximately similar weight and did
not draw any specific conclusions from or with regard to any one method of
analysis. With respect to the comparison of selected companies analysis, no
public company utilized as a comparison is identical to SFNB or Royal Bank.
Accordingly, an analysis of publicly traded comparable companies and comparable
business combinations is not mathematical; rather it involves complex
considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values of the companies concerned. In addition, as described
above, FBR's opinion is just one of many factors taken into consideration by the
SFNB Board of Directors.
The projections furnished to FBR and used by it in certain of its
analyses were prepared by the senior management of SFNB. SFNB does not publicly
disclose internal management projections of the type provided to FBR in
connection with its review of the Sale, and as a result, such projections were
not prepared with a view towards public disclosure. The projections were based
on numerous variables and assumptions which are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions, and accordingly, actual results could vary significantly from those
set forth in such projections.
The following is a summary of the material analyses presented by FBR to
the SFNB Board on March 9, 1998 (the "FBR Report") in connection with its March
9, 1998 opinion.
Comparison of Selected Companies. In connection with the FBR Report,
FBR compared selected operating and stock market results of Royal Bank to the
publicly available corresponding data of SFNB and certain other companies which
FBR deemed to be relevant, including 113 thrift merger and acquisition
transactions announced between January 1, 1997 and March 9, 1998.
Price to Book Value. Using financial data for thrift merger and
acquisition transactions announced between January 1, 1997 and March 9, 1998,
FBR determined the median price to book multiple for all U.S. thrifts, thrifts
with $50 to $75 million in assets, thrifts with a return on average assets
("ROAA") less than 0% and deal sizes between $10 and $15 million are 179.0%,
150.9%, 117.4% and 169.1% respectively. Based upon SFNB's provided book value of
$9,994,000, the implied valuation of SFNB's banking division, using the price to
book multiple for all U.S. thrifts, thrifts with $50 to $75 million in assets,
thrifts with an ROAA less than 0% and deal sizes between $10 million and $15
million are $17,893,258, $15,083,944, $11,730,957, and $16,903,852 respectively.
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Price to Tangible Book Value. Using financial data for thrift merger
and acquisition transactions announced between January 1, 1997 and March 9,
1998, FBR determined the median price to tangible book multiple for all U.S.
thrifts, thrifts with $50 to $75 million in assets, thrifts with an ROAA less
than 0% and deal sizes between $10 and $15 million are 181.7%, 150.9%, 120.3%
and 170.5% respectively. Based upon SFNB's provided tangible book value of
$9,994,000, the implied valuation of SFNB's banking division, using the price to
tangible book multiple for all U.S. thrifts, thrifts with $50 to $75 million in
assets, thrifts with an ROAA less than 0% and deal sizes between $10 and $15
million are $18,159,098, $15,083,944, $12,024,781, and $17,040,769 respectively.
Tangible Book Premium to Core Deposits. Using financial data for thrift
merger and acquisition transactions announced between January 1, 1997 and March
9, 1998, FBR determined the median tangible book premium to core deposits for
all U.S. thrifts, thrifts with $50 to $75 million in assets, thrifts with an
ROAA less than 0% and deal sizes between $10 and $15 million are 10.9x, 8.0x,
3.4x and 10.4x respectively. Based upon SFNB's provided tangible book premium of
$9,994,000 and a core deposit base of $49,128,000, the implied valuation of
SFNB's banking division, using the tangible book premium to core deposits
multiple for all U.S. thrifts, thrifts with $50 to $75 million in assets,
thrifts with an ROAA less than 0% and deal sizes between $10 and $15 million are
$15,353,865, $13,904,589, $11,649,614, and $15,122,963 respectively.
Price to Last Twelve Months Earnings. Using financial data for thrift
merger and acquisition transactions announced between January 1, 1997 and March
9, 1998, FBR determined the median price to earnings for all U.S. thrifts,
thrifts with $50 to $75 million in assets, and deal sizes between $10 and $15
million are 22.9x, 21.3x, and 20.9x respectively. The price to earnings multiple
for thrifts with ROAA less than 0% is not meaningful. Since SFNB does not have
earnings for the last twelve months, valuations based on this metric are not
meaningful.
Discounted Cash Flow on Book Value. Using a discounted cash flow on
book value, FBR estimated the present value of the future streams of cash flows
that SFNB's banking division could produce on a stand-alone basis from 1997
through 2001. In this analysis, FBR assumed that SFNB performed in accordance
with the asset growth and earnings forecasts provided to FBR by SFNB's senior
management. FBR, estimated the terminal multiple between 130% and 155%. The
discounted cash flow on book value analysis indicated a reference range of
$8,652,877 to $12,349,091. The analysis was based upon SFNB senior management's
projections, which were based upon many factors and assumptions, many of which
are beyond the control of SFNB. As indicated above, this analysis is not
necessarily indicative of actual values or future results. FBR notes that the
discounted cash flow on book value was included because it is a widely used
valuation methodology, but that the results of such methodology are highly
dependent upon the numerous assumptions that must be made, including asset
growth rate, income growth rate, terminal values and discount rates.
Discounted Cash Flow on Earnings. Using a discounted cash flow on
earnings, FBR estimated the present value of the future streams of cash flows
that SFNB's banking division could produce on a stand-alone basis from 1997
through 2001. In this analysis, FBR assumed that SFNB performed in accordance
with the earnings forecasts provided to FBR by SFNB's senior management. FBR
estimated the terminal multiple between 12.0 and 14.5. The discounted cash flow
on book value analysis indicated a reference range of $4,270,681 to $5,440,560.
The analysis was based upon SFNB senior management's projections, which were
based upon many factors and assumptions, many of which are beyond the control of
SFNB. As indicated above, this analysis is not necessarily indicative of actual
values or future results. FBR notes that the discounted cash flow on earnings
was included because it is a widely used valuation methodology, but that the
results of such methodology are highly dependent upon the numerous assumptions
that must be made, including asset growth rate, income growth rate, terminal
values and discount rates.
FBR has been retained by the Board of Directors of SFNB as an
independent contractor to act as financial adviser to SFNB with respect to the
Sale. FBR is a nationally recognized investment
47
<PAGE>
banking firm which, among other things, regularly engages in the valuation of
businesses and securities, including banking institutions, in connection with
mergers and acquisitions. FBR has provided, and may provide in the future,
certain investment banking services to SFNB, for which it has received, and will
receive, customary compensation. In the ordinary course of business, FBR and its
affiliates may trade the securities of Royal Bank or SFNB for its own accounts
and the accounts of its customers, and accordingly, may from time to time hold a
long or short position in such securities.
ACCOUNTING TREATMENT
The Holding Company expects to record a gain of $1.3 million on the
Sale. See "Pro Forma Consolidated Financial Statements."
The four principal components of the transactions with Royal Bank have
been accounted for separately based on the fair value of the components. The
components consist of:
(1) Private Placement of Stock. The per share price for the SFNB
Common Stock issued to RBC Holdings in March 1998 was based upon
the average closing price of SFNB Common Stock for the 10 trading
days immediately prior to the transaction.
(2) Grant of Stock Options. The Options were valued as of March 9,
1998, with the assistance of an investment banker using the Black
Scholes model. This value is considered a cost of the Sale of the
Banking Business since the Options are exercisable only upon
closing of the Sale. Accordingly, the value of the Options is
considered in the calculation of gain on Sale of the Banking
Business.
(3) Sale of Banking Business. The sale price of the Banking Business
was $13.0 million in cash which is consistent with the
negotiations with other parties and supported by a fairness
opinion from an investment banker.
(4) Other Agreements. The Other Agreements which have been negotiated
on customary third party terms are being accounted for in the same
manner as S1's other third party agreement and licenses.
FEDERAL INCOME TAX CONSEQUENCES
The Sale of SFNB's Banking Business pursuant to the Agreement is a
fully taxable transaction for federal income tax purposes, and the SFNB
consolidated group (or as successor, the Holding Company consolidated group)
will recognize gain for federal income tax purposes as a result of the Sale. See
"Certain Federal Income Tax Consequences."
NO DISSENTERS' RIGHTS
The holders of SFNB Stock do not have dissenters' rights in connection
with the Sale.
INDEMNIFICATION
The Holding Company has agreed to indemnify New Bank, each of its
subsidiaries, RBC Holdings, Royal Bank and their affiliates (the "Buyer
Indemnified Parties") against all liabilities, claims, actions, damages and
expenses incurred by the Buyer Indemnified Parties in connection with: (i) all
liabilities and obligations arising from or as a result of New Bank's, SFNB's,
the Holding Company's or SFNB Investment, Inc.'s operations prior to the Closing
Date or based upon events, acts or omissions occurring prior to such date other
than the Assumed Liabilities; (ii) any breach of any representation or warranty
of the Holding Company or SFNB contained in the Agreement or any document
delivered at Closing by those entities; (iii) the breach of any covenant,
agreement or obligation of the Holding Company, SFNB or S1 contained in the
Agreement or any document contemplated thereby; (iv) claims with respect to
certain tax matters; and (v) any claims by
48
<PAGE>
shareholders of SFNB relating to the transactions contemplated by the Agreement
or the Plan, including claims based on breach of fiduciary duties or rights of
first refusal and violation of the Securities Act or the Exchange Act.
RBC Holdings has agreed to indemnify SFNB, its subsidiaries and
affiliates (the "Seller Indemnified Parties") against all liabilities, claims,
actions, damages and expenses incurred by the Seller Indemnified Parties in
connection with: (i) any breach of any representation or warranty of RBC
Holdings contained in the Agreement or any document delivered at Closing by RBC
Holdings, or (ii) the breach of any covenant, agreement or obligation of Royal
Bank or RBC Holdings contained in the Agreement or any document contemplated
thereby.
Claims for indemnification by any Buyer Indemnified Party or Seller
Indemnified Party other than Unlimited Claims (defined below) may not be
enforced until the aggregate of all claims for indemnification, other than
Unlimited Claims, exceeds $100,000. Once claims in excess of such amount have
been asserted, all claims above this amount may be pursued, except as otherwise
limited by the Agreement. The Agreement provides that except for Unlimited
Claims, claims for indemnification under the Agreement must be made within 18
months from the Closing Date. "Unlimited Claims" are claims based upon a
willful, grossly negligent, fraudulent or intentional misrepresentation of RBC
Holdings or the Holding Company contained in the Agreement or any document
furnished in connection with the Agreement. Claims made with respect to
representations concerning the power and capacity of SFNB and the Holding
Company, and ownership of and title to the New Bank Shares, claims with respect
to taxes, claims for breach of the obligation to consummate the transactions
contemplated by the Agreement, or claims for breach of any covenant, agreement
or obligation to be performed by RBC Holdings or the Holding Company after the
Closing are subject to different limitation periods specified in the Agreement.
OTHER RELATED AGREEMENTS
On March 9, 1998, SFNB and RBC Holdings also entered into a Common
Stock Purchase and Option Agreement, as amended on June 5, 1998 (the
"Stock/Option Agreement"). After its organization, the Holding Company became a
party to the Stock/Option Agreement. Pursuant to the Stock/Option Agreement,
SFNB issued 92,593 shares of SFNB Common Stock to RBC Holdings in a private
placement at a price of $10.80 per share and granted RBC Holdings four separate
options (the "Options") to purchase an aggregate of $10 million of Holding
Company Common Stock (733,818 shares) subject to and effective upon Closing. The
closing price of the SFNB Common Stock as reported on the Nasdaq Stock Market on
March 9, 1998, the date that RBC Holdings purchased the 92,593 shares, was
$11.75. The price paid by RBC Holdings was determined based upon the average
closing price of the SFNB Common Stock for the 10 trading days prior to the
transaction.
The four separate Options for $2.5 million of Holding Company Common
Stock are exercisable during the following time periods: (i) from the Closing
Date through the first business day 90 days after the Closing Date (the first
Option), (ii) from the Closing Date to the first business day 270 days after the
Closing Date (the second Option), (iii) from the Closing Date to the first
business day 450 days after the Closing Date (the third Option), and (iv) from
the Closing Date to the first business day 630 days after the Closing Date (the
fourth Option). The per share exercise price of the Options are $11.88, $13.07,
$14.38 and $15.81, respectively. Pursuant to the Stock/Option Agreement, upon
the Reorganization, the provisions of the agreement related to the Options will
apply to the Holding Company, references to Option shares shall be deemed to
refer to shares of capital stock of the Holding Company and references to SFNB
shall be deemed to refer to the Holding Company. The Stock/Option Agreement
provides that the Options shall terminate upon termination of the Agreement if
the Agreement terminates other than by reason of Closing thereunder.
Pursuant to the Stock/Option Agreement, if upon exercise of an Option,
RBC Holdings (including any of its subsidiaries and affiliates) would then own
more than 4.999% of the outstanding Holding Company Common Stock, the Option
shares then subject to issuance shall be shares of
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<PAGE>
Holding Company Preferred Stock. Also, the Holding Company shall not be required
to sell any shares of Holding Company Stock under an Option if such sale would
constitute a violation of any law or regulation by the Holding Company or RBC
Holdings. The Stock/Option Agreement also provides that if outstanding shares of
Holding Company Common Stock are increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Holding Company by reason of any recapitalization, reclassification, stock
split, or other increase or decrease in shares, the Option shares shall be
adjusted proportionately.
In addition, on March 9, 1998, S1, SFNB and RBC Holdings entered into
the following technology licensing and consulting agreements effective only upon
the acquisition of SFNB's Banking Business by RBC Holdings: a Strategic Tactical
Advisory Relationship License and Services Agreement (the "STAR Agreement")
between S1 and SFNB, a Remote Financial Services and Data Processing Agreement
(the "Data Center Agreement") between S1 and SFNB, and a Transition Services and
Consulting Agreement (the "Consulting Agreement" and, together with the STAR
Agreement and the Data Processing Agreement, the "Other Agreements") among S1,
RBC Holdings and SFNB. The Other Agreements will be assigned by SFNB to New Bank
in the Reorganization. Accordingly, if the Sale is approved by shareholders and
then consummated, the Other Agreements will become effective. S1 believes that
each of the Other Agreements is similar in all material respects to comparable
agreements entered into in the ordinary course of S1's business.
Through the STAR Agreement, New Bank and its affiliates will license
the VFM suite of software products from S1, S1 will provide certain maintenance
and support services and New Bank will have the opportunity to participate in
the STAR partnership program for the initial term of that agreement.
Participation in the STAR program includes a seat on the S1 Board of Directors
and working with other industry leaders on the development of current and future
S1 software programs. Pursuant to the Data Center Agreement, S1 will provide
data processing, maintenance and support, technical support and service level
agreement services for the initial five year term of that agreement, which
services will be used by New Bank and its affiliates to provide such services to
their customers through the VFM software. Both the STAR Agreement and the Data
Center Agreement contain various provisions limiting liability, providing
indemnification and related to Year 2000 matters, and permit termination of the
agreement in certain instances. The STAR Agreement provides for $5 million of
licensing fees payable at Closing and potential additional licensing fees under
certain circumstances. The Data Center Agreement provides for monthly processing
support and maintenance fees based on the number of customers using the
software. Through the Consulting Agreement, S1 will provide various transition
and consulting services related to the Banking Business as requested by RBC
Holdings and/or New Bank for one year following the Closing Date for a fee of $1
million payable on the Closing Date. S1 has agreed to indemnify RBC Holdings and
SFNB against damages and losses related to certain employee matters. For
information about the other participants in the STAR program, see "Information
about SFNB -- Description of Business -- Strategic Investors in SFNB."
THE BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR" APPROVAL
OF THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
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<PAGE>
PROPOSED INCREASE IN AUTHORIZED CAPITAL STOCK
OF THE HOLDING COMPANY
(PROPOSAL 3)
The following description should be read in conjunction with the
related Contingent Certificate Provision (Section 4.1), which is attached at
Appendix E to this Proxy Statement/Prospectus.
Under SFNB's Charter, SFNB is authorized to issue 25,000,000 shares of
SFNB Common Stock and 2,500,000 shares of preferred stock. This proposal would
increase the number of shares of Holding Company Common Stock that the Holding
Company is authorized to issue from 25,000,000 to 60,000,000 shares and increase
the number of shares of serial preferred stock that the Holding Company is
authorized to issue from 2,500,000 to 5,000,000 shares. The Board of Directors
has determined that this proposal is advisable and in the best interests of the
Holding Company, its shareholders and the shareholders of SFNB and recommends
that the holders of SFNB Common Stock vote to approve this proposal.
The number of shares of Holding Company Stock to be outstanding
immediately after consummation of the Reorganization will be the same as the
number of shares of SFNB Stock outstanding immediately prior to the
Reorganization. On the Record Date, there were 11,191,117 shares of SFNB Common
Stock and 1,174,110 shares of SFNB Preferred Stock outstanding. As a result of
consummation of the Reorganization, as of the Record Date, 11,191,117 shares of
Holding Company Stock would be issued to the holders of the 11,191,117 shares of
SFNB Common Stock and 1,174,110 shares of Holding Company Preferred Stock would
be issued to the holders of the 1,174,110 shares of SFNB Preferred Stock. In
addition, 4,098,152 shares of Holding Company Common Stock would be reserved for
issuance upon the exercise of stock options for 4,098,152 shares of SFNB Common
Stock pursuant to SFNB's stock option plans and agreements, 150,000 shares of
Holding Company Common Stock would be reserved for issuance with respect to the
Holding Company's stock option plan for directors and 1,174,110 shares of
Holding Company Common Stock would be reserved for issuance in the event of the
conversion of all of the outstanding Holding Company Preferred Stock. Upon
consummation of the Sale, 733,818 additional shares of Holding Company Common
Stock would be reserved for issuance upon the exercise of Options granted to RBC
Holdings. Pursuant to the Common Stock Purchase Agreement among SFNB, the
Holding Company and BroadVision, the Holding Company will issue 129,702 shares
of Holding Company Common Stock to BroadVision after the Reorganization and the
Sale. Pursuant to the Stock Purchase Agreement with State Farm, the Holding
Company, based on the average closing asking price per share of SFNB Common
Stock for each of the 10 trading days preceding August 3, 1998, will issue
430,478 shares of non-voting zero coupon preferred stock to State Farm after the
Reorganization and the Sale. Accordingly, if the Reorganization, the Sale and
the transactions with BroadVision and State Farm are consummated, only 7,523,101
shares of authorized but not outstanding Holding Company Common Stock and
895,412 shares of authorized but not outstanding serial preferred stock of the
Holding Company would remain available for issuance based on the number of
shares of SFNB Common Stock and preferred stock outstanding on the Record Date.
Approval of this proposal would result in the Holding Company having
42,523,101 authorized but not outstanding shares of Holding Company Common Stock
and 3,395,412 authorized but not outstanding shares of serial preferred stock
available for issuance after consummation of the transactions described in the
paragraph above based on the number of shares of SFNB Common Stock and preferred
stock outstanding on the Record Date. Although the Holding Company has no
specific plans to issue shares of Holding Company Common Stock or serial
preferred stock except as otherwise disclosed herein, the Board of Directors
believes that the increase in the authorized number of shares of capital stock
of the Holding Company as compared to SFNB is necessary to provide a sufficient
number of shares available in the future for use in connection with possible
stock dividends or splits,
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<PAGE>
raising additional capital through public offerings or private placements,
possible future mergers or acquisitions, or under employee option or stock
ownership plans.
The unissued and unreserved shares of Holding Company Common Stock
and serial preferred stock will be available for any proper corporate purpose,
as authorized by the Board of Directors, without further approval by the
shareholders of the Holding Company, except as otherwise required by law or the
rules of The Nasdaq Stock Market, Inc. Shareholders of the Holding Company do
not have any preemptive or other rights to purchase additional shares of Holding
Company Common Stock. If the Reorganization is consummated, further issuances of
additional shares of Holding Company Common Stock or securities convertible into
Holding Company Common Stock, therefore, may have a dilutive effect on holders
of SFNB Common Stock who acquire Holding Company Common Stock in the
Reorganization.
The Holding Company's Certificate of Incorporation authorizes 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 Holding 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 Holding Company Common Stock. The issuance of
preferred stock could discourage, delay or prevent a change in control of the
Holding Company and also may have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of the Holding
Company even though such a transaction might be economically beneficial to the
Holding Company and its shareholders. The Board of Directors has concluded,
however, that the potential benefits of this provision outweigh the possible
disadvantages.
THE BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR" APPROVAL OF
THE INCREASE IN THE AUTHORIZED CAPITAL STOCK OF THE HOLDING COMPANY.
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<PAGE>
PROPOSED ELIMINATION OF MONETARY LIABILITIES
OF HOLDING COMPANY DIRECTORS
(PROPOSAL 4)
The following description should be read in conjunction with the
related Contingent Certificate Provision (Section 5.3), which is attached at
Appendix E to this Proxy Statement/Prospectus.
The Board of Directors believes that the limitation of liability for
monetary damages for breach of certain fiduciary duties is necessary to attract
and retain qualified directors for the Holding Company. The proposed change to
the Certificate of Incorporation of the Holding Company would provide that no
director shall be liable to the Holding Company or its shareholders for monetary
damages for breach of fiduciary duty as a director except (i) for any breach of
the director's duty of loyalty to the Holding Company or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for the types of liability set forth in
Section 174 of the DGCL, or (iv) for any transaction from which a director
received an improper personal benefit. It also provides that any repeal or
modification of this provision by shareholders shall not adversely affect any
right or protection of a director for acts or omissions occurring prior to the
date of such repeal or modification.
Under Delaware law, the fiduciary duties of a corporate director fall
into two broad categories: the duty of care and the duty of loyalty. The
fiduciary duty of care is the duty of directors to exercise diligence and care
in managing the business and affairs of the corporation. The fiduciary duty of
loyalty requires that, in making a business decision, directors act in good
faith and in the honest belief that the action was taken in the best interests
of the corporation. Liability of directors of a Delaware corporation to the
corporation or its shareholders for breach of the duty of care requires a
finding by a court that the directors were grossly negligent.
The DGCL permits a Delaware corporation to include in its certificate
of incorporation a provision that eliminates or limits a director's personal
liability for monetary damages for breach of his or her fiduciary duty of care,
subject to the limitations discussed herein. The law was prompted in part by the
view that directors should not be subject to undue concern over litigation to
which they may be made parties, and in part by the market for directors' and
officers' liability insurance. Delaware law recognizes that adequate insurance
and indemnity provisions often are a condition to an individual's willingness to
serve as a director of a corporation and is intended to help corporations
continue to attract and retain qualified individuals to serve in such capacity.
The proposed change to the Certificate of Incorporation of the Holding
Company would provide that a director shall not be personally liable to the
Holding Company or its shareholders for monetary damages arising out of the
director's breach of his or her duty of care, except to the extent that Delaware
law does not permit exemption from such liability. This provision does not
eliminate the duty of care of directors; instead, it is designed to limit the
personal liability of directors for monetary damages to the maximum extent
currently permitted by Delaware law. It does not affect the availability of
injunctive or other equitable relief as a remedy for breach of the duty of care.
In addition, the provision applies only to the personal liability of directors
(whether or not they also are officers) acting as directors and has no effect on
the potential liability of individuals for their actions as officers of the
Holding Company.
In accordance with the requirements of the DGCL, this provision
provides that the Holding Company's directors remain subject to liability for
monetary damages (i) for any breach of their duty of loyalty to the Holding
Company or its shareholders, (ii) for acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, (iii) for the
types of liability set forth in Section 174 of the DGCL, imposing liability for
willful or negligent violation of statutory provisions restricting the payment
of dividends and the repurchase or redemption of stock, and (iv) for any
transaction from which the director received an improper personal benefit.
Although this provision, subject to these limitations, eliminates monetary
damage awards occasioned by a breach
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of the duty of care to the maximum extent currently permitted by Delaware law
(and therefore prevents damage awards against directors for grossly negligent
business decisions, including those relating to a change in control of the
Holding Company), the provision does not relieve directors of their fiduciary
duty to act with due care. In addition, the provision does not prevent a
shareholder from seeking equitable remedies, including an injunction prohibiting
a proposed action or transaction or rescission of a consummated action or
transaction. In some cases, however, shareholders may not be aware of a proposed
transaction or other action until it is too late to prevent its completion. As a
result, the Holding Company and its shareholders may, at times, have no
effective remedy for an injury occasioned by the directors' actions. The
provision thus may reduce the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from bringing a
lawsuit against directors for breach of their duty, even though such an action,
if successful, might otherwise have benefited the Holding Company and its
shareholders.
It should be noted that the current and future directors of the Holding
Company will personally benefit from a limitation on liability in the Holding
Company's Certificate of Incorporation. The provision was included in the
Certificate of Incorporation as originally filed in Delaware and therefore
became effective from the outset of the Holding Company's corporate existence.
However, it will not be effective upon the Reorganization unless this proposal
is approved at the Special Meeting. The Certificate of Incorporation provides
that any repeal or modification of the provision by the shareholders will not
adversely affect any right or protection of a director for acts or omissions
occurring prior to the effective date of such repeal or modification. At
present, there are no pending or completed actions or proceedings against any
director of the Holding Company, and the Holding Company knows of no threatened
litigation against the Holding Company's directors which would be affected by
the provision.
There has been little or no judicial guidance as to the scope of the
limitation on liability afforded by similar provisions in certificates of
incorporation under Delaware law; as a result, the effects of such provisions
are uncertain. There may be liabilities which a court would hold are unaffected
by such provisions. The Holding Company has been advised that the provision will
not limit a director's liability for violations of the federal securities laws.
The Board of Directors of the Holding Company believes that the
limitation on liability in its Certificate of Incorporation will significantly
increase the Holding Company's ability to attract and retain qualified
individuals to serve as outside directors by providing additional protection for
directors in making good faith business decisions. The Board of Directors
strongly believes that the potential benefits to the Holding Company outweigh
the potential limitations the provision places on shareholder remedies.
THE BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR" APPROVAL OF
THE ELIMINATION OF MONETARY LIABILITIES OF HOLDING COMPANY
DIRECTORS.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma financial data set forth below as of June 30,
1998 and for the six month period ended June 30, 1998 and the year ended
December 31, 1997 gives effect to the Sale, the Stock/Option Agreement and the
Other Agreements as if they occurred on June 30, 1998 with respect to the
unaudited pro forma consolidated balance sheet and on January 1, 1998 and 1997
with respect to the unaudited pro forma consolidated statement of operations
data for the six month period ended June 30, 1998 and the year ended December
31, 1997, respectively. The gain on the Sale has not been considered in the pro
forma consolidated statement of operations for the six month period ended June
30, 1998 and the year ended December 31, 1997 because of its nonrecurring
nature, but will be included in discontinued operations in the consolidated
financial statements of SFNB which include the closing of the Sale.
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The unaudited pro forma financial data should be read in conjunction
with the historical consolidated financial statements and notes thereto of SFNB
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. See Appendix G and "Information about
SFNB." The unaudited pro forma financial data is not necessarily indicative of
the financial position and results of operations that would have been achieved
had the Sale, the Stock/Option Agreement and the Other Agreements occurred on
the dates indicated nor is it necessarily indicative of the expected results of
future operations. For a discussion of the Other Agreements, see "The Sale of
SFNB's Banking Business -- Other Related Agreements." Dollars are in thousands
except share and per share data.
55
<PAGE>
Pro Forma Consolidated Balance Sheet - Unaudited
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------------------
SFNB Pro forma Pro forma
historical adjustments results
---------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................................... $ 2,911 $ 11,500 (1) $ 15,421
6,000 (2)
(4,990)(3)
Investment securities available for sale................ 6,060 (6,060)(3) --
Accounts receivable, net................................ 4,447 -- 4,447
Banking operations held for sale, net................... -- 11,050 (3) --
(10,000)(1)
(1,050)(5)
Other current assets.................................... 1,297 -- 1,297
----------- ----------- -----------
Total current assets.................................. 14,715 6,450 21,165
Premises and equipment, net............................. 6,790 -- 6,790
Goodwill and purchased technology, net.................. 451 1,050 (5) 1,501
Other assets............................................ 563 1,500 (1) 2,063
----------- ----------- -----------
Total assets.......................................... $ 22,519 $ 9,000 $ 31,519
=========== =========== ===========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable........................................ $ 2,103 $ -- $ 2,103
Accrued expenses........................................ 1,940 350 (1) 2,290
Accrued stock option compensation expense............... 2,972 -- 2,972
Deferred revenues....................................... 8,067 6,000 (2) 14,067
----------- ----------- -----------
Total current liabilities............................. 15,082 6,350 21,432
----------- ----------- -----------
Stockholders' equity:
Class A convertible preferred stock, no par value
for SFNB, par value $0.01 per share for the
Holding Company. Authorized 2,500,000
shares. Issued and outstanding 1,174,110
shares at June 30, 1998................................ 2,583 -- 2,583
Common stock, no par value for SFNB, par value
$0.01 per share for the Holding Company.
Authorized, 25,000,000 shares. Issued and
outstanding 10,843,916 shares at June 30,
1998................................................... 74,609 (74,501)(4) 108
Additional paid-in capital.............................. -- 74,501 (4) 75,851
1,350 (1)
Accumulated deficit..................................... (69,581) 1,300 (1) (68,281)
Accumulated other comprehensive income.................. (174) -- (174)
----------- ------------ -----------
Total stockholders' equity............................ 7,437 2,650 10,087
----------- ----------- -----------
Total liabilities and stockholders' equity............ $ 22,519 $ 9,000 $ 31,519
=========== =========== ===========
</TABLE>
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<PAGE>
Pro Forma Consolidated Statements of Operations - Unaudited
<TABLE>
<CAPTION>
Six months ended June 30, 1998
---------------------------------------------
SFNB Pro forma Pro forma
historical adjustments results
---------- ----------- -------
<S> <C> <C> <C> <C>
Revenues:
Software license fees .......................... $ 1,439 $ 240 (2) $ 1,679
Professional services .......................... 5,634 500 6,134
Data center fees ............................... 904 313 1,217
-------- -------- -------
Total revenues ............................... 7,977 1,053 9,030
-------- ---------- -------
Direct costs:
Software license fees .......................... 40 175 (5) 215
Professional services .......................... 3,800 -- 3,800
Data center fees ............................... 3,648 -- 3,648
-------- ---------- -------
Total direct costs ........................... 7,488 -- 7,663
-------- ---------- -------
Gross margin ................................. 489 1,053 1,367
-------- ---------- -------
Operating expenses:
Selling and marketing .......................... 2,208 -- 2,208
Product development ............................ 6,990 -- 6,990
General and administrative ..................... 2,440 -- 2,440
Depreciation and amortization .................. 1,289 -- 1,289
Amortization of goodwill and acquisition charges 4,171 -- 4,171
-------- ----------- -------
Total operating expenses ..................... 17,098 -- 17,098
-------- ----------- ---------
Operating loss ............................... (16,609) 1,053 (15,731)
Interest income ................................... 390 (204)(6) 186
-------- ----------- -------
Loss from continuing operations ................... $ (16,219) $ 849 $ (15,545)
========== =========== =========
Basic and diluted net loss per common share from
continuing operations .......................... $ (1.52) $ (1.45)
========= =========
Weighted average common shares outstanding ........ 10,644,196 10,713,126
============== ==========
</TABLE>
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Pro Forma Consolidated Statements of Operations - Unaudited
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------
SFNB Pro forma Pro forma
historical adjustments results
---------- ----------- -------
<S> <C> <C> <C>
Revenues:
Software license fees.................................... $ 4,142 $ 480 (2) $ 4,622
Professional services.................................... 6,277 1,000 (2) 7,277
Data center fees......................................... 411 623 (2) 1,034
------------ ----------- ------------
Total revenues......................................... 10,830 2,103 12,933
------------ ----------- ------------
Direct costs:
Software license fees.................................... 1,605 -- 1,605
Professional services.................................... 5,346 -- 5,346
Data center fees......................................... 6,947 -- 6,947
------------ ----------- ------------
Total direct costs..................................... 13,898 -- 13,898
------------ ----------- ------------
Gross margin........................................... (3,068) 2,103 (965)
------------ ----------- ------------
Operating expenses:
Selling and marketing.................................... 4,305 -- 4,305
Product development...................................... 10,507 -- 10,507
General and administrative............................... 4,637 -- 4,637
Depreciation and amortization............................ 1,741 -- 1,741
Amortization of goodwill and acquisition charges......... 4,525 -- 4,525
------------ ----------- ------------
Total operating expenses............................... 25,715 -- 25,715
------------ ----------- ------------
Operating loss......................................... (28,783) 2,103 (26,680)
Interest income............................................. 1,481 (408)(6) 1,073
------------ ----------- ------------
Loss from continuing operations............................. $ (27,302) $ 1,695 $ (25,607)
============ =========== ============
Basic and diluted net loss per common share from
continuing operations.................................... $ (3.06) $ (2.84)
============ ============
Weighted average common shares outstanding.................. 8,922,762 9,015,355
========= =========
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The historical consolidated financial data is derived from the audited
consolidated financial statements of SFNB for the year ended December 31, 1997
and the unaudited consolidated financial statements of SFNB for the six month
period ended June 30, 1998. The unaudited consolidated pro forma financial
statements reflect all adjustments, consisting of normal recurring accruals,
which in the opinion of SFNB's management, are necessary for a fair presentation
of financial position and results of operations for the respective period.
The unaudited pro forma consolidated statement of operations data
reflect only results from continuing operations and thus do not include SFNB's
discontinued operations nor do they include the gain on the Sale.
(1) Reflects the results of the Sale of New Bank to RBC Holdings summarized as
follows (in thousands):
<TABLE>
<S> <C>
Cash proceeds received at closing.............................................. $ 11,500
Cash proceeds received 18 months after closing................................. 1,500(a)
----------
Total consideration............................................................ 13,000
Less estimated transaction costs-accrued expenses.............................. 350
----------
Net consideration.............................................................. 12,650
Banking operations held for sale, net, as adjusted............................. 10,000(b)
----------
Gain on sale................................................................... 2,650
----------
Adjustment for the fair value of options granted............................... (1,350)(c)
----------
Gain on sale, as adjusted...................................................... $ 1,300(d)
==========
</TABLE>
- ----------
(a) The cash proceeds to be received 18 months after the Closing Date bear
interest at the prime commercial lending rate.
(b) A reconciliation of the amount reflected in the SFNB's June 30, 1998
unaudited interim financial statements for banking operations held for
sale, net, to the amount for banking operations held for sale, net, as
adjusted, is as follows:
<TABLE>
<S> <C>
Amount for banking operations held for sale, net, per
June 30, 1998 unaudited interim financial statements $ --
Adjustment to transfer $10 million in assets in accordance with
terms of transaction with RBC Holdings $ 10,000,000
Banking operations held for sale, net, as adjusted $ 10,000,000
</TABLE>
(c) Reflects adjustment for the fair value on March 9, 1998 of the Options
granted under the Stock/Option Agreement entered into between SFNB, RBC
Holdings and the Holding Company. Upon the closing of the Sale of the
Banking Business, the fair value of the Options granted under the
Stock/Option Agreement will be recognized as a reduction in the gain on
the Sale. This is a non-recurring item. SFNB determined the fair value
with the assistance of a financial adviser using the Black Scholes
Option Pricing Model.
(d) The gain on the Sale has not been considered in the pro forma
consolidated statement of operations for the six month period ended
June 30, 1998, and the year ended December 31, 1997, but will be
included in discontinued operations in the consolidated financial
statements for the period which includes the closing date of the Sale.
(2) Reflects the Other Agreements entered into between S1, SFNB and RBC
Holdings including the $6 million in cash to be received at Closing ($5.0
million for the STAR Agreement and $1.0 million for the Consulting
Agreement) which is reflected as deferred revenue at June 30, 1998 in the
accompanying unaudited pro forma consolidated balance sheet. The STAR
Agreement with RBC Holdings provides for $5.0 million of software licensing
fees payable at the closing of the Sale. Revenues from software license
fees are expected to be recognized using the subscription method over a
period of three years from the date of delivery of the related software
products. To the extent the software products have not been delivered, such
license fees are expected to be deferred until the products are delivered,
at which time the license fee
59
<PAGE>
revenue will be recorded using the subscription method over the remaining
term of the three-year period. The pro forma results include software
license fees of $240,000 for the six months ended June 30, 1998 and
$480,000 for the twelve months ended December 31, 1997 for VBM and VCCM,
which are the two products which would have been delivered to RBC Holdings
at closing if the transaction occurred on January 1, 1998 and January 1,
1997. The Consulting Agreement provides for a payment of $1.0 million at
the closing of the Sale for transition and consulting services provided
over a period of one year. This revenue will be recognized as professional
services ratably over the period of time the services are to be performed.
Accordingly, the pro forma results include $500,000 for the six months
ended June 30, 1998 and $1.0 million for the twelve months ended December
31, 1997 of professional services revenue from the Consulting Agreement.
The Data Center Agreement provides for monthly processing fees based on the
number of customers using the software. The data center revenue recognized
of $313,000 for the six months ended June 30, 1998 and $623,000 for the
twelve months ended December 31, 1997 is based on historical usage by the
banking operations, multiplied times the per customer fee set out in the
Data Center Agreement with RBC Holdings.
(3) Reflects the formation of New Bank and the related transfer of the Banking
Business to New Bank excluding purchased technology of $1,050,000 which is
included in the banking operations held for sale, net, but is excluded from
the Sale, and including the $10 million of assets in excess of liabilities
transferred to New Bank in accordance with the terms of the Agreement with
RBC Holdings.
(4) Reflects the Reorganization including issuing Holding Company Common Stock
with $0.01 par value in exchange for all of the outstanding shares of SFNB
Common Stock and issuing Holding Company Preferred Stock with $0.01 par
value in exchange for all of the outstanding shares of SFNB Preferred
Stock.
(5) Reflects reclassification of the purchased technology which is excluded
from the Sale which represents the carrying value of the software
development costs previously capitalized by SFNB during 1995 and 1996. The
amount was included in the banking operations held for sale, net, because
SFNB considered this to be equivalent to a license necessary for the
banking operations. However, RBC Holdings entered into a STAR Agreement
effective upon closing which will result in a license for the VFM suite of
software products, which includes VBM. As a result, the VBM license held by
SFNB will not be needed by RBC Holdings. This cost will be amortized over
three years, which is the period that S1 will record revenue from the Royal
Bank licensing agreement and has been reflected in cost of software license
fees in the June 30, 1998 pro forma Statement of Operations.
(6) Reflects adjustments to interest income representing decreases in interest
income attributable to the $10 million in investment securities available
for sale transferred to New Bank effective with the consummation of the
Plan and increases in interest income attributable to interest income on
the $1.5 million amount due from the Sale at the end of eighteen months
from Closing at the prime rate (8.5%). The interest income adjustments are
summarized as follows:
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Decrease from transfer of $10 million in investment
securities available for sale................................. $ (268) $ (536)
Increase from amount due at the end of eighteen
months from Closing ($1.5 million)............................ 64 128
--------- ---------
$ (204) $ (408)
========= =========
</TABLE>
60
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
KPMG will provide its opinion to SFNB as to the material federal income
tax consequences of the Holding Company Formation and certain related
transactions. The term "Holding Company Formation" includes the following
transactions: (i) the transfer by SFNB of the assets of its Non-Banking-Business
to the Holding Company in exchange for the issuance by the Holding Company to
SFNB of the number of shares of Holding Company Common Stock and Holding Company
Preferred Stock equal to the number of shares of SFNB Common Stock and SFNB
Preferred Stock then outstanding and the assumption by the Holding Company of
the liabilities of the Non-Banking-Business, (ii) the declaration by SFNB of a
distribution of its Holding Company Common Stock and Holding Company Preferred
Stock to SFNB shareholders, (iii) the conversion of the Options granted to RBC
Holdings and options granted in connection with the SecureWare and SBD
acquisitions (the "SFNB Investment Options") into options of the Holding Company
(the "Holding Company Investment Options") and the substitution of non-qualified
options to acquire Holding Company Common Stock and incentive stock options to
acquire Holding Company Common Stock for non-qualified options to acquire SFNB
Common Stock and incentive stock options to acquire SFNB Common Stock,
respectively, and (iv) the voluntary dissolution of SFNB. The opinion of KPMG
takes into consideration the effect of the Sale of the Banking Business to RBC
Holdings on the tax consequences of the Holding Company Formation. The opinion
of KPMG, dated June 17, 1998, is included as part of this Registration
Statement.
The Holding Company Formation does not include (i) the contribution by
SFNB of all of the assets of its Banking Business to New Bank in exchange for
the issuance by New Bank to SFNB of the New Bank Shares and the assumption by
New Bank of the liabilities of the Banking Business, and (ii) the Sale of the
Banking Business to RBC Holdings. The consummation of those transactions will
result in a taxable gain or loss to the SFNB consolidated group (or as
successor, the Holding Company consolidated group).
KPMG's opinion is based upon the facts of the Holding Company Formation
and related transactions and upon the representations of SFNB and its
affiliates. KPMG has not independently verified or investigated these facts and
representations. If any fact or representation is not entirely complete or
accurate, the incompleteness or inaccuracy could cause KPMG to change its
opinion.
KPMG's opinion is rendered with respect to the specific matters
discussed herein and KPMG expresses no opinion, and no inferences should be
drawn, with respect to any other federal, state, or local tax aspect or any
legal or regulatory aspect of these transactions.
KPMG's opinion is not binding upon any tax authority (including the
Internal Revenue Service) or any court and no assurance can be given that a
contrary position will not be asserted by a tax authority and ultimately
sustained by a court. In rendering its opinion, KPMG has relied upon the
relevant provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations thereunder, and judicial and administrative
interpretations thereof. However, all of the foregoing authorities are subject
to change or modification, which can be retroactive in effect and, therefore,
also could affect KPMG's opinion. Unless otherwise indicated, all section
references in this section are to the Code and the regulations thereunder.
Based upon and subject to the foregoing, KPMG has rendered its opinion
that:
1. The Holding Company Formation will constitute a
reorganization within the meaning of section
368(a)(1). Rev. Rul. 69-516, 1969-2 C.B. 56; Rev.
Rul. 79-250, 1979-2 C.B. 156; Rev. Rul. 96-29, 1996-1
C.B. 50.
61
<PAGE>
2. With respect to the Holding Company Formation, the
Holding Company and SFNB will each be a "party to a
reorganization" within the meaning of section 368(b).
3. No gain or loss will be recognized by SFNB on the
transfer of the Non-Banking Business assets to the
Holding Company pursuant to the Holding Company
Formation in exchange for Holding Company Common
Stock, Holding Company Preferred Stock, and the
assumption by the Holding Company of the Non-Banking
Business liabilities of SFNB. Section 361(a) and
section 357(a).
4. No gain or loss will be recognized by the Holding
Company on the receipt of the Non-Banking Business
assets of SFNB pursuant to the Holding Company
Formation in exchange for Holding Company Common
Stock and Holding Company Preferred Stock. Section
1032(a).
5. No gain or loss will be recognized by SFNB on the
distribution of Holding Company Common Stock and
Holding Company Preferred Stock to the SFNB
shareholders pursuant to the Holding Company
Formation. Section 361(c).
6. The basis of the Non-Banking Business assets received
by the Holding Company pursuant to the Holding
Company Formation will be the same as the basis of
the assets in the hands of SFNB immediately prior to
the Holding Company Formation. Section 362(b).
7. The holding period of the Non-Banking Business assets
received by the Holding Company pursuant to the
Holding Company Formation will include the period
during which the assets were held by SFNB. Section
1223(2).
8. No gain or loss will be recognized by the
shareholders of SFNB upon the receipt of solely
Holding Company Common Stock and/or Holding Company
Preferred Stock pursuant to the Holding Company
Formation in exchange for their SFNB Common Stock
and/or SFNB Preferred Stock. Section 354(a)(1).
9. The basis of the Holding Company Common Stock and/or
Holding Company Preferred Stock received by a
shareholder of SFNB pursuant to the Holding Company
Formation will be the same as the basis of the SFNB
Common Stock and/or SFNB Preferred Stock surrendered
in exchange therefor. Section 358(a)(1).
10. The holding period of the Holding Company Common
Stock and/or Holding Company Preferred Stock received
by a shareholder of SFNB pursuant to the Holding
Company Formation will include the shareholder's
holding period of the SFNB Common Stock and/or SFNB
Preferred Stock surrendered in exchange therefor,
provided that the SFNB stock is held as a capital
asset in the hands of the shareholder of SFNB on the
date of the transaction. Section 1223(1).
11. The Holding Company Preferred Stock received pursuant
to the Holding Company Formation will not be "section
306 stock" in the hands of the former holders of SFNB
Preferred Stock. Rev. Rul. 79-287, 1979-2 C.B. 130;
Rev. Rul. 88-100, 1988-2 C.B. 46.
12. No gain or loss will be recognized by the Holding
Company, SFNB, or the option holders on the
substitution of Holding Company non-qualified stock
options, Holding Company incentive stock options and
Holding Company
62
<PAGE>
Investment Options for SFNB non-qualified stock
options, SFNB incentive stock options and SFNB
Investment Options, respectively. Sections 83, 424,
and 1.354-1(e).
13. As provided by section 381(c)(2) and section
1.381(c)(2)-1, the Holding Company will succeed to
and must take into account SFNB's tax attributes as
described in section 381(c) (i.e., net operating
loss, earnings and profits, tax credits, etc.) as of
the date of the Holding Company Formation.
14. The amount and availability to the Holding Company of
the net operating loss carryovers of SFNB existing
immediately before the Holding Company Formation will
not be reduced or otherwise limited under sections
382, 384, or the applicable provisions of the
consolidated return regulations solely by reason of
the Holding Company Formation.
Such opinion is not binding upon the Internal Revenue Service and is
subject to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in a material respect, such
opinion could be incorrect. SFNB is not aware of any facts or circumstances
which would cause such representations and assumptions to be untrue.
ADDITIONAL INFORMATION ABOUT THE HOLDING COMPANY
BUSINESS OF THE HOLDING COMPANY
The Holding Company is a corporation incorporated under the laws of
Delaware in May 1998 for the purpose of becoming the holding company of and,
prior to the Sale, New Bank. The Holding Company's principal executive office is
located at 3390 Peachtree Road, NE, Suite 1700, Atlanta, Georgia 30326, which
also is SFNB's corporate headquarters. The Holding Company is currently a
non-operating business with no assets or liabilities. SFNB is presently the sole
shareholder of the Holding Company. Upon completion of the Reorganization, S1
and, pending the Sale, New Bank, will become wholly owned subsidiaries of the
Holding Company. If the Sale is approved and consummated, immediately after the
Reorganization, the primary business activities of the Holding Company initially
will consist of the operation of S1 as a wholly owned subsidiary. If the Sale is
not approved, the Holding Company still intends to discontinue all banking
operations. No determination has been made as to how the Holding Company would
implement the discontinuation of banking operations if the Agreement is not
consummated. In the future, the Holding Company may become an operating company
or acquire companies engaged in related business activities. Initially, the
Holding Company will neither own nor lease any real property. For more
information about S1, see "Summary -- The Companies -- Security First
Technologies, Inc.," "Information about SFNB -- Description of Business" and "--
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Following the Reorganization and the Sale, the competitive conditions
to be faced by the Holding Company initially will be the same as those faced by
S1. At the present time, the Holding Company does not intend to employ any
persons other than its management. The Holding Company currently has a stock
option plan for directors. In addition, upon completion of the Reorganization,
the stock option plans and agreements of SFNB will become the stock option plans
and agreements of the Holding Company and the directors, officers and other
employees of S1 will be eligible to participate in such plans. Upon consummation
of the Sale, the Options granted to RBC Holdings effective upon the Closing will
become options to purchase Holding Company Stock. Since the directors and
officers of the Holding Company initially will not be compensated by the Holding
Company, no additional Holding Company benefit plans are anticipated at this
time. S1 will continue to maintain its other benefit programs.
63
<PAGE>
FINANCIAL RESOURCES OF THE HOLDING COMPANY
Upon completion of the Reorganization and assuming consummation of the
Sale, on a pro forma basis at June 30, 1998, the Holding Company would have an
initial stockholders' equity of $10.1 million. See "-- Capitalization" and "Pro
Forma Consolidated Financial Statements." The Holding Company, on an
unconsolidated basis, initially will have no indebtedness or other liabilities.
Additional financial resources may be available to the Holding Company
in the future through cash dividends from S1, borrowings from third parties, and
the public or private sale of equity or debt securities of the Holding Company.
There can be no assurance, however, as to the amount of additional financial
resources that will be available to the Holding Company. See "Risk Factors."
DESCRIPTION OF THE CAPITAL STOCK OF THE HOLDING COMPANY
The number of shares of Holding Company Stock to be outstanding upon
consummation of the Reorganization will be the same as the number of shares of
SFNB Stock outstanding immediately prior to the Reorganization. On the Record
Date, there were 11,191,117 outstanding shares of SFNB Common Stock (excluding
stock options previously granted but not exercised for 4,098,152 and 733,818
shares described below) and 1,174,110 outstanding shares of SFNB Preferred
Stock. Upon completion of the Reorganization, as of the Record Date, 11,191,117
shares of Holding Company Stock would be issued to the holders of the 11,191,117
shares of SFNB Common Stock, 4,098,152 shares of Holding Company Common Stock
would be reserved for issuance with respect to the exercise of stock options for
4,098,152 shares of SFNB Common Stock pursuant to SFNB's stock option plans and
agreements, 150,000 shares of Holding Company Common Stock would be reserved for
issuance with respect to the directors' stock option plan of the Holding
Company, 1,174,110 shares of Holding Company Common Stock would be reserved for
issuance in the event of the conversion of all of the outstanding Holding
Company Preferred Stock, and 1,174,110 shares of Holding Company Preferred Stock
would be issued to the holders of the 1,174,110 shares of SFNB Preferred Stock.
Upon consummation of the Sale, 733,818 additional shares of Holding Company
Common Stock will be reserved for issuance pursuant to the Options granted to
RBC Holdings effective upon the Closing.
Holding Company Common Stock
The Holding Company will be authorized to issue 25,000,000 shares of
Holding Company Common Stock, par value $0.01 per share, unless the proposal to
increase the authorized capital stock of the Holding Company is approved, in
which case the Holding Company will be authorized to issue up to 60,000,000
shares of Holding Company Common Stock. Each share of Holding Company Common
Stock has the same relative rights and is identical in all respects to each
other share of Holding Company Common Stock. Holding Company Common Stock is
non-withdrawable capital, is not of an insurable type and is not insured by the
FDIC or any other governmental entity.
Holders of Holding Company Common Stock are entitled to one vote per
share on each matter properly submitted to shareholders for their vote,
including the election of directors. Except in the limited instances where
holders of Holding Company Preferred Stock have the right to vote, the holders
of Holding Company Common Stock initially will possess exclusive voting power in
the Holding Company. Holders of Holding Company Common Stock do not have the
right to cumulate their votes for the election of directors, and they have no
preemptive or conversion rights with respect to any shares that may be issued.
Holding Company Common Stock is not subject to additional calls or assessments
by the Holding Company, and upon receipt by the Holding Company of the full
purchase price therefor, each share of Holding Company Common Stock will be
fully paid and nonassessable. For a discussion of the voting rights of Holding
Company Common Stock, classification of the Holding Company's Board of Directors
and provisions of the Holding Company's
64
<PAGE>
Certificate of Incorporation and Bylaws that may prevent a change in control of
the Holding Company or that would operate only with respect to an extraordinary
corporate transaction involving the Holding Company or its subsidiaries, see
"The Holding Company Reorganization -- Comparison of Shareholders' Rights" and
"The Proposed Increase in Authorized Capital Stock of the Holding Company."
Holders of Holding Company Common Stock and any class or series of
stock entitled to participate therewith are entitled to receive dividends when
and as declared by the Board of Directors of the Holding Company out of any
assets legally available for payment. No such dividends may be paid, however,
unless all accumulated dividends and any sinking fund or retirement payments
have been paid or declared and set aside on any class of stock having preference
as to payments of dividends over the Holding Company Common Stock. For a
description of certain matters relating to the future payment of dividends on
Holding Company Common Stock, see "-- Market for Holding Company Common Stock
and Dividends."
In the unlikely event of any dissolution, liquidation or winding up of
the Holding Company, after payment or provision for payment of all debts and
liabilities of the Holding Company and after the preferences of any class of
stock having preference over the Holding Company Common Stock have been fully
paid or set aside, the holders of Holding Company Common Stock would be entitled
to participate in the distribution of any assets of the Holding Company
remaining, in cash or in kind.
Except as otherwise discussed herein, the Holding Company has no
present plans for the issuance of the additional authorized shares of Holding
Company Stock or any shares of serial preferred stock, other than the issuance
of Holding Company Common Stock pursuant to the exercise of outstanding options
under SFNB stock option plans and agreements, in connection with the exercise of
the Options granted to RBC Holdings effective upon the Closing, upon the
conversion of Holding Company Preferred Stock and as otherwise disclosed herein.
In the future, the authorized but unissued and unreserved shares of Holding
Company Stock will be available for general corporate purposes, including, but
not limited to, possible issuance as stock dividends or stock splits, in future
mergers or other acquisitions, under a cash dividend reinvestment and stock
purchase plan, in a future underwritten public offering or private placement or
under the stock option plans and agreements of the Holding Company. The
authorized but unissued shares of serial preferred stock similarly will be
available for issuance in future mergers or other acquisitions, in a future
underwritten public offering or private placement or for other general corporate
purposes.
After the Reorganization, no shareholder approval generally would be
required for the issuance of additional shares of Holding Company Stock or
shares of serial preferred stock except in limited circumstances. Accordingly,
the Board of Directors of the Holding Company (as is currently the case for the
Board of Directors of SFNB), without shareholder approval, could in the future
issue shares of serial preferred stock with voting or other rights that might
adversely affect the rights of the holders of Holding Company Common Stock or
issue additional shares of Holding Company Common Stock on a dilutive basis.
Holding Company Preferred Stock
The Holding Company's Certificate of Incorporation will authorize its
Board of Directors, without further shareholder approval, to issue 2,500,000
shares of serial preferred stock, par value $0.01 per share, for any proper
corporate purpose, unless the increase in the authorized capital stock of the
Holding Company is approved, in which case the Holding Company will be
authorized to issue up to 5,000,000 shares of serial preferred stock. In
approving any issuance of serial preferred stock, the Board of Directors has
broad authority to determine the rights and preferences of the serial preferred
stock, which may be issued in one or more series. These rights and preferences
may include voting, dividend, conversion and liquidation rights that may rank
prior to the Holding Company Common Stock.
65
<PAGE>
The Holding Company's Certificate of Incorporation authorizes the
issuance of 1,637,832 shares of Holding Company Preferred Stock. As of the
Record Date, 1,174,110 of such shares would be issued to holders of outstanding
shares of SFNB Preferred Stock. Holding Company Preferred Stock is convertible
into Holding Company Common Stock generally on a one share for one share basis
upon the occurrence of certain conditions. The holders of Holding Company
Preferred Stock do not have preference with respect to dividends or liquidation
over the Holding Company Common Stock, but participate fully with the Holding
Company Common Stock as to the payment of dividends and other distributions and
with respect to any liquidation, dissolution or winding up of the Holding
Company. Holders of Holding Company Preferred Stock generally have no voting
rights, but are entitled to vote separately as a class on (i) any amendment or
repeal of any provisions of the Holding Company's Certificate of Incorporation
that would change the specific terms of the Holding Company Preferred Stock that
would adversely affect the rights of such holders and (ii) the approval of
certain mergers or consolidations of the Holding Company or certain sales,
leases or conveyances of the property or business of Holding Company. Holders of
Holding Company Preferred Stock are entitled to vote with holders of Holding
Company Common Stock on any voluntary dissolution or liquidation of the Holding
Company.
MANAGEMENT AND COMPENSATION INFORMATION
Four directors of the Holding Company, Robert W. Copelan, James S.
Mahan, III, Michael C. McChesney and Howard J. Runnion, Jr., also serve as the
four directors of SFNB. Each of the two executive officers of the Holding
Company (Mr. Mahan and Robert F. Stockwell) currently serves as an officer of
SFNB and S1. James S. Mahan, III, the President and Chief Executive Officer of
the Holding Company, currently serves as the Chief Executive Officer and a
director of SFNB and Chairman of the Board and Chief Executive Officer of S1.
Robert F. Stockwell, the Chief Financial Officer, Treasurer and Secretary of the
Holding Company, currently serves as Treasurer, Acting President and Chief
Financial Officer of SFNB and Treasurer and Chief Financial Officer of S1. In
addition, Mr. Dorsey R. Gardner has been added as a director of the Holding
Company. See "Information about SFNB -- Management," "-- Executive and Director
Compensation" and "-- Certain Transactions" for information about Messrs.
Copelan, Mahan, McChesney, Runnion and Stockwell. Information about Mr. Gardner
is provided below and under "Information about SFNB -- Principal Holders of
Voting Securities of SFNB."
DORSEY R. GARDNER has served as a director of the Holding Company since
his appointment in July 1998. Upon election to the Board of Directors, Mr.
Gardner was granted options to purchase 30,000 shares of Holding Company Common
Stock. Mr. Gardner has served as general partner of Hollybank Investments, L.P.
from 1993 to the present. Since 1980, he has served as President of Kelso
Management, advisor to Fidelity International Limited; Integrity Fund-FM&R
private capital; American Values I-IV, Fidelity American Situations Trust;
Fidelity Discovery Fund; and Johnson family accounts, Johnson Foundation, and
Fidelity Foundation. Prior to 1980, he served as Vice President of FM&R, Vice
President and Portfolio Manager of Fidelity Destiny Fund, Group Leader of
Fidelity Capital Appreciation Funds, and a member of the Investment Policy
Committee. Mr. Gardner has served on the board of directors of several
corporations, and is currently a member of the boards of Crane Company and
Filene's Basement.
STOCK OWNED BY MANAGEMENT AND PRINCIPAL HOLDERS OF VOTING SECURITIES
The 1,000 outstanding shares of Holding Company Common Stock presently
are held by SFNB. If the Reorganization is consummated, the holders of SFNB
Stock will own Holding Company Stock in the same proportion as they owned SFNB
Stock immediately prior to the Reorganization. For information about SFNB Stock
held by SFNB officers, directors and principal shareholders, see "Information
about SFNB -- Stock Owned by Management" and "-- Principal Holders of Voting
Securities of SFNB."
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<PAGE>
MARKET FOR HOLDING COMPANY COMMON STOCK AND DIVIDENDS
SFNB Common Stock presently is traded on the Nasdaq Stock Market under
the symbol "SFNB." The Holding Company will apply to the Nasdaq Stock Market to
change the listing of SFNB Common Stock to Holding Company Common Stock under
the symbol "SONE" subject to consummation of the Reorganization. Approval of the
listing of the Holding Company Common Stock on the Nasdaq Stock Market is a
condition to consummation of the Plan. For information about the market price of
SFNB Common Stock, see "Information about SFNB -- Market for SFNB Common Stock
and Dividends."
If the Reorganization and the Sale are approved and consummated, the
source of funds for payment of dividends by the Holding Company initially will
be dividends paid to it by S1, if any. The declaration of dividends by the
Holding Company and S1 is subject to favorable operating results, the financial
condition of the Holding Company or S1, as applicable, tax limitations and other
factors. SFNB has not paid dividends on SFNB Common Stock or SFNB Preferred
Stock since its initial public offering in May 1996. If the Reorganization and
the Sale are consummated, the Holding Company does not presently intend to pay
cash dividends to shareholders for the foreseeable future, as any earnings are
expected to be retained for use in developing and expanding its business. There
can be no assurance as to the amount or timing of future dividend payments, if
any.
REGULATION OF THE HOLDING COMPANY
If the Reorganization is consummated but the Sale is not, the Holding
Company would be a unitary savings and loan holding company, subject to OTS
regulations, examination, supervision and reporting requirements pursuant to
certain provisions of the HOLA and the Federal Deposit Insurance Act. The
following is a summary of the laws and regulations that would be applicable to
the Holding Company. This summary does not purport to be a complete description
of such laws and regulations or of all such laws and regulations. The operations
of the Holding Company may be affected by legislative and regulatory changes as
well as by changes in the policies of various regulatory authorities.
As a unitary savings and loan holding company, the Holding Company
generally will not be restricted under existing laws as to the types of business
activities in which it may engage. Upon any non-supervisory acquisition by the
Holding Company of another savings institution as a separate subsidiary, the
Holding Company would become a multiple savings and loan holding company and
would be subject to limitations on its business activities. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the BHC Act, subject to the prior approval of
the OTS, and to other activities authorized by OTS regulation. Multiple savings
and loan holding companies are prohibited from acquiring or retaining, with
certain exceptions, more than 5% of a company not a subsidiary which is engaged
in activities other than those permitted by the HOLA.
In the event that New Bank fails to qualify as a QTL, the Holding
Company would become subject to the activities restrictions applicable to
multiple savings and loan holding companies, and, unless New Bank qualified as a
QTL within one year thereafter, the Holding Company would have to register and
become subject to the restrictions applicable to a bank holding company under
the BHC Act. In order to qualify as a QTL, New Bank must maintain compliance
with a qualified thrift lender test ("QTL Test"). Under the QTL Test, a savings
institution must either qualify as a "domestic building and loan association,"
as defined in section 7701(a)(19) of the Code, or maintain at least 65% of its
"portfolio assets" in certain designated assets in at least 9 months out of each
12-month period. See "Information about SFNB -- Description of Business --
Regulation -- Qualified Thrift Lender Requirement."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings
67
<PAGE>
institution or holding company thereof or from acquiring such an institution or
company by merger, consolidation or purchase of its assets, without prior
written approval of the OTS. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
If the OTS determines that there is reasonable cause to believe that
the continuation of any of the activities of the Holding Company or S1
constitutes a serious risk to the financial safety, soundness, or stability of
New Bank, the OTS may impose restrictions on the payment of dividends by New
Bank or restrictions on transactions between New Bank and the Holding Company or
S1.
New Bank, as an insured savings institution, would be subject to
restrictions on transactions with the Holding Company and S1 pursuant to certain
provisions of the Federal Reserve Act that have been incorporated into the HOLA
and limit transactions with affiliates. Under Section 23A of the Federal Reserve
Act, an "affiliate" of an institution is defined generally as (i) any company
that controls the institution and any other company that is controlled by the
company that controls the institution, (ii) any company that is controlled by
the shareholders who control the institution or any company that controls the
institution, or (iii) any company that is determined by regulation or order to
have a relationship with the institution (or any subsidiary or affiliate of the
institution) such that "covered transactions" with the company may be affected
by the relationship to the detriment of the institution. "Control" is determined
to exist if a percentage stock ownership test is met or if there is control over
the election of directors or the management or policies of the company or
institution. "Covered transactions" generally include loans or extensions of
credit to an affiliate, purchases of securities issued by an affiliate,
purchases of assets from an affiliate (except as may be exempted by order or
regulation), and certain other transactions. The OTS regulations and Sections
23A and 23B of the Federal Reserve Act generally require that transactions with
affiliates be on terms and conditions consistent with safe and sound banking
practices and on terms comparable to similar transactions with non-affiliated
parties, and impose quantitative restrictions on the amount of and
collateralization requirements on covered transactions. In addition, a savings
institution is prohibited from extending credit to an affiliate (other than a
subsidiary of the institution), unless the affiliate is engaged only in
activities that the Federal Reserve Board has determined, by regulation, to be
permissible for bank holding companies.
If the Reorganization is consummated but the Sale is not, the Holding
Company also would become subject to regulation as a "bank holding company"
under the Georgia Code. As a bank holding company under the Georgia Code, the
Holding Company and its subsidiaries would be required to maintain, on a
consolidated basis, a capital-to-assets ratio of at least 5%, although the
Georgia Department anticipates that most institutions will require a
capital-to-assets ratio of at least 6%. In addition, the Holding Company and its
subsidiaries would be subject to examination by the Georgia Department, and
would have to provide notice to the Georgia Department prior to engaging in or
acquiring shares of a company engaged in a non-banking activity. The Holding
Company would be restricted from entering into any contractual debt obligations
if the servicing of such debt obligations in the aggregate would be dependent
upon revenue produced by the Holding Company's subsidiaries in excess of 50% of
the average annual consolidated net operating earnings of such subsidiaries for
the three fiscal years immediately preceding the extension of credit.
Under the Georgia Code, the Holding Company may not acquire, directly
or indirectly, or through one or more subsidiaries, more than 5% of the voting
stock or all or substantially all of the
68
<PAGE>
assets of any bank, or merge or consolidate with any other bank holding company,
without the prior approval of the Georgia Department. For purposes of this
provision of the Georgia Code, the term "bank" includes any commercial bank,
savings bank, trust company or any other corporation or association doing a
banking business or trust business in Georgia. In evaluating such proposals, the
Georgia Department takes into account factors similar to those considered by the
OTS in reviewing applications for the acquisition of a savings institution.
CAPITALIZATION
The Reorganization will result in no material economic consequence to SFNB. The
following table sets forth (i) the capitalization of SFNB at June 30, 1998 and
(ii) the pro forma capitalization of the Holding Company after giving effect to
the Reorganization and the Sale.
<TABLE>
<CAPTION>
SFNB Holding Company
(actual (pro forma
consolidated) consolidated)
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Stockholders' equity:
Preferred stock...................................... $ 2,583 $ 2,583
Common stock......................................... 74,609 108
Additional paid-in capital........................... -- 75,851
Accumulated deficit.................................. (69,581) (68,281)
Accumulated other comprehensive income............... (174) (174)
------------- -------------
Total stockholders' equity....................... $ 7,437 $ 10,087
============= =============
Number of Shares:
Common stock, no par value for SFNB and par
value $0.01 per share for the Holding Company
Authorized........................................... 25,000,000 25,000,000
Outstanding.......................................... 10,843,916 (1) 10,843,916 (1)
Preferred Stock, no par value for SFNB and par
value $0.01 per share for the Holding Company
Authorized........................................... 2,500,000 2,500,000
Outstanding.......................................... 1,174,110 1,174,110
</TABLE>
- ----------------------
(1) Excludes 4,262,894 shares of SFNB Common Stock authorized and reserved, but
not yet issued, with respect to options granted under SFNB's stock option
plans and agreements and, with respect to the Holding Company only, the
Options to purchase 733,818 shares of Holding Company Common Stock granted
to RBC Holdings effective upon the Closing and 150,000 shares of Holding
Company Common Stock authorized and reserved, but not yet issued, with
respect to options granted under the directors' stock option plan of the
Holding Company. Upon consummation of the Reorganization, such outstanding
options will become options to purchase Holding Company Common Stock.
69
<PAGE>
INFORMATION ABOUT SFNB
DESCRIPTION OF BUSINEss
OVERVIEW
SFNB was organized as a mutual savings and loan association in 1934. In
1992, SFNB was acquired by Cardinal as part of a transaction in which SFNB
converted from the mutual to stock form of ownership. In May 1996, Cardinal
spun-off SFNB to its shareholders and SFNB became an independent entity.
Concurrent with the spin-off, SFNB sold SFNB Common and Preferred Stock to
certain strategic investors, acquired Five Paces, a software development
company, and commenced its initial public offering of SFNB Common Stock.
Additionally, in November 1996, SFNB acquired SecureWare, a developer of network
security software and provider of related security consulting services, which
was then merged into Five Paces. Concurrent with the acquisition of SecureWare,
the name of Five Paces was changed to Security First Technologies, Inc., which
is referred to herein as S1. The primary businesses of SFNB are software
development and data processing activities for the financial services industry
through its wholly owned operating subsidiary S1 and the Internet banking
business of SFNB.
As a condition of its approval of the acquisition of SecureWare, the
OTS required that SFNB commence the steps necessary to establish a holding
company with separate banking and software technology subsidiaries. As discussed
elsewhere in this Proxy Statement/Prospectus, if the Reorganization is
consummated, New Bank and S1 will become separate subsidiaries of the Holding
Company. If the Sale also is consummated, immediately upon the Reorganization,
SFNB's Banking Business will be sold to RBC Holdings. The Reorganization and
Sale are subject to further regulatory and shareholder approvals.
SFNB has offered banking services on the Internet since October 1995.
The Internet banking activities of SFNB presently include deposit and bill
paying services, including checking, money market, and certificate of deposit
accounts and credit card lending. Additionally, SFNB offers other traditional
banking activities through its City Office in Atlanta, Georgia. Through SFNB's
Internet banking operations, customers can apply for accounts, access account
information, transfer funds, pay bills, access their credit card account
information and conduct other banking activity from anywhere in the world over
the Internet. In 1996, management decided to focus solely on its banking
operations that were conducted over the Internet. On March 31, 1997, SFNB sold
all of the assets and liabilities associated with its non-Internet banking
operations located in Pineville, Kentucky to The First State Bank of Pineville,
Pineville, Kentucky. Further, in the third quarter of 1997, SFNB adopted a
formal plan to sell its $52.5 million in banking assets and related liabilities
in order to concentrate its efforts on the rapidly growing Internet software
development and data processing segment of its business.
In March 1998, SFNB announced that Royal Bank, through one of its U.S.
based subsidiaries, had agreed to acquire the banking operations of SFNB for $13
million. However, the Agreement also provides that SFNB include $10.0 million of
assets which qualify as regulatory capital in excess of the liabilities, thereby
making the net equivalent purchase price $3.0 million. In addition, upon the
Closing of the Sale, RBC Holdings shall pay to the Holding Company an additional
sum equal to $1,250 per day for each day beginning on the date of receipt of
shareholder approval by SFNB of the Plan and the Agreement and ending on the day
before the Closing Date, up to an aggregate maximum of $300,000. See "The Sale
of SFNB's Banking Business." The banking operations, which will be separated
from the technology operations through the holding company formation, include
substantially all of SFNB's loans and a majority of SFNB's investment securities
as well as its deposit relationships. The Agreement is subject to regulatory
approval in Canada and the United States, in addition to SFNB shareholder
approval. The transaction is expected to close in September 1998.
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<PAGE>
S1's primary suite of software products is Virtual Financial Manager,
referred to herein as VFM, a suite of software products designed to provide
consumers remote access to all aspects of their balance sheet via the Internet.
This "virtual net worth" solution allows consumers to have access to all of
their financial information on a current market valuation basis even though the
information is maintained on separate computer systems operated by banks,
brokerage firms, insurance companies, credit card processors, etc. S1's initial
product in the suite, Virtual Bank Manager, referred to herein as VBM, allows
end users to view, categorize, update and generate reports on account detail,
view balance information and execute banking transactions over the Internet such
as transfers and bill payment. The second product in the suite, Virtual Credit
Card Manager, referred to herein as VCCM, provides customers access to an
on-line credit card account statement and allows end users to view, categorize
and generate reports on account detail. Virtual Investment Manager ("VIM"),
which is scheduled for general release in 1998, allows customers the ability to
open brokerage accounts, enter and execute stock and mutual fund transactions
and view portfolio positions.
S1 continues to enhance the existing VFM suite by developing new
applications and migrating existing products to a more efficient software
architeture. Implementations and upgrades to VBM version 4.0 are expected to
begin in the second half of 1998. This release will consolidate all existing
users of VBM onto the same version of VBM, which is expected to occur by the
third quarter 1999. In addition, this version will imrove the operational
efficiencies and stability of the existing product. Along with this VBM release,
S1 is also releasing Virtual Loan Manager, which will allow end users to view
loan balances and make loan payments.
Using VFM, all of the customer's information is available centrally on
the financial institution's database server along with the system software. This
model allows customers to access account information and conduct transactions
from anywhere they have Internet access. The VFM model also provides a financial
institution with the ability to implement modifications and add enhancements
without the need for a mass distribution and installation of new software at a
user's location.
RESEARCH AND DEVELOPMENT
SFNB believes that significant ongoing research and development will
be required to become and remain competitive in the Internet-based financial
services industry. S1 currently is focused on integrating additional banking and
investment information and transaction capability into VFM. S1 is also currently
working on the development of the next generation of the VFM suite of products
which will incorporate technology supporting marketing, client services and a
more scalable transaction processing operating environment. This version of VFM
is expected to be released in 1999. Future products in the suite anticipated to
be developed include Virtual Insurance Manager, Virtual Corporate Cash Manager
and Virtual Bill Presentment.
SFNB's ability to attract and retain highly skilled research and
development personnel is important to its success. SFNB significantly expanded
its research and development personnel during 1997. Corresponding with the
increase in personnel, it experienced significant growth in its research and
development expenses. Because SFNB's growth and operations will depend in part
on the continued market reception of its products and services, the increase in
research and development expenses may not necessarily relate to a corresponding
increase in revenues in the future.
STRATEGIC INVESTORS IN SFNB
In 1996, Huntington, Wachovia and Area purchased an aggregate $3.0
million in SFNB Common and Preferred Stock in a private placement and entered
into licensing agreements for an aggregate $2.0 million. All three of the
institutions are offering Internet banking to customers using the S1 solution
through one of the three available distribution channels. Huntington is using
the S1 Data Center as its front-end processor, Wachovia is utilizing the product
in-house and Area is processing using M&I Data Services, a division of the
Marshall and Ilsley Corp. SFNB also sold an additional $3.0 million of SFNB
Common Stock to both Synovus Financial Corporation ("Synovus") and National
Commerce Bancorporation during 1996.
During 1997, SFNB created the STAR partnership program whereby Barnett
Banks, N.A. (now a part of NationsBank), Citicorp, The Principal Financial Group
and Synovus or their affiliates (collectively, the initial "STAR Partners"),
licensed the VFM suite of financial software products for an aggregate $8
million. In addition to the license agreements, SFNB sold an aggregate $6.0
million of SFNB Common and Preferred Stock to the four initial STAR Partners,
Huntington and Wachovia
71
<PAGE>
in a private placement. The STAR program was created to further involve industry
leading financial service organizations in the ongoing development of VFM
applications. As members of the STAR program, the entities also have the right
to participate in the development and direction of S1 products through
representation on the S1 Board of Directors. If the proposed Sale is
consummated, New Bank (then an affiliate of Royal Bank) also will participate in
the STAR program.
Pursuant to the STAR program, S1 granted to the four STAR participants
a perpetual, non-exclusive, non-transferable license for VBM, VCCM and VIM, to
be used by the STAR participants and their affiliates located within the United
States in providing on-line financial services to their end-user customers.
Although the license granted is perpetual, the initial term of the agreement is
a three-year term, which term is applicable to other terms and conditions of the
agreement. In addition, S1 granted to each STAR program participant a seat on
S1's board of directors, as well as maintenance and support services. Such
maintenance and support shall be provided at mutually agreeable pricing, not to
exceed an annual fee of 18% of the license fee.
COMPETITION
The Internet technology, financial services and secure network
communication industries all represent dynamic and competitive markets. SFNB
continues to expect competition to intensify in the future, especially with
respect to Internet-based financial service solutions. 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 SFNB has
identified or considered all possible present and future competitors or that the
discussion set forth below represents a complete coverage of competition. Many
of SFNB's known competitors have substantially greater financial resources than
SFNB.
The market for on-line banking and financial software is competitive,
rapidly evolving and subject to technological change. With the expected
development of the Internet as an accepted avenue for providing financial
services, SFNB expects competition to intensify. Principal competitors currently
include software companies that provide turnkey on-line banking and brokerage
solutions and Internet integration tools.
Many financial institution industry software companies also have
developed dial-up, Windows-based personal computer banking solutions. These
companies generally have significant experience in selling software to financial
institutions. In addition, other Internet solution providers are marketing
Internet system development and integration tools.
S1 faces competition from various sectors of the Internet technology
industry. A number of competing products and network security solutions exist in
the marketplace and are likely to be developed in the future. S1 does not
believe that one security solution is likely to become dominant, but there can
be no assurance that such a dominant solution will not emerge.
PROPRIETARY TECHNOLOGY
SFNB's success is heavily dependent upon its proprietary technology and
information. S1 relies upon a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary technology
and information. S1 generally enters into nondisclosure agreements with its
employees, consultants, distributors and corporate partners and limits access to
and distribution of its software, documentation and other proprietary
information. Despite its efforts to protect its proprietary software,
unauthorized parties may attempt to copy or otherwise obtain and use products or
technology that S1 considers proprietary, and third parties may attempt to
develop similar technology independently. In particular, S1 provides its
existing and potential distribution partners with access to its product
architecture and other proprietary information underlying its licensed software.
Policing unauthorized use of S1's software is very difficult due to the nature
of software, and, while S1 is unable to determine the extent to which piracy of
its software products exists, software piracy can be expected to be a persistent
problem. In
72
<PAGE>
addition, effective protection of intellectual property rights may be
unavailable or limited in certain countries. Accordingly, there can be no
assurance that the steps taken by S1 to protect its services and products are
adequate to prevent misappropriation of its technology or that S1's competitors
will not independently develop technologies that are substantially equivalent or
superior to S1's technology.
Despite the implementation of security measures, the core of SFNB's
network infrastructure could be vulnerable to unforeseen computer problems.
Although SFNB believes it has taken steps to mitigate much of the risk, it may
in the future experience interruptions in service as a result of the accidental
or intentional actions of Internet users, current and former employees or
others. Unknown security risks may result in liability to SFNB and also may
deter financial institutions from licensing its software and services. Although
SFNB intends to continue to implement and establish security measures, there can
be no assurance that measures implemented by SFNB will not be circumvented in
the future, which could have a material adverse effect on its business,
financial condition or results of operations.
BUSINESS AND OPERATIONS OF S1
For information regarding the products, operations and business of S1,
see "-- Management's Discussion and Analysis of Financial Condition and Results
of Operations" below.
BANKING OPERATIONS
As discussed above, SFNB has agreed in principle to sell its banking
operations to RBC Holdings. Accordingly, such operations are reflected as
discontinued operations in the Consolidated Financial Statements and notes
thereto of SFNB attached as Appendix G to this Proxy Statement/Prospectus. See
also "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE>
Average Balance and Yield Table. The following tables set forth certain
information relating to the average interest-earning assets and interest-bearing
liabilities of the banking operations and reflect the average yield on assets
and the average interest cost of liabilities for the periods and the dates
indicated.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
Average Interest Average Average Interest Average
daily income/ yield/ daily income/ yield/
balance expense cost balance expense cost
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans............................. $ 7,092 $ 605 8.53% $ 17,857 $ 1,562 8.75%
Commercial loans........................... 3,569 306 8.57 1,296 110 8.49
Consumer loans............................. 2,377 211 8.88 2,519 238 9.45
----------- ----------- ----------- -----------
Total loans.............................. 13,038 1,122 8.61 21,672 1,910 8.81
Investment securities...................... 4,850 260 5.36 5,168 276 5.34
Mortgage-backed securities................. 30,531 2,103 6.89 17,652 1,156 6.55
FHLB stock................................. 633 38 6.00 479 32 6.68
Interest earning deposits.................. 417 25 6.00 -- -- --
----------- ----------- ----------- -----------
Total interest earning assets............ 49,469 3,548 7.17 44,971 3,374 7.50
Noninterest earning assets, net of
allowance for loan losses.................. 1,803 4,106
----------- -----------
Total assets............................. $ 51,272 $ 49,077
=========== ===========
Interest-bearing liabilities:
Savings accounts........................... $ 2,448 $ 70 2.86% $ 6,102 $ 185 3.03%
Money market accounts...................... 15,793 798 5.05 4,918 215 4.37
NOW accounts............................... 1,807 59 3.27 3,695 141 3.82
----------- ----------- ----------- -----------
Total interest-bearing transaction accounts 20,048 927 4.62 14,715 541 3.68
Time deposits............................... 17,724 1,033 5.83 28,113 1,612 5.73
----------- ----------- ----------- -----------
Total interest-bearing deposit accounts.. 37,772 1,960 5.19 42,828 2,153 5.03
Advances from FHLB.......................... 1,087 60 5.52 1,210 68 5.62
----------- ----------- ----------- -----------
Total interest-bearing liabilities....... 38,859 2,020 5.20 44,038 2,221 5.04
Noninterest-bearing demand deposits......... 11,925 4,465
Other liabilities........................... 488 574
Stockholders' equity........................ -- --
----------- -----------
Total noninterest bearing liabilities and
stockholders' equity.................... 12,413 5,039
----------- -----------
Total liabilities and stockholders' equity $ 51,272 $ 49,077
=========== ===========
Excess of interest earning assets over
interest bearing liabilities/net interest
income..................................... $ 10,610 $ 1,528 $ 933 $ 1,153
=========== =========== =========== ===========
Ratio of interest earning assets to interest-
bearing liabilities........................ 127.30% 102.12%
Average interest rate spread................ 1.97 2.46
Net interest margin......................... 3.09 2.56
</TABLE>
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<PAGE>
Volume and Rate Table. The following table allocates the
period-to-period changes in the various categories of interest income and
interest expense of the banking operations between the changes due to changes in
volume (calculated by multiplying the change in average volume of the related
interest-earning asset or interest-bearing liability category by the previous
year's rate) and changes due to changes in rate (change in rate multiplied by
prior year's volume). Changes due to changes in both rate and volume (change in
rate multiplied by changes in volume) have been allocated proportionately
between changes in volume and changes in rate.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------------
1997 vs. 1996
-------------------------------------
Volume Rate Total
------ ---- -----
(In thousands)
<S> <C> <C> <C>
Interest earning assets:
Mortgage loans............................................. $ (919) $ (38) $ (957)
Commercial loans........................................... 195 1 196
Consumer loans............................................. (13) (14) (27)
-------- -------- --------
Total loans.............................................. (737) (51) (788)
Investment securities...................................... (17) 1 (16)
Mortgage-backed securities................................. 884 63 947
FHLB stock................................................. 9 (3) 6
Interest earning deposits.................................. 25 -- 25
-------- -------- --------
Total interest earning assets............................ 164 10 174
-------- -------- --------
Interest-bearing liabilities:
Savings accounts........................................... (105) (10) (115)
Money market accounts...................................... 545 38 583
NOW accounts............................................... (64) (18) (82)
-------- -------- --------
Total interest-bearing transaction accounts.............. 376 10 386
Time deposits............................................... (608) 29 (579)
-------- -------- --------
Total interest-bearing deposit accounts.................. (232) 39 (193)
Advances from FHLB.......................................... (7) (1) (8)
-------- -------- --------
Total interest-bearing liabilities....................... (239) 38 (201)
-------- -------- --------
Net interest income......................................... $ 403 $ (28) $ 375
======== ======== ========
</TABLE>
Net Interest Income. For the year ended December 31, 1997, net interest
income increased $0.4 million or 32.5%, to $1.5 million in 1997 compared to $1.2
million in 1996. The net interest margin increased from 2.56% to 3.09%. The
increase in the net interest margin is primarily attributable to an increase in
average noninterest-bearing demand deposits, which increased to $11.9 million in
1997 from $4.5 million in 1996. Average interest earning assets increased to
$49.5 million in 1997 from $45.0 million in 1996. Average interest-bearing
liabilities decreased to $38.9 million in 1997 from $44.0 million in 1996,
primarily as a result of the sale of the net assets and liabilities of the
Pineville, Kentucky branch.
LENDING ACTIVITIES
Loan Portfolio Composition. The loan portfolio of the banking
operations primarily consists of conventional first mortgage loans secured by
one-to-four family residences, multi-family residences and commercial real
estate and consumer loans.
At December 31, 1997, net loans were $14.1 million, of which $4.4
million were one-to-four family residential mortgage loans, or approximately
31.1% of SFNB's net loan portfolio. At the same date, commercial real estate
loans totaled $2.3 million or 16.6% of net loans. The remainder of the loan
portfolio at December 31, 1997 consisted of $1.1 million of multi-family
residential loans, or
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<PAGE>
7.6% of net loans, $1.7 million or 11.7% of net loans of commercial business
loans and $4.8 million or 34.2% of net loans of consumer loans.
The following table sets forth the composition of the loan portfolio in
dollar amounts and in percentage of the respective portfolio at the dates
indicated:
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
------------------------ -----------------------
Amount % Amount %
------ - ------ -
(In thousands)
<S> <C> <C> <C> <C>
Mortgage Loans
1-4 residential..................................... $ 4,377 31.1% $ 16,112 69.0%
Multi-family........................................ 1,070 7.6 780 3.3
Commercial.......................................... 2,339 16.6 1,615 6.9
Construction........................................ -- -- 326 1.4
Land................................................ -- -- 95 0.4
Commercial business.................................... 1,650 11.7 2,004 8.6
Consumer............................................... 4,811 34.2 2,748 11.8
-------- ----- --------- -----
Total Loans......................................... 14,247 101.2 23,680 101.4
Less: Unamortized loan fees........................ -- -- (26) (0.1)
Allowance for loan losses.................. (163) (1.2) (303) (1.3)
--------- ----- --------- -----
Net loans.......................................... $ 14,084 100.0% $ 23,351 100.0%
======== ===== ========= =====
</TABLE>
The following table shows the maturity of SFNB's loans at December 31,
1997:
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------
Residential
and
commercial Commercial
real estate Consumer business Total loans
----------- -------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
Within one year........... $3,062 $1,887 $ 646 $ 5,595
After one year:
One to five years......... 734 455 156 1,345
Five to ten years......... 3,501 2,166 744 6,411
Over ten years............ 489 303 104 896
-------- -------- ------- --------
Total amounts due......... $7,786 $4,811 $1,650 $14,247
====== ====== ====== =========
</TABLE>
The following table sets forth at December 31, 1997 the dollar amount
of all loans contractually due after December 31, 1998, and whether such loans
have fixed interest rates or adjustable interest rates:
<TABLE>
<CAPTION>
Due After December 31, 1998
----------------------------------------------
Fixed Adjustable Total
(In thousands)
<S> <C> <C> <C>
1-4 family, multi-family, commercial real estate
and land........................................ $ 520 $ 4,204 $ 4,724
Consumer............................................. 322 2,602 2,924
Commercial Business.................................. 111 893 1,004
--------- ---------- ---------
Total loans..................................... $ 953 $ 7,699 $ 8,652
========= ========== =========
</TABLE>
76
<PAGE>
As noted above, SFNB sold its Pineville, Kentucky office on March 31,
1997 to the First State Bank of Pineville, Pineville, Kentucky. Accordingly, all
loans associated with the Pineville office were transferred to First State as
part of the sale.
Delinquent Loans. It is SFNB's policy generally not to accrue interest
on any loans 90 days or more past due. SFNB also will cease the accrual of
interest on loans and establish a reserve upon a determination that the loan may
result in a loss. Property acquired by SFNB as a result of a foreclosure on a
mortgage loan is classified as real estate owned and is recorded at the lower of
the unpaid principal balance or fair value at the date of acquisition and
subsequently carried at the lower of cost or fair value less costs of disposal.
At December 31, 1997 and 1996 the delinquencies in SFNB's accruing loan
portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------------------ -------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
-------------------- -------------------- -------------------- ------------------
Number Principal Number Principal Number Principal Number Principal
of balance of balance of balance of balance
loans of loans loans of loans loans of loans loans of loans
----- -------- ----- -------- ----- -------- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family................... -- -- -- -- 7 $ 124 16 $ 281
Consumer..................... 5 $ 21 5 $ 20 2 11 8 38
----- ------- ----- ------- ----- ------- ---- -------
Total loans............... 5 $ 21 5 $ 20 9 $ 135 24 $ 319
===== ======= ===== ======= ===== ======= ==== =======
Delinquent loans to
total loans............... 0.15% 0.14% 0.57% 1.35%
</TABLE>
Classified Assets. SFNB's classification policies require the
classification of loans and other assets such as debt and equity securities,
considered to be of lesser quality, as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as "loss" are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. When SFNB
determines that an asset should be classified, it generally does not establish a
specific allowance for such asset unless it determines that such asset may
result in a loss. SFNB may, however, increase its general valuation allowance in
an amount deemed prudent. General valuation allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. SFNB's policy provides for the
establishment of a specific allowance equal to 100% of the amount of an asset
classified as "loss" or a charge off of such amount. A savings institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS which can order the
establishment of additional general or specific loss allowances. SFNB reviews
the problem loans in its portfolio on a monthly basis to determine whether any
loans require classification in accordance with applicable regulations, and
believes its classification policies are consistent with OTS policies.
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<PAGE>
Non-performing Assets. The following table sets forth information
regarding loans which are 90 days or more delinquent, non-accrual loans and
other real estate owned. The amount of interest that would have been recorded
during 1997 had such loans classified as non-accrual been current in accordance
with their original terms, amounted to approximately $15 thousand. There were no
other non-performing assets except as included in the table below for the dates
indicated:
At December 31,
-------------------------
1997 1996
---- ----
(In thousands)
Non-accruing loans delinquent 90 days or more....... $ 193 --
Accruing loans delinquent 90 days or more........... 20 $ 319
------- -------
Total non-performing loans....................... 213 319
Total real estate owned, net of related
allowance for losses............................. -- --
------- -------
Total non-performing assets......................... $ 213 $ 319
======= =======
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers among other matters the estimated net realizable
value of the underlying collateral, national and regional economic conditions,
trends in the real estate markets in its primary market area, historical loan
loss experience and other factors that warrant recognition in providing for an
adequate loan loss allowance. Management will continue to monitor and modify the
allowance for loan losses as conditions dictate. Although management maintains
the allowance at a level that it considers adequate to provide for potential
losses, there can be no assurances that such losses will not exceed the
estimated amounts or that higher provisions will not be necessary in the future.
The following table summarizes the changes in the allowance for
possible loan losses from loans charged off and recoveries on loans previously
charged off by loan category, additions to the allowance which have been charged
to income and reductions for the allowance applicable to loans which were sold:
<TABLE>
<CAPTION>
For the Years
Ended December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year........................................... 303 293
Loans charged-off:
Real estate.......................................................... -- 2
Consumer............................................................. 47 13
------- -------
Total loans charged-off................................................ 47 15
------- -------
Recoveries of loans previously charged off:
Real estate.......................................................... -- 11
Consumer............................................................. 1 14
------- -------
Total loans recovered.................................................. 1 25
------- -------
Net loan (charge-offs) recoveries...................................... (46) 10
Additions to the allowance for loan losses............................. 133 --
Less allowance applicable to loans sold................................ 227 --
------- -------
Ending balance December 31, 1997....................................... 163 303
======= =======
Ratio of net (charge-offs) recoveries to average outstanding loans..... (0.35%) 0.05%
</TABLE>
78
<PAGE>
The following table represents an allocation of SFNB's allowance for
loan losses by loan category and presents the percentage of loans in each loan
category to the total loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1997 1996
------------------------ -----------------------
Allocated Allocated
loan loss loan loss
allowance Percent allowance Percent
--------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C>
Balance at end of period applicable to:
1-4 family mortgage loans..................................... $ 4 30.7% $ 122 68.0%
Multi-family, commercial real estate.......................... 34 23.9 37 10.1
Construction and land loans................................... -- -- 24 1.8
Commercial business........................................... 8 11.6 58 8.5
Consumer loans................................................ 117 33.8 62 11.6
------ ------ ------ ------
$ 163 100.0% $ 303 100.0%
====== ===== ====== =====
</TABLE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES ACTIVITIES
SFNB, as a federally chartered savings association, has authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of federal agencies, certificates of deposit of
federally insured banks and savings associations, bankers' acceptances and
federal funds. Subject to various restrictions, SFNB also may invest a portion
of its assets in commercial paper, corporate debt securities, and mutual funds
whose assets conform to the investments that a federally chartered savings
association is otherwise authorized to make directly. SFNB also is required to
maintain liquid assets at minimum levels which vary from time to time.
The Board of Directors establishes the investment policy of SFNB. This
policy dictates that investments will be made based on the safety of the
principal, liquidity requirements, return on the investment and capital
appreciation. SFNB does not have nor does it intend to invest in below
investment grade instruments. All investments are reviewed quarterly by SFNB's
Board of Directors.
At December 31, 1997, total mortgage-backed securities aggregated $27.6
million, or 52.7% of total assets. As of December 31, 1997, mortgage-backed
securities were issuances of the Government National Mortgage Association,
Fannie Mae or the Federal Home Loan Mortgage Corporation.
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<PAGE>
The following table sets forth the composition of the banking
operation's investment portfolio and mortgage-backed securities portfolio, all
of which are considered available for sale, at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1997 1996
------------------------- ----------------------
Carrying % of Carrying % of
value Portfolio value Portfolio
----- --------- ----- ---------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. government agencies..................... $ 6,063 17.6% $ 1,877 5.6%
Mortgage-backed securities................... 27,642 80.5 32,522 93.8
FHLB stock................................... 652 1.9 214 0.6
---------- ---- --------- ----
Total investment securities............... $ 34,357 100.0% $ 34,613 100.0%
========== ===== ========= =====
</TABLE>
The following table sets forth the maturity and yield on the
investment and mortgage-backed securities portfolio at December 31, 1997:
<TABLE>
<CAPTION>
Securities Portfolio Maturity Schedule
(In thousands)
At December 31, 1997
------------------------------------------------------------------------------------
After one but After five but
Within within within After
one year five years ten years ten years
----------------- ---------------- ----------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government
agencies..................... $ 5,063 5.26% $1,000 6.25% -- -- -- --
FHLB stock................... 652 -- -- -- -- -- -- --
--------- --------- --------- ---------
Total investment
securities................... 5,715 5.26 1,000 6.25 -- -- -- --
--------- --------- --------- ---------
Mortgage-backed
securities................... 5,948 6.86 16,205 6.84 $ 5,140 6.79% $ 349 8.02%
--------- --------- --------- ---------
Total investment and
mortgage-backed securities... $ 11,663 6.00% $ 17,205 6.81% $ 5,140 6.79% $ 349 8.02%
========= ========= ========= =========
</TABLE>
DEPOSIT ACTIVITY AND SOURCES OF FUNDS
SFNB's lending and investment activities are predominantly funded by
savings deposits and interest and principal repayments on loans and
mortgage-backed securities. SFNB offers a variety of deposit accounts having a
wide range of interest rates and terms. SFNB's deposit accounts consist of
savings accounts, NOW (checking) accounts, demand accounts, money market deposit
accounts and certificates of deposit. SFNB does not use brokers to obtain
deposits.
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<PAGE>
Maturity information regarding SFNB's deposit accounts of $100,000 or
more is shown below.
December 31,
------------
1997 1996
---- ----
(In thousands)
Three months or less............................. -- $ 849
Over three through six months.................... -- 949
Over six through twelve months................... $ 425 1,926
Over twelve months............................... 606 1,733
--------- ---------
Total time deposits of $100,000 or more....... $ 1,031 $ 5,457
========= =========
Since the sale of the assets and liabilities of SFNB's Pineville,
Kentucky branch, SFNB's deposit gathering strategy has been focused on its
Internet banking activities. Beginning in December 1996, upon the opening of its
Atlanta City Office, SFNB began to focus its deposit gathering strategy on the
local Atlanta metropolitan area. In addition to traditional marketing programs,
SFNB anticipates that it will offer above market interest rates to attract
deposits. Management anticipates that the higher cost of deposits will be offset
by other efficiencies gained through the Internet delivery channel.
Borrowings. The Federal Home Loan Bank System (the "FHLB System")
functions in a reserve credit capacity for savings associations and certain
other home financing institutions. Members of the FHLB System are required to
own capital stock in a Federal Home Loan Bank ("FHLB"). Members are authorized
to apply for advances on the security of such stock and certain of their home
mortgages and other assets (principally securities which are obligations of, or
guaranteed by, the United States) provided certain creditworthiness standards
have been met. Under its current credit policies, the FHLB limits advances based
on a member's assets, total borrowings and net worth.
SFNB may use FHLB advances as an alternative source of funds to
deposits in order to fund its lending activities when it determines that it can
profitably invest the borrowed funds over their term. Pursuant to SFNB's
asset/liability management strategy, it has used FHLB advances to fund
adjustable rate and fixed rate mortgage loan originations. SFNB had outstanding
FHLB advances of $1.0 million at December 31, 1997.
ASSET AND LIABILITY MANAGEMENT
Net interest income, the primary component of net income of the banking
operations, is derived from the difference or "spread" between the yield on
interest-earning assets and the cost of interest-bearing liabilities. SFNB has
sought to reduce its exposure to changes in interest rates by matching more
closely the effective maturities and repricings of its interest-sensitive assets
and liabilities. At the same time, SFNB's asset and liability management
strategies also must accommodate customer demands for particular types of
deposit and loan products.
While much of SFNB's asset and liability management efforts involve
strategies which increase the rate sensitivity of its loans and investments such
as originations of adjustable rate loans and purchases of adjustable-rate
mortgage-backed securities and short term investments, it also uses certain
techniques to reduce the rate sensitivity of its deposits and borrowed money.
Those techniques include attracting longer term certificates of deposit when the
market will permit and emphasizing core deposits which are less sensitive to
changes in interest rates.
SFNB measures its exposure to rate fluctuations on a quarterly basis
primarily by using a computer modeling system to quantify the approximate impact
that increases and decreases in interest rates would have on net interest
income. Under the model, interest rates are assumed to move to specified levels
on an immediate or "shock" basis. SFNB's Board-approved tolerance for
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<PAGE>
decreases in net interest income is up to 20%, based upon the model's prediction
of the impact of an immediate 200-basis point increase in interest rates. At
December 31, 1997, using asset and liability repricing assumptions based on
historical experience, if interest rates were to immediately increase by 200
basis points, the negative impact on SFNB's net interest income would be within
the Board-approved tolerance level.
SFNB also monitors other indicators of interest rate risk. One commonly
used measure of interest rate risk exposure is reflected in SFNB's one-year
cumulative gap, which is the difference between rate sensitive assets and rate
sensitive liabilities maturing or repricing within one year. An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets.
At December 31, 1997, SFNB's one-year gap was a negative 10.7%. SFNB
believes, however, there are many shortcomings inherent in the gap analysis and,
accordingly, such analysis may not be an accurate measure of interest rate risk.
Although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable-rate mortgages, have features
which restrict changes in interest rates on a short-term basis and over the life
of the assets. In the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. The ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
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<PAGE>
The following table sets forth the amount of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997 which are
expected to mature or reprice in each of the time periods shown:
<TABLE>
<CAPTION>
Maturity and Rate Sensitivity Analysis
--------------------------------------------------------------------------
Repricing Repricing Repricing
within within within Repricing
0-3 months 4-12 months 1-5 over
Amount years 5 years
----------- ------------ ------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................... $14,247 $8,562 $4,733 $ 824 $ 128
Investment securities.............. 6,063 -- 5,063 1,000 --
Mortgage-backed securities......... 27,642 1,489 4,459 16,205 5,489
Interest-earning deposits.......... 1,000 1,000 -- -- --
------- ------- -------- -------- -------
Total interest-earning assets.... $48,952 $11,051 $14,255 $18,029 $ 5,617
======= ======= ======= ======= =======
Interest-bearing liabilities:
Transaction accounts............... $22,608 $22,608 -- -- --
Certificate accounts............... 12,341 -- $ 7,800 $ 4,541 --
Advances from FHLB................. 1,019 35 108 656 $ 220
------- ------- -------- -------- -------
Total interest-bearing
liabilities.................... $35,968 $22,643 $ 7,908 $ 5,197 $ 220
======= ======= ======= ======= =======
Periodic repricing difference
(periodic gap).................... $(11,592) $ 6,347 $ 12,832 $ 5,397
======= ======= ======= =======
Cumulative repricing differences
(cumulative gap).................. $(11,592) $ (5,245) $ 7,587 $12,984
======= ======= ======= =======
Cumulative gap to total
interest-earning assets............. (23.7%) (10.7%) 15.5% 26.5%
======= ======= ======= =======
</TABLE>
The interest rate sensitivity of SFNB's assets and liabilities could
vary substantially if different assumptions were used or if actual experience
differs from the assumptions used.
The preceding table was prepared utilizing certain assumptions
regarding prepayment rates. While management believes that these assumptions are
reasonable, the actual interest rate sensitivity of SFNB's assets and
liabilities could vary significantly from the information set forth in the table
due to market and other factors. The following assumptions were used: (i)
adjustable-rate first mortgage loans on single-family residences and
mortgage-backed securities will prepay at the rate of 19.0% per year; (ii) first
mortgage loans on multi-family, commercial real estate, land and construction
loans will not prepay; (iii) consumer and commercial business loans will prepay
at an annual rate of 18%; and (iv) fixed-rate mortgage loans on single-family
residential properties will prepay at an annual rate of 12.0%.
REGULATION
SFNB, as a federal savings bank, is subject to extensive regulation,
supervision and examination by the OTS as its primary federal regulator. SFNB
also is subject to regulation, supervision and examination by the FDIC and as to
certain matters by the Federal Reserve Board. The following is a summary of the
laws and regulations that are applicable to SFNB, and would be applicable to New
Bank after the Reorganization. This summary does not purport to be a complete
description of such laws and regulations or of all such laws and regulations.
The operations of SFNB (or New Bank) may be affected by legislative and
regulatory changes as well as by changes in the policies of various regulatory
authorities.
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<PAGE>
GENERAL. OTS regulations generally provide that savings institutions
must be examined no less frequently than every 12 months, unless the institution
(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 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, and then it
must be examined no less frequently than every 18 months. SFNB also is subject
to assessments by the OTS to cover the costs of such examinations.
CAPITAL REQUIREMENTS. OTS regulations require that savings institutions
maintain (i) "core capital" in an amount of not less than 3% of adjusted total
assets, (ii) "tangible capital" in an amount not less than 1.5% of adjusted
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 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. At June
30, 1998, SFNB exceeded all capital requirements.
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 100% (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%.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances.
The following table sets forth the actual and required minimum levels
of regulatory capital for SFNB under applicable OTS regulations as of June 30,
1998 (dollars in thousands):
<TABLE>
<CAPTION>
Actual Actual % Required Required % Excess
------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Core............... $ 6,534 8.06% $ 2,279 3.0% $ 4,255
Tangible........... 6,534 8.06 1,140 1.5 5,394
Risk-based......... 6,716 17.21 3,122 8.0 3,594
</TABLE>
PROMPT CORRECTIVE ACTION. Pursuant to the Federal Deposit Insurance
Act, the federal banking agencies established capital measure levels at which an
insured institution is deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Federal banking agencies are required to take prompt
corrective action with respect to insured institutions which are not at least
adequately capitalized. The degree of required regulatory intervention for
institutions that are not at least adequately capitalized is tied to
84
<PAGE>
an insured institution's capital category, with increasing scrutiny and more
stringent restrictions, including the appointment of a receiver, being imposed
as an institution's capital declines.
The prompt corrective action regulations are generally based upon an
institution's capital ratios. Under the prompt corrective action regulation
adopted by the OTS, an institution will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
or core capital to risk-weighted assets ratio of 6% or greater, and a leverage
ratio of 5% or greater (provided that the institution is not subject to an
order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure); (ii) "adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 4% or greater, and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite 1 in its most
recent report of examination); (iii) "undercapitalized" if the institution has a
total risk-based capital ratio that is less than 8%, a Tier 1 or core capital to
risk-weighted assets ratio of less than 4%, or a leverage ratio that is less
than 4% (3% if the institution is rated composite 1 in its most recent report of
examination); (iv) "significantly undercapitalized" if the institution has a
total risk-based capital ratio that is less than 6%, a Tier 1 or core capital to
risk-weighted assets ratio that is less than 3%, or a leverage ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than or equal to 2%. The
regulation also permits the OTS to determine that a savings institution should
be classified in a lower category based on other information, such as the
institution's examination report, after written notice and an opportunity for a
hearing.
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 institutions 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)
restrict transactions with affiliates; (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; (viii) divest or liquidate any
subsidiary which the OTS determines poses a significant risk to the institution;
and (ix) alter, reduce or terminate any activity that the OTS determines poses
excessive risk to the institution.
Critically undercapitalized institutions are subject to additional
restrictions. No later than 90 days after a savings institution becomes
critically undercapitalized, the Director of the OTS is required to appoint a
conservator or receiver for the institution, unless the Director determines,
with the concurrence of the FDIC, that other action would better achieve the
purpose of prompt corrective action. The Director also must make periodic
redeterminations that the alternative action continues to be justified no less
frequently than every 90 days. The Director is required to appoint a receiver if
the institution remains critically undercapitalized during the quarter that
begins nine months after the institution becomes critically undercapitalized,
unless the institution is in compliance with an approved capital plan and the
OTS and FDIC certify that the institution is viable.
Under the OTS prompt corrective action regulations, at June 30, 1998,
SFNB was classified as well capitalized based on its capital ratios.
SAFETY AND SOUNDNESS GUIDELINES. The federal banking agencies have
adopted safety and soundness guidelines 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 stockholders. The guidelines are intended to set out standards that
the agencies will use to identify
85
<PAGE>
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
their 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 their operations.
Under the guidelines, an institution not meeting one or more of the
safety and soundness standards may be required to file a compliance plan with
the appropriate federal banking agency. In the event that an institution 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; (2)
require the institution to increase its ratio of tangible equity to assets; (3)
restrict the rates of interest that the institution may pay; or (4) take any
other action that would better carry out the purpose of the prompt corrective
action regulations.
QUALIFIED THRIFT LENDER REQUIREMENT. SFNB is deemed to be a QTL if it
qualifies as a "domestic building and loan association," as defined in section
7701(a)(19) of the Code, or if 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 the Resolution Trust
Corporation), (iii) shares of stock issued by any Federal Home Loan Bank,
Freddie Mac or Fannie Mae, and (iv) loans for educational purposes, loans to
small businesses and loans made through credit cards or credit card accounts. 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, other than loans for
educational purposes, loans to small businesses and loans made through credit
cards or credit card accounts. 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.
Any savings institution that fails to meet the definition of a QTL must
limit its future investments and activities (including branching and payments of
dividends) to those permitted for both savings institutions and national banks.
SFNB currently qualifies as a QTL.
LIQUIDITY. Under applicable federal regulations, savings institutions
are required to maintain sufficient liquidity to ensure their safe and sound
operation. The OTS regulations specifically require that a savings institution
maintain a minimum average daily balance of liquid assets (including cash,
certain time deposits, certain bankers' acceptances, certain mortgage-related
securities and mortgage loans, certain corporate debt securities and highly
rated commercial paper, securities of certain mutual funds and specified United
States government, state or federal agency obligations) in each calendar quarter
equal to not less than a specified percentage either of the average daily
balance of the savings institution's net withdrawable accounts plus short-term
borrowings during the preceding quarter or the amount of the institution's net
withdrawable accounts plus short-term borrowings at the end of the preceding
calendar quarter. Under the HOLA, this liquidity requirement, which currently is
4%, 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.
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CAPITAL DISTRIBUTIONS. An OTS rule imposes limitations on all capital
distributions by savings institutions (including dividends, stock repurchases
and cash-out mergers). Generally, an institution that both before and after a
proposed capital distribution will have 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 institution'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 savings institution that either before or after a proposed capital
distribution fails to meet its 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.
The Federal Deposit Insurance Act further prohibits an insured
depository institution from declaring any dividend, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be classified as
undercapitalized, significantly undercapitalized or critically undercapitalized.
The OTS recently proposed revising its capital distribution regulation
to conform the definition of "capital distribution" to the definition used in
its prompt corrective action regulations. Under the proposal, there would be no
specific limitations on the amount of permissible capital distributions, but the
OTS could disapprove a capital distribution if the institution would not be at
least adequately capitalized under the OTS prompt correction action regulations
following the distribution, if the distribution raised safety or soundness
concerns, or if the distribution violated a prohibition contained in any
statute, regulation, or agreement between the institution and the OTS, or a
condition imposed on the institution by the OTS. The OTS would consider the
amount of the distribution when determining whether it raised safety or
soundness concerns.
RECENT DEVELOPMENTS. In September 1996, legislation (the "1996
legislation") was enacted to address the undercapitalization of the SAIF, of
which SFNB is a member. As a result of the 1996 legislation, SFNB incurred a
one-time charge of $0.5 million (before taxes) to pay for a special assessment
based upon its level of SAIF deposits as of March 31, 1995. After the SAIF was
deemed to be recapitalized, SFNB's deposit insurance premiums to the SAIF were
reduced as of September 30, 1996. SFNB expects that its future deposit insurance
premiums will continue to be lower than the premiums it paid prior to the
recapitalization.
The 1996 legislation also contemplates the merger of the SAIF with the
BIF, which generally insures deposits in national and state-chartered banks. The
combined deposit insurance fund, which will be formed no earlier than January 1,
1999, will insure deposits at all FDIC insured depository institutions. As a
condition to the combined insurance fund, however, the 1996 legislation
contemplates that no insured depository institution would be chartered as a
savings association. Several proposals for abolishing the federal thrift charter
were introduced in Congress during 1997 in bills addressing financial services
modernization, including a proposal from the Treasury Department developed
pursuant to requirements of the 1996 legislation. While no legislation was
passed in 1997, a financial modernization bill was passed by the House of
Representatives on May 13, 1998. The bill passed by the House of Representatives
would preserve the thrift charter, but would require the FDIC to review and
study issues relating to the planned merger of the SAIF and BIF, including the
cost of merging the funds and the manner in which the costs would be distributed
among the members of the respective funds. Within 9 months of the bill being
enacted into law, the FDIC would be required to prepare a report on the study,
which would include a description of the plans developed by the FDIC for the
merger of the funds. In order to be enacted into law, the bill would have to be
passed by the Senate and signed by the President. SFNB is unable to predict
whether the bill passed by the House of Representatives will become law, or what
form any final legislation will take. If final legislation is passed abolishing
the federal thrift charter, SFNB could be
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required to convert its federal charter to either a national bank charter, a new
federal type of bank charter or a state depository institution charter.
Various proposals were introduced in Congress in 1997 to permit the
payment of interest on required reserve balances, and to permit savings
institutions and other regulated financial institutions to pay interest on
business demand accounts. While this legislation appears to have strong support
from many constituencies, SFNB is unable to predict whether such legislation
will be enacted.
In 1997, the OTS proposed revising its regulations addressing
electronic banking operations. The proposal would expand the services that SFNB
can provide electronically by permitting savings institutions to engage in any
activity through electronic means that they may conduct through more traditional
delivery mechanisms, including opening new deposit accounts and the
establishment of loan accounts. The proposal also would allow savings
institutions to market and sell electronic capacities and by-products to third
parties if the capacities and by-products are acquired or developed in good
faith as part of providing financial services.
The OTS recently released for comment proposed guidance on minimum
standards for interest rate risk management as well as proposed guidelines
examiners will use in assigning the "sensitivity to market risk" component in
the CAMELS rating system. The proposal would require all savings institutions to
establish, and receive board of director approval for, minimum interest rate
risk limits, with the limits to be expressed in terms of net portfolio value and
to specify the minimum allowable net portfolio value ratio for current interest
rates and for a range of interest rates assuming immediate, permanent, parallel
movement equal to plus and minus 100, 200 and 300 basis points. The proposal
would introduce examiner assessment criteria for interest rate risk limits,
would increase the threshold at which savings institutions must calculate their
own net portfolio value interest rate sensitivities, and detail risk management
practices for board of directors and senior management, including oversight
responsibilities, policies and procedures, and risk measurement, monitoring and
control. The proposal also provides guidance for examiner assessment of the
level of a savings institution's interest rate risk exposure as well as for the
assessment of the quality of the institution's practices to manage interest rate
risk.
The FDIC has issued a request for comment regarding its advertising
regulations with respect to electronic transmission of banking information
including over the Internet. The FDIC staff has indicated that they are of the
view that an institution's home page on the World Wide Web is, to some extent,
an advertisement and therefore should comply with FDIC advertising rules that
require the statement "Member of the Federal Deposit Insurance Corporation" or
"Member FDIC." The FDIC also is seeking comments with respect to whether insured
depository institutions should be required to utilize an electronic equivalent
of the official FDIC bank or savings association signs on their World Wide Web
sites. SFNB can give no assurances with respect to the final form of any such
regulation.
EMPLOYEES
As of June 30, 1998, SFNB and S1 had 18 and 255 (1 part-time)
employees, respectively, not including 24 S1 Data Center personnel and 34
contractors. SFNB's and S1's employees are not represented by a collective
bargaining unit, and SFNB and S1 believe that their relations with their
employees are satisfactory. SFNB and S1 currently offer medical insurance
benefits to employees and other benefits including a 401(k) savings plan.
DESCRIPTION OF PROPERTY
SFNB's executive offices and its Atlanta City Office are located at
3390 Peachtree Road, NE, Atlanta, Georgia. SFNB's customer service center also
is located at 3390 Peachtree Road, NE, Atlanta, Georgia. S1 also maintains a
development office in Littleton, Massachusetts. The executive offices, Atlanta
City Office, customer service center and the Littleton office are leased
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facilities. The customer service center houses SFNB's Internet bank server,
technical staff and customer/technical service representatives. SFNB owns
electronic data processing equipment with a net book value of approximately $2.5
million at December 31, 1997.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which SFNB or any subsidiary
is a party to or to which their property is subject other than routine
litigation incidental to its business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
S1 is a wholly owned subsidiary of SFNB, the world's first Internet
bank. SFNB offers banking services to its customers, including deposit and bill
paying services and credit card lending, on the Internet. Additionally, SFNB
offers other traditional banking activities through its City Office in Atlanta,
Georgia. S1 develops, markets, installs and services integrated, brandable
Internet applications that enable financial institutions to offer products,
services and transactions over the Internet in a secure environment. S1
generates revenues from licensing the VFM suite of products, providing
professional services relating to the installation and integration of the
software, and providing data center processing services and technical support to
financial institution customers.
S1's primary product is VFM, a suite of software products designed to
provide consumers remote access to all aspects of their balance sheet via the
Internet. This "virtual net worth" solution allows consumers to have access to
all of their financial information on a current market valuation basis even
though the information is maintained on separate computer systems operated by
banks, brokerage firms, insurance companies, credit card processors, etc. S1's
initial product in the suite, VBM, allows end-users to view, categorize, update
and generate reports on account detail, view balance information and execute
banking transactions over the Internet such as transfers and bill payments. The
second product in the suite, VCCM, provides customers access to an on-line
credit card account statement to view, categorize and generate reports on
account detail. VIM, which is scheduled for general release in 1998, allows
customers the ability to open brokerage accounts, enter and execute stock and
mutual fund transactions and view portfolio positions.
S1 continues to enhance the existing VFM suite by developing new
applications and migrating existing products to a more efficient software
architecture. Implementations and upgrades to VBM version 4.0 are expected to
begin in the second half of 1998. This release will consolidate all existing
users of VBM onto the same version of VBM, which is expected to occur by the
third quarter of 1999. In addition, this version will improve operational
efficiencies and stability of the existing product. Along with this VBM release,
S1 is also releasing Virtual Loan Manager, which will allow end users to view
loan balances and make loan payments.
On June 30, 1998, SFNB and the Holding Company entered into a
relationship with BroadVision under a Stock Purchase Agreement and other
technology and licensing agreements. Under the Stock Purchase Agreement,
BroadVision purchased on July 15, 1998, 181,610 shares of SFNB Common Stock by
granting to SFNB a license which grants SFNB the right to use and resell
BroadVision's "One-to-One" marketing suite of software products. Over the next
two quarters, S1 will integrate the BroadVision "One-to-One" marketing product
with the VFM suite. The addition of the "One-to-One" product will allow
financial institutions to better market their services to their customers using
the VFM product through intelligent cross-selling, relationship management and
content management capabilities. Management anticipates that it will earn
revenues from this
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arrangement by direct sales of the "One-to-One" licenses, fees for implementing
the product and ongoing fees for running the product in the S1 Data Center.
S1 is also currently working on the development of the next generation
of the VFM suite of products which will incorporate technology supporting
marketing, client services and a more scalable transaction processing operating
environment. This version of VFM is expected to be released in 1999. Future
products in the suite anticipated to be developed include Virtual Insurance
Manager, Virtual Corporate Cash Manager and Virtual Bill Presentment.
Using VFM, all of the customer's information is consolidated from
disparate mainframe legacy systems and brought together centrally on the VFM
database server. This consolidation enables end-users to access their financial
information through many different types of end-user access devices such as an
Internet browser, personal financial manager software or voice response units.
The VFM model also provides a financial institution with the ability to
implement modifications and add enhancements without the need for mass
distribution and installation of new software at their customers' location.
The primary difference between VFM and competitive products is the
additional functionality provided by the incorporation of business logic and a
database running on a server within the VFM product. The combination of database
and business logic on the VFM server, often referred to as a "fat server"
architecture, significantly raises the complexity of building and operating the
software as compared to other Internet banking products which do not have an
integrated business logic and database ("thin server" architecture). However,
having integrated business logic and a database in front of the financial
institution's mainframe systems provides for far greater functionality and
performance for end-user customers. In a fat server environment, end-users can
personalize information within the VFM server by including the name of payees
and by categorizing transactions in their accounts. Additionally, the fat server
provides for the capability to consolidate the end-user's financial data from
disparate host systems (banking, brokerage, insurance, etc.) in one place.
Information contained in the fat server is retained for an extended period of
time allowing the end-user customer to generate consolidated reports on
financial transactions during the period. Further, the information on the fat
server is available to the end-user customer during extended periods when the
financial institution's mainframe systems are not readily accessible for
customer banking inquiries.
The thin server model, which connects the end-user directly to the
financial institution's mainframe system, limits the information available to
the data currently being held on the host system. Additionally, after 60 to 90
days, financial institutions remove a customer's financial data from the
mainframe system and store the information in a fashion that makes it
unavailable to the customer through their thin server Internet banking
applications. Most mainframe systems are unaccessible to the customer while
being updated. VFM's fat server architecture mitigates this risk of service
unavailability by integrating server based business logic and database so
end-user requests can be serviced anytime, 24 hours a day, 365 days a year.
Limitations such as those described above in the thin server model significantly
reduce the information and the overall functionality to the end-user customer.
The thin server start-up and maintenance costs are significantly less than the
fat server's, however, S1 believes most major financial institutions are
recognizing the limitations in the thin server model and are moving in the
direction of the fat server model.
S1 derives revenues from its financial institution customers primarily
through one of the following three distribution channels:
o By processing Internet transactions through the S1 Data Center.
Financial institutions pay a monthly fee for processing and
technical support based on the number of customers using the VFM
product.
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O By licensing VFM to third party data processors. Third party data
processors install VFM at their own data processing centers and
offer the product to their financial institution clients. S1
earns fees from third party data processing centers through a
monthly fee based on the number of customers of the financial
institutions who are using the product.
O By licensing VFM directly to financial institutions which operate
their own data centers "in-house." S1 receives a license fee
up-front plus an annual recurring charge for ongoing product
upgrades and support and maintenance which is based on the
greater of the number of customers or a percentage of the initial
license fee.
Additionally, S1 provides professional services related to the installation and
integration of the VFM product, including installing the product at third party
data processing centers and financial institutions and integrating the financial
institution's data processing systems with the S1 Data Center. Customers are
charged for these services on primarily a time and materials basis. During the
previous two years, professional services has been the largest revenue source as
S1 has focused on the sale, implementation and integration of the VFM product in
the marketplace. However, growth is expected to occur in the software licensing
and data processing fees in the future as more customers use the product.
The table below reflects quarter end information on the cumulative
number of financial service organizations that have either executed a letter of
intent or signed a contract to use the S1 software applications and technology
segregated by distribution channel for the quarters ended June 30, 1998 and 1997
and December 31, 1998 and 1997. The table also shows the quarter end information
on completed implementations.
<TABLE>
<CAPTION>
December 31, June 30, December 31, June 30,
1996 1997 1997 1998
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Number of financial
institutions:
S1 data center................... 7 18 17 17
Third party data processors*..... 4 24 43 58
Direct license in-house.......... 2 6 6 6
------- ------- ------- -------
13 48 66 81
------- ------- ------- -------
Completed VFM implementations:
S1 data center................... 2 3 8 12
Financial institutions using
third party data processors*... -- 3 11 17
Direct license in-house.......... -- -- 4 4
------- ------- ------- -------
2 6 23 33
------- ------- ------- -------
Number of VFM customers
in S1 data center**.............. 9,500 17,600 32,700 58,100
Number of accounts processed in
S1 data center**................. 12,200 21,000 49,500 94,600
Number of accounts processed
by third -- -- 700 8,400
party data processors*...........
Estimated number of accounts
using VFM though direct license*. -- -- 2,000 160,000
</TABLE>
* Information based on discussions with officials of third party data
processors and direct licensees.
** Includes SFNB's accounts and customers
S1 charges financial institutions which use the S1 Data Center based on the
number of customers, which may have multiple relationships, rather than the
number of accounts processed. Accordingly, Data Center revenue is based on the
number of VFM customers. The Data Center costs are based on the number of
financial institutions using the product and the number of accounts processed.
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RESULTS OF OPERATIONS -- COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES AND OPERATING MARGINS
For the six months ended June 30, 1998, total revenue increased to $8.0
million from $4.6 million, a 75% increase. Direct costs increased 8% from $6.9
million for the six months ended June 30, 1997 to $7.5 million for the six
months ended June 30, 1998. As a result of the size of the companies S1 does
business with and the magnitude of the implementations for companies of this
size, along with the limited amount of capacity to perform implementations, in
any given period a significant portion of the revenues of S1 may be attributed
to one or two customers.
Software Licensing. For the six months ended June 30, 1998, software
license fees were $1.4 million compared to $1.9 million in the corresponding
period in 1997. Software license fees decreased between 1997 and 1998 as there
were four implementations of direct licenses occurring in 1997 for which the
license fees were recognized on a percentage of completion basis over the
implementation period. These implementations were completed in the fourth
quarter of 1997. During 1998 there have not been any new in-house direct license
implementations occurring as new implementations of VFM are occurring either in
the S1 Data Center or through third party data processors. In March 1998, S1
entered into technology and licensing and consulting agreements with Royal Bank
for $5.0 million payable upon the Sale of the Banking Business. Management
anticipates that software license fees will increase in future periods as S1
recognizes revenue from this agreement as well as from third party processors as
they begin bringing banks on-line.
Direct costs associated with software licenses were $40 thousand for
the six months ended June 30, 1998 compared to $974 thousand for the six months
ended June 30, 1997. In 1997, the direct costs associated with software license
fees mainly consisted of the amortization of purchased technology. Purchased
technology includes technology acquired in the 1996 acquisitions and software
development costs paid to an independent contractor in 1995 and 1996. These
costs have been amortized using the straight-line method over a period of 3
years, which is the period resulting in the amount that is the greater of the
amortization cost using the straight-line method or the amortization cost using
the ratio of current revenues to total anticipated revenues. During the fourth
quarter of 1997, SFNB wrote off the remaining unamortized balance of goodwill
and purchased technology associated with the 1996 acquisitions after determining
that there were minimal future cash flows expected to be derived from these
intangible assets as discussed further below. Accordingly, direct costs for
software license fees decreased for the six months ended June 30, 1998 as
compared to the same period for 1997. Direct costs of software license fees is
expected to approximate the level in 1998 in future periods as direct software
license costs in the future are expected to be minimal.
Professional Services. For the six months ended June 30, 1998,
professional services revenues increased $3.0 million from $2.6 million to $5.6
million. The direct costs associated with professional services, which are
primarily personnel costs, were $3.8 million for the six months ended June 30,
1998, resulting in a gross margin of $1.8 million, compared to $2.7 million and
a negative gross margin of $92 thousand in the same period for 1997. The
increase in professional services revenues and the improvement in the gross
margin in 1998 as compared to 1997 can be attributed to the fixed pricing
established for S1's initial implementation contracts for professional services.
Under these arrangements, S1 was limited in the amount it could bill for
professional services to a fixed price contained in the contract. In addition,
S1 experienced increased costs to implement these institutions as a result of
delays experienced in the early implementations in integrating VBM with the
customers' legacy mainframe systems resulting in the accrual of losses related
to these contracts in early 1997. Because S1 has gained more experience in
implementing VFM, and because S1 now prices
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its contracts based on time and materials, management anticipates that the
professional services' margin will either remain comparable to that realized in
1998 or increase in the future.
Data Center. Data Center revenues, which includes revenues for
technical support provided to all institutions using VFM, increased to $904
thousand for the six months ended June 30, 1998 compared to $114 thousand for
the six months ended June 30, 1997. At the end of the second quarter of 1998,
twelve financial institutions were on-line through the S1 Data Center compared
to three financial institutions at the end of the second quarter 1997. For the
six months ended June 30, 1998, direct costs associated with the Data Center
were $3.6 million compared to $3.2 million for the six months ended June 30,
1997. The direct costs of the Data Center are attributable to establishing the
basic infrastructure (composed of personnel and equipment) needed to process
accounts for the growing financial institution customer base. The established
capacity at June 30, 1998 should be adequate to meet the anticipated growth in
both the number of entities and the accounts processed in the Data Center for
the remainder of 1998.
During the month of June 1998, the Data Center processed, including
SFNB, in excess of 94,600 Internet banking accounts, representing approximately
58,100 billable customers. This represents an increase of 350% in the number of
accounts from approximately 21,000 accounts and an increase of 230% in the
number of customers from approximately 17,600 customers for the month of June
1997.
OPERATING EXPENSES
Operating expenses increased to $17.1 million for the six months ended
June 30, 1998 from $10.9 million in the same period in 1997. Included in the
1998 operating expenses is $5.5 million of amortization of goodwill related to
the 1997 acquisition of Solutions by Design, Inc. ("SBD") and depreciation and
amortization. During the six months ended June 30, 1997, depreciation and
amortization of goodwill related to acquisitions amounted to $1.4 million.
Excluding these amounts, operating expenses were $11.6 million in 1998 compared
to $9.5 million in 1997.
Approximately $7.0 million of the 1998 operating expenses related to
product development costs as compared to $4.9 million in second quarter 1997.
The increase in product development costs is related primarily to the increase
in personnel expenses resulting from the acquisition of SBD in the fourth
quarter of 1997. The acquisition has resulted in an increase in personnel costs
as a result of the additional employees brought on staff following the
acquisition. S1 expected to experience significant growth in personnel based on
the growing operations. The SBD acquisition accelerated the growth in personnel
costs and reduced the additional costs associated with using contract labor.
Also, the 1998 product development costs included a significant portion of a
$1.1 million non-cash compensation charge associated with the vesting of certain
performance options granted to former employees of SBD. The increase in product
development costs represents management's commitment to enhancing the current
VFM products by migrating the existing products to more efficient software
architecture and to developing new VFM applications, including the Virtual
Investment Manager and the Virtual Loan Manager.
Selling and marketing expenses and general and administrative expenses
for the six months ended June 30, 1998 were consistent with the amounts for the
six months ended June 30, 1997.
In the fourth quarter 1997, the Board of Directors decided to abandon
certain research and development efforts known as Webtone. Following the
decision to terminate the activities, the Chairman of the Board created and
funded his own company to continue to develop Webtone. In undertaking these
activities, Mr. McChesney and the Board of Directors have agreed that Webtone
and Mr. McChesney should enter into some form of arrangement for a future
business relationship. However, the parties have not determined what that
arrangement should be, and do not intend to complete such discussions until
following the Reorganization, at which time the Holding Company (which in
contrast to SFNB will be unregulated as to its activities) will have far greater
flexibility to consider equity or other relationships with Mr. McChesney's
Webtone. Through the period prior to terminating the Webtone activities, the
project was accounted for as research and development and expensed as
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incurred. A total of approximately $300,000 was expended on this project. Since
abandoning this activity, S1 has provided to Webtone certain administrative and
technical services on a time and materials basis amounting to approximately
$182,000 through June 30, 1998. As of June 30, 1998, S1 had a receivable from
Webtone related to these services of $110,000.
RESULTS OF OPERATIONS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES AND OPERATING MARGINS
S1's total revenues increased to $10.8 million for the year ended
December 31, 1997 from $1.3 million for the comparable period in 1996. The
primary components of 1997 revenue were $4.1 million in software license fees,
$6.3 million in professional service fees and $0.4 million in Data Center fees.
Direct costs associated with S1's revenues were $13.9 million in 1997, up from
$3.6 million in 1996.
Software Licensing. Software license fees, which accounted for
approximately 38% of 1997's total revenues, increased to $4.1 million from $0.5
million in 1996. The increase in license fee revenue is attributable to the
increase in in-house installations during 1997 as compared to 1996. At the end
of 1997, four in-house installations of VFM were substantially complete. Direct
costs in 1997 associated with software licenses were $1.6 million, resulting in
a gross margin of $2.5 million, versus a negative gross margin in 1996 of $0.3
million. The direct costs associated with software license fees represent the
amortization of purchased technology.
During 1997, SFNB created the STAR partnership program. See "--
Description of Business -- Strategic Investors in SFNB." The increase in
deferred revenues between December 31, 1996 and December 31, 1997 relates to the
$8 million in licensing fees received from the STAR partners in August 1997.
These license fees have been recorded as deferred revenue and are recognized as
revenue using the subscription method over a period of three years. These
organizations have rights to participate in the development and direction of S1
products through representation on both the S1 Board of Directors and the S1
Product Advisory Committee.
Professional Services. Professional services, which accounted for 58%
of 1997 revenues, increased to $6.3 million from $0.7 million in 1996. During
1997, SFNB completed the installation of six financial institutions in the S1
Data Center, one third party data processing center and four financial
institutions operating their own data centers. This compares to a total of two
implementations completed during 1996, both using the S1 Data Center. The direct
costs associated with professional services, which are primarily personnel
costs, were $5.3 million in 1997, resulting in a gross margin of $0.9 million or
15%, versus a gross margin in 1996 of $0.2 million or 23%. The decrease in the
gross margin from 1996 to 1997 is attributable to the same factors discussed
above for the increase in the gross margin from the first quarter of 1997 to
1998. Also, the impact of the discussed delays and contract provisions was
experienced mostly during 1997, as there were a greater number of
implementations in 1997 as compared to 1996.
Data Center. Data Center revenues, which include revenues for technical
support provided to all institutions using VFM, accounted for approximately 4%
of 1997 revenues and increased to $0.4 million from $0.1 million in 1996. At the
end of 1997, eight financial institutions were on-line through the S1 Data
Center. Direct costs of approximately $6.9 million were associated with Data
Center operations in 1997 resulting in a negative operating margin of $6.5
million. The direct costs are attributable to establishing the basic
infrastructure (composed of personnel and equipment) needed to process accounts
for the growing financial institution customer base. The established capacity
should be adequate to meet the anticipated growth in the number of entities and
accounts processed in the Data Center in 1998.
During the month of December, the Data Center processed in excess of
49,000 Internet banking accounts, representing approximately 32,700 billable
customers. Typically, there is a time lag between the completion of an
implementation by S1 and the marketing of the VFM product by a financial
institution to its retail customers. Due to this time lag, over 98% of the
49,000 accounts
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being processed in the S1 Data Center were attributable to four of the eight
institutions that had been implemented as of the end of 1997.
OPERATING EXPENSES
Operating expenses increased to $25.7 million in 1997 from $17.2
million in 1996 and reflect S1's ongoing development of the Internet banking
operations. Approximately $10.5 million, or 41% of the $25.7 million in
operating expenses in 1997 was attributable to product development expenses.
During 1996, SFNB acquired Five Paces and SecureWare. Both acquisitions were
accounted for using the purchase method and, accordingly, results of operations
for the period from the date of acquisition through December 31, 1996 are
included in the 1996 results. The acquisitions resulted in an increase in
product development expenses and cost of professional services associated with
the increase in personnel costs from the addition of these employees. The
increase in personnel costs was necessary as S1 was increasing its software
development and implementation activities. Selling and marketing expenses
increased to $4.3 million in 1997 from $2.2 million in 1996, primarily as a
result of management's commitment to increase the awareness of VFM products in
the financial services community. General and administrative expenses increased
to $4.6 million in 1997 from $3.6 million in 1996. S1 has experienced
significant growth since it was acquired by SFNB in May 1996. The increase in
general and administrative expenses is the result of a combination of having a
full year of expense reflected in 1997 compared to approximately eight months in
1996. In addition, the increase is related to increased personnel costs and
staffing costs associated with supporting the increased staffing levels of S1.
Employment levels increased at SFNB during the year, with 277 total
full-time employees, including all Data Center personnel and contractors, at
December 31, 1997, versus 203 at December 31, 1996. The increase in employment
during 1997 was attributable to the SBD acquisition completed during 1997, as
well as to the addition of employees to continue the development of the VFM
products and to expand sales and marketing efforts.
Approximately $6.3 million of the $25.7 million represented non-cash
expenses such as depreciation and amortization. Amortization of goodwill and
acquisition charges totaled $4.5 million in 1997 compared to $7.1 million in
1996. Included in the 1997 amortization of goodwill and acquisition charges are
one-time charges of $1.4 million for the write-off of goodwill and purchased
technology from previous acquisitions discussed further below. In addition, S1
recorded intangible assets and goodwill of approximately $6.0 million from the
acquisition of SBD during 1997 of which $1.4 million was amortized during the
fourth quarter of 1997. Included in the 1996 operating expenses are one-time
charges of $6.8 million for acquired in-process research and development related
to 1996 acquisitions.
In the fourth quarter 1997, the Board of Directors decided to abandon
certain research and development efforts known as Webtone. Following the
decision to terminate the activities, the Chairman of the Board created and
funded his own company to continue to develop Webtone. In undertaking these
activities, Mr. McChesney and the Board of Directors have agreed that Webtone
and Mr. McChesney should enter into some form of arrangement for a future
business relationship. However, the parties have not determined what that
arrangement should be, and do not intend to complete such discussions until
following the Reorganization, at which time the Holding Company (which in
contrast to SFNB will be unregulated as to its activities) will have far greater
flexibility to consider equity or other relationships with Mr. McChesney's
Webtone. Through the period prior to terminating the Webtone activities, the
project was accounted for as research and development and expensed as incurred.
A total of approximately $300,000 was expended on this project. Since abandoning
this activity, S1 has provided to Webtone certain administrative and technical
services on a time and materials basis amounting to approximately $80,000
through December 31, 1997.
RESULTS OF OPERATIONS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
S1, formerly Five Paces, was acquired by SFNB in May 1996 and
SecureWare was acquired and merged into S1 in November 1996. Both acquisitions
were accounted for using the purchase method of accounting, and accordingly,
only the results of operations from the acquisition date through the end of the
year are reflected in SFNB's 1996 Statement of Operations.
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RESULTS OF OPERATIONS
The software operations group was primarily focused on two objectives
during 1996. The first was to continue the development of VBM and additional
modules of the VFM suite of software. the second objective was to educate the
financial services community as to both the efficiencies of the Internet channel
and the benefits the VFM software could provide their customers. To meet the
dual objectives, S1 continued to invest significant funds into research and
development and sales and marketing efforts. As a result of this investment,
during the period subsequent to the acquisition and through year end, S1
recorded a loss from continuing operations of $17.8 million.
S1 recorded total revenues of $1.3 million for 1996. As of the year end
1996, S1 had entered into contractual agreements with 13 financial institutions
with aggregate assets totaling more than $220 billion, and an estimated combined
11 million customers. Each of these institutions will use the latest version of
VBM, the first application available within the VFM suite of secure Internet
banking and financial management software applications, to offer their customers
financial products and services securely over the Internet. Additionally, two of
the 13 financial institutions plan to offer their customers the VCCM, the second
product offering in the VFM suite. Of the 13 institutions that had signed with
S1 as of year end 1996, two are global banks -- one domestic, one international
- -- with combined assets of more than $175 billion.
S1 recorded a total cost of revenues of $3.6 million during 1996. The
total cost of revenues was composed of $2.3 million related to the cost of
operating the S1 Data Center, $796,000 in amortization of purchased technology,
and $535,000 personnel costs related to professional services.
OPERATING EXPENSES
During 1996, S1 recorded total operating expense of $17.2 million. In
connection with the acquisitions discussed above, $2.8 million in goodwill and
other intangible assets was recorded. Based upon an evaluation of the
intangibles acquired, a total of $6.8 million was charged to the Statement of
Operations immediately following the acquisitions as in-process research and
development.
Management estimated that $3.5 million of the purchase price of Five
Paces and $3.3 million of the purchase price for SecureWare represented
purchased in-process technology that had not reached technological feasibility
and had no alternative future use at the dates of acquisition. These amounts
were expensed as non-recurring charges in 1996.
The value assigned to purchased in-process research and development was
determined by identifying on-going research and development projects in areas
for which technological feasibility had not been established. For Five Paces,
these projects included Virtual Brokerage Manager, a new software product that
assists with investments via the Internet (subsequently renamed Virtual
Investment Manager); Virtual Credit Card Manager, an add-on to Virtual Bank
Manager, which allows on-line monitoring of credit card balances; and Virtual
Bank Manager 3.0, which represents an updated version of the existing software
and features additional functionality. SecureWare's projects in-process included
new releases of its existing products, HannaH, a network security product
designed to provide secure network communications through cryptography; Troy,
which is designed to provide virus prevention and software configuration control
through cryptography; and SecureMail, a secure electronic e-mail package which
uses cryptography to encrypt e-mail.
The value was determined by estimating the costs to develop the
purchased in-process technologies into commercially viable products; estimating
the resulting net cash flows from such projects; and discounting the net cash
flows back to their present value using a rate of return commensurate with the
risks associated with the incomplete technologies.
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The nature of the efforts to develop the purchased in-process
technologies into commercially viable products principally relate to the design,
programming, testing, debugging, and documentation efforts typically required in
order to produce commercially viable software programs with the intended
functions, features, and technical performance requirements. At the time of the
acquisition, the estimated costs required to complete the in-process
technologies acquired from Five Paces were $161,000 in fiscal year 1996 and
$29,000 in fiscal year 1997. The estimated costs required to complete the
in-process technologies acquired from SecureWare, as of the date of its
acquisition, were $78,000 in fiscal year 1996.
The resulting net cash flows from the in-process projects are based on
S1 management's estimates of revenues, cost of sales, operating expenses, and
income taxes. Additionally, net cash flows were adjusted to allow for a return
on other assets employed by S1, including net working capital, fixed assets,
other intangible assets, and the current technology. These estimates are based
on the following assumptions.
o The estimated revenues for the in-process technology acquired from
Five Paces were projected to grow from $266,000 in fiscal year 1996 to
$32.3 million in fiscal year 1999. The estimated revenues for the
in-process technology acquired from SecureWare were projected to grow
from $3.5 million in fiscal year 1997 to $13.3 million in fiscal year
1999. These projections are based upon management's experience with
predecessor projects and industry expectations for similar, successor
projects. The gross margins anticipated in the appraisal reflected a
sales mix that primarily consisted of direct license revenues. Since
the appraisal was completed, a significant number of customers have
decided to use the product through the S1 Data Center rather than
license the product directly and use their own data processing
environment. Accordingly, the weighted average gross margin for S1 has
been less than originally anticipated due to the revenue streams being
weighted toward lower margin Data Center revenues. Although the sales
mix has shifted from the higher margin direct license revenues, the
revenues generated from the Data Center operation are anticipated to
be realized over a longer term. Therefore, management believes that
the value of this revenue stream would support a similar value for the
in-process projects acquired from Five Paces. For SecureWare, the
projected revenues also included payment for consulting services
associated with the installation, customization, and training
associated with the in-process products.
o Cost of sales and operating expenses were similarly based on
management's experience with similar projects and consistent with
historical financial results. For Five Paces, management's
expectations of rapid revenue growth (100% in fiscal year 1998 and 55%
in fiscal year 1999), along with projected cost stability once the
in-process products gained market acceptance, led to expectations of
significant increases in profit margins in those years. For
SecureWare, management anticipated a relatively constant cost
structure and profit margin over the expected life of the in-process
technology.
o As of the acquisition dates, the acquired in-process projects had not
demonstrated technological or economic feasibility. As a result, the
attainability of the income projections provided by management is
subject to three additional risk components which were factored into
the value of each project. The three risk factors considered were
project risk, product risk, and market risk. To assess risk,
management rated each type of risk on a scale from Very Low to Very
High. The ratings were then translated into probability percentages
associated with each indicated level of uncertainty for each project.
The combination of the risk factors resulted in a downward adjustment
to the value derived from an unadjusted discounted cash flow approach.
o Since the cash flows associated with the acquired in-process research
and development ("IPR&D") are due in part to the deployment of both
tangible and intangible assets, a charge was applied to the projected
cash flows to allow for a return on these other
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assets. The returns charged on these other assets employed ranged from
six to ten percent of their estimated fair values. Other assets
employed include working capital, fixed assets, current software
technology, and a work force-in-place.
o As part of the acquisitions, S1 acquired existing products currently
in use and marketed by the two acquired companies. The core product
for Five Paces is the Virtual Financial Manager, a suite of software
products being designed to allow customers remote access to all
aspects of their balance sheet via the Internet or a dial-up
connection through their financial institution. Existing SecureWare
products included the current versions of HannaH, Troy, and
SecureMail. The value of the acquired software technology was
estimated through the Income Approach. Under this approach, the fair
value is based on the present value of the expected income to be
derived from the existing technology. To determine the value under
this approach, S1 developed an estimate of future revenues and costs
applicable to the commercial exploitation of the current technology.
Since the cash flows associated with the current technology are due in
part to the deployment of other assets, a charge was applied to the
projected cash flows to allow for a return on those assets. The cash
flows associated with the current products were then discounted to
present value at a discount rate commensurate with the current product
portfolio's level of risk. Once the value of the current technologies
was determined, a capital charge for the use of these technologies was
applied to the cash flows of the in-process technologies. This charge
includes both a return on capital of 10 percent, as well as a return
of capital invested in the current technologies.
o For SecureWare IPR&D, the discount rate used was 28 percent. For Five
Paces, the discount rate applied to the in-process technologies was 38
percent. Several methods were considered for estimating the discount
rate applicable to the in-process technologies. First, the overall
discount rate in each transaction was determined by comparing the
expected future cash flows from each business with the purchase price
paid. The implied discount rate is the rate necessary to discount the
projected free cash flows back to a present value equal to the
purchase price. A market-derived rate was also estimated for each
company. The market-derived rate is based on the estimated weighted
average cost of capital ("WACC") for Five Paces and SecureWare. The
WACC is the implied rate of return an investor would require for an
investment in a company with similar risk and business characteristics
to each of the two acquisitions. The WACC is determined by examining
market information for several comparable companies, using this
information to estimate an equity cost of capital (using the Capital
Asset Pricing Model), determining the applicable cost of debt and
calculating a weighted average of the two rates. As a third approach,
rates of return demanded by venture capital investors for investments
in start-up companies with similar risks to those of the in-process
products, were researched and reviewed.
o The higher rate of return for Five Paces is consistent with the higher
risks and higher anticipated returns associated with those in-process
technologies. SecureWare's in-process technologies represented new
versions of existing products. Once completed, these standardized
products could provide security to a wide range of network and
Internet applications. SecureWare's historical commercial
relationships included such lower risk customers such as the U.S.
Government and Hewlett-Packard. In contrast, the Five Paces in-process
technologies are applications for an entirely new industry: Internet
banking. SFNB was the world's first Internet bank and the long-term
success and viability of this industry is not yet proven or certain.
There is a significantly greater risk associated with an investment in
this type of application.
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o For both Five Paces and SecureWare, the discount rate applied to the
in-process technologies was greater than the anticipated overall
return expected on each company as a whole. The overall rate of return
does not reflect the risk specific to a particular project or product.
The IPR&D is similar to a venture capital investment because there are
no current revenues and the technical and commercial viability of the
products under development is unproven and risky. The rates applied to
the IPR&D of SecureWare and Five Paces are similar to the rates
demanded by venture capital investors for investments in start-up
companies with similar risks to those of the in-process products.
The following is a status update on the three in-house projects and
technologies acquired and a comparison of actual results to the assumptions
underlying the valuations:
Virtual Bank Manager - At the time the appraisal was completed, VBM
version 3.0 (two-tier architecture) was anticipated to be completed in the
fourth quarter of 1996 and installed in the S1 Data Center in the early part of
1997. Further, management anticipated that a three-tier version of VBM would be
completed and implemented in 1997 and thereby limit the revenues associated with
the VBM 3.0 product.
The VBM 3.0 product was completed in the latter part of 1996 and
installed at both customer locations and the S1 Data Center in early 1997.
However, based upon additional customer requirements for the VBM 3.0 version,
management determined to defer the VBM three-tier development effort and
continue developing additional functionality for the VBM 3.0 version. During
1997, S1 released additional versions of the VBM 3.X product to its existing
customer base. Additionally, S1 determined that an intermediate release of the
VBM product, VBM 4.0 -- which had extensive additional new functionality --
would be required prior to the development and release of a three-tier VBM
product. VBM 4.0 is currently in beta testing and is anticipated to be installed
and operating at customer sites and the S1 Data Center during the fourth quarter
of 1998.
The licensing and Data Center revenues actually realized from the VBM
3.0 product release have been greater than the amounts anticipated within the
appraisal due to the longer than expected life of the product. Additionally, the
costs associated with the completion of the initial version of VBM 3.0 were
consistent with the anticipated costs reflected in the valuation.
Virtual Credit Card Manager - VCCM was completed and delivered into
production in August 1996, which was both on schedule and within the costs
anticipated in the valuation. The revenues for the VCCM product have been lower
than originally anticipated in the appraisal due to lower than expected
near-term demand for the product in the marketplace. However, in the latter part
of 1997 and 1998, a number of licenses have been sold for VCCM and management
anticipates that the revenues projected in the valuation will be realized from
the new license sales.
Virtual Investment Manager (formerly referred to as Virtual Brokerage
Manager) - As noted in the appraisal, the project development effort on this
product began in January 1996 with an estimated completion date of February
1997. In February 1997, a two-tier architecture beta version of the VIM product
was tested on schedule and at a cost consistent with the projected costs
contained within the appraisal. Based upon the completed testing and discussions
with major customers regarding the scalability of the product, it was determined
that the VIM product would have to be redesigned on a three-tier architecture to
meet the requirements of the market. Further, S1 determined that the majority of
its resources would have to be allocated to the continued upgrading of the VBM
product. This decision resulted in limiting the further development of VIM until
such time as potential customers for the VIM product agreed to fund the
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development effort for a three-tier VIM product. In the latter part of the third
quarter of 1997, SFNB sold, on a pre-paid and non-refundable basis, four
licenses for a three-tier VIM product totaling $4 million, with a commitment to
deliver a fully functional product sometime in the future. The VIM development
effort was restarted in the fourth quarter of 1997 and testing of a three-tier
beta version 1.0 of the software was begun in the second quarter of 1998.
Management anticipates that VIM version 2.0 will be completed and tested in the
fourth quarter of 1998 and become generally available for installation in the S1
Data Center during that period.
During the fourth quarter of 1997, S1 made the strategic decision to
refocus the resources which had been involved in the development and marketing
of the network security products acquired from SecureWare towards the VFM suite
of products and related services. As a result, S1 wrote off the balance of the
intangible assets from the SecureWare acquisition and a significant portion of
the revenues and costs projected to be realized and incurred through 1999 when
valuing the in-process projects acquired from SecureWare are not expected to be
realized by S1.
Due to the $4 million in license sales made in the third quarter 1997,
the cash flows for direct licenses are greater than the amounts projected in the
appraisal. However, since it was determined that the VIM product required a
further development effort to upgrade the product to a three-tier architecture
prior to general release to customers, the Data Center processing revenues
anticipated in the appraisal have not been realized at this time. Management
anticipates that the projected revenues will be realized upon the introduction
of the VIM product into the marketplace in the latter part of 1998.
Sales and marketing expenses of $2.2 million for the year ended
December 31, 1996 relate to management's commitment to increase the awareness of
VFM in the financial services community. Product development expenses were $4.0
million for the year ended December 31, 1996. The expenses relate both to the
addition of staff (including staff additions as a result of the SecureWare
acquisition) to expand the VFM development effort. Management anticipates that
as a result of its commitment to research and development, as well as its
efforts to increase the awareness of VFM in the marketplace, the sales,
marketing and product development expenses will continue to increase. Further,
as additional institutions begin using VFM, management anticipates that
additional staffing will be necessary to support and manage the software
installation and implementation efforts.
RESULTS OF DISCONTINUED OPERATIONS
GENERAL
SFNB has offered banking services on the Internet since October 1995.
The Internet banking activities of SFNB presently include deposit and bill
paying services, including checking, money market, and certificate of deposit
accounts and credit card lending. Additionally, SFNB offers other traditional
banking activities through its City Office in Atlanta, Georgia. Through SFNB's
Internet banking operations, customers can apply for accounts, access account
information, transfer funds, pay bills, access their credit card account
information and conduct other banking activity from anywhere in the world over
the Internet. In 1996, management decided to focus solely on its banking
operations that were conducted over the Internet. On March 31, 1997, the Company
sold all of the assets and liabilities associated with its non-Internet banking
operations located in Pineville, Kentucky to The First State Bank of Pineville,
Pineville, Kentucky. Further, in the third quarter of 1997 SFNB adopted a formal
plan to sell its banking assets and related liabilities in order to concentrate
its efforts on the rapidly growing Internet software development and data
processing segment of its business.
In 1997, SFNB announced its decision to discontinue its banking
operations in order to concentrate its efforts on the rapidly growing Internet
software development
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segment of its business. As part of this decision, SFNB substantially reduced
its marketing efforts and thereby limited the growth of the Internet banking
activities. As a result of the reduction in growth, management anticipates that
the banking operations will remain unprofitable through the date of disposition.
In March 1998, SFNB announced that Royal Bank had entered into an
agreement to acquire SFNB's banking operations. Pursuant to the terms of the
Agreement, the Holding Company will receive $3 million in excess of the net
assets sold, including $1.5 million (plus accrued interest) that is expected to
be received eighteen months from the Closing Date. The Sale is expected to close
in September 1998. The Holding Company estimates that it will record a gain on
the Sale of approximately $1.3 million.
From the time of the adoption of a formal plan in the third quarter of
1997 to sell the Banking Business, management of SFNB expects the banking
operations to continue to generate operating losses through the Closing Date
comparable to its historical trend. Management is unaware of any trends, events
or uncertainties involving discontinued banking operations that will materially
impact SFNB's liquidity, financial condition or results of operations. Upon
completion of the Sale, RBC Holdings and New Bank will continue as customers of
S1 pursuant to the Other Agreements. Prior to the Sale, any revenue from SFNB's
Data Center processing with S1 is eliminated as an intercompany transaction.
After the Sale, any such revenue from New Bank will be fully recognized by the
Holding Company.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
For the six months ended June 30, 1998, net interest income increased
from $92,000 to $853,000 as compared to the same period in 1997. The increase
was attributable to an increase in average non-interest bearing deposits which
increased by $22 million between the two periods. The net interest margin
decreased from 4.05% in 1997 to 3.40% in 1998. The decrease in the net interest
margin was primarily attributable to a decrease in the ratio of interest earning
assets to interest bearing liabilities and a change in the mix of interest
earning assets to investment securities which are lower yielding than loans. The
cost of funds remained relatively stable over the periods at 5.17%.
SFNB recorded a provision for loan losses for the six month period
ended June 30, 1998 and 1997 in the amount of $84,000 and $33,000, respectively.
For the six month periods ended June 30, 1998 and 1997, SFNB had net charge-offs
of $61,000 and $3,000, respectively. As of June 30, 1998 and December 31, 1997,
the allowance for loan losses as a percentage of net loans was 1.20% and 1.15%,
respectively. Non-performing assets decreased to $66,000 at June 30, 1998
compared to $213,000 at December 31, 1997. Non-performing assets represented
0.46% of total loans as of June 30, 1998 compared to 1.51% at December 31, 1997.
The level of the provision reflects management's determination as to the
adequacy of the allowance for loan losses based on, among other things, an
analysis of the risk elements of the loan portfolio, current trends related to
loan payments and general economic conditions as well as volume growth and
composition of the loan portfolio. Based on this analysis, management considers
the allowance for loan losses at June 30, 1998 and December 31, 1997 to be
adequate to cover loan losses in the portfolio.
For the six months ended June 30, 1998, non-interest income increased
$75,000 to $291,000 as compared to $216,000 in the same period in the prior
year. The increase was primarily due to a $47,000 increase in service charges on
deposits and a $21,000 increase in fees recognized on credit cards. The increase
in service charges on deposits was a result of higher demand deposit volumes. In
addition, SFNB recognized a $1.5 million gain on the sale of the Pineville,
Kentucky banking operations during the six months ended June 30, 1997.
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For the six months ended June 30, 1998, non-interest expenses were $2.4
million compared to $2.4 million in the same period in the prior year. Included
in non-interest expenses for the six months ended June 30, 1998 is a $450,000
non-cash charge for compensation expense related to the acceleration of SFNB's
bank employees' unvested stock options. Excluding the $450,000 noted above,
non-interest expenses for the six months ended June 30, 1998 decreased
approximately $450,000. The decrease was primarily related to a decrease in
general operating expenses as a result of the sale of the Pineville Kentucky
branch which occurred in early 1997 and a general reduction in spending in
anticipation of the sale of the banking operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997, net interest income increased
$0.4 million or 32.5%, to $1.5 million in 1997 compared to $1.2 million in 1996.
The net interest margin increased from 2.56% to 3.09%. The increase in the net
interest margin was primarily attributable to an increase in average
noninterest-bearing demand deposits, which increased to $11.9 million in 1997
from $4.5 million in 1996. Average interest earning assets increased to $49.5
million in 1997 from $45.0 million in 1996. Average interest-bearing liabilities
decreased to $38.9 million in 1997 from $44.0 million in 1996, primarily as a
result of the sale of the net assets and liabilities of the Pineville, Kentucky
branch in early 1997.
The provision for loan losses for the year ended December 31, 1997 was
$133,000. SFNB did not establish a provision for loan losses during 1996. During
1997, SFNB had net charge-offs of $47,000. During 1996, SFNB had net recoveries
of $10,000 on loans formerly charged off. As of December 31, 1997 and 1996, the
allowance for loan losses as a percentage of net loans was 1.14% and 1.28%,
respectively. Non-performing assets decreased to $213,000 in 1997 compared to
$319,000 in 1996. Non-performing assets represented 1.51% of total loans as of
December 31, 1997 compared to 1.35% at December 31, 1996. The level of the
provision reflects management's determination as to the adequacy of the
allowance for loan losses based on, among other things, an analysis of the risk
elements of the loan portfolio, current trends related to loan payments and
general economic conditions as well as volume growth and composition of the loan
portfolio. Based on this analysis, management considers the allowance for loan
losses at December 31, 1997 and 1996 to be adequate to cover loan losses in the
portfolio.
Excluding the $1.5 million gain on the sale of the Pineville, Kentucky
branch, non-interest income increased $487,000 to $725,000 in 1997 compared to
$238,000 in 1996. This increase was primarily due to a $108,000 increase in
service charges on deposits and a $78,000 increase in fees recognized on credit
cards. The increase in service charges on deposits was a result of higher demand
deposit volumes. Other income included $250,000 received from a financial
institution for exclusive rights to evaluate the banking operations for
potential acquisition.
Non-interest expenses decreased $1.7 million to $4.3 million in 1997
compared to $6.0 million in 1996. The decrease was primarily related to a
decrease in salary, equipment and facilities expenses as a result of the sale of
the Pineville Kentucky branch which occurred in early 1997. In addition,
advertising expense decreased approximately $773,000 as SFNB reduced its
marketing efforts after making the decision to discontinue the banking
operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996, net interest income decreased
$0.8 million or 40%, to $1.2 million in 1996 compared to $1.9 million in 1995.
The decrease was primarily attributable to a reduction in average loans of
approximately $16 million
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between 1996 and 1995 as a result of the sale of the net assets of SFNB's
branches in June 1995. The net interest margin decreased from 3.88% in 1995 to
2.56% in 1996. The decrease in the net interest margin was primarily
attributable to a decrease in the yield on interest-earning assets, which
declined from 8.57% in 1995 to 7.5% in 1996. This decrease was attributable to
both a decrease in the yields earned on loans and an increase in the average
balance of lower yielding investment and mortgage-backed securities. The cost of
funds increased from 4.69% in 1995 to 5.04% in 1996. The increase in the cost of
funds is primarily the result of offering deposit accounts to its Internet
banking customers at the higher end of prevailing competitive market interest
rates.
SFNB did not establish a provision for loan losses during 1996 or 1995.
During 1996, SFNB had net recoveries of $10,000 on loans formerly charged off.
During 1995, SFNB had net charge-offs of $63,000. As of December 31, 1996 and
1995, the allowance for loan losses was 1.28% and 1.39%, respectively, of loans,
net of unearned income. Non-performing assets increased to $319,000 in 1996
compared to $178,000 in 1996. Non-performing assets represented 1.35% of total
loans as of December 31, 1996 compared to 0.84% at December 31, 1995. The level
of the provision reflects management's determination as to the adequacy of the
allowance for loan losses based on, among other things, an analysis of the risk
elements of the loan portfolio, current trends related to loan payments and
general economic conditions as well as volume growth and composition of the loan
portfolio. Based on this analysis, management considers the allowance for loan
losses at December 31, 1996 and 1995 to be adequate to cover loan losses in the
portfolio.
Non-interest income increased from $196,000 in 1995 to $238,000 in
1996. The increase in non-interest income was primarily attributable to a
$50,000 loss on sale of investment securities in 1995. There were no gains or
losses recognized on sales of investments securities in 1996. Excluding the loss
on sale of investment securities in 1995, non-interest income for 1995 is
comparable to 1996.
Non-interest expenses increased $1.8 million to $6.0 million in 1996
compared to $4.2 million in 1995. The increase was primarily related to a
increase in general operating expenses related to the Internet operations
including an increase of $0.7 million in advertising and $0.5 million increase
in depreciation. The Internet banking operations, which were first offered to
the public in October 1995, were still in the development and test phase during
the first nine months of 1995. In addition, FDIC insurance expense increased
$0.4 million as a result of the special one-time SAIF assessment, which occurred
in 1996.
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QUARTERLY RESULTS OF CONTINUING OPERATIONS FOR THE FIVE QUARTERS ENDED JUNE 30,
1998
The following table sets forth certain quarterly financial data for the
five quarterly periods ended June 30, 1998. As S1 is still in the early stages
of its development, the following presentation more clearly reflects the changes
and trends in historical operations.
QUARTERLY STATEMENTS OF CONTINUING OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30, December 31, March 31, June 30,
1997 1997 1997 1998 1998
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees.......... $ 1,187 $ 1,094 $ 1,188 $ 669 $ 770
Professional services.......... 1,605 1,661 2,038 2,449 3,185
Data center fees............... 90 122 175 310 594
--------- --------- --------- --------- ---------
Total revenues........... 2,882 2,877 3,401 3,428 4,549
--------- --------- --------- --------- ---------
Direct costs:
Software license fees.......... 484 391 240 20 20
Professional services.......... 1,433 1,157 1,519 1,570 2,230
Data center fees............... 1,717 1,854 1,869 1,823 1,825
--------- --------- --------- --------- ---------
Total direct costs....... 3,634 3,402 3,628 3,413 4,075
--------- --------- --------- --------- ---------
Gross margin............. (752) (525) (227) 15 474
--------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing.......... 1,088 992 1,142 1,071 1,137
Product development............ 2,524 2,696 2,912 3,383 3,607
General and administrative..... 1,098 991 1,179 1,204 1,236
Depreciation and amortization.. 370 401 660 637 652
Amortization of goodwill
and acquisition charges..... 346 346 3,492 2,088 2,083
--------- --------- --------- --------- ---------
Total operating expenses. 5,426 5,426 9,385 8,383 8,715
--------- --------- --------- --------- ---------
Operating loss........... (6,178) (5,951) (9,612) (8,368) (8,241)
Interest income..................... 351 346 365 255 135
--------- --------- --------- --------- ---------
Loss from continuing operations..... $ (5,827) $ (5,605) $ (9,247) $ (8,113) $ (8,106)
========== ========= ========== ========== ==========
</TABLE>
REVENUES AND OPERATING MARGINS
Software Licensing. Software license fees were $0.8 million in the
second quarter of 1998 compared to $0.7 million in the first quarter 1998. The
first and second quarter 1998 license fees consist primarily of revenue from
technology licensing agreements which is being recognized on a subscription
basis over a period of 3 years.
Direct costs for software license fees were $20 thousand in the first
and second quarters of 1998 a decrease from $240 thousand in the fourth quarter
1997, as S1 has not capitalized any software development costs and the costs of
previously capitalized purchased technology were completely expensed in the
fourth quarter of 1997.
Professional services. Professional service fees totaled $3.2 million
in the second quarter of 1998, compared to $2.5 million in the first quarter of
1998. Gross margins for professional services were $1.0 million, or 30% in the
second quarter of 1998 compared to $0.9 million, or 36%, in the first quarter
1998. The decrease in the professional services' margin is primarily related to
higher levels of pass through costs in the second quarter of 1998 which carry a
lower margin than implementation services.
Data Center. Data Center fees, which represented 13% of second quarter
1998 revenues, will likely remain the most rapidly growing segment of revenues.
Revenues associated with the Data Center are directly influenced by the numbers
of financial institutions that are using VFM products through the S1 Data Center
and the product marketing efforts of these financial institutions. Data Center
revenue increased by 92% between the second quarter 1998 and first quarter 1998
as compared to an increase of 77% between the first quarter 1998
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<PAGE>
and fourth quarter 1997. The increase in the second quarter revenue is related
to minimums now set for data processing services and increased maintenance fees.
Gross margins for the Data Center remained negative in the second
quarter due to the limited revenues generated and the significant costs
associated with establishing the necessary infrastructure to process the banks
on-line. Management anticipates that the Data Center and technical support will
reach a break-even level when approximately 250,000 billable customers are
processed on a monthly basis. As of June 30, 1998, the Data Center was
processing approximately 94,600 Internet accounts, which represented
approximately 58,100 billable customers. As the number of financial institutions
using the S1 Data Center increases, the number of customers using the VFM
products is expected to increase.
S1 experienced a 32% growth in the number of billable customers from
44,000 at the end of the first quarter 1998 to 58,100 at the end of the second
quarter 1998, which can be attributed to the increased marketing efforts of the
financial institutions brought on-line during the first quarter 1998. The
average quarterly revenue per billable customer processed in the Data Center,
including customers processed for SFNB, amounted to $13.34 for the second
quarter of 1998 compared to $9.64 in the first quarter of 1998. The increase in
average quarterly revenue per billable customer relates to new pricing
structures for some financial institutions which sets higher minimum charges for
data processing services to cover the infrastructure costs of the Data Center
while the financial institutions begin to market the VFM product to their retail
customers. Management anticipates that the average quarterly revenue per
billable customer will move back towards the first quarter level as institutions
increase the number of customers using the product.
QUARTERLY RESULTS OF CONTINUING OPERATIONS FOR THE FIVE QUARTERS ENDED
DECEMBER 31, 1997
The following table sets forth certain quarterly financial data for the
five quarterly periods ended December 31, 1997. This quarterly information has
been prepared on the same basis as the annual financial statements and, in the
opinion of SFNB's management, reflects all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the information for the
periods presented. Operating results for any quarter are not necessarily
indicative of results for any future period. As S1 is still in the early stages
of its development, the following presentation more clearly reflects the changes
and trends in historical operations.
105
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS OF CONTINUING OPERATIONS
(Dollars in thousands)
Unaudited
December 31, March 31, June 30, September 30, December 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees.......... $ 275 $ 673 $ 1,187 $ 1,094 $ 1,188
Professional services.......... 522 973 1,605 1,661 2,038
Data center fees............... 25 24 90 122 175
--------- --------- --------- --------- ---------
Total revenues........... 822 1,670 2,882 2,877 3,401
--------- --------- --------- --------- ---------
Direct costs:
Software license fees.......... 385 490 484 391 240
Professional services.......... 368 1,237 1,433 1,157 1,519
Data center fees............... 1,176 1,507 1,717 1,854 1,869
--------- --------- --------- --------- ---------
Total direct costs....... 1,929 3,234 3,634 3,402 3,628
--------- --------- --------- --------- ---------
Gross margin............. (1,107) (1,564) (752) (525) (227)
--------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing.......... 1,613 1,083 1,088 992 1,142
Product development............ 2,437 2,375 2,524 2,696 2,912
General and administrative..... 1,529 1,369 1,098 991 1,179
Depreciation and amortization.. 142 310 370 401 660
Amortization of goodwill
and acquisition charges..... 3,498 341 346 346 3,492
--------- --------- --------- --------- ---------
Total operating expenses. 9,219 5,478 5,426 5,426 9,385
--------- --------- --------- --------- ---------
Operating loss........... (10,326) (7,042) (6,178) (5,951) (9,612)
Interest income..................... 574 419 351 346 365
--------- --------- --------- --------- ---------
Loss from continuing operations..... $ (9,752) $ (6,623) $ (5,827) $ (5,605) $ (9,247)
========= ========= ========= ========= =========
</TABLE>
REVENUES AND OPERATING MARGINS
Software Licensing. Software license fees increased over the course of
1997 from $0.3 million in the last quarter of 1996 to $1.2 in the fourth quarter
1997. The increase is the result of the combination of the progress made on the
in-house implementations and the STAR agreements entered into in the third
quarter. The software license fee for in-house implementations is recognized on
the percentage of completion basis over the implementation period. Accordingly,
as implementations were completed during the course of 1997, there was an
increase in the quarterly license fee revenue recorded. There were four
completed in-house implementations at the end of 1997. In addition, beginning in
the third quarter of 1997, SFNB began recognizing revenue from the technology
licensing agreements with the STAR partners which is recorded on a subscription
basis over 3 years. S1 recorded $0.2 million in the third quarter and $0.3
million in the fourth quarter from the STAR agreements. Total subscription
revenue for 1997 was $1.2 million, which includes revenue from license
agreements entered into in 1996 and the STAR agreements entered into in 1997.
SFNB anticipates a reduction in the software licensing revenues in the
near term as the majority of the new software implementations are occurring in
the S1 Data Center rather than at a financial institution's own data center.
However, this revenue is expected to increase over the course of 1998 as S1
begins to recognize revenue from the STAR Agreement with an affiliate of Royal
Bank. In addition, an increase in software license fees is anticipated as third
party data processors, who are offering the S1 software to their financial
institution customers, bring their financial institutions on-line and as the
number of customers processed through the S1 Data Center increases. At the end
of 1997, the number of financial institutions using VFM products through third
party data processors was eleven. In addition, based on discussions with
officials of the third party data processors, there are 32 additional
institutions which have agreed to use the products through the third party data
processors.
Software license fees generated a gross margin of 80% in the fourth
quarter, up from 64% in the third quarter and 27% in the first quarter of the
year. The magnitude of the increase in the gross margin percent for software
license fees reflects, at least in part, the low variable costs associated
<PAGE>
with incremental software license revenues. The direct costs associated
with software license fees represent the amortization of purchased technology.
Direct costs are expected to decline over the next several quarters, as S1 has
not capitalized any software development costs. In addition, during the fourth
quarter of 1997, S1 wrote off the remaining balance of purchased technology
associated with the 1996 acquisitions after determining that there were minimal
future cash flows to be derived from the intangible assets acquired in the
SecureWare and Five Paces acquisitions. In the fourth quarter, S1 made the
strategic decision to refocus the resources which had been involved in the
development and marketing of the network security products acquired from
SecureWare towards the VFM suite of products and related services and therefore
it did not believe there would be significant future revenues from the acquired
products. As a result, the unamortized balances of purchased technology and
goodwill related to the SecureWare acquisition of $0.6 million and $0.4 million,
respectively, were charged-off in the 1997 Statement of Operations. Because of a
significant rewrite of S1's VBM product, management did not anticipate that
there would be any future sales of the version of VBM which was acquired from
Five Paces. S1 wrote off the balance of $0.2 million of purchased technology and
$0.2 million of goodwill related to the Five Paces acquisition in the fourth
quarter of 1997.
Professional services. Professional service fees reflected strong
growth throughout the year and represented the largest component of revenues in
1997. Specifically, professional service fees totaled $2.0 million in the fourth
quarter of 1997, or 60% of total revenues. Professional service fees were 56% of
total revenues in the second quarter and 58% of total revenues in the third
quarter of 1997. The percentage of revenues attributable to professional
services increased slightly throughout most of 1997, reflecting the increased
amount of installation and integration activity that occurred during the year.
The number of completed implementations increased from three at the end of the
first quarter to thirteen at the end of 1997. At the end of 1997, there were
twelve implementations which were still in progress and are anticipated to be
completed during the first half of 1998.
Gross margins for professional services experienced improvement
throughout 1997, increasing from a negative $0.3 million in the first quarter of
1997 to $0.2 million in the second quarter, and $0.5 million in the third and
fourth quarters. The 1997 fourth quarter gross margin percentage for
professional services was 25%. The professional services gross margin percentage
was 30% in the third quarter of 1997, 11% in the second quarter and a negative
27% in the first quarter of the year. A contributing factor to the lower gross
margins is the maximum charge established on certain implementation contracts
for professional services. Under these arrangements, S1 is limited in the amount
it charges for professional services to a pre-set maximum fixed price contained
in the contract.
In 1997, during the course of the initial bank implementations, S1 has
experienced delays in integrating the software with the financial institutions
legacy mainframe systems resulting in delays in completing implementations. This
has resulted in an increase in costs to implement as well as a delay in the
recognition of revenues associated with the implementation effort. As S1 has
gained more experience in implementing the VFM products, the complex
implementation process has become more efficient resulting in an acceleration in
the number of implementations completed. Also, the acceleration in
implementations completed is attributable to the expertise acquired from the
addition of the professionals from the acquisition of SBD. Management
anticipates that the professional services' margin will increase in the future
as pricing for professional services stabilizes and as a result of the
efficiencies gained from previous implementations.
Data Center. Data Center fees, which represented 5% of fourth quarter
revenues, will likely remain the most rapidly growing segment of revenues. As a
comparison, Data Center fees represented slightly more than 1% of total revenues
in the first quarter of 1997. Revenues associated with the Data Center are
directly influenced by the numbers of financial institutions that are using VFM
products through the S1 Data Center and the product marketing efforts of these
financial institutions. Data Center processing revenue increased by 43% between
the third and fourth quarter. This increase is attributable to the increased
number of institutions implemented in
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<PAGE>
the Data Center, from three at the beginning of the third quarter to eight at
the end of the fourth quarter 1997.
Gross margins for Data Center processing remained negative throughout
the year due to the limited revenues generated and the significant costs
associated with establishing the necessary infrastructure to process the banks
on-line. Management anticipates that the Data Center and technical support will
reach a break-even level when approximately 250,000 billable customers are
processed on a monthly basis. As of December 31, 1997, the Data Center was
processing approximately 49,000 Internet accounts, which represented
approximately 32,700 billable customers. As the number of financial institutions
using the S1 Data Center increases, the number of customers using the VFM
products is expected to increase. Of the eight financial institutions using the
S1 Data Center at December 31, 1997, two have been on-line for the entire year,
one was brought on-line during the first quarter of 1997 and five were brought
on-line during the third and fourth quarter 1997.
S1 experienced growth in the number of billable customers from 17,600
at the end of the second quarter 1997 to 32,700 at the end of 1997, which can be
attributed to the additional financial service organizations brought on-line in
the third and fourth quarter. Typically, there is a time lag between the
completion of an implementation by S1 and the marketing of the VFM product by a
financial institution to its retail customers. Due to this time lag, over 98% of
the 32,700 billable customers being processed in the S1 Data Center were
attributable to four of the eight institutions that had been implemented as of
the end of 1997.
S1 anticipates that as more financial institutions are brought on-line
and as these financial service organizations market the product to their
customers, it will experience growth in the number of customers and revenues
generated from the S1 Data Center. In addition, the direct cost of operating the
Data Center and providing technical support to customers has stabilized, and as
a result, management anticipates that the negative margin will decline in future
periods. Although the Data Center costs will continue to increase as financial
institutions are brought on-line, the rate of growth in these expenses is
anticipated to be significantly slower than the growth in revenues.
Additionally, management is assessing ways to reduce the cost of the Data Center
operations which are currently operated under a contract with ALLTEL Financial
Services, Inc. Management anticipates that certain functions, currently being
performed by ALLTEL, in the future will be performed by S1 personnel or other
third party contractors, resulting in lower costs for such services.
It is expected that gross margins should benefit in future periods from
the continuation of the trends in revenue and direct costs described above, as
well as from a revised Data Center and technical support pricing structure that
will be implemented during 1998. While financial institutions using the Data
Center have historically been billed monthly on a per customer basis with a
minimum charge, S1 has adopted a higher new minimum pricing structure based upon
the basic configuration required for a bank using the Data Center. Additionally,
certain customer service and technical support functions will be charged
separately and will vary depending upon the desired level of support. It is
expected that this new pricing structure will better enable S1 to accelerate
towards break-even in the Data Center and technical support operations, as well
as to provide more customized technical support services for customers.
OPERATING EXPENSES
Total operating expenses increased to $9.4 million in the fourth
quarter from $5.4 million in the third quarter. A significant portion of the
increase was attributable to the amortization of goodwill and intangible assets
resulting from the SBD acquisition and certain other non-recurring charges. S1
recorded goodwill and intangible assets of approximately $6.0 million from the
acquisition of SBD of which $1.4 million was amortized in the fourth quarter. S1
acquired SBD to obtain professionals with extensive experience in Internet
application development and implementations to assist S1 in meeting short-term
development and
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<PAGE>
implementation goals. Accordingly, a significant portion of the remaining
balance of intangible assets and goodwill will be amortized over the first two
quarters of 1998. Included in amortization of goodwill and acquisition charges
is $1.4 million which is attributable to the write-off of goodwill and purchased
technology from previous acquisitions. In addition, S1 incurred approximately
$0.5 million in non-recurring charges paid to SBD prior to the acquisition for
services during October and November which represented the incremental
difference between the cost of SBD personnel to S1 as contractors and those same
individuals as employees of S1. Net of goodwill amortization and these
nonrecurring charges, operating expenses approximated $6.0 million for the
fourth quarter of 1997. The remaining increase over previous quarters is
primarily attributable to the increase in personnel expenses related to the SBD
acquisition and increase in marketing expenses related to trade shows S1
participated in during the fourth quarter.
As anticipated, product development costs also increased throughout
1997, reaching $2.9 million in the fourth quarter. Management anticipates that
the cost of product development will continue to escalate over the next several
quarters. Management is committed to enhancing the current VFM products by
migrating the existing products to a more efficient software architecture and to
developing new VFM applications, including VIM. General and administrative
expenses were comparable with prior quarters, at $1.2 million in the fourth
quarter.
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 1998
Total stockholders' equity decreased to $7.4 million as of June 30,
1998 from $23.5 million at December 31, 1997. The decrease in stockholders'
equity is primarily attributable to the $17.6 million net loss incurred during
1998. This decrease was partially offset by the issuance of an aggregate 92,593
shares of common stock to RBC Holdings for $1 million in March 1998.
The transactions with Royal Bank (discussed above), upon consummation,
will provide an additional $7.5 million in cash available to the Holding Company
at closing and $1.5 million eighteen months after closing. In addition, as part
of the Royal Bank transaction, SFNB has granted RBC Holdings Options effective
upon the Closing to purchase up to $10.0 million in Holding Company Stock. If
exercised in full, at prices ranging from $11.88 to $15.81, the Holding Company
will issue 733,818 shares of Holding Company Stock over the 21 month option
period.
On June 29, 1998, SFNB entered into a Stock Purchase Agreement and
other technology and license agreements with State Farm. Pursuant to the Stock
Purchase Agreement, State Farm agreed to purchase from the Holding Company $10.0
million of Holding Company non-voting, zero coupon preferred stock at a per
share price based upon the average closing asking price per share of SFNB Common
Stock (or Holding Company Common Stock, if applicable) for each of the 10
trading days preceding the business day before the closing date (occurring
immediately after the Reorganization). Such non-voting preferred stock is
convertible after two years into shares of Holding Company Common Stock at a 40%
premium to the per share price paid for the preferred stock. The sale of the
preferred stock will occur immediately following the Reorganization which is
expected to occur in September 1998.
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<PAGE>
Management believes that following the receipt of the proceeds from the
Royal Bank transactions and the State Farm equity investment, along with
anticipated increases in revenues, the Holding Company will have adequate cash
resources available to fund operations through 1999 at which time the Holding
Company anticipates it will become cash flow positive from operations. SFNB's
estimated cash resources over the next eighteen months to fund operations are as
follows (in millions):
Cash on hand and investment
securities at June 30, 1998 $ 9.0
Transactions with Royal Bank 7.5
Preferred stock sale to State Farm 10.0
-----
Total cash $26.5
=====
If the sale of the Banking Business is not consummated, the Holding Company will
need to raise additional capital to meet its operational expenses and regulatory
capital requirements. If additional capital is needed, the Holding Company
intends to continue to pursue capital raising opportunities similar to the STAR
program through which it has raised capital in the past. S1 did not have any
material capital commitments at June 30, 1998, however S1 does expect to make
approximately $1 million in capital expenditures during the remainder of 1998.
SFNB has previously committed to the OTS, its primary regulator, that
it will create a holding company structure. As part of the Reorganization, New
Bank will become a wholly-owned subsidiary of the Holding Company resulting in a
complete segregation of SFNB's assets (including cash and related investment
securities), deposit liabilities, other liabilities and the capital necessary to
support its operating activities from the activities of S1. If the Sale is not
consummated, the FDIC will require $12.0 million in capitalization for New Bank.
The Holding Company's investment in SFNB will then be restricted as to repayment
from SFNB in the form of cash dividends which are subject to the regulatory
dividend limitations, the dividend restriction imposed by the FDIC and SFNB's
minimum capital requirement.
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 1997
Total stockholders' equity decreased to $23.5 million as of December
31, 1997 from $39.9 million at December 31, 1996. The decrease in stockholders'
equity is primarily attributable to the $28.0 million net loss incurred during
1997. This decrease was partially offset by the issuance of an aggregate 569,978
shares of SFNB Common Stock and 159,952 shares of SFNB Preferred Stock to the
four initial STAR Partners, as well as to Huntington and Wachovia, resulting in
approximately $6.0 million in proceeds to SFNB. Additionally, approximately $5.7
million in SFNB Common Stock was issued in connection with the SBD acquisition
in November 1997, increasing capital by a like amount.
SFNB has previously committed to the OTS, its primary regulator, that
it will create a holding company structure. As part of the Reorganization, New
Bank will become a wholly-owned subsidiary of the Holding Company resulting in a
complete segregation of SFNB's assets (including cash and related investment
securities), deposit liabilities, other liabilities and the capital necessary to
support its operating activities from the activities of S1. If the Sale is not
consummated, the FDIC will require $12.0 million in capitalization for New Bank.
The Holding Company's investment in SFNB will then be restricted as to repayment
from SFNB in the form of cash dividends which are subject to the regulatory
dividend limitations, the dividend restriction imposed by the FDIC and SFNB's
minimum capital requirement.
Management believes that its commitment to ongoing research and
development, as well as to the sales and marketing effort is necessary to
execute the business plans for S1. In anticipation that SFNB would be unable to
sustain the current level of expenditures for an extended period of time,
without either an increase in revenues or an increase in capital, SFNB entered
into the STAR
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<PAGE>
agreements and the equity sales discussed above. As of December 31, 1997, SFNB
had approximately $20.0 million in cash and liquid assets. The transactions with
Royal Bank, upon consummation, will release the Holding Company from capital
requirements related to the Banking Business. Management anticipates that this
level of cash resources, along with anticipated increases in revenues, will
provide sufficient capital to fund software operations. SFNB believes it will
become cash-flow positive from operations in 1999. In addition, as part of the
Royal Bank transaction, SFNB has granted RBC Holdings Options effective upon the
Closing to purchase up to $10.0 million in Holding Company Stock. If exercised
in full, at prices ranging from $11.88 to $15.81, the Holding Company will issue
733,818 shares of Holding Company Stock over the 21 month option period.
CAPITAL ADEQUACY
As of June 30, 1998, each of SFNB's regulatory capital ratios exceeded
the minimum requirements.
YEAR 2000
The Year 2000 issue relates to the use by many existing computer
programs of only two digits to identify a year in the date field. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. SFNB recognizes the need to ensure that the potential Year
2000 software failures will not adversely impact its operations. In 1997, S1
established a task force, with representation from all major business units, to
evaluate and manage the risks, solutions and cost associated with addressing
this issue which affects both the internal computer systems as well as the
software applications that S1 markets to customers. The task force is in the
process of identifying all business systems, products and services, including
third party software used by S1 and in conjunction with VBM, and determining
whether they are Year 2000 compliant. In addition, SFNB is developing plans of
action for the systems and products which are not Year 2000 compliant. SFNB
believes that based on the assessments completed to date, that critical Year
2000 issues can be corrected. The failure of SFNB or third party software which
is used by S1 or in conjunction with VBM to be Year 2000 compliant could have a
material adverse impact on SFNB's financial position and results of operations.
Management has determined that its newest version of the VBM software,
scheduled for release in the third quarter of 1998, will be Year 2000 compliant.
Complete "end to end" testing is anticipated to occur as part of the VBM
implementation process. Due to the near term release of this version, prior
releases will not be Year 2000 compliant. Management anticipates that all S1
financial institution customers will be converted to the new version by the
third quarter of 1999. These conversions will require a significant portion of
S1's implementation resources. Management is currently evaluating the potential
impact on professional services margins due to the deployment of such resources
and potential discounting of services related to these implementations.
The costs incurred in addressing the Year 2000 problem are being
expensed as incurred in compliance with generally accepted accounting
principles. None of these costs are expected to materially impact the results of
operations in any one period. A significant portion of the costs to be incurred
are not expected to be incremental but rather are related to current product
development efforts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 130 requires all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in an annual financial statement that is displayed in equal
prominence with the other annual financial statements. For interim period
financial statements, enterprises are required to
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disclose a total for comprehensive income in those financial statements. The
term "comprehensive income" is used in SFAS 130 to describe the total of all
components of comprehensive income including net income. "Other comprehensive
income" refers to revenues, expenses, gains, and losses that are included in
comprehensive income but excluded from earnings under current accounting
standards. Currently, "other comprehensive income" for SFNB consists solely of
items previously recorded as a component of stockholders' equity under SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities" and SFAS 52,
"Foreign Currency Translation." SFNB adopted the interim period disclosure
requirements of SFAS 130 effective March 31, 1998 and will adopt the annual
financial statement reporting and disclosure requirements of SFAS 130 effective
December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS 14,
"Financial Reporting in Segments of a Business Enterprise," and establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected financial information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The adoption of this new standard did not require significant changes
to SFNB's current segment information that is presented in the 1997 annual
report and did not impact interim financial statements for the six months ended
June 30, 1998 as the interim disclosures are not required in the first year of
adoption.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition." SOP No.
97-2, which revises the rules for accounting for software transactions by
superseding SOP 91-9, "Software Revenue Recognition," is effective for financial
statements for years beginning after December 15, 1997. The adoption of SOP 97-2
did not have a material effect on the interim financial statements for the six
months ended June 30, 1998.
MARKET FOR SFNB COMMON STOCK AND DIVIDENDS
SFNB Common Stock is quoted on the Nasdaq Stock Market under the symbol
"SFNB." The following chart sets forth the high and low sales prices of SFNB
Common Stock for each quarter since May 23, 1996, the date when SFNB Common
Stock began to be quoted on the Nasdaq Stock Market:
Quarter ended: High Low
-------------- ---- ---
June 30, 1996.................. $45.00 $31.75
September 30, 1996............. 34.25 21.00
December 31, 1996.............. 26.25 10.00
March 31, 1997................. 13.50 8.00
June 30, 1997.................. 9.38 5.50
September 30, 1997............. 13.88 7.63
December 31, 1997.............. 11.38 5.75
March 31, 1998................. 13.63 8.25
June 30, 1998.................. 14.94 7.51
As of the Record Date, there were 409 holders of record of SFNB Common
Stock.
SFNB has not paid dividends on SFNB Common Stock or SFNB Preferred
Stock since its initial public offering in May 1996.
112
<PAGE>
MANAGEMENT
The following table sets forth the names of the current directors and
executive officers of SFNB. Also set forth is certain other information with
respect to each such person's age at December 31, 1997, the periods during which
such person has served as a director or executive officer of SFNB and positions
currently held with SFNB and S1. SFNB's Bylaws provide that the Board of
Directors shall be divided into three classes as nearly equal in number as
possible. The terms of office of only one class of directors expires in each
year, and directors are elected for terms of three years and until their
successors are elected and qualified. SFNB's Bylaws provide that the number of
directors shall be six. At the present time, there are two vacancies on the
Board of Directors.
<TABLE>
<CAPTION>
Age at Director Expiration Positions held with
Name December 31, 1997 since of term SFNB and S1
- ---- ----------------- ----- ------- -----------
<S> <C> <C> <C> <C>
Robert W. Copelan, D.V.M. 71 1995 1998 Director of SFNB and S1
James S. Mahan, III 46 1995 2000 Chief Executive Officer and
Director of SFNB and Chairman
of the Board and Chief
Executive Officer of S1
Michael C. McChesney 42 1996 2000 Chairman of the Board of SFNB
and Director of S1
Howard J. Runnion, Jr. 68 1995 1999 Director of SFNB and S1
Robert F. Stockwell 44 Treasurer, Acting President
and Chief Financial Officer
of SFNB and Treasurer and
Chief Financial Officer of S1
</TABLE>
The following information concerns the principal occupation of each
director and executive officer of SFNB for the past five years. Each of the
directors of SFNB also has served as a director of the Holding Company since its
organization in the second quarter of 1998. SFNB's executive officers are
elected by the Board to serve a one-year term.
ROBERT W. COPELAN, D.V.M. has been President of Copelan & Thornbury,
Inc. in Paris, Kentucky since 1959 and President of R.W. Copelan, PSC in Paris,
Kentucky since 1979. Dr. Copelan is a veterinarian in private practice. From
1987 through September of 1996, Dr. Copelan served on the Board of Directors of
Cardinal and certain of its subsidiaries. Dr. Copelan is the stepfather of James
S. Mahan, III.
MICHAEL C. MCCHESNEY has served as the Chairman of the Board of SFNB
and a director of S1 since May 1996. Mr. McChesney has served as the Chairman of
the Board of the Holding Company since its organization in the second quarter of
1998. Mr. McChesney founded Five Paces, which is now known as S1. Mr. McChesney
also co-founded and served as Chief Executive Officer of SecureWare, which was
merged into Five Paces in November 1996. Mr. McChesney served as Chief Executive
Officer of S1 from May 1996 to January 1998. Mr. McChesney's spouse is the
sister of the wife of James S. Mahan, III.
JAMES S. MAHAN, III has served as the Chief Executive Officer and a
director of SFNB since June 1995, as Chairman of the Board of S1 since May 1996
and as Chief Executive Officer of S1 since January 1998. Mr. Mahan has served as
the Chief Executive Officer of the Holding Company since its organization in the
second quarter of 1998. Mr. Mahan served as Chairman of the Board of SFNB until
May 1996. Mr. Mahan was the Chairman of the Board and Chief Executive Officer of
Cardinal, as well as certain subsidiaries of Cardinal from November 1987 until
September 1996. Mr. Mahan's
<PAGE>
spouse is the sister of the wife of Michael C. McChesney and Mr. Mahan is the
stepson of Robert W. Copelan.
HOWARD J. RUNNION, JR. was Vice Chairman of the Board and Chief
Financial Officer of The Wachovia Corporation in Winston-Salem, North Carolina
from December 1985 to June 1990. Since 1992, Mr. Runnion has served as a
consultant and an insurance broker. Mr. Runnion was a director of Cardinal and
certain subsidiaries until September 1996.
ROBERT F. STOCKWELL has served as the Treasurer and Chief Financial
Officer of SFNB since June 1995 and the Treasurer and Chief Financial Officer of
S1 since May 1996. Since October 1996, he has served as Acting President of
SFNB. Mr. Stockwell has served as the Chief Financial Officer, Treasurer and
Secretary of the Holding Company since its organization in the second quarter of
1998. Mr. Stockwell served as Treasurer of Cardinal from January 1994 to
September 1996 and as a director of Jefferson Banking Company during 1994. From
1987 to 1993, Mr. Stockwell was Executive Vice President and Chief Financial
Officer of Security Financial Holding Company, a thrift holding company located
in Durham, North Carolina.
EXECUTIVE AND DIRECTOR COMPENSATION
The following table shows for the fiscal years ended December 31, 1997,
1996 and 1995, the cash compensation paid by SFNB or S1, as well as certain
compensation paid or accrued for those years, to the Chief Executive Officer of
SFNB and the two other highest paid executive officers of SFNB serving at
December 31, 1997 whose total annual salary and bonus exceeded $100,000 (the
"named executive officers") for the fiscal year ended December 31, 1997. SFNB
has not granted any stock appreciation rights ("SARs").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Awards
----------------------
Other annual Securities All other
Name and Annual Compensation compensation underlying options compensation
Principal Position Year Salary ($) Bonus ($) ($) (c) (#) ($) (d)
- ------------------ ---- ---------- --------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
James S. Mahan, III 1997 $ 200,000 -- $ 9,861 -- $ 9,756
Chief Executive Officer and 1996 87,535 -- 68,080 -- 3,131
Director of SFNB and 1995 -- -- -- 929,200 --
Chairman of the Board
and Chief Executive Officer
of S1 (a)
Michael C. McChesney 1997 $ 150,000 -- -- -- $ 11,183
Chairman of the Board of 1996 87,570 (b) -- -- -- 3,453 (b)
SFNB and Director of S1 1995 -- -- -- 464,400 --
Robert F. Stockwell 1997 $ 119,141 -- -- 20,000 $ 6,392
Treasurer, Acting 1996 104,962 -- $ 70,009 -- 2,272
President and Chief 1995 -- -- -- 92,920 --
Financial Officer of SFNB
and Treasurer and Chief
Financial Officer of S1
</TABLE>
- ----------
(a) During the first nine months of 1996, Mr. Mahan's annual rate of salary was
$50,000. During that time, he also served as the Chairman and Chief
Executive Officer of Cardinal. Mr. Mahan's compensation for 1995 was
received for his role as Chairman of the Board and Chief Executive Officer
of Cardinal, the former holding company of SFNB. Although Mr. Mahan did not
receive any salary or other compensation from SFNB, he was awarded options
for SFNB Common Stock in 1995.
(b) For the fiscal year ended December 31, 1996, Mr. McChesney received only
$87,570 in salary and $3,453 in other compensation because he did not
assume such positions until May 23, 1996.
114
<PAGE>
(c) Other annual compensation includes car allowance and club membership for
Mr. Mahan. For 1996, other annual compensation includes reimbursement of
moving expenses of $56,880 and $70,009, including applicable taxes
associated with such reimbursement, for Messrs. Mahan and Stockwell,
respectively.
(d) All other compensation includes contributions to the SFNB 401(k) plan, and
insurance premiums. SFNB 401(k) contributions were $2,501 and $2,667 for
Mr. Mahan, $3,003 and $4,094 for Mr. McChesney and $2,002 and $3,292 for
Mr. Stockwell in 1996 and 1997, respectively. Insurance premiums were $630
and $7,089 for Mr. Mahan, $450 and $7,089 for Mr. McChesney and $270 and
$3,100 for Mr. Stockwell in 1996 and 1997, respectively.
Directors of SFNB do not receive any fees or other compensation for
their service as directors. Directors, however, are reimbursed for travel and
other expenses incurred in connection with attending meetings of the SFNB Board
of Directors.
EMPLOYMENT CONTRACTS
SFNB currently does not have any employment contracts or other
compensatory plans or arrangements pertaining to resignation, retirement or any
other termination of its executive officers' employment with SFNB or S1 or from
a change in control of SFNB or a change of responsibilities following a change
in control of SFNB.
OPTION GRANTS
The following table contains information concerning the grant of stock
options to the named executive officers during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
Number Percent of Potential realizable value
of securities total options at assumed annual rates
underlying granted to Exercise of stock price appreciation
options employees or base Expiration for option term
Name granted (#) in fiscal year price ($/Sh) date 5% 10%
- ---- ----------- -------------- ------------ ----------- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Robert F. Stockwell 20,000 1.7% $6.06 Dec. 12, 2007 $76,222 $193,162
</TABLE>
OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
The following table sets forth on an aggregated basis certain
information concerning each exercise of stock options during fiscal year 1997 by
the named executive officers and the value of unexercised options.
115
<PAGE>
AGGREGATED OPTION EXERCISES IN 1997 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of securities
Shares underlying unexercised Value of unexercised in-the
acquired on Value options at FY-end (#) money options at FY-end ($)(b)
Name exercise (#) realized ($) (a) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ---------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James S. Mahan, III -- -- 464,600/464,600 $3,077,975/$3,077,975
Michael C. McChesney -- -- 232,200/232,200 $1,538,325/$1,538,325
Robert F. Stockwell 15,000 $110,625 31,460/66,460 $208,423/$331,598
</TABLE>
(a) Based on the market value of SFNB Common Stock at date of exercise, less
the exercise price.
(b) Based on the closing price per share of SFNB's Common Stock on December 31,
1997 of $7.25 on the Nasdaq Stock Market, less the exercise price, of all
unexercised stock options having an exercise price less than such market
value.
CERTAIN TRANSACTIONS
From time to time SFNB makes loans to the directors and executive
officers for the financing of their homes, as well as home improvement and
consumer loans. It is the belief of management that these loans are made in the
ordinary course of business, are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and neither involve more than normal risk of
collectibility nor present other unfavorable features.
In May 1996, SFNB acquired Five Paces in exchange for an aggregate of
1,920,000 shares of SFNB Common Stock. The acquisition of Five Paces was
completed as part of the spin-off of SFNB from Cardinal pursuant to the Cardinal
Amended and Restated Plan of Distribution. Under that Plan of Distribution,
Cardinal distributed, pro rata to each Cardinal stockholder, all of the then
outstanding shares of SFNB Common Stock (approximately 2,400,000). In connection
with the spin-off, SFNB adopted an Amended and Restated Plan of Recapitalization
pursuant to which, among other things, SFNB sold SFNB Common Stock and Preferred
Stock to Area, Huntington and Wachovia for $3.0 million, and issued to Five
Paces stockholders 1,920,000 shares of Common Stock in the acquisition of Five
Paces. Among the principal shareholders of Five Paces was Michael C. McChesney
who upon consummation of the acquisition became Chairman of the Board of SFNB.
Mr. McChesney received 807,438 shares of SFNB Common Stock in the acquisition.
The controlling shareholders of Five Paces, including Mr. McChesney's father,
George McChesney, Sr. and his brother George McChesney, Jr., also participated
in the transaction and became the controlling shareholders of SFNB.
In November 1996, SFNB acquired by merger SecureWare for an aggregate
cash consideration of $5.0 million in cash and $783,000 of non-cash
consideration related to the conversion of outstanding SecureWare options. This
acquisition was effected pursuant to an Agreement of Merger of SFNB with
SecureWare and its stockholders. Among the principal shareholders of SecureWare
was Michael C. McChesney, the Chairman of the Board of SFNB. Mr. McChesney
received $1,695,817 in exchange for his shares of SecureWare. Mr. McChesney's
father, George McChesney, Sr. and his brother George McChesney, Jr., as well as
other shareholders who are deemed to control SFNB, also participated in the
transaction and received consideration.
During the latter part of 1996, among its ordinary course research and
development activities, S1 started a project known as "Webtone." The Webtone
project was established to assess the customer care issues raised as a result of
interacting with retail customers over new delivery channels and subsequently to
develop software solutions to resolve such issues more efficiently. In November
1997, after the assessment phase of the project was completed at a cost of
approximately $300,000, SFNB's Board of Directors determined not to proceed with
Webtone, primarily because of
116
<PAGE>
the Board's uncertainty regarding the potential profitability of such a
project and because of the limited resources, both capital and personnel, of S1.
The Board believes this decision is consistent with its determination to
discontinue the Banking Business and focus resources on the VFM suite of
products and related services. With the Board's full knowledge and agreement,
Chairman of the Board Michael M. McChesney has created and funded his own
company to develop Webtone. In undertaking these activities, Mr. McChesney and
the Board of Directors have agreed that Webtone and Mr. McChesney should enter
into some form of arrangement for a future business relationship. However, the
parties have not determined what that arrangement should be, and do not intend
to complete such discussions until following the Reorganization, at which time
the Holding Company (which in contrast to SFNB will be unregulated as to its
activities) will have far greater flexibility to consider equity or other
relationships with Mr. McChesney's Webtone. Since abandoning the Webstone
project, S1 has provided to Webtone certain administrative and technical
services on a time and materials basis amounting to approximately $182,000
through June 30, 1998. As of June 30, 1998, S1 had a receivable from Webtone
related to these services of $110,000.
STOCK OWNED BY MANAGEMENT
The following table sets forth certain information as of August 3,
1998, with respect to the amount of SFNB Common Stock beneficially owned by each
director and named executive officer of SFNB and by all directors and executive
officers of SFNB as a group. At August 3, 1998, there were 11,191,117 shares of
SFNB Common Stock outstanding.
All information with respect to beneficial ownership has been furnished
to SFNB by the respective shareholders, directors and executive officers of
SFNB, and unless otherwise indicated, each of the shareholders has sole voting
and investment power with respect to all shares that they beneficially own.
<TABLE>
<CAPTION>
Number of shares Percent of
Name and position(s) and nature of common stock
with SFNB or S1 beneficial ownership (a) outstanding
- -------------------- ----------------------- ------------
<S> <C> <C>
Robert W. Copelan
Director of SFNB and S1 143,552 (b) 1.3%
James S. Mahan, III
Chief Executive Officer 776,854 (c) 6.5%
and Director of SFNB and
Chairman of the Board
and Chief Executive
Officer of S1
Michael C. McChesney
Chairman of the Board of 1,075,657 (d) 9.3%
SFNB and Director of S1
Howard J. Runnion, Jr.
Director of SFNB and S1 110,424 (e) *
Robert F. Stockwell
Treasurer, Acting President 79,436 (f) *
and Chief Financial Officer
of SFNB and Treasurer and
Chief Financial Officer of S1
All directors and executive officers of SFNB
as a group (5 persons) 2,185,923 17.7%
</TABLE>
- ----------
* Less than one percent.
117
<PAGE>
(a) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of SFNB
Common Stock if such person has or shares voting power or investment power
with respect to such security, or has the right to acquire beneficial
ownership at any time within 60 days from August 3, 1998. As used herein,
"voting power" includes the power to vote or direct the voting of shares
and "investment power" includes the power to dispose or direct the
disposition of shares.
(b) The share ownership of Dr. Copelan includes 92,920 shares of SFNB Common
Stock that would be issued upon the exercise of options exercisable within
60 days of August 3, 1998, 7,452 shares that are held by the Robert W.
Copelan D.V.M. Retirement Plan and 1,224 shares that are held by his wife
Patricia.
(c) The share ownership of Mr. Mahan includes 696,900 shares of SFNB Common
Stock that would be issued upon the exercise of options exercisable within
60 days of August 3, 1998, 75,124 shares held by his wife Marguerite, and
4,218 shares held in SFNB's 401(k) plan.
(d) The share ownership of Mr. McChesney includes 348,300 shares of SFNB Common
Stock that would be issued upon the exercise of options exercisable within
60 days of August 3, 1998, 331 shares held in SFNB's 401(k) plan and 7,680
shares owned by certain members of his family.
(e) The share ownership of Mr. Runnion includes 10,424 shares of SFNB Common
Stock that would be issued upon the exercise of options exercisable within
60 days of August 3, 1998.
(f) The share ownership of Mr. Stockwell includes 29,690 shares of SFNB Common
Stock that would be issued upon the exercise of options exercisable within
60 days of August 3, 1998, 45,288 shares held jointly with his wife Jana,
2,594 shares held in SFNB's 401(k) plan and 1,864 shares held in an IRA.
PRINCIPAL HOLDERS OF VOTING SECURITIES OF SFNB
The following table sets forth information as of August 3, 1998 with
respect to ownership of SFNB Common Stock by each person believed by management
to be the beneficial owner of more than 5% of the outstanding SFNB Common Stock.
With respect to Mr. McChesney, and with respect to Mr. Mahan to the extent
indicated below, the historical information set forth below is based on the most
recent Schedule 13D or 13G filed on behalf of such person with the OTS.
<TABLE>
<CAPTION>
Number of shares Percent of
Name and address and nature of common stock
of beneficial owner beneficial ownership (a) outstanding
- ------------------- ------------------------ ------------
<S> <C> <C>
Michael C. McChesney 1,075,657 (b) 9.3%
3390 Peachtree Road, NE
Atlanta, GA 30326
James S. Mahan, III 776,854 (c) 6.5%
3390 Peachtree Road, NE
Atlanta, GA 30326
Hollybank Investments, LP/Dorsey R. Gardner 685,100 (d) 6.1%
One International Place, Suite 2401
Boston, MA 02110
</TABLE>
- ----------
(a) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of SFNB
Common Stock if such person has or shares voting power or investment power
with respect to such security, or has the right to acquire beneficial
ownership at any time within 60 days. As used herein, "voting power"
includes the power to vote or direct the voting of shares and "investment
power" includes the power to dispose or direct the disposition of shares.
(b) Mr. McChesney filed a Schedule 13D with the OTS dated April 29, 1998
reporting beneficial ownership of 1,075,657 shares of SFNB Common Stock,
representing approximately 9.7% of the
118
<PAGE>
outstanding SFNB Common Stock as of April 27, 1998. According to the
Schedule 13D, 348,300 of such shares are issuable upon the exercise of
options held by Mr. McChesney that are exercisable within 60 days of April
27, 1998, 719,346 of such shares are owned directly by Mr. McChesney, 331
shares are held in SFNB's 401(k) plan, and 7,680 shares are held by certain
members of his family.
As stated on Mr. McChesney's Schedule 13D, pursuant to Rule 13d-4 under the
Exchange Act, except for the shares owned by members of his family, Mr.
McChesney disclaims beneficial ownership of all shares of SFNB Common Stock
beneficially owned by members of a group, which includes Mr. McChesney, for
whom the OTS has indicated that it did not intend to disapprove a Notice of
Change of Control with respect to SFNB. The other members of the control
group and the maximum percentage ownership of SFNB Common Stock that each
of such individuals can own under the Notice of Change of Control are:
David A. Arnovitz, 7.89%; Harold Arnovitz, 0.40%; Robert Copelan, 0.43%;
William R. Jacobs, 7.89%; Steven M. Kramer, 3.17%; James S. Mahan, III,
8.27%; Ryan Mahan, 1.19%.; George McChesney, Sr., 0.41%; and George
McChesney Jr., 0.08%.
(c) The share ownership of Mr. Mahan includes 696,900 shares of SFNB Common
Stock that would be issued upon the exercise of options exercisable within
60 days of August 3, 1998, 75,124 shares held by his wife Marguerite, and
4,218 shares held in SFNB's 401(k) plan.
As stated on Mr. Mahan's Schedule 13D filed with the OTS dated January 9,
1997, pursuant to Rule 13d-4 under the Exchange Act, Mr. Mahan disclaims
beneficial ownership of all shares of SFNB Common Stock beneficially owned
by members of a group, for whom the OTS has indicated that it did not
intend to disapprove a Notice of Change of Control with respect to SFNB.
The other members of the control group and the maximum percentage ownership
of SFNB Common Stock that each of such individuals can own under the Notice
of Change of Control are: David A. Arnovitz, 7.89%; Harold Arnovitz, 0.40%;
Robert Copelan, 0.43%; William R. Jacobs, 7.89%; Steven M. Kramer, 3.17%;
Ryan Mahan, 1.19%.; George McChesney, Sr., 0.41%; George McChesney Jr.,
0.08%; and Michael McChesney 15.79%.
(d) Hollybank Investments, LP ("Hollybank") reports beneficial ownership of
608,600 shares of SFNB Common Stock, representing approximately 5.6% of the
outstanding SFNB Common Stock. Hollybank reports that it has sole voting
and sole dispositive power over all such shares. Dorsey R. Gardner, the
general partner of Hollybank and a director of the Holding Company, is
deemed to beneficially own these shares. Mr. Gardner also owns directly
76,500 shares.
ADJOURNMENT OF THE SPECIAL MEETING
The holders of SFNB Common Stock will be asked to approve, if
necessary, an adjournment of the Special Meeting to solicit further votes in
favor of the Plan and the Agreement. The proxies of SFNB shareholders voting
against the Plan or the Agreement may not be used by management to vote in favor
of an adjournment pursuant to its discretionary authority.
SHAREHOLDER PROPOSALS
If the Plan is approved and the Reorganization is consummated, there
will not be an annual meeting of SFNB's shareholders in 1998. As a result of the
new corporate form and the dissolution of SFNB, it is anticipated that the first
annual meeting of shareholders the Holding Company will be held in May 1999. Any
proposal intended to be presented by a Holding Company shareholder for inclusion
in the Holding Company's proxy statement for its 1999 annual meeting must be
received by the Holding Company at its principal executive office at 3390
Peachtree Road, NE, Suite 1700, Atlanta, Georgia 30326 no later than December
1998.
If the Plan is not approved and consummated, SFNB anticipates that its
1998 annual meeting will be held in the third quarter of 1998.
119
<PAGE>
OTHER MATTERS
It is not expected that any matters other than those described in this
Proxy Statement/Prospectus will be brought before the Special Meeting. If any
other matters are presented, however, it is the intention of the persons named
in the SFNB proxy to vote such proxy in accordance with the determination of a
majority of the Board of Directors of SFNB, including, without limitation, a
motion to adjourn the Special Meeting to another time and/or place for the
purpose of soliciting additional proxies in order to approve the Plan, the
Agreement or otherwise.
EXPERTS
The consolidated financial statements of SFNB as of December 31, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, have been included in Appendix G of this Proxy Statement/Prospectus and in
the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing in Appendix G, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Holding Company Common Stock to be issued in
connection with the Reorganization has been passed upon by Hogan & Hartson
L.L.P., Washington, D.C.
120
<PAGE>
APPENDIX A
[LOGO] FRIEDMAN, BILLINGS, RAMSEY & CO. INC. Institutional Brokerage
Research
Investment Banking
FBR
POTOMAC TOWER
1001 NINETEENTH STREET NORTH
ARLINGTON, VIRGINIA 22209
TELEPHONE (703) 312-9500
MARCH 9, 1998
BOARD OF DIRECTORS
SECURITY FIRST NETWORK BANK
3390 PEACHTREE ROAD
ATLANTA, GA 30326
BOARD OF DIRECTORS:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR"), provide
you with its opinion as to the fairness, from a financial point of view, to
holders of common stock ("Stockholders") of Security First Network Bank ("SFNB")
of the Sale Price (as defined) to be received by such holders pursuant to the
Stock Purchase Agreement between Royal Bank Of Canada ("RBC"), RBC Holdings
(Delaware) Inc., a U.S. subsidiary of RBC and SFNB dated as of March 9, 1998
(The "Stock Purchase Agreement"), pursuant to which the banking business of SFNB
will be acquired by RBC (the "Sale"). The Sale Price for the banking business of
SFNB is $13 million in cash (subject to adjustment as described in the Stock
Purchase Agreement).
In delivering this opinion, FBR has completed the following tasks:
1. reviewed RBC Annual Report to Stockholders for the fiscal year ended
October 30, 1997 and RBC Annual Reports on Form 10-K filed with the
Securities and Exchange Commission (the "SEC") for the fiscal years
ended December 31, 1994 through 1996; reviewed RBC Quarterly Reports
on Form 10-Q for the fiscal quarters ended January 30, 1997, April 30,
1997 and July 31, 1997 filed with thE SEC;
2. reviewed SFNB Annual Report to stockholders for the fiscal year ended
December 31, 1996 and SFNB Annual Report on Form 10-KSB filed with the
Office of Thrift Supervision ("OTS") for the fiscal year ended
December 31, 1996; reviewed SFNB Quarterly Reports On Form 10-Q for
the fiscal quarters ended March 31, 1997, June 30, 1997 and September
30, 1997 filed with the OTS;
3. reviewed SFNB'S unaudited financial statements for the twelve months
ended December 31, 1997;
4. reviewed the reported market prices and trading activity for the RBC
common stock for the period January 1994 through March 9, 1998;
5. discussed the financial condition, results of operations, business and
prospects of SFNB and RBC with the managements of SFNB and RBC;
A-1
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO. INC. Page 2
6. compared the results of operations and financial condition of SFNB and
RBC with those of certain publicly-traded financial institutions (or
their holding companies) that FBR deemed to be reasonably comparable
to SFNB or RBC, as the case may be;
7. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably
comparable to the Sale;
8. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions entered into by RBC;
9. reviewed a copy of the Stock Purchase Agreement; and
10. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning SFNB and RBC furnished to it by SFNB or RBC, or the
publicly-available financial and other information regarding SFNB, RBC and other
financial institutions (or their holding companies). FBR has assumed that all
such information is accurate and complete. FBR has further relied on the
assurances of management of SFNB and RBC that they are not aware of any facts
that would make such financial or other information relating to such entities
inaccurate or misleading. With respect to financial forecasts for SFNB provided
to FBR by its management, FBR has assumed, for purposes of this opinion, that
the forecasts have been reasonably prepared on bases reflecting the best
available estimates and judgements of such managements at the time of
preparation as to the future financial performance of SFNB. FBR has assumed that
there has been no material change in SFNB's assets, financial condition, results
of operations, business or prospects since December 31, 1997. FBR did not
undertake an independent appraisal of the assets or liabilities of SFNB nor was
FBR furnished with any such appraisal. FBR is not an expert in the evaluation of
allowances for loan losses, was not requested to and did not review such
allowances, and was not requested to and did not review any individual credit
files of SFNB. FBR's conclusions and opinion are necessarily based upon
economic, market and other conditions and the information made available to FBR
as of the date of this opinion. FBR expresses no opinion on matters of a legal,
regulatory, tax or accounting nature related to the Sale.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
savings institutions and financial institution holding companies, initial and
secondary offerings, mutual-to-stock conversions of savings institutions, as
well as business valuations for other corporate purposes for financial
institutions and real estate related companies. FBR has experience in, and
knowledge of, the valuation of bank and thrift securities in Georgia and the
rest of the United States.
FBR has acted as a financial advisor to SFNB in connection with the Sale and
will receive a fee for services rendered which is contingent upon the
consummation of the Sale. In the ordinary course of FBR's business, it may
effect transactions in the securities of SFNB or RBC for its own account and/or
for the accounts of its customers and, accordingly, may at any time hold long or
short positions in such securities. From time to time, principals and/or
employees of FBR may also have positions in the securities.
Based upon and subject to the foregoing, as well as any such other matters as we
consider relevant, it is FBR's opinion, as of the date hereof, that the Sale
Price is fair, from a financial point of view, to the Stockholders of SFNB.
A-2
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO. INC. Page 3
This letter is solely for the information of the Board of Directors and
Stockholders of SFNB and may not be relied upon by any other person or used for
any other purpose, reproduced, disseminated, quoted from or referred to without
FBR's prior written consent; provided, however, this letter may be referred to
and reproduced in its entirety in proxy materials sent to the stockholders in
connection with the solicitation of approval for the Sale.
Very truly yours,
/s/ Suzanne N. Richardson
Suzanne N. Richardson
Managing Director
A-3
<PAGE>
APPENDIX B
SECOND AMENDED AND RESTATED
PLAN OF REORGANIZATION*
This Second Amended and Restated Plan of Reorganization (the "Plan of
Reorganization") is dated as of March 9, 1998, and is entered into and agreed
upon by and among Security First Network Bank ("SFNB"), and, upon organization,
Security First Technologies Corporation, a Delaware corporation (the "Holding
Company") and New Security First Network Bank, a federal savings bank in
organization (the "New Bank") (jointly referred to as the "Parties"), and
replaces in its entirety the Plan of Reorganization and Merger, dated January
28, 1997, and the Amended and Restated Plan of Reorganization, dated January 28,
1998, by and among the Parties. This Plan of Reorganization also constitutes a
plan of voluntary dissolution of SFNB pursuant to Section 546.4 of the rules and
regulations of the Office of Thrift Supervision ("OTS").
RECITALS
1. SFNB is a federal savings bank, duly organized and validly existing
under the laws of the United States, with its principal office at 3390 Peachtree
Road, NE, Atlanta, Georgia. The authorized capital stock of SFNB consists of (i)
25,000,000 shares of common stock, no par value per share ("SFNB Common Stock"),
of which 10,487,244 shares were issued and outstanding as of December 31, 1997,
and (ii) 2,500,000 shares of preferred stock, no par value, of which 1,251,084
shares were issued and outstanding as of December 31, 1997 ("SFNB Preferred
Stock") (SFNB Common Stock and SFNB Preferred Stock are jointly referred to as
"SFNB Stock").
2. SFNB will cause the organization of the Holding Company and then will
cause the Holding Company to enter into this Plan of Reorganization.
3. Upon its organization, the Holding Company will be a corporation, duly
organized and validly existing under the laws of the State of Delaware, with its
principal office to be located at 3390 Peachtree Road, NE, Atlanta, Georgia. At
the time the transactions contemplated by the Plan of Reorganization are
consummated, the authorized capital stock of the Holding Company will consist of
40,000,000 shares of common stock, par value $0.01 per share (the "Holding
Company Common Stock"), and 5,000,000 shares of serial preferred stock, par
value $0.01 per share (the "Holding Company Preferred Stock") (Holding Company
Common Stock and Holding Company Preferred Stock are jointly referred to as the
"Holding Company Stock"). No shares of the Holding Company Stock are issued and
outstanding as of the date hereof.
4. SFNB will cause the organization of the New Bank as a wholly owned
operating subsidiary of SFNB and then will cause the New Bank to enter into this
Plan of Reorganization.
5. Upon its organization, New Bank will be chartered as a federal savings
bank, duly organized and existing under the laws of the United States, with its
principal office at a location within the United States to be determined by the
Parties prior to the Contribution (as defined below). At the time the
transactions contemplated by the Plan of Reorganization are consummated, the
authorized capital stock of New Bank will consist of 1,000 shares of common
stock, $.01 par value per share.
- --------
* As amended on June 4, 1998
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<PAGE>
NOW, THEREFORE, each of the Parties agrees as follows:
SECTION 1. SHAREHOLDER APPROVAL OF THE PLAN OF REORGANIZATION
1.1. This Plan of Reorganization shall be submitted for approval by the
holders of SFNB Common Stock at a meeting to be called and held in accordance
with the applicable provisions of law (the "Shareholder Meeting"). This Plan of
Reorganization also will be submitted for approval by the holders of SFNB's
Preferred Stock by written consent. SFNB, as the organizer of the Holding
Company will approve the Plan of Reorganization on behalf of the Holding Company
by unanimous written consent. SFNB as the organizer of the New Bank will approve
the Plan of Reorganization on behalf of the New Bank by unanimous written
consent.
1.2. If the requisite approval of the Plan of Reorganization is obtained at
the Shareholder Meeting, then after the Shareholder Meeting and until the
Effective Time, as hereafter defined, SFNB shall issue certificates for SFNB
Stock, whether upon transfer or otherwise, only if such certificates bear a
legend, the form of which shall be approved by the board of directors of the
Holding Company, indicating that the Plan of Reorganization has been approved
and that shares of SFNB Stock evidenced by such certificates are subject to
consummation of the Plan of Reorganization.
SECTION 2. DEFINITIONS
2.1. EFFECTIVE TIME. The Plan of Reorganization shall become effective upon
the agreement of each of the Parties and as soon as possible upon satisfaction
of all conditions hereto, including obtaining the shareholder approval of the
Plan of Reorganization, and the expiration of any applicable waiting periods.
Such time, when all the transactions contemplated hereby are effected, is
hereinafter called the "Effective Time." Notwithstanding the foregoing, the
Effective Time shall not occur until the moment immediately prior to the
Closing, as defined in the Agreement identified in Section 2.2.
2.2. BANKING BUSINESS. The term "Banking Business" shall have the meaning
set forth in Section 2.3 of the Stock Purchase Agreement (the "Agreement"),
dated as of March 9, 1998, by and among Royal Bank of Canada, RBC Holdings
(Delaware) Inc., SFNB and upon organization, the Holding Company, and shall
include the Acquired Assets and Assumed Liabilities, as provided for and defined
in the Agreement. "Banking Business" does not include, among other things, the
stock of Security First Technologies, Inc. and cash or cash equivalent assets
that when taken from SFNB will not cause its total capital to decrease below $10
million.
2.3. NON-BANKING BUSINESS. The term "Non-Banking Business" shall mean those
assets and liabilities of SFNB that are not included in the Banking Business.
The term Non- Banking Business also includes the stock of the New Bank.
SECTION 3. ACTIONS AT THE EFFECTIVE TIME
SECTION 3.1. CONTRIBUTION OF THE BANKING BUSINESS OF SFNB TO THE NEW BANK
3.1.1. At the Effective Date, SFNB shall contribute the Banking Business to
the New Bank (the "Contribution").
3.1.2. As a result of the Contribution, the New Bank shall possess all of
the rights, privileges, immunities, powers and franchises of a public as well as
of a private nature, and shall be subject to all of the restrictions,
disabilities and duties of SFNB with respect to the Banking Business; and all
singular rights, privileges, immunities, powers and franchises of SFNB, and all
property, real, personal and mixed, and all debts due to SFNB with respect to
the Banking Business, on whatever account, including subscriptions to shares,
and all other things in action or belonging to
B-2
<PAGE>
SFNB shall be vested in the New Bank; and all property, rights, privileges,
immunities, powers and franchises, and all and every interest with respect to
the Banking Business, shall be thereafter as effectually the property of the New
Bank as they were of SFNB.
3.1.3. All rights of creditors and all liens upon any of the Acquired
Assets shall be preserved unimpaired and all Assumed Liabilities thenceforth
attach to the New Bank and may be enforced against the New Bank to the same
extent as if said Assumed Liabilities had been incurred or contracted by it;
provided, however, that all such liens shall attach only to the Acquired Assets
to which they were attached prior to the Effective Time.
3.1.4. Any action or proceeding, whether civil, criminal or administrative,
instituted, pending or threatened by or against SFNB relating to the Banking
Business shall be prosecuted as if the Contribution had not taken place, and the
New Bank may be substituted as a party in such action or proceeding in place of
SFNB.
3.1.5. If, at any time after the Effective Time, the New Bank shall
consider or be advised that any deeds, bills of sale, assignments, assurances or
any other acts or things are necessary or desirable to vest, perfect or confirm
in the New Bank its right, title or interest in, to or under any of the rights,
properties or assets of SFNB acquired or to be acquired as a result of the
Contribution or otherwise to carry out the purposes of this Plan of
Reorganization, the New Bank and its proper officers and directors shall be
authorized to execute and deliver, in the name and on behalf of the New Bank,
all such deeds, bills of sale, assignments and assurances and to do, in the name
and on behalf of SFNB, all such other acts and things necessary or desirable to
vest, perfect or confirm any and all right, title or interest in, to or under
such rights, properties or assets in the New Bank or otherwise to carry out the
purposes of this Plan of Reorganization.
3.1.6. Immediately following the Contribution, the Purchase and Assumption
(as defined below) and the dissolution contemplated by Section 3.3 of this Plan
of Reorganization, the New Bank shall change its corporate title to "Security
First Network Bank."
3.1.7. Notwithstanding anything in this Section 3.1, at the Effective Time,
the only assets to which New Bank shall be entitled and the only liabilities to
which New Bank will be subject shall be the Acquired Assets and the Assumed
Liabilities specifically included in the Banking Business at the Effective Time
pursuant to the Agreement.
SECTION 3.2. PURCHASE OF THE NON-BANKING BUSINESS OF SFNB BY THE HOLDING
COMPANY
3.2.1. Immediately following the Contribution, the Holding Company shall
acquire the Non-Banking Business of SFNB, which shall include all assets of SFNB
other than the Acquired Assets, and shall assume all liabilities of SFNB, other
than the Assumed Liabilities (the "Purchase and Assumption") in exchange for a
number of shares of Holding Company Common Stock equivalent to the number of
shares of SFNB Common Stock outstanding immediately prior to the Effective Time,
and a number of shares of Holding Company Preferred Stock equivalent to the
number of shares of SFNB Preferred Stock outstanding immediately prior to the
Effective Time.
3.2.2. As a result of the Purchase and Assumption, the Holding Company
shall possess all of the rights, privileges, immunities, powers and franchises
of a public as well as of a private nature, and shall be subject to all of the
restrictions, disabilities and duties of SFNB with respect to SFNB's Non-Banking
Business; and all singular rights, privileges, immunities, powers and franchises
of SFNB, and all property, real, personal and mixed, and all debts due to SFNB
with respect to its Non-Banking Business, on whatever account, including
subscriptions to shares, and all other things in action or belonging to SFNB
shall be vested in the Holding Company; and all property, rights, privileges,
immunities, powers and franchises, and all and every interest with respect to
SFNB's Non-Banking Business, shall be thereafter as effectually the property of
the Holding Company as they were of SFNB.
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<PAGE>
3.2.3. All rights of creditors and all liens upon any of the assets
included in the Non-Banking Business of SFNB shall be preserved unimpaired and
all debts, liabilities and duties of SFNB, other than the Assumed Liabilities,
thenceforth attach to the Holding Company and may be enforced against the
Holding Company to the same extent as if said debts, liabilities and duties had
been incurred or contracted by it; provided, however, that all such liens shall
attach only to the assets included in the Non-Banking Business to which they
were attached prior to the Effective Time.
3.2.4. Any action or proceeding, whether civil, criminal or administrative,
instituted, pending or threatened by or against SFNB relating to its Non-Banking
Business or shares of common stock shall be prosecuted as if the Purchase and
Assumption had not taken place, and the Holding Company may be substituted as a
party in such action or proceeding in place of SFNB.
3.2.5. If, at any time after the Effective Time, the Holding Company shall
consider or be advised that any deeds, bills of sale, assignments, assurances or
any other acts or things are necessary or desirable to vest, perfect or confirm
in the Holding Company its right, title or interest in, to or under any of the
rights, properties or assets of SFNB acquired or to be acquired as a result of
the Purchase and Assumption or otherwise to carry out the purposes of this Plan
of Reorganization, the Holding Company and its proper officers and directors
shall be authorized to execute and deliver, in the name and on behalf of the
Holding Company, all such deeds, bills of sale, assignments and assurances and
to do, in the name and on behalf of SFNB, all such other acts and things
necessary or desirable to vest, perfect or confirm any and all right, title or
interest in, to or under such rights, properties or assets in the Holding
Company or otherwise to carry out the purposes of this Plan of Reorganization.
SECTION 3.3. DISSOLUTION OF SFNB
3.3.1. Immediately after the Contribution and the Purchase and Assumption,
SFNB will prepare and file a certificate with the OTS evidencing the dissolution
of SFNB at the Effective Time and shall surrender its charter for cancellation.
3.3.2. In connection with the dissolution of SFNB and as of the Effective
Time, SFNB shall declare a distribution to its shareholders of the shares of
Holding Company Stock issued in its name so that a share of Holding Company
Common Stock shall be distributed for each outstanding share of SFNB Common
Stock, and a share of Holding Company Preferred Stock shall be distributed for
each outstanding share of SFNB Preferred Stock. Thereafter, the former holders
of SFNB Stock shall have full and exclusive power to vote such shares of Holding
Company Stock, to receive dividends thereon and to exercise all rights of an
owner thereof as provided by the terms thereof.
3.3.3. At the Effective Time, all previously issued and outstanding
certificates representing shares of SFNB Stock (the "Old Certificates") shall be
canceled and therefore shall cease to represent shares of SFNB Stock or any
interest therein.
SECTION 4. ACTIONS AFTER THE EFFECTIVE TIME
As soon as practicable and in any event not more than 30 days after the
Effective Time, the Holding Company shall make available through its stock
transfer agent for the then holders of the Old Certificates, a certificate or
certificates for the aggregate number of shares of Holding Company Stock (the
"New Certificates") to which said holders shall be entitled. Each such holder
may surrender his Old Certificate and receive a New Certificate for an equal
number of shares of Holding Company Stock. Until so surrendered, each Old
Certificate shall be deemed, for all corporate purposes, to evidence the
ownership of the number of shares of Holding Company Stock which the holder
thereof would be entitled to receive upon its surrender.
B-4
<PAGE>
SECTION 5. CONDITIONS PRECEDENT
This Plan of Reorganization and the transactions provided for herein shall
not become effective unless all of the following shall have occurred:
5.1. The Plan of Reorganization shall have been approved (i) by the
requisite vote of holders of SFNB Common Stock at the Shareholder Meeting; (ii)
by holders of at least two-thirds of the shares of SFNB Preferred Stock, and
(iii) by the requisite vote or consent of the holders of any other class of SFNB
Stock.
5.2. The OTS, acting under Section 10 of the Home Owners' Loan Act, as
amended, shall have approved the application of the Holding Company to become
the savings and loan holding company and all waiting periods shall have expired
following such approval. The OTS also shall have approved the Contribution of
SFNB's Banking Business to the New Bank, the Purchase and Assumption of the
Non-Banking Business by the Holding Company and the dissolution of SFNB in
accordance with this Plan of Reorganization.
5.3. The shares of Holding Company Common Stock to be issued to the holders
of SFNB Common Stock pursuant to the Plan of Reorganization shall have been
registered or qualified for issuance under the Securities Act of 1933, as
amended, and all applicable state securities laws or be exempt therefrom.
5.4. The Holding Company Common Stock shall have been approved for listing
on the Nasdaq.
5.5. SFNB and the Holding Company shall have obtained all other consents,
permissions and approvals and taken all actions required by law or agreement, or
deemed necessary by SFNB or the Holding Company, prior to the consummation of
the transactions provided for by the Plan of Reorganization.
SECTION 6. ABANDONMENT OF PLAN OF REORGANIZATION
The Plan of Reorganization may be abandoned by any of the Parties at any
time before the Effective Time in the event that:
(a) Any action, suit, proceeding or claim has been instituted, made or
threatened relating to the Plan of Reorganization which shall make
consummation of the actions contemplated by the Plan of Reorganization
inadvisable in the opinion of the Parties; or
(b) For any other reason, consummation of the actions contemplated by
the Plan of Reorganization is inadvisable in the opinion of the Parties.
Such abandonment shall be effected by written notice by any one of the
Parties to each of the other Parties, authorized or approved by the board of
directors by the Party giving such notice. Upon the giving of such notice, this
Plan of Reorganization shall terminate and there shall be no liability hereunder
or on account of such termination on the part of any of the Parties or the
directors, officers, employees, agents or shareholders of any of them.
SECTION 7. AMENDMENT OF PLAN OF REORGANIZATION
The Plan of Reorganization may be amended or modified in any respect at any
time by mutual agreement of the boards of directors of all of the Parties prior
to the approval hereof by the shareholders of SFNB.
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<PAGE>
SECTION 8. STOCK OPTIONS
By voting in favor of this Plan of Reorganization, the Holding Company
shall have approved adoption of all existing stock option plans and agreements
of SFNB as stock option plans and agreements of the Holding Company and shall
have agreed to issue Holding Company Common Stock in lieu of SFNB Common Stock
pursuant to options for SFNB Common Stock currently outstanding. As of the
Effective Time, the unexercised portion of the options for SFNB Common Stock
then outstanding (including options outstanding under the existing stock option
plans of SFNB) shall be assumed by the Holding Company and thereafter shall be
exercisable only for shares of Holding Company Common Stock, with each such
option being exercisable for a number of shares of Holding Company Common Stock
equal to the number of shares of SFNB Common Stock that were available
thereunder immediately prior to the Effective Time, and with no change in the
option exercise price or any other term or condition of such option. The Holding
Company and SFNB shall make appropriate amendments to the existing stock option
plans and agreements to reflect the adoption of those plans as the stock option
plans and agreements of the Holding Company without adverse effect upon the
outstanding options.
SECTION 9. GOVERNING LAW
The Plan of Reorganization shall be governed by and construed in accordance
with the laws of the United States and the State of Delaware, except with
respect to choice of laws.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Second Amended and
Restated Plan of Reorganization to be duly executed on the date specified.
SECURITY FIRST NETWORK BANK
By: /s/ James S. Mahan, III
--------------------------------
James S. Mahan, III
Chief Executive Officer
Date: March 9, 1998
-------------------------------
[SEAL APPEARS HERE]
CORPORATE SEAL
ATTEST:
/s/ Lisa Wilkie
- -----------------------
Lisa Wilkie
Assistant Secretary
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SECURITY FIRST
TECHNOLOGIES CORPORATION
By: /s/ Robert F. Stockwell
-------------------------------
Name: Robert F. Stockwell
Title: Chief Financial Officer
Date: June 4, 1998
ATTEST:
/s/ Jeannie Morrill
- ------------------------
Name: Jeannie Morrill
Assistant Secretary
NEW SECURITY FIRST NETWORK BANK
By:
-------------------------------------
Name:
----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
ATTEST:
- -------------------------------
Name:
--------------------------
Secretary
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<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT*
- --------------------------------------------------------------------------------
Dated as of
March 9, 1998
Among
ROYAL BANK OF CANADA,
Parent,
RBC HOLDINGS (DELAWARE) INC.,
Buyer,
and
Old Bank
SECURITY FIRST NETWORK BANK,
- --------
* AS AMENDED ON JUNE 5, 1998
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TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and is not intended
to define, limit or describe the scope or intent of any provision of this
Agreement.)
Page
----
Parties; Recitals ....................................................8
ARTICLE ONE TERMS OF THE TRANSACTION......................................10
SECTION 1.1. Sale and Purchase.......................................10
SECTION 1.2. Purchase Price..........................................10
SECTION 1.3. Certain Expenses........................................10
SECTION 1.4. The Closing.............................................11
SECTION 1.5. Further Assurances......................................11
ARTICLE TWO REPRESENTATIONS AND WARRANTIES OF SELLER AND OLD BANK........11
SECTION 2.1. Power and Capacity......................................11
SECTION 2.2. The Shares..............................................12
SECTION 2.3. Assets and Liabilities..................................12
SECTION 2.4 No Additional Liabilities...............................12
SECTION 2.5. Conflicting Instruments; Consents.......................13
SECTION 2.6. Transfer of the Shares..................................14
SECTION 2.7. Organization and Authority..............................14
SECTION 2.8. Subsidiaries and Affiliates.............................15
SECTION 2.9. Capitalization..........................................15
SECTION 2.10. Financial Statements...................................15
SECTION 2.11. Real Property..........................................16
SECTION 2.12. Securities Owned.......................................17
SECTION 2.13. Personnel..............................................17
SECTION 2.14. Labor Matters..........................................18
SECTION 2.15. Environmental Matters..................................18
SECTION 2.16. Non-ERISA Plans........................................18
SECTION 2.17. ERISA Plans............................................18
SECTION 2.18. Compliance with Law....................................18
SECTION 2.19. Other Activities.......................................19
SECTION 2.20. Litigation.............................................20
SECTION 2.21. Regulatory Matters.....................................20
SECTION 2.22. Material Contracts.....................................20
SECTION 2.23. Conduct of Business....................................21
SECTION 2.24. Tax Matters............................................22
SECTION 2.25 Insurance...............................................23
SECTION 2.26 Corporate Name and Intellectual Property................23
SECTION 2.27 Transactions with RelatedParties........................23
SECTION 2.28 Permits.................................................24
SECTION 2.29 Proxy Statement and Regulatory Approvals................24
SECTION 2.30 Disclosure..............................................24
SECTION 2.31. Site Locations.........................................24
SECTION 2.32. Loans..................................................25
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SECTION 2.33. Allowance for Losses...................................25
SECTION 2.34. Derivatives Risk Management Instruments................25
SECTION 2.35.Technology..............................................25
SECTION 2.36. Broker's and Finder's Fees.............................26
ARTICLE THREE REPRESENTATIONS AND WARRANTIES OF BUYER......................26
SECTION 3.1. Organization; Authority.................................26
SECTION 3.2. Conflicting Instruments; Consents.......................26
SECTION 3.3. Litigation..............................................26
SECTION 3.4. Approvals and Consents..................................27
SECTION 3.5. Information.............................................27
SECTION 3.6. Regulatory Matters......................................27
ARTICLE FOUR COVENANTS OF SELLER, OLD BANK AND BUYER.......................27
SECTION 4.1. Access..................................................27
SECTION 4.2. Transfer of the Shares..................................28
SECTION 4.3. Conduct of the Business of Old Bank.....................28
SECTION 4.4. Preparation of Proxy Statement..........................30
SECTION 4.5. Meeting of Shareholders.................................30
SECTION 4.6. Pursuit of Approvals....................................30
SECTION 4.7. Other Consents..........................................31
SECTION 4.8. Ongoing Financial Disclosure............................31
SECTION 4.9. Acquisition Proposals...................................31
SECTION 4.10. Completion of the Plan.................................32
SECTION 4.11. Notification of Pending FRB, OTS, State
of Georgia or FDIC Exams.............................32
SECTION 4.12. Operating Losses.......................................32
SECTION 4.13. Retention of Employees.................................32
SECTION 4.14. Notice of Default......................................33
SECTION 4.15. Section 338(h)(10) Elections...........................33
SECTION 4.16. Non-Compete............................................34
SECTION 4.17. Additional Parties.....................................35
SECTION 4.18. Update of Schedules....................................35
SECTION 4.19 Sublease................................................35
SECTION 4.20 Delivery of 401(k) Determination Letter.................35
SECTION 4.21 Insurance...............................................35
SECTION 4.22 Permits.................................................35
ARTICLE FIVE INDEMNIFICATION..............................................35
SECTION 5.1. Indemnification Obligation..............................35
SECTION 5.2. Limitations.............................................37
SECTION 5.3. Claims..................................................37
SECTION 5.4. Defense by the Indemnifying Party.......................37
SECTION 5.5. Manner of Indemnification...............................38
SECTION 5.6. Notice..................................................38
SECTION 5.7. Tax Procedures and Indemnification......................38
ARTICLE SIX CONDITIONS TO BUYER'S OBLIGATIONS.............................40
SECTION 6.1. Representations, Warranties and Covenants...............41
SECTION 6.2. Certain Documents.......................................41
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SECTION 6.3. Governmental and Regulatory Actions.....................41
SECTION 6.4. Board and Shareholder Approval..........................42
SECTION 6.5. Opinion of Seller's Counsel.............................43
SECTION 6.6. Legal Matters...........................................43
SECTION 6.7. Delivery of the Shares..................................43
SECTION 6.8. Material Adverse Change.................................43
SECTION 6.9. Related Party Advances..................................43
SECTION 6.10. Third Party Consents...................................43
SECTION 6.11. Banking Crisis.........................................43
SECTION 6.12. Transfer Actions Taken.................................43
SECTION 6.13. Seller as Party........................................44
SECTION 6.14 Sublease................................................44
SECTION 6.15 Insurance...............................................44
SECTION 6.16 Permits.................................................44
ARTICLE SEVEN CONDITIONS TO SELLER'S OBLIGATIONS..........................44
SECTION 7.1. Representations and Warranties..........................44
SECTION 7.2. Opinion of Buyer's Counsel..............................44
SECTION 7.3. Legal Matters...........................................45
SECTION 7.4. Payment for the Shares..................................45
SECTION 7.5. Legal Proceedings.......................................45
ARTICLE EIGHT TERMINATION.................................................45
SECTION 8.1. Termination.............................................45
ARTICLE NINE MISCELLANEOUS................................................46
SECTION 9.1. Survival of Representations, Warranties and Covenants...46
SECTION 9.2. Governing Law...........................................46
SECTION 9.3. Notices.................................................46
SECTION 9.4. Jurisdiction; Agent for Service.........................47
SECTION 9.5. Entire Agreement........................................48
SECTION 9.6. Binding Effect..........................................48
SECTION 9.7. Third Party Beneficiaries...............................48
SECTION 9.8. Amendments; Waivers.....................................48
SECTION 9.9. Counterparts............................................48
SECTION 9.10. Severability...........................................48
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SCHEDULES
SCHEDULE 2.3 Assets and Liabilities
SCHEDULE 2.5 Conflicting Instruments and Regulatory Approvals
SCHEDULE 2.8 Subsidiaries and Affiliates
SCHEDULE 2.11 Real Property
SCHEDULE 2.13 Personnel
SCHEDULE 2.18 Compliance with Law
SCHEDULE 2.20 Litigation
SCHEDULE 2.21 Regulatory Matters
SCHEDULE 2.23 Conduct of Business
SCHEDULE 2.25 Insurance
SCHEDULE 2.26 Corporate Name and Intellectual Property
SCHEDULE 2.27 Transactions with Related Parties
SCHEDULE 2.32 Loans
SCHEDULE 2.36 Broker's and Finder's Fees
SCHEDULE 6.9 Related Party Advances
EXHIBITS
EXHIBIT A Second Amended and Restated Plan of Reorganization
EXHIBIT B Federal Stock Charter of New Bank
EXHIBIT C By-laws of New Bank
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DEFINED TERMS INDEX
DEFINED TERM SECTION
- ------------ -------
Acquired Assets....................................................2.3
Acquisition Proposal...............................................4.9
Agreement...............................................Introduction
Applicable Laws....................................................2.18
Assumed Deposits...................................................2.3
Assumed Liabilities................................................2.3
Balance Sheet......................................................2.10
Balance Sheet Date.................................................2.10
Banking Business...................................................2.3
Board.......................................................Recitals
Buyer...................................................Introduction
Buyer Indemnified Parties..........................................5.1
Buyer Indemnifying Party...........................................5.1
Closing............................................................1.4
Closing Date.......................................................1.4
Code...............................................................2.24
Common Stock.......................................................2.9
Competing Business.................................................4.16
Elections..........................................................4.15
Environmental Damages..............................................2.4
Environmental Requirements.........................................2.4
ERISA..............................................................2.17
ERISA Plan.........................................................2.17
Excess Cash.................................................Recitals
Exchange Act.......................................................2.27
FDIC...............................................................2.5
Financial Statements...............................................2.10
foreign person.....................................................2.24
Fraud Claims.......................................................5.2
FRB................................................................2.5
GAAP...............................................................2.10
Hazardous Materials................................................2.4
Holdback Amount....................................................1.2
Impairments........................................................2.11
Indemnified Parties................................................5.2
Indemnifying Party.................................................5.3
Insider............................................................2.23
Intellectual Property..............................................2.26
Leased Property....................................................2.11
Minister of Finance................................................2.5
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New Bank....................................................Recitals
Prospectus.........................................................4.4
Old Bank................................................Introduction
Operating Loss Date................................................4.12
OTS.........................................................Recitals
Parent..................................................Introduction
Pension Plans......................................................2.17
Plan........................................................Recitals
Property Leases....................................................2.11
Prospectus.........................................................4.4
Proxy Statement....................................................4.4
Purchase Price.....................................................1.2
Real Property......................................................2.4
Regulatory Approvals...............................................2.5
Related Costs......................................................5.7
S1..........................................................Recitals
Securities Act.....................................................2.10
Seller......................................................Recitals
Seller Indemnified Parties.........................................5.1
Seller Indemnifying Party..........................................5.1
Seller's Refunds...................................................5.7
Seller's taxes.....................................................5.7
Services...........................................................2.5
Shares......................................................Recitals
Shareholders Meeting...............................................4.5
Sublease...........................................................4.19
taxes..............................................................2.24
Tax Group..........................................................2.24
tax proceeding.....................................................5.7
tax return.........................................................2.24
Technology Systems.................................................2.35
Threshold Amount...................................................5.2
Tradenames.........................................................2.26
Transferred Capital................................................2.3
Unlimited Claims...................................................5.2
Welfare Plans......................................................2.17
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STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of March 9,
1998 by and among Royal Bank of Canada, a Canadian chartered banking institution
("Parent"), RBC Holdings (Delaware) Inc., a wholly owned subsidiary of Parent
("Buyer") and Security First Network Bank, a federally chartered savings bank
("Old Bank").
R E C I T A L S
A. The Board of Directors (the "Board") of Old Bank has approved a Second
Amended and Restated Plan of Reorganization in the form attached as Exhibit A
(the "Plan") pursuant to which, subject to shareholder and regulatory approval,
Old Bank will, among certain other actions, cause the organization of both
Security First Technologies Corporation, a Delaware corporation ("Seller") and
New Security First Network Bank, a federally chartered savings bank ("New Bank")
as wholly-owned subsidiaries of Old Bank.
B. The Plan will be submitted by the Board to the shareholders of Old Bank
for their approval.
C. Upon approval of the Plan by the shareholders of Old Bank and the
receipt of all necessary government approvals required in connection with the
implementation of the Plan, the following actions shall occur: (i) Old Bank
shall contribute all of its banking-related assets and liabilities (as more
particularly defined herein) to New Bank; (ii) Seller shall acquire all of the
non-banking related assets of Old Bank, as well as the capital stock of New
Bank, in exchange for that number of shares of Seller capital stock equal to the
number of shares of Old Bank capital stock then outstanding; (iii) Old Bank will
be liquidated into Seller upon the distribution of the shares of capital stock
of Seller then owned by Old Bank to Old Bank's shareholders, and (iv) New Bank
shall change its name from "New Security First Network Bank" to "Security First
Network Bank".
D. The banking-related assets and liabilities of Old Bank to be contributed
to New Bank pursuant to the Plan, and as contemplated hereby, shall consist only
of the assets and liabilities of Old Bank described in Section 2.3 and shall not
include (i) any capital stock of Old Bank's wholly owned subsidiary, Security
First Technologies, Inc. ("S1"), (ii) inter-company accounts payable from S1 to
Old Bank, or (iii) the "Excess Cash" (as defined below).
E. For purposes of this Agreement and the Plan, the Excess Cash shall be
that amount of cash or cash equivalent assets on the books of Old Bank
immediately prior to the time the transactions contemplated by the Plan are
consummated which equals the amount by which Old Bank's total capital (as
calculated in accordance with Part 567 of the regulations of the Office of
Thrift Supervision ("OTS")) exceeds $10.0 million.
F. Upon completion of the transactions contemplated by the Plan, Seller
shall own all of the outstanding capital stock of New Bank, consisting of 1,000
shares of common stock, par value $0.01 per share (the "Shares").
G. Upon the organization of Seller, Old Bank shall cause Seller to become a
party hereto, including the representations and warranties set forth in Article
Two herein, and as sole shareholder of Seller, shall approve of Seller's actions
in connection therewith.
H. Concurrent with the execution of this Agreement, Buyer is entering into
a Common Stock Purchase and Option Agreement with Old Bank, and Old Bank is
entering into (i) a Strategic Tactical Advisory Relationship License and Service
Agreement with S1, (ii) a Remote Financial Services and Data Processing
Agreement with S1 and (iii) a Transition Services and Consulting Agreement with
S1., with such agreements to be assigned to New Bank upon consummation of the
Plan and to be effective only upon the Closing of the transactions contemplated
by this Agreement.
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I. Buyer desires to acquire the Shares from Seller, and Seller desires to
sell the Shares to Buyer, all upon the terms and subject to the conditions set
forth in this Agreement.
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A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained in this Agreement and for other valuable consideration Parent, Buyer
and Old Bank and, upon its organization, Seller agree as follows:
ARTICLE ONE
TERMS OF THE TRANSACTION
SECTION 1.1. SALE AND PURCHASE.
Seller, on the Closing Date (as defined in Section 1.4 below), agrees to
sell the Shares to Buyer by delivering certificates for the Shares to Buyer in
proper form for transfer by delivery or with duly executed stock powers attached
thereto.
SECTION 1.2. PURCHASE PRICE.
(a) Subject to adjustment pursuant to Section 1.3(b), Buyer shall pay to
Seller, as purchase price for the Shares an aggregate amount of $13,000,000 (the
"Purchase Price"). All dollar amounts in this Agreement are in U.S. dollars
unless otherwise specifically indicated.
(b) The Purchase Price shall be paid to Seller as follows:
(i) on the Closing Date, Buyer shall pay to Seller $11,500,000 in
immediately available funds via wire transfer, to an account to be
designated in writing by Seller; and
(ii) on the date 18 months from Closing, Buyer shall pay to Seller in
immediately available funds via wire transfer to an account to be
designated in writing by Seller a sum (the "Holdback Amount") equal to (A)
$1,500,000 (plus interest accrued as set forth below) less (B) the amount
of any claims that have been asserted against Seller pursuant to the
provisions of Article Five hereto. The Holdback Amount shall bear interest
from the Closing Date until the date of payment at a fluctuating interest
rate that is at all times equal to the rate of interest from time to time
announced in the Wall Street Journal as the prime commercial lending rate.
The Holdback Amount shall be available to satisfy any indemnity or breach
of contract claim that Buyer, Parent or New Bank may have against Seller
pursuant to the terms of this Agreement.
SECTION 1.3. CERTAIN EXPENSES.
(a) None of the Buyer, Parent or New Bank shall pay or be liable for any of
the following fees, expenses, taxes or liabilities incurred by Seller, Old Bank
or New Bank, all of which shall be borne and paid by Seller or Old Bank:
(i) the fees and expenses, if any, of any person retained by Seller,
Old Bank or prior to the Closing Date, as defined below, New Bank for
brokerage, financial advisory or investment banking services or services as
a finder rendered to Seller, Old Bank or New Bank in connection with the
proposed sale of the Shares including, without limitation, the transactions
contemplated by the Plan and this Agreement;
(ii) any fees and expenses of legal counsel, auditors and accountants
retained or employed by Seller, Old Bank or New Bank for services rendered
to Seller, Old Bank or New Bank (prior to the Closing Date) in connection
with the proposed sale of the
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Shares including, without limitation, the transactions contemplated by the
Plan and this Agreement;
(iii) any income, capital gains or other tax incurred by Seller, Old
Bank or New Bank as a result of the consummation of the transactions
contemplated by the Plan or this Agreement.
(b) If Parent, Buyer or New Bank shall pay or be liable for any fee,
expense, tax or liability described in Section 1.3(a), the sum of all such
payments or liabilities shall be paid by Seller to Buyer upon demand or Buyer
may reduce the Purchase Price accordingly.
SECTION 1.4. THE CLOSING.
The closing of the purchase and sale of the Shares (the "Closing") shall be
held at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York,
New York 10166, or at such other place as the parties may agree upon, at 10:00
A.M., local time and shall take place at the close of business on a date which
is no later than 10 business days following receipt of all shareholder and
regulatory approvals necessary to consummate the transactions contemplated by
this Agreement and the Plan. Old Bank shall cause the transactions contemplated
by the Plan to be consummated on the Closing Date neither earlier, nor later
than the moment immediately prior to the Closing such that upon consummation of
the Plan, Seller will immediately sell the Shares to Buyer pursuant to this
Agreement. The date upon which the Closing shall occur is referred to as the
"Closing Date."
SECTION 1.5. FURTHER ASSURANCES.
Each of the parties hereto, at their sole respective cost and expense, will
do such further acts and execute and deliver such further documents regarding
their obligations hereunder as may be reasonably required solely for the purpose
of (i) accomplishing the purposes of this Agreement or (ii) assuring and
confirming the validity of any documents of conveyance to be delivered at
Closing.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF
SELLER AND OLD BANK
Old Bank and Seller, jointly and severally, represent and warrant to Buyer
(Old Bank makes such representations and warranties both as of the date hereof
and, except as otherwise indicated, as of the Closing Date and Seller makes such
representations and warranties both upon its execution of this Agreement and,
except as otherwise indicated, as of the Closing Date) as follows:
SECTION 2.1. POWER AND CAPACITY.
Old Bank has, and Seller will have upon entering into this Agreement, all
requisite power and authority to execute and deliver this Agreement, to perform
their obligations hereunder and to consummate the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by Old
Bank and, upon its entering into this Agreement, Seller, constitutes the valid
and binding agreement of Old Bank and, upon its entering into this Agreement,
Seller and is enforceable against Seller and Old Bank in accordance with its
terms except as enforcement may be limited by general principles of equity,
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
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SECTION 2.2. THE SHARES.
Immediately prior to the Closing, Seller will be the beneficial and record
owner of the Shares. The Shares will be held by Seller as record owner thereof,
free and clear of all liens, charges, encumbrances, equities and claims
whatsoever (other than encumbrances created by this Agreement) and will not be
subject to any restriction with respect to their transferability (other than
restrictions on transfer under applicable federal and state securities laws).
SECTION 2.3. ASSETS AND LIABILITIES.
(a) As of the Closing, New Bank will have good and valid title to, or a
valid leasehold interest in the assets listed on Schedule 2.3 hereto plus or
minus, as the case may be, all assets acquired or disposed of from February 28,
1998 until the Closing in the ordinary course consistent with past practice and
in accordance with Section 4.3 hereto, and as reflected on the revised and
updated Schedule 2.3 to be delivered to the Buyer 5 days prior to Closing free
and clear of all Impairments (as defined in Section 2.11) (collectively, the
"Acquired Assets"). Together, the Acquired Assets and the Assumed Liabilities
(as defined below) including any and all operations related thereto are
collectively referred to herein as the "Banking Business". As of the Closing,
Old Bank will have effectively transferred good and valid title to or a valid
leasehold interest in, all of the Acquired Assets to New Bank. Notwithstanding
any losses incurred by the Banking Business whether or not in the ordinary
course of business, Old Bank and Seller shall cause the Banking Business as of
the Closing, to have, without limitation, a minimum of $10,000,000 of total
capital (as calculated in accordance with Part 567 of the regulations of the
OTS) (the "Transferred Capital").
(b) The furniture, fixtures and equipment (listed on Schedule 2.3)
(including all computer and computer related equipment and the Technology
Systems) of Old Bank are in adequate working condition for use in the Banking
Business in the ordinary course of its business, normal wear and tear excepted.
(c) As of the Closing, New Bank will only be subject to: (i) Assumed
Deposits (as defined below) (ii) the liabilities listed on Schedule 2.3 hereto;
and (iii) any Assumed Deposits or liabilities of the type listed on Schedule 2.3
incurred by the Banking Business from February 28, 1998 until the Closing in the
ordinary course of business consistent with past practice and in accordance with
Section 4.3, as reflected on the revised and updated Schedule 2.3 to be
delivered to the Buyer 5 days prior to Closing, subject in all cases to the
disposition of any of such liabilities in accordance with Section 4.3
(collectively, the "Assumed Liabilities"). "Assumed Deposits" means all deposit
liabilities of Old Bank, including all uncollected items included in depositors
balances including, without limitation, regular checking accounts, commercial
checking accounts, NOW accounts, money market accounts, savings accounts and
certificates of deposit.
(d) New Bank will be organized on the Closing Date and not prior thereto
and does not and has not conducted any business of any kind whatsoever. New Bank
will not be subject to, and has not assumed from Old Bank or Seller, any debt,
obligation or liability whatsoever, whether known or unknown, actual or
contingent, matured or unmatured, presently existing or arising in the future
other than the Assumed Liabilities.
(e) The Acquired Assets and Assumed Liabilities listed on Schedule 2.3
hereto constitute all of the assets and liabilities used in the Banking Business
except for the excluded loans referenced on such Schedule 2.3 hereto.
SECTION 2.4 NO ADDITIONAL LIABILITIES
Unless specifically set forth on Schedule 2.3, the Assumed Liabilities will
not include any debts, obligations or liabilities of Old Bank or the Seller
whatsoever, whether known or
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unknown, actual or contingent, matured or unmatured, including but not limited
to the liabilities set forth below:
(a) any liability or obligation (contingent or otherwise) of Old Bank or
Seller arising out of any claim or litigation with respect to events occurring
during the periods through and including the Closing Date that are not listed on
Schedule 2.3; and
(b) any and all Environmental Damages (as defined below) arising from the
presence of Hazardous Materials (as defined below) upon, about or beneath the
Real Property or migrating to or from the Real Property during the periods
through and including the Closing Date, or arising in any manner whatsoever out
of the violation, during the periods through and including the Closing Date, of
any Environmental Requirements (as defined below) pertaining to the Real
Property.
For purposes of this Agreement the following terms shall have the following
meanings:
(i) "Environmental Damages" means all claims, judgments, damages,
losses, penalties, fines, liabilities (including strict liability),
encumbrances, liens, costs and expenses of defense of a claim (whether or
not such claim is ultimately defeated), good faith settlements of judgment,
and costs and expenses of reporting, investigating, removing and/or
remediating Hazardous Materials, of whatever kind or nature, contingent or
otherwise, matured or unmatured, foreseeable or unforeseeable, including,
without limitation, reasonable attorney's fees and disbursements and
consultants' fees, any of which arise out of or relate to the existence of
Hazardous Materials at, upon, about or beneath the Real Property, or
migrating or threatening to migrate to or from the Real Property or
transported by, to, from, or across any Real Property.
(ii) "Environmental Requirements" means all applicable statutes,
regulations, rules, ordinances, codes, licenses, permits, orders,
authorizations, and similar items of all federal, state, and local
governmental branches, agencies, departments, commissions, boards, bureaus
or instrumentalities, domestic and foreign, having jurisdiction and all
applicable judicial and administrative and regulatory decrees, judgments
and orders and all covenants running with the land that relate to the
protection of health or the environment, including without limitation those
that relate to the existence, handling, manufacture, treatment, storage,
use, generation, release, discharge, refining, recycling, reclaiming or
disposal of Hazardous Materials.
(iii) "Real Property" means any real property interest included in the
Acquired Assets including any fee, leasehold or other equitable interest in
real property, and including, without limitation, the Leased Property (as
defined in Section 2.11 below)
(iv) "Hazardous Materials" means (A) petroleum or petroleum products,
radioactive material, asbestos in any form that is friable, urea
formaldehyde foam insulation, transformers or other equipment that contain
dielectric fluid containing levels of polychlorinated biphenyls, and radon
gas; (B) any chemicals, materials or substances defined as or included in
the definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "restricted hazardous waste," "toxic substances," "toxic
solutions," "contaminates," or "pollutants," or words of similar import
under any of the Environmental Requirements.
SECTION 2.5. CONFLICTING INSTRUMENTS; CONSENTS.
(a) The execution and delivery by Old Bank and Seller of this Agreement
does not, and the consummation of the transactions contemplated hereby,
including the transactions contemplated by the Plan, will not, violate any
provision of the articles of incorporation, the charter
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<PAGE>
or the by-laws (or the equivalent thereof) of Seller, Old Bank, New Bank or SFNB
Investment, Inc. ("Services"), or result in the creation of any lien, security
interest, charge or encumbrance upon the Shares or any of the properties or
assets of the Banking Business under, conflict with or result in a breach of,
create an event of default (or event that, with the giving of notice or lapse of
time or both, would constitute an event of default) under, or, except as set
forth on Schedule 2.5, give any third party the right to accelerate any
obligation under, any agreement, mortgage, license, lease, indenture,
instrument, order, arbitration award, judgment or decree to which New Bank shall
be a party or by which the Shares, New Bank, or any assets or properties of the
Banking Business, are bound or affected.
(b) Except for the Regulatory Approvals (as defined below) and shareholder
approval, the execution and delivery by Old Bank and Seller of this Agreement
does not, and the consummation of the transactions contemplated by the Plan and
this Agreement by Old Bank and Seller will not, result in a violation by Seller
or Old Bank of, or require any authorization, approval, consent or other action
by, or registration, declaration or filing with or notice to, any court or
administrative or governmental body pursuant to, any statute, law, rule,
regulation or ordinance. There is no pending or, to Old Bank's knowledge,
threatened action, suit, proceeding or investigation against or of Old Bank
before or by any court or governmental body or agency, to restrain or prevent
the consummation of the transactions contemplated by the Plan or this Agreement
or that might affect the right of Buyer to own and vote the Shares or the right
of New Bank to operate the Acquired Assets or conduct the Banking Business that
might affect the right of New Bank to own and vote the shares of capital stock
of Services.
(c) For purposes of this Agreement "Regulatory Approvals" shall mean with
respect to a particular party all necessary approvals, consents, authorizations
and the like from any court or administrative or governmental body, agency or
regulatory authority pursuant to any statute, law, rule, regulation or
ordinance, including without limitation any necessary approval of the Minister
of Finance (Canada) upon the recommendation of the Office of the Superintendent
of Financial Institutions (Canada) (the "Minister of Finance"), the Board of
Governors of the Federal Reserve System ("FRB"), OTS, the Federal Deposit
Insurance Corporation ("FDIC"), the State of Georgia, the Securities and
Exchange Commission, the Federal Trade Commission, the Department of Justice
together with any other approvals that are necessary or required to allow such
party to effectuate the transactions contemplated by the Plan and this
Agreement, and the expiration of any applicable waiting periods.
SECTION 2.6. TRANSFER OF THE SHARES.
Upon the delivery of the certificates by Seller and payment for the Shares
as provided for in Sections 1.1 and 1.2, Buyer will acquire good and marketable
title to the Shares which constitute all of the outstanding shares of capital
stock of New Bank, free and clear of all liens, charges, encumbrances, equities
and claims whatsoever except for the obligation to sell the Shares as provided
for herein.
SECTION 2.7. ORGANIZATION AND AUTHORITY.
(a) The New Bank will be a federally chartered savings bank duly organized
and validly existing under the laws of the United States. The Assumed Deposits
as in existence from time to time are, and as of the Closing Date will be,
insured by the Savings Association Insurance Fund of the FDIC to the fullest
extent permitted under Applicable Law.
(b) The charter and the by-laws of New Bank will be in full force and
effect, and the minute books and other corporate records of New Bank to be
provided to Buyer as of the Closing Date will be true, correct and complete.
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SECTION 2.8. SUBSIDIARIES AND AFFILIATES.
(a) New Bank will, upon consummation of the Plan, beneficially own,
directly or indirectly, all of the outstanding capital stock or other equity
interests of Services. Set forth on Schedule 2.8 is a true and complete list of
all agreements to which Services is a party. All such agreements have been
terminated in accordance with their terms and are of no further force and
effect. Services does not and has not actively conducted business, has not
entered into any existing agreements and does not have any liabilities of any
kind other than as set forth on Schedule 2.8. There is no other entity with
respect to which (i) New Bank will beneficially own, as of the Closing, directly
or indirectly, any outstanding stock or other ownership interests except as set
forth in Schedule 2.3, (ii) New Bank, as of the Closing, may be deemed to be in
control because of factors or relationships other than the quantity of stock or
other interests owned, (iii) New Bank, as of the Closing, may be liable under
any circumstances for the payment of additional amounts with respect to its
ownership interest, whether in the form of assessments, capital calls,
installment payments, general partner liability or otherwise or (iv) New Bank's
investment will be accounted for by the equity method. Neither New Bank nor
Services will be a party to any partnership or joint venture agreement as of the
Closing.
(b) Services is duly organized, validly existing and in good standing under
the laws of the State of Kentucky and is not qualified to do business as a
foreign corporation in any jurisdiction.
(c) Services' authorized capital stock consists of 100 common shares, no
par value, of which 100 shares have been issued. The shares of capital stock so
issued by Services have been duly authorized and validly issued, are fully paid
and nonassessable. Services has not issued any other shares of its capital stock
and there is no outstanding or authorized option, subscription, warrant, call,
right, commitment or other agreement of any character obligating Old Bank, New
Bank or Services to issue, sell, transfer, pledge or otherwise encumber any
share of capital stock or other ownership interest of Services or any security
or other instrument convertible into or exercisable for or evidencing the right
to subscribe for any such share of capital stock or other ownership interest.
(d) The minute books, stock ledgers and stock transfer records of Services
furnished to Buyer for review are accurate and complete.
SECTION 2.9. CAPITALIZATION.
New Bank will have an authorized capital consisting of 1,000 shares of
common stock (the "Common Stock"). Upon the Closing, all outstanding shares of
Common Stock shall have been duly authorized and validly issued, will be fully
paid and non-assessable and issued by New Bank in compliance with all applicable
federal and state securities laws, rules and regulations. Upon the Closing,
there will be no outstanding or authorized option, subscription, warrant, call,
right, commitment or other agreement of any character obligating New Bank to
sell or transfer any additional shares of its capital stock or any other
securities convertible into or exercisable for or evidencing the right to
subscribe for any shares of its capital stock.
SECTION 2.10. FINANCIAL STATEMENTS.
(a) Old Bank has furnished Buyer with copies of the following
(collectively, the "Financial Statements"): (i) the consolidated audited
financial statements of Old Bank for the fiscal year ended December 31, 1996 and
the consolidated unaudited financial statements of Old Bank for the fiscal year
ended December 31, 1997,
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including a balance sheet at December 31, 1997 (the "Balance Sheet" and such
date the "Balance Sheet Date") and a consolidated statement of financial
condition and the related statements of income, cash flows and changes in equity
for such years; (ii) the unaudited financial statements of Old Bank for the
fiscal year ended December 31, 1997, including a balance sheet at December 31,
1997 as well as the related statement of income consolidating solely the
financial condition of Old Bank and Services, and excluding S1 and (iii) a
balance sheet at February 28, 1998 consolidating solely the financial condition
of Old Bank and Services, and excluding S1.
(b) The Financial Statements: (i) are correct and complete in all material
respects and have been prepared in accordance with the books and records of Old
Bank and Services; (ii) have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods covered
("GAAP"), except as noted in the Financial Statements (except that any interim
period financial statements do not reflect notes to financial statements); (iii)
reflect and provide adequate reserves in respect of all known liabilities of the
Old Bank and Services, including all known contingent liabilities, as of their
respective dates; and (iv) present fairly the consolidated financial condition
of Old Bank and Services at such dates and the consolidated results of their
operations for the fiscal periods then ended.
(c) Old Bank maintains records that accurately, validly and fairly reflect
its transactions and dispositions of assets and maintains a system of internal
accounting controls, policies and procedures sufficient to insure that (i) such
transactions are executed in accordance with its management's general or
specific authorization and (ii) such transactions are recorded in conformity
with GAAP and in such a manner as to permit preparation of financial statements
in accordance with GAAP, applicable regulatory accounting requirements, and any
other criteria applicable to such statements and to maintain accountability for
assets.
(d) In the past three fiscal years, Old Bank has not changed its
independent auditing firm and there has been no disagreement with a former
accountant of the type which would otherwise have to be reported if Old Bank
were subject to Item 304 of Regulation S-K promulgated under the Securities Act
of 1933, as amended (the "Securities Act").
SECTION 2.11. REAL PROPERTY.
(a) As of the date of this Agreement, the Banking Business does not
currently own any real property. Set forth on Schedule 2.11 is a description of
each lease of real property included in the Acquired Assets (the "Leased
Property"). True and complete copies of all such leases and other instruments
granting such leasehold interests, rights, options or other interests (the
"Property Leases") have been delivered to Buyer.
(b) With respect to the Property Leases, no breach or event of default on
the part of Old Bank, or to the knowledge of Old Bank, any other party to any of
the Property Leases and no event that, with the giving of notice or lapse of
time or both, would constitute such breach or event of default, have occurred
and are continuing unremedied that could materially adversely affect the
business, financial condition or results of operations of the Banking Business.
All the Property Leases are in full force and effect and are valid and
enforceable by Old Bank against the parties thereto in accordance with their
terms except as enforcement may be limited by general principles of equity,
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally..
All rental and other payments by Old Bank due under each of the Property Leases
have been duly paid in accordance with the terms of such Property Lease. Except
as set forth in Schedule 2.11, the sale of the Shares pursuant to this Agreement
does not require the consent of any party to, constitute an event of default
under or trigger any options to terminate or otherwise change the existing terms
of any Property Lease.
(c) As of the date hereof, Old Bank has, and as of the Closing, New Bank
will have, good and marketable leasehold title to the Leased Property and to all
improvements thereon, free and clear of any mortgages, liens, security
interests, claims, charges, encroachments, rights-of-way, squatters' rights or
encumbrances ("Impairments"), except for those Impairments that (i) are
described on Schedule 2.11 or (ii) individually or in the aggregate are not
material in character,
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amount or extent and do not materially adversely affect the present use of any
Leased Property subjected thereto or affected thereby or otherwise materially
impair the business, financial condition or results of operations of the Banking
Business or (iii) are reflected in such property leases.
(d) The Leased Property and any improvements thereon, and the operation or
maintenance thereof as operated and maintained, do not contravene any applicable
zoning or building law or ordinance or other administrative regulation
(including but not limited to those relating to zoning, land division, building,
fire, health and safety) except for such contraventions that individually or in
the aggregate are not material in character, amount or extent and do not
materially adversely affect the present use of the Leased Property.
(e) There is no pending or, to the knowledge of Old Bank, threatened
condemnation or eminent domain proceeding with respect to, or that could affect,
any Leased Property.
SECTION 2.12. SECURITIES OWNED.
Schedule 2.3 includes a true, correct and complete list, as of the date
hereof, of all securities included as part of the Acquired Assets, including
without limitation, all securities owned by Old Bank of record or beneficially
as of the date hereof, including without limitation, securities issued by the
United States or any instrumentality thereof, or any state or political
subdivision thereof. All such securities are maintained on the books of Old Bank
in accordance with GAAP. Upon completion of the Plan, New Bank will have good
title to all such securities (to the extent not disposed of in the ordinary
course) and to all securities acquired in the ordinary course of business or
otherwise subsequent to the date hereof, free and clear of any mortgage, claim,
lien, encumbrance, limitation or security interest, whether perfected or not.
SECTION 2.13. PERSONNEL.
(a) Set forth on Schedule 2.13 is a true and complete list of:
(i) the name of each person employed by Old Bank and who actively
engages in activities related primarily to the Banking Business as of the
date hereof (other than hourly employees), the title or job classification
of each such person and the current compensation of each such person, and
any bonuses paid (or to be paid) for services rendered in 1997 or to be
paid in connection with the consummation of the transactions contemplated
herein;
(ii) the name of each person, if any, holding tax or other powers of
attorney from Old Bank and a summary of the terms thereof; and
(iii) the name and title or job description of each director and
officer, and each other key employee, of Old Bank or New Bank who actively
engages in activities related primarily to the Banking Business if not
listed in subsection (i) above.
(b) Except as set forth on Schedule 2.13, since the Balance Sheet Date,
there has been no material change in the rate of total compensation for services
rendered, including without limitation bonuses and deferred compensation, for
any of the employees listed on Schedule 2.13.
(c) To the extent New Bank employs any person set forth on Schedule 2.13 as
of the Closing Date, such person will not also be employed by Old Bank, S1 or
Seller as of such date.
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SECTION 2.14. LABOR MATTERS.
New Bank is not a party to and the Banking Business is not subject to any
contract or collective bargaining agreement with any labor organization. To the
knowledge of Old Bank, no labor organization representation question is pending
respecting the employees of the Banking Business and no such question has been
raised within the preceding three years.
(b) There is no labor or employment dispute pending between Old Bank and
any of its employees listed on Schedule 2.13 that individually or in the
aggregate materially affects or may materially adversely affect the business,
financial condition or results of operations of the Banking Business.
SECTION 2.15. ENVIRONMENTAL MATTERS.
Neither the Seller nor Old Bank have knowledge of material risk of any
Environmental Damages, liabilities, claims or violations of Environmental
Requirements relating to the Banking Business.
SECTION 2.16. NON-ERISA PLANS.
New Bank is not and, as of the Closing, will not be a party to any current
employment contract or consulting agreement, deferred compensation, bonus,
incentive compensation, restricted stock, stock option, change of control,
employee stock purchase, savings, severance or termination pay agreement or plan
or any other employee benefit plan, agreement, arrangement or commitment,
whether formal or informal.
SECTION 2.17. ERISA PLANS.
New Bank is not and, as of the Closing, will not be a party to any employee
pension benefit plan (the "Pension Plans") as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974 ("ERISA") or any employee
welfare benefit plan (the "Welfare Plans" and, together with the Pension Plans,
collectively referred to as the "ERISA Plans") as defined in Section 3(1) of
ERISA.
SECTION 2.18. COMPLIANCE WITH LAW.
Except as set forth on Schedule 2.18, Old Bank, with respect to the Banking
Business, has complied with all applicable statutes, regulations and orders or
other requirements of the United States of America, all states and other
subdivisions thereof, all applicable foreign jurisdictions, all agencies and
instrumentalities of the foregoing and all national and international
self-regulatory bodies and authorities in respect of the conduct of their
businesses and ownership of their properties ("Applicable Laws"), including,
without limitation, Applicable Laws relating to state bank licensing, federal
deposit insurance, electronic banking, remote banking, truth in savings,
mortgage banking, electronic funds transfers, equipment leasing, leveraged
leasing, consumer credit protection, disclosure, usury, truth-in-lending,
adjustable rate mortgage disclosure, real estate settlement procedures, loan
origination practices, equal credit opportunity, fair debt collection practices,
fair credit reporting and cash transaction reporting, low and moderate and
community lending, suspicious or criminal activity reporting, bank secrecy,
discrimination, fair lending, except where the failure to so comply would not,
individually or in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of the Banking Business.
The forms, procedures, and practices now or previously used by it are or were in
compliance in all material respects with all Applicable Laws, the non-compliance
with which would, individually or in the aggregate, have a material adverse
effect on the business, financial condition or results of operations of the
Banking Business.
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(b) Old Bank has properly filed all reports and other filings and
maintained all records required to be filed or maintained by such entity
relating to the Banking Business under Applicable Laws except where the failure
to file such reports or filings would not have a material adverse effect on the
business, financial condition or results of operations of the Banking Business.
Such reports or filings contain all information required to be stated therein
and all such information was true and correct in all material respects on the
date the report or filing containing such information was made.
(c) No investigation or review by any governmental body or agency
concerning any possible violation of Applicable Law is pending, nor to Old
Bank's knowledge, is any such investigation threatened, nor, has any such
investigation occurred during the last three years, except to the extent that
such investigations occur in the ordinary course of regulatory examination by
bank regulatory authorities. No governmental body or agency has delivered any
written notice to Seller or Old Bank or otherwise asserted an intention to
conduct any such investigation, nor is there any reasonable basis for any
investigation of the type described above, except to the extent that such
investigations occur in the ordinary course of regulatory examination by bank
regulatory authorities.
(d) Except as set forth on Schedule 2.21, New Bank is not (i) a party to
any cease and desist order, consent order, written agreement, stipulation,
commitment letter, conditional approval, memorandum of understanding or similar
undertaking with any governmental body or agency, (ii) a recipient of any
extraordinary supervisory letter from any government body or agency, or (iii)
subject to any judgment, order, decree, directive or requirement of such a
governmental body or agency, that, in any case, restricts or monitors the
conduct of its business, or in any manner relates to its capital adequacy,
credit policies, management or customer base. Old Bank has not been advised that
any governmental body or agency is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
agreement, letter, stipulation, approval, memorandum, judgment, order, decree or
directive relating to either New Bank or the Banking Business.
(e) Except as set forth on Schedule 2.18, Old Bank is in compliance with
all applicable regulatory capital requirements and will remain in compliance
through the Closing and the consummation of the transactions contemplated by the
Plan and this Agreement.
(f) New Bank will have, as of the Closing, all licenses, franchises,
permits, certificates of public convenience, orders and other authorizations of
all federal, state and local governments and governmental authorities necessary
for the lawful conduct of the Banking Business, as currently conducted, all such
licenses, franchises, permits, certificates of public convenience, orders and
other authorizations are, or will be, valid and in effect, and no suspension of
any of the foregoing operating rights or cancellation thereof has been initiated
or threatened and all filings, applications and registrations with respect
thereto are current.
SECTION 2.19. OTHER ACTIVITIES.
(a) The Banking Business consists only of activities permissible under
Applicable Law. The Banking Business, in connection with Old Bank's activities
relating to funds transfers, (i) is not in default under any agreement to which
New Bank is, or will be, a party relating to the transfer of funds or settlement
with respect to such transfers; or (ii) has not agreed to be or is liable for
consequential damages for error or delay in acting on requests for the transfer
of funds. The Banking Business has adopted and followed procedures reasonably
adapted to avoid such errors and delay, has adopted commercially reasonable
security procedures (as such term is defined in ss. 4A-202 of the Uniform
Commercial Code) for verifying the authenticity of requests received for the
transfer of funds and is in compliance, in all material respects, with the
Applicable Law relating to the transfer of funds and settlement with respect
thereto with the applicable operating rules of each funds transfer system of
which it is a member or by which it is bound.
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(b) The Banking Business does not perform personal trust, corporate trust
or other fiduciary activities other than in connection with individual
retirement accounts.
SECTION 2.20. LITIGATION.
Except as set forth on Schedule 2.20, there is no action, suit, claim,
proceeding, inquiry or investigation pending against or affecting the Banking
Business or to Old Bank's knowledge threatened against or affecting the Banking
Business or relating to or involving the transactions contemplated by the Plan
or this Agreement at law or in equity, or before or by any arbitrator or any
federal, state, local or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, and Old Bank does not
know of any reasonable basis for any of the foregoing. Except as set forth on
Schedule 2.20, none of Old Bank and, upon their organization, Seller and New
Bank has received any opinion or memorandum or legal advice or notice from legal
counsel to the effect that it is exposed, from a legal standpoint, to any
liability or disadvantage that may be material to the Acquired Assets or the
Banking Business. New Bank is not in default with respect to any order, writ,
injunction or decree known to or served upon Seller, Old Bank or New Bank.
Except as set forth on Schedule 2.20, there is no pending action or suit brought
by Seller, Old Bank or New Bank against others relating to the Acquired Assets
or the Banking Business.
SECTION 2.21. REGULATORY MATTERS.
Except as set forth on Schedule 2.21, there are no pending or, to Old
Bank's knowledge, threatened disputes among or between Old Bank or, upon their
organization, Seller and New Bank, and any federal, state or local governmental
authority. At the date of this Agreement and as of the Closing Date, Old Bank
has not received any indication from any federal, state or local governmental
authority that such authority would oppose or refuse to grant or issue its
consent or approval to the Plan, this Agreement or the transactions contemplated
thereby or hereby, or would impose a condition or requirement that has not been
disclosed on Schedule 2.21.
SECTION 2.22. MATERIAL CONTRACTS.
(a) Set forth on Schedule 2.3 is each written or oral contract to which New
Bank shall be a party immediately prior to the Closing, including, without
limitation, any:
(i) consulting agreement or contract for the employment of any
officer, employee or other person on a full-time, part-time or consulting
basis;
(ii) agreement, mortgage, indenture, loan or credit agreement,
security agreement, guaranty or indemnity or other agreement or instrument
relating to the borrowing of money or providing for the mortgaging or
pledging of, or otherwise placing a lien or security interest on, any
shares, assets or properties of New Bank;
(iii) option, warrant or other contract for the purchase of any debt
or equity security of any corporation;
(iv) intellectual property (including trademark) licensing agreements.
(b) Old Bank is not in breach of or in default under any of
the contracts, obligations or commitments listed on Schedule 2.3, and no event
has occurred that, with the giving of notice or lapse of time or both, would
constitute such a breach or default by Old Bank or New Bank, which would,
individually or in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of the Banking Business.
Except as set forth on Schedule 2.3, the execution and delivery of the Plan and
this Agreement and the execution and delivery of the
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respective agreements contemplated by the Plan and this Agreement and the
consummation of the transactions contemplated by all of such agreements by Old
Bank and Seller will not (i) violate, or conflict with, or result in a breach of
any provision of or constitute a default (or an event which, with the giving of
notice, the passage of time or otherwise would constitute a default) under, or
entitle any party (with the giving of notice, the passage of time or otherwise)
to terminate, accelerate or call a default under, or result in the creation of
any lien, security interest, charge or encumbrance upon the Banking Business or
the Acquired Assets under any of the terms or conditions of any contract set
forth on Schedule 2.3 or (ii) require the consent of any party (other than Old
Bank) to any contract set forth on Schedule 2.3.
SECTION 2.23. CONDUCT OF BUSINESS.
Since the Balance Sheet Date, Old Bank has used its commercially reasonable
efforts to preserve the business organization related to the Banking Business,
to keep available to the Banking Business the services of its officers and
employees and to preserve the goodwill of the suppliers, customers, employees
and others having business relations with the Banking Business. Except as set
forth on Schedule 2.23, since the Balance Sheet Date, Old Bank has conducted the
Banking Business in the ordinary course, has maintained its assets, including
deposits, and properties, in at least as good order and condition as existed on
the Balance Sheet Date (other than wear as may be accounted for by reasonable
use) and as is necessary to continue to conduct its business in the ordinary
course and has not:
(a) incurred any obligation or liability (absolute, accrued,
contingent or other), except in the ordinary course of business or as
contemplated by with the performance of the Plan or this Agreement;
(b) discharged or satisfied any lien or encumbrance, or paid or
satisfied any obligation or liability (absolute, accrued, contingent or
other), other than liabilities reflected on the Balance Sheet or incurred
since the Balance Sheet Date in the ordinary course of business;
(c) increased or established any reserve for taxes or other
liabilities on their respective books or otherwise provided therefor;
(d) mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets or properties of the Banking Business
including the Acquired Assets;
(e) sold, assigned or transferred any asset, property or business or
canceled any debt or claim or waived any right, except in the ordinary
course of business;
(f) granted any increase in the compensation (including bonuses and
deferred compensation) payable to any officer, director, consultant,
employee or agent of the Banking Business (other than in the ordinary
course consistent with past practice or as expressly described on Schedule
2.13);
(g) made any loan to any 5% or greater shareholder of capital stock or
any owner of shares of Old Bank's preferred stock (an "Insider") or any
relative or affiliate of any Insider, or declared, set aside or paid to any
Insider any dividend or other distribution in respect of its capital stock,
or redeemed or purchased any of its capital stock, or agreed to take any
such action, other than deposit accounts or credit card accounts incurred
in the ordinary course of business consistent with past practice.;
(h) transferred any asset or paid any commission, salary or bonus to
any Insider or any relative or affiliate of any Insider other than the
payment of wages or salaries to Insider employees or any relative or
affiliate of any Insider employees in the ordinary course
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of business and as disclosed on Schedule 2.13 or paid any rent, commission
or fee to any Insider or any relative or affiliate of any Insider;
(i) entered into or agreed to enter into any transaction with or for
the benefit of any Insider or any relative or affiliate of any Insider
other than the transactions contemplated by the Plan and this Agreement;
(j) issued, sold or transferred, or agreed to issue, sell or transfer,
any stock, bond, debenture or other security of Old Bank or Services;
(k) experienced damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the assets, properties or the
business of the Banking Business; or
(l) experienced any material adverse change in the business, financial
condition or results of operations of Old Bank or the Banking Business.
SECTION 2.24. TAX MATTERS.
(a) Each of Old Bank, New Bank, Seller, or each affiliated, combined or
unitary group ("Tax Group") of which Old Bank, New Bank or Seller is or has been
a member, in a timely manner have, or as of the Closing will have, filed all tax
returns and other reports required of it under all federal, state, local and
foreign tax laws to which it is subject and has paid all taxes shown due on such
returns. All such tax returns are true, correct and complete in all material
respects and accurately set forth all items to the extent required to be
reflected or included in such tax returns by applicable federal, state, local or
foreign tax laws, regulations or rules.
(b) With respect to New Bank deposits, Old Bank is and New Bank as of the
Closing will be in compliance in all material respects with all federal tax
information reporting laws and backup withholding rules.
(c) Except for property taxes that are not delinquent, there is no tax
lien, whether imposed by any federal, state, local or foreign taxing authority,
outstanding against any of the Acquired Assets.
(d) Seller will not be a "foreign person" as that term is used in ss.
1.1445-2 of the United States Treasury Regulations promulgated under the
Internal Revenue Code of 1986 (the "Code").
(e) At the closing, New Bank shall provide Buyer with a list of New Bank
deposits for which neither Old Bank nor New Bank has received a properly
completed Form W-8 or W-9 and on which New Bank is back-up withholding as of the
Closing Date; such list shall include the date that each such deposit was
opened. New Bank shall also provide Buyer with copies of all Forms W-8 and W-9
on all New Bank deposits and a list of all New Bank deposits and loans with
respect to which Old Bank or New Bank has received notice from the Internal
Revenue Service (the "IRS") that the taxpayer identification number is missing
or incorrect, and the date of each such notice.
(f) Neither Old Bank nor any member of a Tax Group has filed an election
pursuant to Rev. Proc. 95-11, 1995-1 C.B. 505 or under Treasury Regulation
Section 1.1502-75(c) or any similar provision of state or local law with respect
to Old Bank or New Bank.
(g) As used in this Agreement, the term "tax return" includes any material
report, statement, form, return or other document or information required to be
supplied to a taxing authority in connection with taxes. As used in this
Agreement, the term "taxes" means any federal,
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state, local and foreign income or gross receipts tax, alternative or add-on
minimum tax, sales and use tax, customs duty and any other tax, charge, fee,
levy or other assessment including without limitation property, transfer,
occupation, service, license, payroll, franchise, excise, withholding, ad
valorem, severance, stamp, premium, windfall profit, employment, rent or other
tax, governmental fee or like assessment or charge of any kind whatsoever,
together with any interest, fine or penalty thereon, addition to tax, additional
amount, deficiency, assessment or governmental charge imposed by any federal,
state, local or foreign taxing authority.
SECTION 2.25 INSURANCE.
Set forth on Schedule 2.25 is a complete list and description of all
policies of insurance, together with the premiums currently payable thereon,
covering (i) damage to goods, held or otherwise processed in the Banking
Business, (ii) providing for fire, property, casualty, business interruption,
personal or product liability, workers' compensation and other forms of
insurance coverage for the Acquired Assets and the Banking Business or (iii)
providing for fire, property, casualty and other forms of insurance coverage for
the Leased Property. There was no material inaccuracy in any application for any
such insurance coverage. Except as set forth on Schedule 2.25, there is no
claim, action, suit or proceeding arising out of or based upon any of such
policies of insurance relating to the Banking Business, and no basis for any
such claim, action, suit or proceeding exists. There is no notice of any pending
or, to the knowledge of Old Bank, threatened termination or premium increase
with respect to any of such policies, and Old Bank is in compliance with all
conditions contained therein.
SECTION 2.26 CORPORATE NAME AND INTELLECTUAL PROPERTY.
(a) Set forth on Schedule 2.26 are all of the corporate names used in the
Banking Business (collectively, the "Tradenames"). Old Bank (as of the date
hereof), New Bank (as of the Closing) and Services have the full legal right to
use such names in the manner presently being used. There is no actual or, to the
knowledge of Seller and Old Bank, threatened claim by any third party with
respect to the use of such names or of any actual or proposed use of such names
or any variations thereof by any third party in conflict with the use thereof by
each of Old Bank and Services. To the best knowledge of Seller and Old Bank, the
use by Old Bank and Services of such names or any variations thereof does not
infringe upon the rights of any third party and none of Old Bank or Services
have granted any third party any right to use such name or any variations
thereof.
(b) Set forth on Schedule 2.26 is a list and brief description or
identification of all patents, patent rights, patent applications, trademarks,
trademark applications, service marks, service mark applications, trade names
and copyrights licensed to, used by, owned by or registered in the name of Old
Bank or Services or in which Old Bank or Services has any rights (the
"Intellectual Property"). None of Old Bank or Services is a licensor in respect
of any Intellectual Property. Old Bank or Services own or possess adequate
licenses or other rights to use all Intellectual Property. No claim is pending
or, to the knowledge of Old Bank, threatened to the effect that (i) the current
or past operations of Old Bank or Services infringe upon or conflict with the
asserted rights of any other person in respect of any Intellectual Property or
(ii) any Intellectual Property is invalid or unenforceable.
SECTION 2.27 TRANSACTIONS WITH RELATED PARTIES.
Except as set forth on Schedule 2.27, there are no outstanding notes
payable to, accounts receivable from or advances by New Bank to, and New Bank is
not otherwise a creditor of or party to any contract with any Insider or S1 or,
to Old Bank's knowledge, any relative or affiliate (as such term is defined in
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of any
Insider or former Insider or S1 other than deposit accounts or credit card
accounts with the Banking Business incurred in the ordinary course of business
consistent with past practice.
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SECTION 2.28 PERMITS.
As of the Closing, New Bank will have, all franchises, licenses, permits,
certificates and other authorizations from federal, state, local or foreign
governments or governmental agencies, departments or bodies that are necessary
for the conduct of the Banking Business and which, if not obtained, would,
individually or in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of the Banking Business.
Neither Seller or Old Bank has knowledge of any fact, error or omission relevant
to any such franchise, license, permit, certificate or other authorization that
would permit the revocation or withdrawal, or the threatened revocation or
withdrawal, thereof. New Bank will continue to have the use and benefit thereof
and the rights granted thereby after the transactions contemplated by the Plan
and this Agreement have occurred.
SECTION 2.29 PROXY STATEMENT AND REGULATORY APPROVALS.
(a) When the Proxy Statement and Prospectus referred to in Section 4.4, or
any amendment or supplement thereto, shall be mailed to Old Bank's shareholders,
and at all times subsequent to such mailings up to and including the date of the
meeting of Old Bank's shareholders to approve the Plan and the transactions
contemplated herein, (i) such Proxy Statement and Prospectus and all amendments
or supplements thereto, with respect to all information set forth therein, other
than that relating to Parent or Buyer, will comply in all material respects with
the provisions (to the extent applicable) of the Securities Act, the Exchange
Act and the rules and regulations of the SEC thereunder and 12 C.F.R. Part 563g
and any other applicable OTS regulations and (ii) the information set forth in
the Proxy Statement and Prospectus, other than that relating to Parent or Buyer,
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein, when taken as a whole, not misleading.
(b) When the applications for the Regulatory Approvals are filed, or
amended or supplemented, any information that is provided to Buyer by Seller,
Old Bank or New Bank for inclusion in applications for such Regulatory Approvals
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, when taken as a whole, not misleading.
SECTION 2.30 DISCLOSURE.
Without limiting any of the representations and warranties contained
herein, no representation or warranty of Old Bank or, upon its organization,
Seller in this Agreement, no statement contained in the Financial Statements,
the disclosure schedules, any supplements thereto and the schedules or
certificates to be provided pursuant to this Agreement furnished or to be
furnished by Old Bank to Buyer, Parent or any of their affiliates pursuant to
the provisions hereof or in connection with the transactions contemplated by the
Plan or this Agreement, contains or will contain any untrue statement of
material fact or omits or will omit to state any material fact necessary in
order to make the statements herein or therein taken as a whole, in light of the
circumstances under which they were made, not misleading.
SECTION 2.31. SITE LOCATIONS.
Old Bank conducts its business solely from its offices located at 3390
Peachtree Road, Atlanta, Georgia.
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SECTION 2.32. LOANS.
(a) Except as set forth in Schedule 2.32, (i) each outstanding loan, lease
or other extension of credit or commitment to extend credit that is an Acquired
Asset of the Banking Business is a legal, valid and binding obligation, is in
full force and effect and is enforceable by New Bank in accordance with its
terms; (ii) Old Bank has duly performed in all material respects all of its
obligations thereunder to the extent that such obligations to perform have
accrued; (iii) all documents and agreements necessary for Old Bank and New Bank
to enforce such loan, lease or other extension of credit are in existence; and
(iv) each such loan, lease and extension of credit has been, in all material
respects, originated and serviced in accordance with Old Bank's applicable
underwriting guidelines at the time such loans were originated, the terms of the
relevant credit documents and agreements and Applicable Law.
(b) Schedule 2.3 lists all loan commitments of Old Bank (with single family
loan commitments and consumer commitments listed in the aggregate only)
outstanding as of the date hereof. Except as may have been or as may hereafter
be disclosed in writing to Buyer, there are no loans, leases, other extensions
of credit or commitments to extend credit of the Banking Business set forth on
Schedule 2.3 that have been or should have been classified as "Other Assets
Especially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable
classification, or as to which any payment of principal, interest or any other
amount is 30 days or more past due. Old Bank has provided to Buyer true, correct
and complete information concerning the loan portfolios of the Banking Business
and no material information with respect to the loan portfolios has been
withheld from Buyer.
SECTION 2.33. ALLOWANCE FOR LOSSES.
(a) The Banking Business's loans are classified in accordance with
applicable standards set by OTS for savings banks, as such standards may be
amended from time to time, GAAP, and the Banking Business's policies and
procedures in effect on the date hereof, all consistently applied.
(b) The specific valuation reserves for all real estate interests acquired
by the Banking Business in satisfaction of loans made in the ordinary course of
business which are properly classified on the Banking Business's OTS Thrift
Financial Report as repossessed assets are adequate in relation to the assets in
question in accordance with GAAP, and are in accordance with the standards set
by the OTS as provided in Applicable Law, as such standards may be amended from
time to time, and Old Bank's procedures.
(c) The Banking Business's allowance for possible credit losses is in
accordance with GAAP and Applicable Law.
SECTION 2.34. DERIVATIVES RISK MANAGEMENT INSTRUMENTS.
New Bank is not a party to any derivative agreement or arrangement
including any interest rate swaps, repossession security or repurchase
agreement, caps, floors, and option agreements or any other derivative security,
or other similar financial instrument, risk management agreement or hedging
arrangement.
SECTION 2.35. TECHNOLOGY.
(a) Schedule 2.3 includes a true and complete list and description of each
of the electronic data processing, disaster recovery services and other computer
systems owned by Old Bank which are to be transferred to New Bank and which are
material to the operation of the business of Old Bank in the ordinary course
(collectively, the "Technology Systems"); including (i) a
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description of any computer hardware and software owned by Old Bank that is used
in the operation of its Technology Systems and (ii) a list of any contracts
pursuant to which Old Bank is granted rights which are used in the operation of
the Technology Systems, including Software licenses and similar agreements. The
use by Old Bank or Services of all such Technology Systems is in compliance in
all material respects with the applicable license agreements covering such
Technology Systems.
(b) Old Bank's Technology Systems will not cease to function, will not
generate incorrect data, and will not produce incorrect results when processing,
providing, and/or receiving (i) date-related data into and between the twentieth
and twenty-first centuries and (ii) date-related data in connection with any
valid date in the twentieth and twenty-first centuries.
SECTION 2.36. BROKER'S AND FINDER'S FEES.
Except as set forth on Schedule 2.36, Old Bank or, upon its organization,
Seller has not paid or become obligated to pay any fee or commission to any
broker, finder, intermediary, financial advisor or financial consultant or other
person in connection with the transactions contemplated by the Plan or this
Agreement (including, without limitation, any restructuring of obligations,
refinancings or other transactions that have been entered into as part of the
transactions contemplated by the Plan or this Agreement) and no person or entity
is entitled to receive from any such entities any such fee or commission. None
of New Bank, Buyer or Parent is liable for any broker's fees or finders fees set
forth on Schedule 2.36.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Old Bank and Seller, as of the date hereof
and as of the Closing Date, that:
SECTION 3.1. ORGANIZATION; AUTHORITY.
Buyer is a corporation duly organized and validly existing and in good
standing under the laws of the State of Delaware. Buyer has all requisite
corporate power, and corporate authority, to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by Buyer, constitutes the valid and binding agreement of Buyer
enforceable against Buyer in accordance with its terms and subject to its
conditions.
SECTION 3.2. CONFLICTING INSTRUMENTS; CONSENTS.
The execution and delivery by Buyer of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, violate any
provision of the articles of incorporation or the by-laws (or the equivalent
thereof) of Buyer, or conflict with or result in a breach of, or create an event
of default (or event that, with the giving of notice or lapse of time or both,
would constitute an event of default) under, any agreement, mortgage, license,
lease, indenture, instrument, order, arbitration award, judgment or decree to
which Buyer is a party.
SECTION 3.3. LITIGATION.
There is no action, suit, claim, proceeding, inquiry or investigation
pending or, to the knowledge of Buyer, threatened, at law or in equity, or
before or by any arbitrator or any federal, state, local or other governmental
department, commission, board, bureau, agency or
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instrumentality, domestic or foreign, relating to or involving the transactions
contemplated by this Agreement.
SECTION 3.4. APPROVALS AND CONSENTS.
The Regulatory Approvals include the approvals of the Minister of Finance,
FRB, OTS, the State of Georgia and such other persons or entities as may be
required under Applicable Law. Except as required to obtain the Regulatory
Approvals, no notices, reports or other filings are required to be made by Buyer
with, nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by Buyer from, any governmental or regulatory
authorities of the United States or the several States in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
SECTION 3.5. INFORMATION.
Any information that is provided by Buyer to Old Bank (or, upon its
organization, Seller) in writing for inclusion in the Proxy Statement or
Prospectus will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein, when taken as a whole, not misleading.
SECTION 3.6. REGULATORY MATTERS.
Based on its knowledge of (i) the U.S. and Canadian laws and regulations
that would govern Parent's and Buyer's acquisition of New Bank, (ii) examination
and other supervisory records and reports of Parent and its subsidiaries filed
with or prepared by Canadian or U.S. governmental authorities, (iii) the
processing of any previous applications and notices filed by Parent or Buyer
with Canadian or U.S. governmental authorities and (iv) any formal
communications with Canadian or U.S. governmental authorities, Parent and Buyer
have no reason to believe that, with respect to any aspect of, or issue relating
to, the operations and business of Parent and its subsidiaries, the approval or
effectiveness of any of the Regulatory Approvals that Parent or Buyer is
responsible for obtaining cannot be obtained or granted on a timely basis.
Neither Parent nor Buyer is aware of any aspect of, or issue relating to, the
operations and business of Parent and its subsidiaries that would reasonably be
expected to result in the imposition of any condition or requirement in any
Regulatory Approval that would be unduly burdensome upon the Buyer, New Bank or
Parent or any affiliate thereof, or the conduct of the business after Closing of
Buyer, New Bank, Parent or any affiliate thereof, in each case as such business
was conducted prior to the Closing or as such business is anticipated to be
conducted after the Closing Date as described in the applications for the
Regulatory Approvals (which applications shall be reasonable in the activities
that are requested to be conducted). In addition, neither Parent nor Buyer has
any knowledge of any proposed condition by a foreign, federal, state or local
governmental authority that would reasonably be expected to result in the
failure to satisfy the condition to Buyer's obligations contained in Section
6.3, including the disclosures set forth on Schedule 2.21 attached hereto.
ARTICLE FOUR
COVENANTS OF SELLER, OLD BANK AND BUYER
SECTION 4.1. ACCESS.
(a) From the date hereof through the Closing Date, Old Bank will give to
Buyer and Parent and their respective financial advisors, legal counsel,
independent accountants and other representatives, upon reasonable notice,
complete access during normal business hours to all properties, documents,
contracts, employees and records of Old Bank and New Bank including to the
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extent permitted by Applicable Law all documents, records or correspondence with
the OTS, FDIC, the State of Georgia or any other federal, state or local
regulatory authority and will furnish Buyer or Parent with copies of such
documents (certified if so requested) and with such information with respect to
Old Bank as Buyer or Parent from time to time reasonably may request provided,
however, that Old Bank shall not be obligated to disclose or provide copies of
any documents, records or information which Old Bank, in good faith, determines
to be confidential or entirely unrelated to the Banking Business.
(b) From the date hereof through the Closing Date, Old Bank will permit
representatives of Buyer to be present at each facility of Old Bank and to
observe the conduct of the business of Old Bank in the ordinary course at any
time during normal business hours upon reasonable advance notice and in such a
manner as will not unreasonably interfere with the conduct of the business of
Old Bank in the ordinary course.
SECTION 4.2. TRANSFER OF THE SHARES.
From the date hereof through the Closing Date, Seller will not (i) sell or
otherwise transfer or agree to sell or otherwise transfer, any of the Shares or
(ii) incur or permit to exist any liens, charges, encumbrances, equities or
claims with respect to the Shares whatsoever.
SECTION 4.3. CONDUCT OF THE BUSINESS OF OLD BANK.
(a) From the date hereof through the Closing Date, Old Bank shall use its
reasonable efforts to preserve the Banking Business in the ordinary course, keep
available to the Banking Business the services of current officers and
employees, and preserve for New Bank and Buyer the goodwill of the suppliers,
customers, employees and others having business relations with Old Bank.
(b) From the date hereof through the Closing Date, Old Bank, except as
otherwise permitted by this Agreement or the Plan or consented to in writing by
Buyer, will continue the operation of the Banking Business in the ordinary
course and will maintain its assets, properties and rights in the ordinary
course, consistent with past practice and subject to ordinary wear and tear.
Without limiting the generality of the foregoing, except as otherwise permitted
by this Agreement or the Plan or consented to in writing by Buyer, or except as
my be unrelated to the Banking Business, Old Bank shall not:
(i) incur, discharge or satisfy any obligation or liability or any
liens, charges, encumbrances, equities or claims, except in the ordinary
course of business or as contemplated by this Agreement or the Plan;
(ii) increase or establish any reserve for taxes or other liabilities
on its books or otherwise provide therefor, except for taxes or other
liabilities relating to the Banking Business in the ordinary course of
operations since the Balance Sheet Date; write up or down the value of
assets or securities held for its account or inventory or determine as
collectible any notes or accounts receivable that were previously
considered to be uncollectible, except for write-ups or write-downs in
accordance with GAAP in the ordinary course of business consistent with
past practice; or voluntarily make any change in any of its methods of
accounting or in any of its accounting principles or practices;
(iii) except for the renewal of leases relating to equipment leased by
Old Bank prior to the date hereof, purchase, lease, sell, assign or
transfer any asset, property or business or waive or permit to lapse any
right, except in the ordinary course of business; or make or authorize any
capital expenditure for additions to plant and equipment in excess of
$15,000 in the aggregate;
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(iv) make any loan to any Insider or any relative or affiliate of any
Insider, or declare, set aside or pay to any Insider any dividend or other
distribution in respect of its capital stock, transfer any asset or pay any
money to any Insider or any relative or affiliate of any Insider other than
the payment of wages or salaries to Insiders who are also employees of Old
Bank in the ordinary course of business and as disclosed on Schedule 2.13;
or enter into or agree to enter into any transaction with or for the
benefit of any Insider of Old Bank or any relative or affiliate of any
Insider other than the transactions contemplated pursuant to the Plan and
this Agreement;
(v) reclassify or change in any manner the outstanding shares of
capital stock of Old Bank or issue or agree to issue, sell, transfer,
pledge, encumber or deliver any stock, bond, debenture or other security of
Old Bank other than the transactions contemplated pursuant to the Plan and
this Agreement or in accordance with the terms of such capital stock;
(vi) grant any increase in the compensation payable to any officer,
director, consultant, employee or agent of Old Bank that is to be employed
or otherwise engaged by New Bank, except for increases in the compensation
payable in the ordinary course of business to employees in amounts and at
times consistent with past practice; enter into or amend any contract for
the employment of any officer, employee or other person that is not
terminable upon 30 days notice or less, except for accrued vacation pay for
past services; enter into any contract or collective bargaining agreement
with any labor union; enter into or agree to enter into any bonus, pension,
profit-sharing, retirement, stock purchase, stock option, deferred
compensation, incentive compensation, hospitalization, insurance or similar
plan, contract or understanding providing for employee benefits; or make
any payment or a contribution under any ERISA Plan or Non-ERISA Plan or
incur any obligation to make any such payment or contribution that is not
in accordance with the usual past practice of the Banking Business;
(vii) enter into any contract, except in the ordinary course of
business, or make or permit to be made any amendment, modification,
cancellation or termination of any material contract, agreement, lease,
license, finance agreement or written evidence of indebtedness;
(viii) settle any administrative or judicial proceedings;
(ix) amend the charter or the by-laws of Old Bank;
(x) open any branch office, or acquire or sell or agree to acquire or
sell, any branch or any deposit liabilities;
(xi) change its interest rate or fee pricing policies, or materially
alter the mix of rate, terms and account types, with respect to deposits
and services other than in the ordinary course of business and in response
to verifiable changes in Old Bank's market;
(xii) introduce any new deposit account or loan product or change any
feature (other than interest rates) of any existing deposit account or loan
product other than in the ordinary course of business and in response to
verifiable changes in the local market;
(xiii) incur or guarantee any liability or obligation (direct,
contingent or otherwise) for borrowings other than in the ordinary course
of business in an immaterial amount or incur any liability or obligation
for borrowings of any nature from any Federal Home Loan Bank exceeding the
amount of Federal Home Loan Bank borrowings outstanding on the date of this
Agreement or fail to pay when due or upon maturity or renew or extend any
Federal Home Loan Bank borrowings;
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(xiv) make or agree or commit to make any loan exceeding $150,000;
(xv) foreclose upon or otherwise acquire any real property securing
any loan exceeding $150,000;
(xvi) directly or indirectly engage in any line of business activity
not engaged in on the date hereof;
(xvii) deviate from existing OTS and FDIC policies and procedures
existing on the date hereof with respect to (i) classification of assets,
(ii) accrual of interest on assets, and (iii) the calculation of allowances
for losses on loans and foreclosed real estate; provided, however, that
interest shall not be accrued with respect to any loan that is sixty (60)
days or more past due;
(xviii) change its lending policies and criteria including, but not
limited to evaluative standards used in assessing prospective borrowers; or
(xiv) make any material tax election.
(c) From the date hereof through the Closing Date, Seller, Old Bank and New
Bank shall comply in all material respects with all Applicable Laws.
SECTION 4.4. PREPARATION OF PROXY STATEMENT.
Old Bank will prepare a Proxy Statement (the "Proxy Statement") and
Prospectus (the "Prospectus") as contemplated by the Plan to be mailed to its
shareholders. Nothing shall be contained in the Proxy Statement or Prospectus or
any proxy soliciting materials with respect to any party unless approved by such
party, which approval shall not be unreasonably withheld. Old Bank shall bear
all costs of preparing, mailing and securing all necessary approvals in
connection with the Proxy Statement or Prospectus. Promptly upon request of Old
Bank, Parent and Buyer shall provide all necessary information regarding Parent
or Buyer for inclusion in the Proxy Statement and Prospectus as required by
Applicable Law.
SECTION 4.5. MEETING OF SHAREHOLDERS.
Old Bank shall duly call a meeting of its shareholders (the "Shareholders
Meeting") for the purpose of obtaining the approval of its shareholders to the
transactions contemplated by the Plan and this Agreement. In connection with
such meeting, the Board of Old Bank shall recommend approval of the transactions
contemplated by the Plan and this Agreement and indicate the determination by
the Board that such transactions are in the best interests of Old Bank's
shareholders. Notice of the Shareholders' Meetings shall be accompanied by the
Proxy Statement.
SECTION 4.6. PURSUIT OF APPROVALS.
(a) Parent, Buyer and Old Bank shall cooperate and use their commercially
reasonable efforts to obtain all Regulatory Approvals required to consummate the
transactions contemplated by the Plan and this Agreement, including, without
limitation, any necessary approvals of the Minister of Finance, FRB, OTS, FDIC
and the State of Georgia and such other persons or entities as may be required
under Applicable Law.
(b) Each party shall cooperate with the other parties hereto in preparation
of all applications for such Regulatory Approvals and will furnish promptly upon
request all documents, information, financial statements or other materials as
may be required in order to complete such applications. Two business days prior
to the filing of any such applications for Regulatory Approvals,
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the parties hereto shall provide each other with a proposed draft of such
applications, provided, however, that the parties hereto shall not be obligated
to disclose any portion of an application which such party determines, in good
faith, to be confidential. Should the appearance of any of the officers,
directors, employees or agents of any of the parties hereto be requested by any
of the parties or by any governmental body or agency at any hearing or otherwise
in connection with any such application, such party shall promptly use its
commercially reasonable efforts to arrange for those appearances. Each party
shall bear and pay all costs, fees and expenses incurred in connection with
obtaining all Regulatory Approvals relating to such party.
SECTION 4.7. OTHER CONSENTS.
The parties agree to apply for and diligently seek to obtain all waivers,
consents and approvals of other persons or entities required in connection with
the transactions contemplated by the Plan and this Agreement. Old Bank shall use
its commercially reasonable efforts to obtain by the Closing Date any consents
necessary for the agreements set forth on Schedule 2.3 attached hereto.
SECTION 4.8. ONGOING FINANCIAL DISCLOSURE.
To the extent permitted by Applicable Law, from the date hereof through the
earlier to occur of the Closing Date or the termination of this Agreement, Old
Bank shall provide to Buyer regular monthly financial statements and all
financial statements and other written information distributed internally or
provided to Old Bank's Board, and copies of all reports required to be filed
with federal or state regulatory agencies. Any such material shall be provided
to Buyer no later than two (2) business days following the date of provision
thereof to the Old Bank's Board (and any committees thereof) or the date of
filing thereof with any state or federal regulatory agencies, as the case may
be.
SECTION 4.9. ACQUISITION PROPOSALS.
(a) None of Seller, Old Bank or New Bank shall, directly or indirectly,
through any officer, director, employee, agent or representative (including,
without limitation, any investment banker, attorney or accountant retained by
it) or otherwise, solicit, initiate or encourage or participate in any
negotiation in respect of or cooperate with (including, without limitation, by
way of furnishing any nonpublic information concerning the business, properties
or assets of Old Bank, any Acquisition Proposal (as defined herein). Seller, Old
Bank and New Bank and any affiliate thereof will immediately notify Parent and
Buyer of, and cease and cause to be terminated any existing activities,
discussions or negotiations with any parties (other than Buyer or Parent)
conducted heretofore with respect to an Acquisition Proposal. Old Bank shall not
release or permit to be released any person or entity from any confidentiality
agreement entered into in connection with the consideration of an Acquisition
Proposal or any proposal involving an acquisition, merger or other business
combination involving Old Bank. Old Bank and, upon its organization, Seller
shall notify Parent and Buyer promptly by telephone, and thereafter promptly
confirm such notification in writing, if any such information is requested from,
or any Acquisition Proposal or inquiry with respect to any Acquisition Proposal
is received by Old Bank or, upon its organization, Seller.
(b) No Acquisition Proposal shall be accepted, approved, adopted or
recommended by the Board of Old Bank or, upon its organization, Seller.
(c) Except as otherwise required by any governmental body or agency having
jurisdiction with respect to a party, Seller, Old Bank and New Bank shall not
prepare or assist in the preparation of or file or assist in the filing of any
notice or application to any Governmental Authority pertaining to or seeking
approval of any change in control incident to or which would result from any
Acquisition Proposal.
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(d) "Acquisition Proposal" shall mean any proposal by any person or entity
(other than Buyer or Parent) for a merger, consolidation, liquidation,
dissolution, or any other business combination involving Old Bank or the
Acquired Assets or for the acquisition of a substantial equity interest in, or a
portion of the Acquired Assets of, Old Bank.
SECTION 4.10. COMPLETION OF THE PLAN.
Seller, Old Bank and New Bank shall take all actions necessary to complete
the transactions more particularly described in the Plan.
SECTION 4.11. NOTIFICATION OF PENDING FRB, OTS, STATE OF GEORGIA OR FDIC
EXAMS.
Within five (5) Business Days of receiving notification thereof, Old Bank
or New Bank, as the case may be, shall notify Parent and Buyer of any
examination reviews with respect to the business of Old Bank in the ordinary
course that are to be conducted by FRB, OTS, the State of Georgia or FDIC or by
any other governmental authority under any Applicable Law, and shall report to
Parent and Buyer on a regular basis (subject to Applicable Law) on the
preliminary and final results of any such examination review. Old Bank or New
Bank, as the case may be, shall request the consent of each governmental
authority conducting any such examination to the release of such results to
Buyer and Old Bank or New Bank, as the case may be, shall use their best efforts
to secure such release.
SECTION 4.12. OPERATING LOSSES
(a) In consideration of operating losses that the Banking Business expects
to incur in the ordinary course of business prior to the Closing, beginning on
the date that is later of (such date referred to as the "Operating Loss Date")
(i) 90 days following the execution of this Agreement or (ii) the receipt of
shareholder approval by Old Bank of the Plan, this Agreement and the
transactions contemplated hereby Buyer shall pay Seller $1,250 per day to, but
excluding the Closing Date, up to an aggregate maximum of $300,000. Neither
Buyer's obligations hereunder, nor Old Bank's incurrence of operating or other
losses shall reduce the Seller's obligations to provide New Bank with the
Transferred Capital as of the Closing.
(b) Buyer shall pay to Seller on the Closing Date, or the date this
Agreement is terminated pursuant to the provisions of Article Eight the
aggregate amount, if any, owed to Seller pursuant to Section 4.12(a) above in
immediately available funds via wire transfer to an account to be designated in
writing by Seller.
SECTION 4.13. RETENTION OF EMPLOYEES.
(a) Buyer shall pay or cause New Bank to pay any employee of New Bank on
the Closing Date who is terminated without cause within 90 days after the
Closing Date a severance payment equal to 60 days of the salary paid to such
employee at the time of termination.
(b) Buyer shall pay or cause New Bank to pay any employee of Old Bank who
is retained after the Closing Date by New Bank but who is terminated without
cause after 90 days after the Closing Date a severance payment in accordance
with Buyer's or Parent's current U.S. termination policies recognizing service
with Old Bank and New Bank in the aggregate.
(c) Buyer shall provide or cause New Bank to provide the employees of New
Bank with employee benefits that are no less favorable in the aggregate than
those provided to similarly situated employees of Parent's operating
subsidiaries in the U.S. Subject to the implementation of any necessary plan
amendments, for purposes of this Section 4.13 (c), time of
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service as an employee of Old Bank shall be included in determining whether any
employee of New Bank meets the eligibility and vesting requirements under any
employee benefit plan to be provided to New Bank's employees, provided, however
that such time of service shall not be included in determining accrued benefits
under the terms of such plans and, provided, further, that such time of service
shall only include continuous employment with Old Bank from the most recent date
of hire and shall apply only to employees of Old Bank who are employed by Old
Bank as of the Closing Date.
(d) Old Bank shall not prohibit Buyer and Parent from making offers of
employment by New Bank to the employees listed on Schedule 2.13.
(e) Old Bank shall cause all contribution by Old Bank to Old Bank's 401(k)
plan to fully vest with respect to each employee of Old Bank who is retained
after the Closing Date by New Bank.
SECTION 4.14. NOTICE OF DEFAULT.
(a) The parties hereto shall promptly give notice to the other parties
hereto of the occurrence of any event, or the failure of any event to occur,
known to such party hereto that results in a breach of any representation or
warranty by such party, or a failure by any such party to comply with any
covenant, condition or agreement contained herein. From the date hereof through
the Closing Date, Seller, Old Bank and New Bank will disclose to Buyer in
writing all information that comes to their attention that, to their knowledge,
is material to an understanding of the business, assets, condition (financial or
otherwise) of the Banking Business.
(b) The parties hereto will (i) take all reasonable actions necessary to
render accurate as of the Closing Date their representations and warranties
contained herein, (ii) refrain from taking any action that would render any such
representation or warranty inaccurate as of such time and (iii) perform or cause
to be satisfied each covenant or condition to be performed or satisfied as
contemplated by this Agreement.
SECTION 4.15. SECTION 338(H)(10) ELECTIONS.
(a) Seller and Buyer will make, or will cause to be made, elections (the
"Elections") under Section 338(h)(10) of the Code and the regulations
promulgated thereunder in respect of the purchase of the Shares and under any
corresponding or similar provisions of state or local law in respect of such
purchase. On all tax returns, Seller and Buyer will report the transfers under
this Agreement consistent with the Elections. Neither Seller nor Buyer will take
a position contrary to the Elections unless required to do so by applicable tax
laws pursuant to a determination as defined in Section 1313(a) of the Code. For
the purpose of executing the Elections, on or prior to the Closing Date, Buyer
and Seller shall jointly execute four copies (three for Buyer and one for
Seller) of Form 8023-A.
(b) Buyer will prepare at its expense and deliver Form 8023-A, together
with all required attachments to Seller for its review, approval and signature
at least thirty (30) days before the due date thereof. After its review and
approval, which will not be unreasonably withheld, Seller will attach a copy of
Form 8023-A as filed by Buyer to the federal tax return of New Bank for the year
ended on the Closing Date, and take such other actions as Buyer may reasonably
request in order to effectuate the Elections. If the parties are unable to agree
on the contents of the Form 8023-A, the respective Forms 8023-A signed by both
parties with all required attachments to complete properly the Elections will in
all events be filed.
(c) The purchase price of the Shares shall be allocated among the assets of
New Bank in accordance with the mutual agreement of the parties to be reached
prior to due date for filing any tax returns to which an Election is relevant.
Buyer shall propose an allocation and provide a copy of such allocation to
Seller prior to the due date of the first such tax return, allowing Seller a
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reasonable time during which to review such allocation. Buyer and Seller agree
to cooperate to resolve any disputes regarding such allocation prior to the due
date for filing such tax returns. Subject to the requirements of any applicable
foreign, state, local or foreign tax law, all tax returns filed by Buyer, New
Bank and Seller shall be prepared consistently with such allocation. In the
event of any purchase price adjustment hereunder, Buyer and Seller agree to
adjust such allocation to reflect such purchase price adjustment and to file
consistently any tax returns required as a result of such purchase price
adjustment.
(d) Each of Buyer and Seller agrees to cooperate, and to cause its
affiliates to cooperate, with the other in preparing, executing and filing any
tax forms and other documents required under Section 338(h)(10) of the Code and
other applicable laws so that the Elections will be made in a proper and timely
manner.
(e) To the extent permitted by state and local laws, the principles and
procedures of Section 4.15(a) and (b) hereof shall also apply with respect to
Section 338(h)(10) and to forms and related documents to be filed pursuant
thereto.
SECTION 4.16. NON-COMPETE
(a) In consideration of, among other things, the payments set forth in
Section 1.2 of this Agreement, for the three year period commencing on the
Closing Date, Seller, or any company directly or indirectly controlled by Seller
including S1, will not, directly or indirectly (including, without limitation,
as a shareholder, partner, joint venturer of or through any person, firm,
corporation, partnership, association or other entity):
(i) engage in business as a depository institution, trust company or
similar entity or engage in the business of providing insurance, securities
brokerage, lending or investment products or services directly or as agent
to consumers (other than providing financial software and support services
to such institutions) (the "Competing Business") within the United States;
(ii) solicit for the employment of employees, officers or directors,
either as of the Closing Date or thereafter, of New Bank, Buyer, Parent or
any affiliate of New Bank, Buyer or Parent or their successors or assigns
(other than through general solicitation for employment to which such
persons may be exposed);
provided, however, that the foregoing shall not be construed to prohibit the
ownership of less than 1% of the outstanding shares of any class of capital
stock of a publicly held corporation.
(b) Old Bank hereby acknowledges and agrees that in the event of any breach
or threatened breach of the agreement not to compete in this Section 4.16, New
Bank, Buyer or Parent may have no adequate remedy at law and may suffer
substantial and irreparable damage. In the event of the breach by Seller of the
terms and conditions of this Section 4.16 of the Agreement, New Bank, Buyer or
Parent shall be entitled to institute and prosecute proceedings to enforce the
specific performance thereof by Seller, or any company directly or indirectly
controlled by Seller including S1, or to enjoin Seller, or any company directly
or indirectly controlled by Seller including S1, as the case may be, from
breaching the provisions of this Section 4.16. Nothing contained in this Section
4.16 shall be construed to prevent New Bank, Buyer or Parent from seeking such
other remedies, in case of any breach of this Agreement by Seller, or any
company directly or indirectly controlled by Seller including S1, as Buyer may
elect.
(c) New Bank shall own the Tradenames as of the Closing Date. Seller, Old
Bank and their affiliates, including S1, shall not directly or indirectly
through the purchase or acquisition of a controlling interest in any firm,
corporation, partnership, association or other entity use the Tradenames in any
Competing Business.
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SECTION 4.17. ADDITIONAL PARTIES
Upon the organization of Seller, Old Bank shall cause Seller to become a
party hereto, including the representations and warranties set forth in Article
Two herein, and as sole shareholder of Seller, shall approve of Seller's actions
in connection therewith.
SECTION 4.18. UPDATE OF SCHEDULES
Old Bank and Seller shall deliver a revised and updated Schedule 2.3 to
Buyer 5 days prior to closing. Such Schedule shall be revised and updated to
reflect any disposition or acquisition of Acquired Assets or the assumption or
incurrence of any Assumed Liabilities.
SECTION 4.19 SUBLEASE
The parties agree to cooperate and use commercially reasonable efforts to
negotiate in good faith a sublease for the sublet of certain premises at 3390
Peachtree Road, Atlanta, Georgia. Such sublease shall contain substantially the
same terms and conditions as the lease that currently governs such premises and
shall include a proportionate number of parking spaces for the premises to be
sublet and provided that any payment obligations under the sublease will be
reduced pro rata in proportion to the premises to be sublet (the "Sublease").
SECTION 4.20 DELIVERY OF 401(K) DETERMINATION LETTER
Within 5 days of receiving the determination letter issued by the IRS with
respect to Old Bank's 401(k) Plan, Old Bank shall deliver a copy of such
determination letter to Buyer and Parent.
SECTION 4.21 INSURANCE
The parties agree to cooperate and use commercially reasonable efforts to
obtain for New Bank by the Closing Date insurance of the type and quality
currently utilized in the conduct of the Banking Business.
SECTION 4.22 PERMITS
Seller shall deliver to the Buyer and Parent a complete list of all
registrations, licenses, permits and franchises that are material to the
operations of the Banking Business, and copies of all such documents will be
provided to Buyer or Parent.
ARTICLE FIVE
INDEMNIFICATION
SECTION 5.1. INDEMNIFICATION OBLIGATION.
(a) Seller (for purposes of this Article Five the "Buyer Indemnifying
Party") shall indemnify and hold harmless New Bank, each of its subsidiaries,
Buyer, Parent and their affiliates (collectively, the "Buyer Indemnified
Parties") in respect of any and all liabilities, claims, actions, causes of
action, arbitrations, proceedings, losses, damages and expenses (including,
without limitation, settlement costs, attorneys' fees at such attorneys'
customary hourly rates and any other expenses of investigating or defending any
actions or threatened actions), whether or not due and payable, incurred by the
Indemnified Parties in connection with each and all of the following,
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together with interest on cash disbursements, calculated from the date of
disbursement by the Buyer Indemnified Parties in connection therewith until
payment is made by the Buyer Indemnifying Parties pursuant to this Article Five,
at a fluctuating interest rate that is at all times equal to the rate of
interest from time to time announced in the Wall Street Journal as the prime
commercial lending rate:
(i) Any and all liabilities and obligations of every nature and
description of New Bank, Old Bank, Seller or Services, known or unknown,
arising from or as a result of New Bank's, Old Bank's, Seller's or
Service's operations prior to the Closing Date, or based upon events, acts
or omissions of New Bank, Old Bank, Seller or Services which occurred prior
to such date, except for the Assumed Liabilities;
(ii) Any breach (whether as of the date hereof, the Closing Date or as
of some other date set forth in any such representation or warranty) of any
representation or warranty contained herein of Seller or Old Bank (for this
Section 5, the representation set forth in Section 2.1 shall be considered
without the exception taken in the second sentence of such representation
and the representations set forth in Sections 2.18(a) and (b) shall be
considered without any materiality exceptions or qualifiers), or in any
instrument delivered at the Closing by Seller, Old Bank, New Bank or
Services, including the representations of Seller and Old Bank in Article
Two;
(iii) The breach of any covenant, agreement or obligation of Seller,
Old Bank or S1, contained in this Agreement or any other instrument
contemplated by this Agreement;
(iv) Any claims arising under Section 5.7 of this Agreement; and
(v) Any and all claims by any shareholders of Old Bank against any
Buyer Indemnified Party, relating to, arising out of, or in connection
with, the transactions contemplated by this Agreement or the Plan,
including, without limitation, claims based on (A) breach of fiduciary
duties or rights of first refusal by Seller or Old Bank, their board of
directors or any of the shareholders of Seller or Old Bank or (b) violation
of the Securities Act or the Exchange Act.
(b) Buyer (for purposes of this Section 5 the "Seller Indemnifying Party")
shall indemnify and hold harmless Old Bank, and each of its subsidiaries and
affiliates (the "Seller Indemnified Parties") in respect of any and all
liabilities, claims, actions, causes of action, arbitrations, proceedings,
losses, damages and expenses (including, without limitation, settlement costs,
attorneys' fees at such attorneys' customary hourly rates and any other expenses
of investigating or defending any actions or threatened actions), whether or not
due and payable, incurred by the Seller Indemnified Parties in connection with
each and all of the following, together with interest on cash disbursements,
calculated from the date of disbursement by the Seller Indemnified Parties in
connection therewith until payment is made by the Seller Indemnifying Party
pursuant to this Article Five, at a fluctuating interest rate that is at all
times equal to the rate of interest from time to time announced in the Wall
Street Journal as the prime commercial lending rate:
(ii) Any breach (whether as of the date hereof, the Closing Date or as
of some other date set forth in any such representation or warranty) of any
representation or warranty contained herein of Buyer or in any instrument
delivered at the Closing by Buyer, including the representations of Buyer
in Article Three;
(iii) The breach of any covenant, agreement or obligation of Buyer or
Parent, contained in this Agreement or any other instrument contemplated by
this Agreement;
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SECTION 5.2. LIMITATIONS.
(a) The Buyer Indemnified Parties or the Seller Indemnified Parties, as the
case may be (the "Indemnified Parties") shall not be permitted to enforce any
claim for indemnification pursuant to this Agreement, other than Unlimited
Claims (as defined below), until the aggregate of all claims for
indemnification, other than Unlimited Claims, exceeds the amount of $100,000
(the "Threshold Amount"). Once such claims in excess of the Threshold Amount
have been asserted by the Indemnified Parties, all claims above the Threshold
Amount, may be pursued, except as otherwise limited by this Agreement. As used
herein, "Unlimited Claims" means all (a) claims based upon a willful, grossly
negligent, fraudulent or intentional misrepresentation of Buyer or Seller
contained in this Agreement or any other document, list, exhibit or instrument
furnished in connection herewith ("Fraud Claims"); (b) claims made with respect
to the representations and warranties in Sections 2.1, 2.2 and 2.6 hereof; (c)
claims for taxes governed by Section 5.7; (d) claims for breach of Buyer's or
Seller's obligation to consummate the transaction contemplated hereby and claims
for breach of any covenant, agreement or obligation to be performed by Buyer or
Seller after the Closing including the covenant to make the payment in Section
5.7 hereof.
(b) Subject to Sections 5.2(a) and 5.7, claims for indemnification made
under this Agreement may be made during the period from the Closing Date until
eighteen (18) months following the Closing Date; provided, however, that: (a)
any claims in respect to taxes which shall be governed by Section 5.7; (b) Fraud
Claims, claims for breach of Old Bank's, Seller's or Buyer's obligation to
consummate the transactions contemplated hereby and claims for breach of any
covenant, agreement or obligation to be performed by Buyer or Seller after the
Closing may be made until barred by applicable statutes of limitation; (c)
claims made under Section 2.1, 2.2 and 2.6 may be made until thirty (30) days
after any claims by a third party giving rise to any such claim are barred by
the applicable statutes of limitation, if any. Notwithstanding the foregoing,
any claim for indemnification shall survive such termination date if any party,
prior to such termination date, shall have advised the other party in writing of
facts that constitute or may give rise to an alleged claim for indemnification,
specifying in reasonable detail the basis under this Agreement for such claim.
SECTION 5.3. CLAIMS.
Whenever any claim shall arise for indemnification, the Indemnified Parties
shall notify the party who may be liable hereunder pursuant to Section 5.1(a) or
5.1(b) as the case may be (the "Indemnifying Party) in writing of the claim
pursuant to Section 5.6 hereunder and, when known, the facts constituting the
basis for such claim and the amount or estimate of the amount of the liability
arising from such claim.
SECTION 5.4. DEFENSE BY THE INDEMNIFYING PARTY.
In connection with any claim giving rise to indemnity hereunder resulting
from or arising out of any claim or legal proceeding by a person other than the
Indemnified Parties, the Indemnifying Party at its sole cost and expense, may,
upon written notice to the Indemnified Parties assume the defense of any such
claim or legal proceeding, provided that the Indemnifying Party first
acknowledges in writing its obligation to indemnify the Indemnified Parties in
respect of the entire amount of all of the claims asserted therein. If the
Indemnifying Party assumes the defense of any such claim or legal proceeding,
the Indemnifying Party shall select counsel reasonably acceptable to the
Indemnified Parties to conduct the defense of such claims or legal proceedings
and, at its sole cost and expense, shall take all steps necessary in the defense
or settlement thereof. The Indemnifying Party shall not consent to a settlement
of, or the entry of any judgment arising from, any such claim or legal
proceeding, without the prior written consent of the Indemnified Parties, unless
the Indemnifying Party admits in writing its liability to hold the Indemnified
Parties harmless from and against any losses, damages, expenses and liabilities
arising out of such settlement and concurrently with such settlement the
Indemnifying Party pays into court the full
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amount of all losses, damages, expenses and liabilities to be paid by the
Indemnifying Party in connection with such settlement. The Indemnified Party
shall be entitled to participate in (but not control) the defense of any such
action, with its own counsel and at its own expense. If the Indemnifying Party
does not assume the defense of any such claim or litigation resulting therefrom
in accordance with the terms hereof, the Indemnified Parties may defend against
such claim or litigation in such manner as they may deem appropriate, including,
but not limited to, settling such claim or litigation, after giving written
notice of the same to the Indemnifying Party, on such terms as the Indemnified
Parties may deem appropriate. The Indemnifying Parties shall be entitled to
participate in the defense of any action by the Indemnified Parties, which
participation shall be limited to contributing information to the defense and
being advised of its status.
In any action by the Indemnified Parties seeking indemnification from the
Indemnifying Party in accordance with the provisions of this Section 5.4, the
Indemnifying Party shall not be entitled to question the manner in which the
Indemnified Parties defended such claim or litigation or the amount of or nature
of any such settlement.
SECTION 5.5. MANNER OF INDEMNIFICATION.
Within thirty days of written receipt of notice by the Indemnifying Party
of a claim by the Indemnified Parties, the Indemnifying Party shall satisfy such
claim by the payment of cash to the Indemnified Parties for the full amount of
such claim.
SECTION 5.6. NOTICE.
The Indemnified Parties agree that in the event of any occurrence which may
give rise to a claim by the Indemnified Parties against the Indemnifying Party
hereunder, the Indemnified Parties will give written notice thereof to the
Indemnifying Party; provided, however, that failure of the Indemnified Parties
to timely give the notice provided in this Section 5.6 shall not be a defense to
the liability of the Indemnifying Party for such claim, but the Indemnifying
Parties may recover from or offset any amounts due to, the Indemnified Parties
any actual damages arising from the Indemnified Parties' failure to give such
timely notice.
SECTION 5.7. TAX PROCEDURES AND INDEMNIFICATION.
(a) Seller shall be responsible for, and shall pay or cause to be paid, and
shall indemnify and hold the Buyer Indemnified Parties harmless from and against
any and all taxes that may be imposed on or assessed against New Bank or its
assets or for which New Bank would otherwise be liable (i) with respect to all
taxable periods ended on or prior to the Closing Date; (ii) with respect to any
and all taxes of any member (other than New Bank) of any Tax Group by reason of
the liability of New Bank pursuant to Treasury Regulation Section 1.1502-6(a) or
any analogous or similar state, local or foreign law or regulation; (iii) with
respect to any and all taxes allocated to Seller pursuant to Section 5.7(c)
hereof; (iv) without duplication, with respect to any taxes arising as a result
of the Elections (as such term is defined in Section 4.15 hereof); and (v)
arising from any misrepresentation or breach of warranty contained in Section
2.24 hereof. Subject to Section 5.7(f) hereof, Seller shall also pay or cause to
be paid and shall indemnify and hold harmless Buyer Indemnified Parties from and
against all losses, damages and reasonable third party costs and expenses
(including reasonable attorney, accountant and expert witness fees and
disbursements) ("Related Costs") incurred in connection with the taxes for which
Seller indemnifies Buyer Indemnified Parties pursuant to this Section 5.7(a) (or
any asserted deficiency, claim demand or assessment, including the defense or
settlement thereof) or the enforcement of this Section 5.7(a).
(b) Buyer shall be responsible for, and shall pay or cause to be paid, and
shall indemnify and hold Seller harmless from and against, any and all taxes
that may be imposed on or
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assessed against New Bank or its assets with respect to (i) taxable periods of
New Bank beginning on or after the Closing Date and (ii) any and all taxes
allocated to Buyer pursuant to Section 5.7(c) hereof. Subject to Section 5.7(f)
hereof, Buyer shall also pay or cause to be paid and shall indemnify and hold
harmless Seller from and against all Related Costs of Seller incurred in
connection with the taxes for which Buyer indemnifies Seller pursuant to this
Section 5.7(b) (or any asserted deficiency, claim, demand or assessment,
including the defense or settlement thereof) or the enforcement of this Section
5.7(b).
(c) New Bank and Buyer shall close the taxable period of New Bank on the
Closing Date, unless such action is prohibited by law. In any case where
applicable law prohibits New Bank from closing its taxable year on the Closing
Date, then taxes, if any, attributable to the taxable period of New Bank
beginning before and ending after the Closing Date shall be allocated (i) to
Seller for the period up to and including the Closing Date, and (ii) to Buyer
for the period subsequent to the Closing Date. For purposes of this Section
5.7(c), taxes for the period up to and including the Closing Date ("Seller's
taxes") shall be determined on the basis of an interim closing of the books as
of the end of the Closing Date; provided, however, that in the case of any tax
not based on income, such Seller's taxes shall be equal to the amount of such
tax properly allocable to New Bank or Old Bank for the taxable year multiplied
by a fraction, the numerator of which shall be the number of days from the
beginning of the taxable year through the Closing Date, and the denominator of
which shall be the number of days in the taxable year.
(d) (i) Except as otherwise specifically provided herein, Seller shall be
responsible for filing or causing to be filed all tax returns required to be
filed by or on behalf of New Bank on or before the Closing Date, and Buyer shall
be responsible for filing or causing to be filed all other tax returns required
to be filed by or on behalf of New Bank after the Closing Date.
(ii) Buyer shall cause New Bank to consent to join, for all taxable periods
of New Bank ending on or before the Closing Date for which New Bank is eligible
to do so, in any consolidated, combined or unitary federal, state, local or
foreign income and franchise tax returns which Seller shall request it to join.
Seller shall cause to be prepared and filed all such consolidated, combined or
unitary returns. Buyer agrees to cooperate with Seller in the preparation of the
portions of such returns pertaining to New Bank. Seller shall pay or cause to be
paid all taxes to which such returns relate for all periods covered by such
returns.
(iii) Seller shall cause to be prepared and Buyer shall, upon timely
receipt from Seller, cause to be timely filed all required state, local and
foreign income, franchise and capital tax returns of New Bank (other than those
to be filed by Seller pursuant to Section 5.7(d)(ii) hereof) for any period
which ends on or before the Closing Date, for which returns have not been filed
as of the Closing Date. Seller shall pay to Buyer an amount equal to the taxes
shown due on such returns not later than five days before the due date for
payment of taxes with respect to such tax returns.
(iv) Buyer shall cause to be prepared and timely filed all required state,
local and foreign income, franchise and capital tax returns of New Bank for
taxable periods beginning on or before and ending after the Closing Date. Buyer
shall pay or cause to be paid all taxes to which such returns relate for all
periods covered by such returns; provided, however, that Seller shall pay to
Buyer the amount determined pursuant to Section 5.7(c) hereof not later than
five days before the due date for payment of taxes with respect to such tax
returns. Buyer shall provide Seller with copies of such returns for Seller's
review, together with a statement setting forth the amount payable pursuant to
Section 5.7(c) hereof.
(e) Seller and Buyer shall cooperate fully with each other and make
available to each other in a timely fashion such tax data and other information
and personnel as may be reasonably required for the payment of any estimated
taxes and the preparation of any tax returns required to be prepared and filed
by Buyer and Seller, as the case may be, hereunder. Seller and Buyer shall make
available to the other, as reasonably requested, all information, records or
documents in their possession relating to tax liabilities of New Bank for all
taxable periods of New
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Bank ending on, prior to or including the Closing Date and shall preserve all
such information, records and documents until the expiration of any applicable
tax statute of limitations or extensions thereof; provided, however, that in the
event the party in possession shall receive written notice that a proceeding has
been instituted for which the information, records or documents are required
prior to the expiration of the applicable statute of limitations such
information, records or documents shall be retained until there is a final
determination with respect to such proceeding.
(f) Buyer and Seller shall promptly notify each other in writing upon
receipt by Buyer, New Bank, Old Bank, Seller or any member of a Tax Group, as
the case may be, of any notice of any tax audits of or assessments against New
Bank for taxable periods of New Bank ending on or prior to, or including, the
Closing Date. Seller shall have the sole right to represent New Bank's interests
in any tax audit or administrative or court proceeding (a "tax proceeding")
relating to taxable periods of New Bank ended on or prior to the Closing Date
and to employ counsel of its choice at its own expense; provided, however, that
Buyer shall have the right to consult with Seller regarding any tax proceeding
that may affect New Bank for any periods after the Closing Date and provided
further that any settlement or other disposition of any such tax proceeding may
only be made with the consent of Buyer, which consent shall not be unreasonably
withheld. Buyer and Seller shall jointly have the right to represent New Bank's
interests in any tax proceeding relating to a taxable period beginning before
and ending after the Closing Date, each at its own expense. Buyer shall have the
sole right to represent New Bank' s interests in any tax proceeding relating to
taxable periods beginning on or after the Closing Date and to employ counsel of
its choice at its expense. Buyer and Seller each agrees that it will cooperate
fully with each other and its respective counsel in the defense against or
compromise of any claim in any tax proceeding.
(g) Any refunds or credits (except to the extent accrued as a receivable on
the Balance Sheet) of (i) taxes received by or credited to New Bank attributable
to taxable periods ending on or prior to the Closing Date, or (ii) Seller's
taxes (collectively, "Seller's Refunds"), shall be for the benefit of Seller,
and Buyer shall cause New Bank to pay over to Seller any Seller's Refunds (net
of any tax cost to Buyer attributable to the receipt of such refund, taking into
account the deductibility of state and local income taxes for other income tax
purposes), within five days after receipt of such Seller's Refunds. In addition,
all other refunds received by New Bank shall be for the benefit of Buyer.
(h) Seller and Buyer agree that any payments made hereunder (whether made
directly to a party or to another indemnitee) will be treated by the parties as
an adjustment to the aggregate purchase price for the Shares and shall be
reflected in the allocation of such purchase price pursuant to Section 4.15
hereof.
(i) All obligations under this Section 5.7 shall survive the Closing
hereunder and continue until 30 days following the expiration of the statute of
limitations on assessment of the relevant tax. Notwithstanding the foregoing,
any claim for indemnification hereunder shall survive such termination date if,
prior to the termination date, the party making the claim shall have advised the
other party in writing of facts that may constitute or give rise to an alleged
claim for indemnification, specifying in reasonable detail the basis under this
Agreement for such claim.
(j) Notwithstanding anything to the contrary in this Agreement, all claims
for taxes by any party shall be governed exclusively by Section 5.1(d) and this
Section 5.7, provided, however, that the payment provisions of Section 5.5 will
apply to claims for indemnification pursuant to this Section 5.7.
ARTICLE SIX
CONDITIONS TO BUYER'S OBLIGATIONS
The obligations of Buyer hereunder shall be subject to the satisfaction, as
of the Closing Date, of the following conditions (any of which may be waived, in
whole or in part, by Buyer):
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SECTION 6.1. REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations and warranties of Seller and Old Bank contained in this
Agreement (including the Schedules and Exhibits) or any certificate, instrument
or other document delivered to Buyer in connection herewith shall be true and
correct in all material respects as of the Closing Date. Seller, Old Bank and
New Bank shall have duly performed and complied with all covenants and
agreements required by this Agreement to be performed by such parties at or
prior to the Closing. Parent and Buyer shall have been furnished with
certificates of Seller, dated the Closing Date, certifying in such detail as
Buyer reasonably may reasonably request to the fulfillment of the foregoing
conditions.
SECTION 6.2. CERTAIN DOCUMENTS.
Seller shall have furnished Buyer with the following documents:
(a) the federal stock charter of New Bank substantially in the form
attached hereto as Exhibit B, duly certified by the Assistant Secretary of
New Bank as being in full force and effect on the Closing Date;
(b) the by-laws of New Bank substantially in the form attached hereto
as Exhibit C, duly certified by the Assistant Secretary of New Bank as
being in full force and effect on the Closing Date;
(c) the charter documents of Services and all amendments thereto, duly
certified by the Secretary of State of the State of Kentucky;
(d) certificate as to the good standing of Services and payment of all
applicable state taxes thereby, executed by the appropriate officials of
the State of Kentucky;
(e) the by-laws of Services, duly certified by the Secretary of
Services as being in full force and effect on the Closing Date;
(f) the complete and correct corporate minute books, stock ledgers,
stock transfer records and corporate seals of New Bank and Services;
(g) a certification of non-foreign status executed by Seller and
satisfying the requirements of ss. 1.1445-2(b)(2)(i) of the United States
Treasury Regulations promulgated under the Code;
(h) any and all instruments of transfer or conveyance, properly
executed, necessary to transfer the Banking Business to New Bank;
(i) a revised Schedule 2.3 revised in accordance with Sections 4.3 and
4.18 hereto; and
SECTION 6.3. GOVERNMENTAL AND REGULATORY ACTIONS.
(a) All Regulatory Approvals shall have been obtained, and shall be in full
force and effect, and no proceedings shall have been instituted or threatened by
any governmental body or agency with respect thereto; and all applicable waiting
periods with respect to such consents, approvals and authorizations shall have
expired or been terminated; all conditions and requirements prescribed by the
Regulatory Approvals to be satisfied by the Closing Date shall have been
satisfied, and no Regulatory Approval shall have imposed any condition or
requirement, including, without limitation, with respect to capital
requirements, that is or would become applicable to Buyer, New
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Bank or Parent or any affiliate thereof after the Closing Date which Buyer or
Parent, in good faith, determines would be unduly burdensome upon Buyer, New
Bank, or Parent or any affiliate thereof or the conduct of the business after
Closing of Buyer, New Bank, or Parent or any affiliate thereof, in each case as
such business was conducted prior to the Closing Date or as such business is
anticipated to be conducted after the Closing Date as described in the
applications for the Regulatory Approvals (which applications shall be
reasonable in the activities that are requested to be conducted). All other
consents, approvals and waivers and other actions required from any other person
or entity other than Parent or Buyer (other than those which in the aggregate
would not be material) shall have been obtained in form and substance reasonably
satisfactory to Buyer.
(b) No governmental body or agency or any regulatory authority as a result
of any examination or investigation, shall have imposed any condition or
requirement, including, without limitation, with respect to capital requirements
that is or would become applicable to Buyer, New Bank or Parent or any affiliate
thereof after the Closing Date which Buyer or Parent, in good faith, determines
would be unduly burdensome upon Buyer, New Bank, or Parent or any affiliate
thereof or the conduct of the business after Closing of Buyer, New Bank, Parent
or any affiliate thereof, in each case as such business was conducted prior to
the Closing Date.
(c) No governmental body or agency shall have deemed Buyer or Parent to
have a controlling influence over S1.
(d) No action, suit, proceeding or investigation shall be pending or
threatened before or by any court or governmental body or agency or any
temporary restraining order, preliminary or permanent injunction, cease and
desist order or other order issued by any court or governmental body or agency
or any other legal restraint or prohibition preventing the consummation of any
of the transactions contemplated by the Plan or this Agreement, or imposing
damages, fines or penalties in respect thereto, shall be in effect, and there
shall be no pending or threatened actions or proceedings by any person or entity
or governmental body, agency or authority (or determinations by any such body,
agency or authority) challenging or in any manner seeking to restrict or
prohibit the transactions contemplated by the Plan or this Agreement or seeking
to obtain any losses against any person or entity as a result of the
transactions contemplated by the Plan or this Agreement.
SECTION 6.4. BOARD AND SHAREHOLDER APPROVAL.
(a) The requisite number of outstanding shares of capital stock of Old Bank
(including 2/3 of the Series A Preferred Stock) entitled to vote thereon shall
have approved the Plan, this Agreement, and the transactions contemplated
thereby and hereby; and
(b) Old Bank shall have furnished Buyer with:
(i) a certified copy of the resolutions duly adopted by the Board of
Old Bank approving the Plan, this Agreement and the transactions
contemplated thereby and hereby and directing the submission thereof to a
vote of the Old Bank's shareholders;
(ii) a certified copy of resolutions duly adopted by the requisite
number of outstanding shares of capital stock of Old Bank (including 2/3 of
the Series A Preferred Stock) entitled to vote thereon approving the Plan,
this Agreement and the transactions contemplated thereby and hereby.
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SECTION 6.5. OPINION OF SELLER'S COUNSEL.
Hogan & Hartson shall have delivered to Buyer an opinion, dated the Closing
Date, in a form reasonably satisfactory to Buyer's counsel.
SECTION 6.6. LEGAL MATTERS.
All legal matters, and the form and substance of all documents to be
delivered by Seller or Old Bank to Buyer at the Closing, shall be reasonably
satisfactory to counsel for Buyer.
SECTION 6.7. DELIVERY OF THE SHARES.
Seller shall have delivered to Buyer certificates for the Shares in proper
form for transfer by delivery or with duly executed stock powers attached
thereto.
SECTION 6.8. MATERIAL ADVERSE CHANGE.
There shall not have been any material adverse change in the business,
financial condition or results of operations of the Banking Business, Old Bank
or S1 at the Closing Date from the Balance Sheet Date and Buyer shall have been
furnished with a certificate to that effect executed by the Chief Executive
Officer and the Chief Financial Officer of Seller.
SECTION 6.9. RELATED PARTY ADVANCES.
On the Closing Date, except for those items described on Schedule 6.9, all
notes payable, accounts receivable, advances, loans and other amounts owing to
New Bank by Seller, Old Bank or S1 or any officer, employee, director or Insider
of Seller, Old Bank, S1 or New Bank or, other than in the ordinary course,
consistent with past practice and on terms available to third parties, any
former officers, employees, directors or Insiders of Seller, Old Bank, S1 or New
Bank shall have been repaid in full to New Bank.
SECTION 6.10. THIRD PARTY CONSENTS.
Seller, Old Bank and New Bank shall have obtained all consents, waivers,
approvals, amendments and authorizations that are necessary under applicable
law, agreement, or otherwise to be obtained by any one or more of such parties
in connection with the sale of the Shares to Buyer and the consummation of the
transactions contemplated by the Plan or this Agreement, or to enable New Bank
to continue the Banking Business after the Closing in all material respects in
the same manner as such business is being conducted by Old Bank on the date
hereof, including any consents necessary for the agreements set forth on
Schedule 2.3 attached hereto, and shall have delivered to Buyer evidence of the
receipt of such consents in a form reasonably satisfactory to Buyer's counsel.
SECTION 6.11. BANKING CRISIS.
There shall not have occurred and be continuing any general banking
moratorium or general suspension of payments in respect of banks in the United
States or Canada.
SECTION 6.12. TRANSFER ACTIONS TAKEN.
All actions necessary to consummate the transfer to New Bank of each of the
assets set forth on Schedule 2.3 as provided in the Plan and this Agreement
shall have been taken and
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completed, and all documents necessary to consummate such transfer to New Bank
shall have been executed, delivered and, to the extent necessary, filed or
recorded.
SECTION 6.13. SELLER AS PARTY
Seller shall have been duly organized and shall be a party to this
Agreement.
SECTION 6.14 SUBLEASE
Old Bank shall have executed and delivered to Buyer the Sublease.
SECTION 6.15 INSURANCE
New Bank shall have obtained or be reasonably able to obtain all insurance
of the type and quality currently utilized in the conduct of the Banking
Business.
SECTION 6.16 PERMITS
Seller shall have delivered to the Buyer and Parent a complete list of all
registrations, licenses, permits and franchises that are material to the
operations of the Banking Business, and provided copies of all such documents to
Buyer or Parent.
ARTICLE SEVEN
CONDITIONS TO SELLER'S OBLIGATIONS
The obligation of Seller hereunder shall be subject to the satisfaction, as
of the Closing Date, of the following conditions (any of which may be waived, in
whole or in part, by Seller):
SECTION 7.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Parent and Buyer contained in this
Agreement (including the Schedules and Exhibits), or any certificate, instrument
or other document delivered to Seller in connection herewith, shall be true and
correct in all respects as of the Closing Date, as if made on the Closing Date.
Buyer shall have duly performed and complied with all covenants and agreements
required by this Agreement to be performed by Buyer at or prior to the Closing
Date. Seller shall have been furnished with certificates of appropriate officers
of Buyer, dated the Closing Date, certifying in such detail as Seller reasonably
may request to the fulfillment of the foregoing conditions.
SECTION 7.2. OPINION OF BUYER'S COUNSEL.
Gibson, Dunn & Crutcher LLP shall have delivered to Seller an opinion,
dated the Closing Date, in a form reasonably satisfactory to Seller's counsel.
To the extent that such opinion relates to or is governed by the laws of any
jurisdiction other than the United States or New York, such counsel may rely
upon or deliver the opinions of local or in-house counsel, who shall be
reasonably acceptable to Seller.
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SECTION 7.3. LEGAL MATTERS.
All legal matters, and the form and substance of all documents to be
delivered by Buyer to Seller at the Closing, shall be reasonably satisfactory to
counsel for Seller.
SECTION 7.4. PAYMENT FOR THE SHARES.
Buyer shall have paid to Seller, by wire transfer the amount required to be
paid to Seller pursuant to Section 1.2.
SECTION 7.5. LEGAL PROCEEDINGS.
No action, suit, proceeding or investigation shall be pending or threatened
before or by any court or governmental body or agency challenging the
transactions contemplated by this Agreement or otherwise seeking damages or
seeking to restrain or prevent the carrying out of the transactions contemplated
by this Agreement.
ARTICLE EIGHT
TERMINATION
SECTION 8.1. TERMINATION.
In addition to any rights or remedies for default or breach that a party
may have under applicable law, this Agreement may be terminated at any time
prior to the Closing:
(a) By the mutual written consent of Old Bank and, upon its
organization, Seller on the one hand and Buyer and Parent, on the other
hand, at any time whether or not theretofore approved by Old Bank's
shareholders;
(b) By Old Bank, Seller, Buyer or Parent in the event that the Closing
has not occurred by September 30, 1998;
(c) By Old Bank and Seller on one hand or Buyer and Parent on the
other hand upon written notice to the other of any Applicable Law that
shall hereafter be enacted or become applicable that makes consummation of
the transactions contemplated by the Plan or this Agreement illegal or
otherwise prohibited, or if any judgment, injunction, order or decree
enjoining any party hereto from consummating such transactions is entered
and such judgment, injunction, order or decree shall become final and
nonappealable;
(d) By Old Bank and Seller on one hand or Buyer and Parent on the
other hand upon the expiration of fifteen (15) calendar days after any
governmental body or agency having jurisdiction over any of the
transactions set forth herein, in writing denies or refuses to grant any
Regulatory Approval, and no Regulatory Approval shall have imposed any
condition or requirement, including, without limitation, with respect to
capital requirements, that is or would become applicable to Buyer, New Bank
or Parent or any affiliate thereof after the Closing Date which Buyer or
Parent, in good faith, determines would be unduly burdensome upon Buyer,
New Bank, or Parent or any affiliate thereof or the conduct of the business
after Closing of Buyer, New Bank, or Parent or any affiliate thereof, in
each case as such business was conducted prior to the Closing Date or as
such business is anticipated to be conducted after the Closing Date as
described in the applications for the Regulatory Approvals (which
applications shall be reasonable in the activities that are requested to be
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conducted), or indicates to Old Bank, Seller, Buyer or New Bank that any
application for Regulatory Approval should be withdrawn or will be
returned;
(e) By Parent and Buyer, if there has been a material breach of, or
inaccuracy in, a representation or warranty by Seller of Old Bank in this
Agreement (including the Schedules and Exhibits) or any certificate,
instrument or other document delivered pursuant hereto by Old Bank or
Seller, or a breach by Old Bank or Seller of any covenant set forth herein
or a failure of any condition to which the obligations of Buyer are
subject; or
(f) By Old Bank and Seller, if there has been a material breach of, or
inaccuracy in, a representation or warranty in this Agreement (including
the Schedules and Exhibits) or any certificate, instrument or other
document delivered pursuant hereto by Buyer or Parent, or a breach by Buyer
of any covenant set forth herein or a failure of any condition to which the
obligations of Old Bank and Seller are subject.
Termination of this Agreement in accordance with the foregoing shall not
deprive any party of any remedies it may otherwise be entitled to under this
contract or applicable law.
ARTICLE NINE
MISCELLANEOUS
SECTION 9.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations and warranties made in this Agreement (including the
Schedules and Exhibits) or any certificate, instrument or other document
delivered in connection herewith shall survive the Closing Date for a period of
eighteen (18) months, except for the representations and warranties (i) set
forth in Section 2.1, 2.2 and 2.6 and in any related Schedule or certificate,
which shall survive indefinitely, (ii) set forth in Section 2.24 and in any
related Schedule or certificate, which shall survive for 30 days following the
expiration of the statute of limitations on assessment of the relevant tax.
Notwithstanding the foregoing, any such representation or warranty shall survive
a given date (i) if any party, prior to such given date, shall have advised the
other party in writing of an alleged breach thereof, specifying in reasonable
detail the representation or warranty that is alleged to be inaccurate or that
is alleged to have been breached and the basis for such allegation or (ii) if
Parent, Buyer, Seller or Old Bank made a willful, fraudulent, grossly negligent
or intentional misrepresentation in connection with a representation or
warranty. The covenants of Seller, Old Bank, Parent and Buyer shall continue in
full force and effect in accordance with their terms.
SECTION 9.2. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the internal, substantive laws of the State of New York, without
giving effect to the conflict of laws rules thereof.
SECTION 9.3. NOTICES.
All notices, consents, requests, instructions, approvals and other
communications provided for herein shall be deemed validly given, made or served
if in writing and delivered personally or sent by certified mail, postage
prepaid, or by overnight courier, or by telex, telecopier or telegraph (with
receipt confirmed by telephone), charges prepaid:
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(a) if to Buyer or Parent, addressed to:
Royal Bank of Canada
16th Floor, South Tower, Royal Bank Plaza
200 Bay Street
Toronto, Ontario M5J2J2
Attention: Vice-President, Business Development
Telephone: (416) 974-9878
Telecopier: (416) 974-9344
with copies to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10166
Attention: Steven R, Shoemate
Telephone: (212) 351-4000
Telecopier: (212) 351-4035
(b) if to Seller, addressed to:
Security First Technologies Corporation
3390 Peachtree Road, Suite 1700
Atlanta, GA 30326-1108
Attention: President
Telephone: (404) 812-6710
Telecopier: (404) 812-6707
with a copy to:
Hogan & Hartson L.L.P.
Columbia Square
Washington, D.C. 20002-1109
Attention: Stuart Stein
Telephone: (202) 637-8575
Telecopier: (202) 637-5910
or such other address as shall be furnished in writing by any party to the
others.
SECTION 9.4. JURISDICTION; AGENT FOR SERVICE.
Legal proceedings commenced by Seller, Old Bank, New Bank, Parent or Buyer
arising out of any of the transactions or obligations contemplated by this
Agreement shall be brought exclusively in the federal courts, or in the absence
of federal jurisdiction in state courts, in either case in the State of New
York. Buyer, Old Bank, Parent and Seller irrevocably and unconditionally submit
to the jurisdiction of such courts and agree to take any and all future action
necessary to submit to the jurisdiction of such courts. Parent, Buyer, Old Bank
and Seller irrevocably waive any objection that they now have or hereafter may
have to the laying of venue of any suit, action or proceeding brought in any
such court and further irrevocably waive any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
Final judgment against Seller, Old Bank, Parent or Buyer in any such suit shall
be conclusive and may be enforced in other jurisdictions by suit on the
judgment, a certified or true copy of which shall be conclusive evidence of the
fact and the amount of any indebtedness or liability of Seller, Old Bank, Parent
or Buyer therein described, or by appropriate proceedings under any applicable
treaty or otherwise.
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SECTION 9.5. ENTIRE AGREEMENT.
This Agreement represents the entire agreement among the parties and
supersedes and cancels any prior oral or written agreement, letter of intent or
understanding related to the subject matter hereof except for the
Confidentiality Agreement, as amended, dated as of January 12, 1998, among Old
Bank, S1 and Parent.
SECTION 9.6. BINDING EFFECT.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. Seller and
Old Bank may not assign or transfer any right hereunder without the prior
written consent of Buyer. Buyer or Parent may assign or transfer their
respective rights hereunder to another direct or indirect wholly-owned
subsidiary of Parent.
SECTION 9.7. THIRD PARTY BENEFICIARIES.
This Agreement shall not confer any rights or remedies upon any person or
entity other than the parties hereto and their respective successors and
permitted assigns.
SECTION 9.8. AMENDMENTS; WAIVERS.
No provision of this Agreement may be terminated, amended, supplemented,
waived or modified other than by an instrument in writing signed by the party
against whom the enforcement of the termination, amendment, supplement, waiver
or modification is sought.
SECTION 9.9. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original and all of which together shall be deemed to
be one and the same instrument, and shall become effective when one or more
counterparts have been signed by each of the parties.
SECTION 9.10. SEVERABILITY.
In the event any provision, or portion thereof, of this Agreement is held
by a court having proper jurisdiction to be unenforceable in any jurisdiction,
then such portion or provision shall be deemed to be severable as to such
jurisdiction (but, to the extent permitted by law, not elsewhere) and shall not
affect the remainder of this Agreement, which shall continue in full force and
effect. If any provision of this Agreement is held to be so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as is
necessary for it to be enforceable.
(The remainder of this page has been left blank intentionally.)
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
ROYAL BANK OF CANADA
By: /s/ Jim Rager
------------------------------------
Name: JIM RAGER
Title: EXECUTIVE VICE PRESIDENT
By: /s/ Robert Horton
-------------------------------------
Name: Robert Horton
Title: Vice President
RBC HOLDINGS (DELAWARE) INC.
By: /s/ Charles F. Seitz
-------------------------------------
Name: Charles F. Seitz
Title: Treasurer + Secretary
SECURITY FIRST NETWORK BANK
By: /s/ Robert F. Stockwell
-------------------------------------
Name: ROBERT F. STOCKWELL
Title: TREASURER, ACTING PRESIDENT
AND CHIEF FINANCIAL OFFICER
SECURITY FIRST TECHNOLOGIES CORPORATION
By: /s/ James S. Mahan, III
-------------------------------------
Executed as of June 5, 1998
Name: James S. Mahan, III
Title: Chief Executive Officer
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<PAGE>
APPENDIX D
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SECURITY FIRST TECHNOLOGIES CORPORATION
1. NAME
The name of this corporation is Security First Technologies Corporation
(the "Corporation").
2. REGISTERED OFFICE AND AGENT
The registered office of the Corporation shall be located at 1013 Centre
Road, Wilmington, Delaware 19805 in the County of New Castle. The registered
agent of the Corporation at such address shall be Corporation Service Company.
3. PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "Delaware General Corporation Law"). The Corporation
shall have all power necessary or helpful to engage in such acts and activities.
4. CAPITAL STOCK
4.1. AUTHORIZED SHARES
The total number of shares of all classes of stock that the Corporation
shall have the authority to issue is twenty-seven million, five hundred thousand
(27,500,000), of which twenty-five million (25,000,000) shares shall be common
stock, par value $0.01 per share ("Common Stock"), and two million, five hundred
thousand (2,500,000) shares shall be serial preferred stock, par value $0.01 per
share ("Preferred Stock").
4.2. COMMON STOCK
4.2.1. RELATIVE RIGHTS
The Common Stock shall be subject to all of the rights, privileges,
preferences and priorities of the Preferred Stock as set forth herein or in the
certificate of designations filed to establish the respective series of
Preferred Stock. Each share of Common Stock shall have the same relative rights
as and be identical in all respects to all the other shares of Common Stock.
4.2.2. DIVIDENDS
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of shares of any class of stock having preference over
the Common Stock as to the payment of dividends, the full amount of dividends
and of sinking fund or retirement payments, if any, to which such holders are
respectively entitled in preference to the Common Stock, then dividends may be
paid on the Common Stock and on any class or series of stock entitled to
participate therewith as to dividends, out of any assets legally available for
the payment of dividends thereon, but only when and as declared by the Board of
Directors of the Corporation.
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4.2.3. DISSOLUTION, LIQUIDATION, WINDING UP
In the event of any dissolution, liquidation, or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Common Stock
shall become entitled to participate in the distribution of any assets of the
Corporation remaining after the Corporation shall have paid, or set aside for
payment, to the holders of any class of stock having preference over the Common
Stock in the event of dissolution, liquidation or winding up the full
preferential amounts (if any) to which they are entitled.
4.2.4. VOTING RIGHTS
Each holder of shares of Common Stock shall be entitled to attend all
special and annual meetings of the shareholders of the Corporation and, share
for share and without regard to class, together with the holders of all other
classes of stock entitled to attend such meetings and to vote (except any class
or series of stock having special voting rights), to cast one vote for each
outstanding share of Common Stock so held upon any matter or thing (including,
without limitation, the election of one or more directors) properly considered
and acted upon by the shareholders. There shall be no cumulative voting rights
in the election of directors.
4.3. PREFERRED STOCK
The Board of Directors is authorized, subject to limitations
prescribed by the Delaware General Corporation Law and the provisions of this
Certificate of Incorporation, to provide, by resolution and by filing a
certificate of designations pursuant to the Delaware General Corporation Law,
for the issuance of the shares of Preferred Stock in series, to establish from
time to time the number of shares to be included in each such series, and to fix
the designation, powers, preferences and other rights of the shares of each such
series and to fix the qualifications, limitations and restrictions thereon.
4.3.1. SERIES A PREFERRED STOCK
The Corporation is hereby authorized to issue up to one million, six
hundred thirty seven thousand, eight hundred and thirty two (1,637,832) shares
of the Preferred Stock authorized pursuant to Section 4.3 as a series of
Preferred Stock, which series shall be designated "Series A Convertible
Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock") and
shall have the following rights and preferences:
4.3.1.1. DIVIDENDS
The holders of shares of the Series A Preferred Stock shall not
have any preference with respect to dividends over the holders of the Common
Stock, but shall participate fully and equally, on a share for share basis, with
the Common Stock, with respect to the payment of any and all dividends or other
distributions, whenever declared and whether paid or payable in cash, the
capital stock of the Corporation, the capital stock of any other entity, or any
other property.
4.3.1.2. VOTING
Except as otherwise provided by law and except as hereinafter
provided, the holders of the Series A Preferred Stock shall have no voting
rights and shall not be entitled to notice of meetings of shareholders, and the
exclusive voting power of the Corporation shall be vested in the holders of the
Common Stock. Notwithstanding the foregoing, the holders of the Series A
Preferred Stock shall be entitled to the following specific limited voting
rights:
(a) The holders of the Series A Preferred Stock shall be entitled
to vote, as a separate class, with respect to (i) any amendment or repeal of any
of the provisions of the Certificate of Incorporation which would change the
specific terms of the Series A Preferred Stock as
D-2
<PAGE>
set forth in this Section 4 (or in any supplementary sections hereto) so as to
have an adverse effect on the rights of the Series A Preferred Stock, including
any amendment which would create or enlarge any class or series ranking prior to
the Series A Preferred Stock in rights and preferences (provided, however, that
an amendment which increases the number of authorized shares of any class or
series of capital stock, or substitutes the surviving association in a merger or
consolidation for the Corporation, shall not be considered to be such an adverse
effect), and (ii) the approval of a merger or consolidation of the Corporation
with another corporation or the sale, lease, or conveyance (other than by
mortgage or pledge) of the properties or business of the Corporation in exchange
for securities of a corporation other than the Corporation if the Series A
Preferred Stock is to be exchanged for securities of such other corporation and
if the terms of such securities are less favorable in any respect to the holders
thereof than the specific terms of the Series A Preferred Stock as set forth in
Section 4.3.1 (or any supplementary section hereto), provided, however, that no
such approval for transactions undertaken with the assistance or pursuant to the
direction of the Office of Thrift Supervision or the Federal Deposit Insurance
Corporation, shall be required. No such amendment, repeal, merger,
consolidation, sale, lease, or conveyance shall be approved or adopted without
the affirmative vote, at a meeting duly called for that purpose and upon notice
duly given to the holders of the Series A Preferred Stock, or the written
consent with or without a meeting, of the holders of at least two-thirds of the
shares of the Series A Preferred Stock then outstanding, together with any other
vote or consent of the holders of other classes of the capital stock of the
Corporation as may be required; and
(b) The holders of the Series A Preferred Stock shall be entitled
to one vote per share, voting with the holders of the shares of Common Stock as
if a single class, on any voluntary dissolution or liquidation of the
Corporation.
4.3.1.3. CONVERSION
Each holder of record of shares of the Series A Preferred Stock
(a "Holder") shall have the option to convert all or fewer than all of such
shares into shares of Common Stock of the Corporation, on a one share for one
share basis upon the following terms and conditions:
(a) Shares of Series A Preferred Stock shall be convertible only
upon the occurrence of one or another of the events or circumstances described
in subparagraphs (i) or (ii) below, to the extent described in such
subparagraphs:
(i) upon a reduction of an original Holder's (the "Original
Holder") ownership of shares of the Common Stock of the Corporation below
4.999% of the total number of shares of Common Stock outstanding at any
given time, that is attributable only to the issuance of additional shares
of Common Stock and not because of any action taken by the Original Holder
that would reduce the Original Holder's percentage ownership interest in
the total number of shares of Common Stock then outstanding provided,
however, that the Original Holder's ownership of such shares of Common
Stock following the conversion of shares of Series A Preferred Stock shall
not exceed the lesser of 4.999% of the total number of shares of Common
Stock then outstanding or such lesser percentage attributable to the
Original Holder as a result of actions taken by the Original Holder; and
(ii) at any time following a transfer of the shares of
Series A Preferred Stock held by the Original Holder to any person or
entity not an "affiliate" of such Holder; provided, however, that the
Original Holder shall not be permitted to transfer such shares to any party
(other than an affiliate of the Original Holder) except in a transfer (A)
to the Corporation, (B) to any party who has acquired more than 50% of the
outstanding Common Stock of the Corporation, or (C) in a widely dispersed
distribution or private placement of shares of the Series A Preferred Stock
to non-affiliated parties in which no party or its affiliate acquires
shares that are convertible into more than 2% of the outstanding Common
Stock of the Corporation; or (D) to a single party (e.g., a broker or
investment banker) for the purpose of conducting a widely dispersed public
distribution on
D-3
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behalf of the Original Holder pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"). (For the purposes hereof, "affiliate" shall have the meaning
specified in Rule 405 promulgated by the Securities and Exchange Commission
under the Securities Act.)
(b) The option to convert shares of the Series A Preferred Stock
into shares of Common Stock of the Corporation shall be exercisable by
delivering the certificate or certificates for the shares to be converted,
properly endorsed to the Corporation or in blank, together with a written notice
specifying the number of shares to be converted, to the Secretary of the
Corporation at the home office of the Corporation. The conversion of the shares
of Series A Preferred Stock shall be effective as of the date on which the
Corporation receives such certificate or certificates and such notice of
conversion.
(c) All shares of Common Stock issued upon the conversion of any
shares of Series A Preferred Stock shall be fully paid and non-assessable.
(d) The number of shares of Common Stock of the Corporation into
which the shares of Series A Preferred Stock can be converted shall be subject
to adjustment from time to time as follows:
(i) If, at any time after the issuance of any shares of
Series A Preferred Stock, the Corporation pays or makes a dividend or other
distribution on any class of capital stock of the Corporation in Common
Stock of the Corporation, then the number of shares of Common Stock into
which each share of Series A Preferred Stock may be converted shall be
increased by multiplying such number by a fraction, the denominator of
which is the number of shares of such Common Stock outstanding at the close
of business on the day immediately preceding the date of such distribution
and the numerator of which is the sum of such number of shares and the
total number of shares constituting such dividend or other distribution,
such increase to become effective immediately after the opening of business
on the day following such distribution.
(ii) If, at any time after the issuance of any shares of
Series A Preferred Stock, the outstanding shares of Common Stock of the
Corporation are subdivided into a greater number of such shares, then the
number of shares of Common Stock into which each share of Series A
Preferred Stock may be converted shall be proportionately increased, and,
conversely, if, at any time after the issuance of any shares of Series A
Preferred Stock, the outstanding shares of Common Stock of the Corporation
are combined into a smaller number of such shares, then the number of
shares of Common Stock into which each share of Series A Preferred Stock
may be converted shall be proportionately decreased, such increase or
decrease, as the case may be, to become effective immediately after the
opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(iii) The reclassification (including any reclassification
upon a merger in which the Corporation is the continuing corporation) of
the Common Stock of the Corporation into securities, including other than
shares of such Common Stock, shall be deemed to involve a subdivision or
combination, as the case may be, of the number of shares of the Common
Stock of the Corporation outstanding immediately prior to such
reclassification into the number of shares of such Common Stock outstanding
immediately thereafter and the effective date of such reclassification
shall be deemed to be the day upon which such subdivision or combination
becomes effective, within the meaning of subparagraph (ii) above.
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4.3.1.4. LIQUIDATION
In the event of the liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Preferred Stock shall be entitled to share ratably, without distinction
as to class, in all of the assets of the Corporation available for distribution
to shareholders.
4.3.1.5. RESERVATION OF COMMON STOCK
So long as any shares of Series A Preferred Stock are
outstanding, the Corporation shall maintain a sufficient number of authorized
but unissued shares of Common Stock to provide for the conversion of all
outstanding shares of Series A Preferred Stock into shares of Common Stock.
4.4. PREEMPTIVE RIGHTS
Holders of the capital stock of the Corporation shall not be entitled
to preemptive rights with respect to any shares or other securities of the
Corporation which may be issued.
5. INCORPORATOR; DIRECTORS
5.1. INCORPORATOR
The name and mailing address of the incorporator (the "Incorporator")
is Security First Network Bank, 3390 Peachtree Road, NE, Suite 1700, Atlanta,
Georgia 30326. The powers of the Incorporator shall terminate upon the filing of
this Certificate of Incorporation.
5.2. DIRECTORS
The number of directors of the Corporation shall be such number as
from time to time shall be fixed by, or in the manner provided in, the bylaws of
the Corporation.
The classification shall be such that the term of one class shall
expire each succeeding year. The Corporation's board of directors shall
initially be divided into three classes named Class I, Class II and Class III,
with Class I and II each initially consisting of one director and Class III
initially consisting of two directors. The terms, classifications,
qualifications and election of the board of directors and the filling of
vacancies thereon shall be as provided herein and in the bylaws of the
Corporation. The names and business addresses of those persons of each class to
serve on the initial board of directors shall be as follows:
Class I: Term of office expires at the first annual meeting of shareholders:
Name Address
- ---- -------
Robert W. Copelan 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Class II: Term of office expires at the second annual meeting of shareholders:
Name Address
- ---- -------
Howard J. Runnion, Jr. 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
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Class III: Terms of office expire at the third annual meeting of shareholders:
Name Address
- ---- -------
Michael C. McChesney 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
James S. Mahan, III 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Subject to the foregoing, at each annual meeting of shareholders the
successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting and until their successors shall be elected and qualified.
Any vacancy occurring in the board of directors, including any vacancy
created by reason of an increase in the number of directors, shall be filled for
the unexpired term in the manner provided in the Corporation's bylaws, and any
director so chosen shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified, or until the director's earlier resignation or removal.
No director may be removed except for cause and then only by an
affirmative vote of at least two-thirds of the total votes eligible to be voted
by shareholders at a duly constituted meeting of shareholders called for such
purpose. At least 30 days prior to such meeting of shareholders, written notice
shall be sent to the director or directors whose removal will be considered at
such meeting.
6. INDEMNIFICATION
To the extent permitted by law, the Corporation shall fully indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
To the extent permitted by law, the Corporation may fully indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was an employee or agent of the Corporation, or is or was serving
at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
The Corporation may advance expenses (including attorneys' fees) incurred
by a director or officer in advance of the final disposition of such action,
suit or proceeding upon the receipt of an undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be determined
that such director or officer is not entitled to indemnification. The
Corporation may advance expenses (including attorneys' fees) incurred by an
employee or agent in advance of the final disposition of such action, suit or
proceeding upon such terms and conditions, if any, as the Board of Directors
deems appropriate.
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7. CALL OF SPECIAL MEETINGS
Special meetings of shareholders relating to changes in control of the
Corporation or amendments to its Certificate of Incorporation shall be called
only upon direction of the Board of Directors.
8. AMENDMENT OF BYLAWS
The Board of Directors or the shareholders may from time to time amend the
bylaws of the Corporation as provided under the Delaware General Corporation
Law.
9. AMENDMENT OF CERTIFICATE OF INCORPORATION
The Certificate of Incorporation of the Corporation may be amended in
accordance with the provisions of the Delaware General Corporation Law.
D-7
<PAGE>
APPENDIX E
CONTINGENT CERTIFICATE PROVISIONS
4. CAPITAL STOCK
4.1. AUTHORIZED SHARES
The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is sixty-five million
(65,000,000), of which sixty million (60,000,000) shares shall be common stock,
par value $0.01 per share ("Common Stock"), and five million (5,000,000) shares
shall be serial preferred stock, par value $0.01 per share ("Preferred Stock").
5. INCORPORATOR; DIRECTORS
5.3. LIMITATION OF LIABILITY
No director of the Corporation shall be liable to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision shall not eliminate or limit the
liability of a director (a) for any breach of the director's duty of loyalty to
the Corporation or its shareholders; (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (c) for
the types of liability set forth in Section 174 of the Delaware General
Corporation Law; or (d) for any transaction from which the director received any
improper personal benefit. Any repeal or modification of this Section 5.3 by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director for acts or omissions occurring prior to the effective
date of such repeal or modification.
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APPENDIX F
BYLAWS
OF
SECURITY FIRST TECHNOLOGIES CORPORATION
1. OFFICES
1.1. REGISTERED OFFICE
The initial registered office of the Corporation shall be in
Wilmington, Delaware, and the initial registered agent in charge thereof shall
be Corporation Service Company.
1.2. OTHER OFFICES
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors may from
time to time determine or as may be necessary or useful in connection with the
business of the Corporation.
2. MEETINGS OF SHAREHOLDERS
2.1. PLACE OF MEETINGS
All meetings of the shareholders shall be held at such place as may be
fixed from time to time by or upon the authority of the Board of Directors.
2.2. ANNUAL MEETINGS
The Corporation shall hold annual meetings of shareholders, commencing
with the year 1999, on such date and at such time as shall be designated from
time to time by the Board of Directors, at which shareholders shall elect a
Board of Directors and transact only such other business as may properly be
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
shareholder.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 30 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 45 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the shareholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.2. The chairman of an
annual
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meeting shall, if the facts warrant, determine and declare to the annual meeting
that a matter of business was not properly brought before the meeting in
accordance with the provisions of this Section 2.2, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
2.3. SPECIAL MEETINGS
Special meetings of the shareholders for any purpose or purposes,
unless otherwise prescribed by statute may be called at any time by the Chairman
of the Board of Directors, the President, or a majority of the Board of
Directors, and shall be called by the Chairman of the Board of Directors, the
President, or the Secretary upon the written request of the holders of not less
than one tenth of all of the outstanding capital stock of the Corporation
entitled to vote at the meeting. Such written request shall state the purpose or
purposes of the meeting and shall be delivered to the principal office of the
Corporation addressed to the Chairman of the Board, the President, or the
Secretary.
2.4. NOTICE OF MEETINGS
Notice of any meeting of shareholders, stating the place, date and
hour of the meeting, and (if it is a special meeting) the purpose or purposes
for which the meeting is called, shall be given to each shareholder entitled to
vote at such meeting not less than ten nor more than sixty days before the date
of the meeting (except to the extent that such notice is waived or is not
required as provided in the General Corporation Law of the State of Delaware
(the "Delaware General Corporation Law") or these Bylaws). Such notice shall be
given in accordance with, and shall be deemed effective as set forth in, Section
222 (or any successor section) of the Delaware General Corporation Law.
2.5. WAIVERS OF NOTICE
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and
delivered to the Corporation, signed by the person or persons entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance of a shareholder at a meeting
shall constitute a waiver of notice (1) of such meeting, except when the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (2) (if it is a special meeting) of
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the shareholder
objects to considering the matter at the beginning of the meeting.
2.6. BUSINESS AT SPECIAL MEETINGS
Business transacted at any special meeting of shareholders shall be
limited to the purposes stated in the notice (except to the extent that such
notice is waived or is not required as provided in the Delaware General
Corporation Law or these Bylaws).
2.7. LIST OF SHAREHOLDERS
After the record date for a meeting of shareholders has been fixed, at
least ten days before such meeting, the officer who has charge of the stock
ledger of the Corporation shall make a list of all shareholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
Such list shall be open to the examination of any shareholder for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place in the city where the meeting
is to be held, which place is to be specified in the notice of the meeting, or
at the place where the meeting is to be held. Such list shall also, for the
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duration of the meeting, be produced and kept open to the examination of any
shareholder who is present at the time and place of the meeting.
2.8. QUORUM AT MEETINGS
Shareholders may take action on a matter at a meeting only if a quorum
exists with respect to that matter. Except as otherwise provided by statute or
by the Certificate of Incorporation, the holders of one-third of the shares
issued and outstanding and entitled to vote at the meeting, and who are present
in person or represented by proxy, shall constitute a quorum at all meetings of
the shareholders for the transaction of business. Once a share is represented
for any purpose at a meeting (other than solely to object (1) to holding the
meeting or transacting business at the meeting, or (2) (if it is a special
meeting) to consideration of a particular matter at the meeting that is not
within the purpose or purposes described in the meeting notice), it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for the
adjourned meeting. The holders of a majority of the voting shares represented at
a meeting, whether or not a quorum is present, may adjourn such meeting from
time to time.
2.9. VOTING AND PROXIES
Unless otherwise provided in the Delaware General Corporation Law or
in the Corporation's Certificate of Incorporation, and subject to the other
provisions of these Bylaws, each shareholder shall be entitled to one vote on
each matter, in person or by proxy, for each share of the Corporation's capital
stock that has voting power and that is held by such shareholder. No proxy shall
be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A duly executed appointment of proxy shall be
irrevocable if the appointment form states that it is irrevocable and if, and
only as long as, it is coupled with an interest sufficient in law to support an
irrevocable power.
2.10. REQUIRED VOTE
If a quorum exists, action on a matter (other than the election of
directors) is approved if the votes cast favoring the action exceed the votes
cast opposing the action, unless the Certificate of Incorporation or the
Delaware General Corporation Law requires a greater number of affirmative votes
(in which case such different requirement shall apply). Directors shall be
elected by a plurality of the votes cast by the shares entitled to vote in the
election (provided a quorum exists), and the election of directors need not be
by written ballot.
2.11. ACTION WITHOUT A MEETING
Any action required or permitted to be taken at a shareholders'
meeting may be taken without a meeting if the action is taken by persons who
would be entitled to vote at a meeting and who hold shares having voting power
to cast not less than the minimum number of votes that would be necessary to
authorize or take the action at a meeting at which all shareholders entitled to
vote were present and voted. The action must be evidenced by one or more written
consents describing the action taken, signed by the shareholders entitled to
take action without a meeting, and delivered to the Corporation for inclusion in
the minute book. No consent shall be effective to take the corporate action
specified unless the number of consents required to take such action are
delivered to the Corporation within sixty days of the delivery of the
earliest-dated consent. All shareholders entitled to vote on the record date of
such written consent who do not participate in taking the action shall be given
written notice thereof in accordance with the Delaware General Corporation Law.
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3. DIRECTORS
3.1. POWERS
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things, subject to any
limitation set forth in the Certificate of Incorporation, these Bylaws, or
agreements among shareholders which are otherwise lawful.
3.2. NUMBER AND ELECTION
The number of directors which shall constitute the whole Board shall
not be fewer than four nor more than fifteen. The first Board shall consist of
four. Thereafter, within the limits above specified, the number of directors
shall be determined by resolution of the Board of Directors.
3.3. NOMINATION OF DIRECTORS
(a) The Board of Directors shall nominate candidates to stand for
election as directors; and other candidates also may be nominated by any
Corporation shareholder as provided in Section 3.3(b) below. The directors shall
be elected at the annual meeting of the shareholders, except as provided in
Section 3.4 hereof, and each director elected shall hold office until such
director's successor is elected and qualified or until the director's earlier
resignation or removal. Directors need not be shareholders.
(b) Only persons who are nominated in accordance with the procedures
set forth in this Section 3.3 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of shareholders by or at the direction of the Board of
Directors or by any shareholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 3.3(b). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 30 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 45 days notice
or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 15th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person, and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the shareholder giving notice (i) the name and address,
as they appear in the Corporation's books, of such shareholder and (ii) the
class and number of shares of the Corporation which are beneficially owned by
such shareholder. At the request of the Board of Directors, any person nominated
by the Board of Directors for election as a director shall furnish to the
Secretary of the Corporation that information required to be set forth in a
shareholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 3.3. The chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with procedures prescribed by the
Bylaws, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
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3.4. VACANCIES
Vacancies and newly created directorships resulting from any increase
in the authorized number of directors may be filled by the shareholders or by a
majority of the directors then in office, although fewer than a quorum, or by a
sole remaining director. Each director so chosen shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor is elected and qualified, or until the director's earlier resignation
or removal. In the event that one or more directors resigns from the Board,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office until the
next election of directors, and until such director's successor is elected and
qualified, or until the director's earlier resignation or removal.
3.5. MEETINGS
3.5.1. REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
Board of Directors.
3.5.2. SPECIAL MEETINGS
Special meetings of the Board may be called by a majority of the Board
of Directors on one day's notice to each director, either personally or by
telephone, express delivery service (so that the scheduled delivery date of the
notice is at least one day in advance of the meeting), telegram or facsimile
transmission, and on five days' notice by mail (effective upon deposit of such
notice in the mail). The notice need not describe the purpose of a special
meeting.
3.5.3. TELEPHONE MEETINGS
Members of the Board of Directors may participate in a meeting of the
Board by any communication by means of which all participating directors can
simultaneously hear each other during the meeting. A director participating in a
meeting by this means is deemed to be present in person at the meeting.
3.5.4. ACTION WITHOUT MEETING
Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting if the action is taken by all
members of the Board. The action must be evidenced by one or more written
consents describing the action taken, signed by each director, and delivered to
the Corporation for inclusion in the minute book.
3.5.5. WAIVER OF NOTICE OF MEETING
A director may waive any notice required by statute, the Certificate
of Incorporation or these Bylaws before or after the date and time stated in the
notice. Except as set forth below, the waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the minute book. Notwithstanding the foregoing, a director's attendance at or
participation in a meeting waives any required notice to the director of the
meeting unless the director at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
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3.6. QUORUM AND VOTE AT MEETINGS
At all meetings of the Board, a quorum of the Board of Directors
consists of a majority of the total number of directors prescribed pursuant to
Section 3.2 of these Bylaws (or, if no number is prescribed, the number in
office immediately before the meeting begins). The vote of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation or by these Bylaws.
3.7. COMMITTEES OF DIRECTORS
The Board of Directors may by resolution create one or more committees
and appoint members of the Board of Directors to serve on the committees at the
pleasure of the Board of Directors. To the extent specified in a resolution
adopted by the Board of Directors, each committee may exercise the full
authority of the Board of Directors, except as limited by Section 141 (or any
successor section) of the Delaware General Corporation Law. All provisions of
the Delaware General Corporation Law and these Bylaws relating to meetings,
action without meetings, notice (and waiver thereof), and quorum and voting
requirements of the Board of Directors apply, as well, to such committees and
their members.
3.8. COMPENSATION OF DIRECTORS
The Board of Directors shall have the authority to fix the
compensation of directors. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
4. OFFICERS
4.1. POSITIONS
The officers of the Corporation shall be a Chairman, a Chief Executive
Officer, a President, a Secretary and a Treasurer, and such other officers as
the Board of Directors (or an officer authorized by the Board of Directors) from
time to time may appoint, including one or more Vice Chairmen, Executive Vice
Presidents, Vice Presidents, Assistant Secretaries and Assistant Treasurers.
Each such officer shall exercise such powers and perform such duties as shall be
set forth below and such other powers and duties as from time to time may be
specified by the Board of Directors or by any officer(s) authorized by the Board
of Directors to prescribe the duties of such other officers. Any number of
offices may be held by the same person, except that in no event shall the
President and the Secretary be the same person. Each of the Chairman, the Chief
Executive Officer, the President, the Chief Financial Officer and/or any Vice
President may execute bonds, mortgages and other documents under the seal of the
Corporation, except where required or permitted by law to be otherwise executed
and except where the execution thereof shall be expressly delegated by the Board
of Directors to some other officer or agent of the Corporation.
4.2. CHAIRMAN
The Chairman shall (when present) preside at all meetings of the Board
of Directors and shareholders, and shall ensure that all orders and resolutions
of the Board of Directors and shareholders are carried into effect. The Chairman
may be the Chief Executive Officer of the Corporation.
4.3. CHIEF EXECUTIVE OFFICER
The Chief Executive Officer shall have overall responsibility and
authority for management of the operations of the Corporation (subject to the
authority of the Board of Directors), shall (in the absence of the Chairman)
preside at all meetings of the Board of Directors and
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shareholders, and shall ensure that all orders and resolutions of the Board of
Directors and shareholders are carried into effect.
4.4. PRESIDENT
The President may be the chief operating officer of the Corporation
and shall have full responsibility and authority for management of the
day-to-day operations of the Corporation, subject to the authority of the Board
of Directors and the Chairman.
4.5. VICE PRESIDENT
In the absence of the President or in the event of the President's
inability or refusal to act, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the President.
4.6. SECRETARY
The Secretary shall have responsibility for preparation of minutes of
meetings of the Board of Directors and of the shareholders and for
authenticating records of the Corporation. The Secretary shall give, or cause to
be given, notice of all meetings of the shareholders and special meetings of the
Board of Directors. The Secretary or an Assistant Secretary may also attest all
instruments signed by any other officer of the Corporation.
4.7. ASSISTANT SECRETARY
The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board of Directors (or if there shall
have been no such determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of the Secretary's inability or
refusal to act, perform the duties and exercise the powers of the Secretary.
4.8. TREASURER
The Treasurer may be the chief financial officer of the Corporation
and shall have responsibility for the custody of the corporate funds and
securities and shall see to it that full and accurate accounts of receipts and
disbursements are kept in books belonging to the Corporation. The Treasurer
shall render to the Chairman, the Chief Executive Officer, the President, and
the Board of Directors, upon request, an account of all financial transactions
and of the financial condition of the Corporation.
4.9. ASSISTANT TREASURER
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer.
4.10. TERM OF OFFICE
The officers of the Corporation shall hold office until their
successors are chosen and qualify or until their earlier resignation or removal.
Any officer may resign at any time upon written notice to the Corporation. Any
officer elected or appointed by the Board of Directors may be removed at any
time, with or without cause, by the affirmative vote of a majority of the Board
of Directors.
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4.11. COMPENSATION
The compensation of officers of the Corporation shall be fixed by the
Board of Directors or by any officer(s) authorized by the Board of Directors to
prescribe the compensation of such other officers.
4.12. FIDELITY BONDS
The Corporation may secure the fidelity of any or all of its officers
or agents by bond or otherwise.
5. CAPITAL STOCK
5.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors may provide by resolution that some or all
of any or all classes or series of the Corporation's stock shall be
uncertificated shares. Any such resolution shall not apply to shares represented
by a certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates, and upon request every holder
of uncertificated shares, shall be entitled to have a certificate (representing
the number of shares registered in certificate form) signed in the name of the
Corporation by the Chairman, President or any Vice President, and by the
Treasurer, Secretary or any Assistant Treasurer or Assistant Secretary of the
Corporation. Any or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar whose signature or facsimile
signature appears on a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent or registrar at the date of issue.
5.2. LOST CERTIFICATES
The Board of Directors, Chairman, President or Secretary may direct a
new certificate of stock to be issued in place of any certificate theretofore
issued by the Corporation and alleged to have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming that the
certificate of stock has been lost, stolen or destroyed. When authorizing such
issuance of a new certificate, the Board or any such officer may, as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
advertise the same in such manner as the Board or such officer shall require
and/or to give the Corporation a bond, in such sum as the Board or such officer
may direct, as indemnity against any claim that may be made against the
Corporation on account of the certificate alleged to have been lost, stolen or
destroyed or on account of the issuance of such new certificate or
uncertificated shares.
5.3. RECORD DATE
5.3.1. ACTIONS BY SHAREHOLDERS
In order that the Corporation may determine the shareholders entitled
to notice of or to vote at any meeting of shareholders (or to take any other
action), the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors and shall not be less than 10 nor more than 60 days
before the meeting or action requiring a determination of shareholders.
In order that the Corporation may determine the shareholders entitled
to consent to corporate action without a meeting, the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of
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Directors and shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting,
unless the Board of Directors fixes a new record date.
If no record date is fixed by the Board of Directors, the record date
shall be at the close of business on the day next preceding the day on which
notice is given, or if notice is not required or is waived, at the close of
business on the day next preceding the day on which the meeting is held or such
other action is taken, except that (if no record date is established by the
Board of Directors) the record date for determining shareholders entitled to
consent to corporate action without a meeting is the first date on which a
shareholder delivers a signed written consent to the Corporation for inclusion
in the minute book.
5.3.2. PAYMENTS
In order that the Corporation may determine the shareholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the shareholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining shareholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
5.4. SHAREHOLDERS OF RECORD
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends, to
receive notifications, to vote as such owner, and to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise may be provided by the Delaware General Corporation Law.
6. INSURANCE
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation
(or is or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) against liability
asserted against or incurred by such person in such capacity or arising from
such person's status as such (whether or not the Corporation would have the
power to indemnify such person against the same liability).
7. GENERAL PROVISIONS
7.1. INSPECTION OF BOOKS AND RECORDS
Any shareholder, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the Corporation's
stock ledger, a list of its shareholders, and its other books and records, and
to make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a shareholder. In every instance
where an attorney or other agent shall be the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing which authorizes the attorney or other
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agent to so act on behalf of the shareholder. The demand under oath shall be
directed to the Corporation at its registered office or at its principal place
of business.
7.2. DIVIDENDS
The Board of Directors may declare dividends upon the capital stock of
the Corporation, subject to the provisions of the Certificate of Incorporation
and the laws of the State of Delaware.
7.3. RESERVES
The directors of the Corporation may set apart, out of the funds of
the Corporation available for dividends, a reserve or reserves for any proper
purpose and may abolish any such reserve.
7.4. EXECUTION OF INSTRUMENTS
All checks, drafts or other orders for the payment of money, and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board of Directors may from time to time
designate.
7.5. FISCAL YEAR
The fiscal year of the Corporation shall be December 31 of each year.
7.6. SEAL
The corporate seal shall be in such form as the Board of Directors
shall approve. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
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APPENDIX G
INDEX TO FINANCIAL STATEMENTS
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Interim Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 (Unaudited)......................................... G-3
Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997 (Unaudited).................................... G-4
Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 1998 (Unaudited)...................................... G-5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (Unaudited).................................... G-6
Notes to Consolidated Financial Statements for the six months ended
June 30, 1998 (Unaudited)............................................. G-7
Annual Financial Statements
Independent Auditors' Report............................................... G-11
Consolidated Balance Sheets as of December 31, 1997 and 1996............... G-12
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995...................................... G-13
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................... G-14
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................... G-15
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995...................................... G-16
FIVE PACES, INC.
Statements of Operations for the period ended May 23, 1996
and the year ended December 31, 1995 (Unaudited)...................... G-34
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Note to Statements of Operations for the period ended May 23, 1996
and the year ended December 31, 1995 (Unaudited)...................... G-35
SECUREWARE, INC.
Statements of Operations for the period ended November 4, 1996
and the year ended December 31, 1995 (Unaudited)...................... G-36
Note to Statements of Operations for the period ended November 4, 1996
and the year ended December 31, 1995 (Unaudited)...................... G-37
G-2
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash................................................................................ $ 2,911 $ 3,137
Investment securities available for sale (amortized cost of $6,017
at June 30, 1998 and $16,759 at December 31, 1997, respectively)................... 6,060 16,814
Accounts receivable, net of allowance for doubtful accounts of
$333 at June 30, 1998 and $257 at December 31, 1997................................ 4,447 4,297
Banking operations held for sale, net............................................... -- --
Other current assets................................................................ 1,297 1,141
--------- ---------
Total current assets.............................................................. 14,715 25,389
Premises and equipment, net......................................................... 6,790 5,797
Goodwill and purchased technology, net of accumulated amortization
of $5,539 at June 30, 1998 and $1,368 at December 31, 1997......................... 451 4,622
Other assets........................................................................ 563 384
--------- ---------
Total assets...................................................................... $ 22,519 $ 36,192
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 2,103 $ 486
Accrued expenses.................................................................... 1,940 1,550
Accrued stock option compensation expense........................................... 2,972 1,602
Deferred revenues................................................................... 8,067 9,016
--------- ---------
Total current liabilities......................................................... 15,082 12,654
--------- ---------
Stockholders' equity:
Class A convertible preferred stock, no par value. Authorized 2,500,000
shares. Issued and outstanding 1,174,110 shares at June 30, 1998
and 1,251,084 at December 31, 1997................................................. 2,583 2,679
Common stock, no par value. Authorized, 25,000,000 shares. Issued and
outstanding 10,843,916 and 10,487,245 shares at June 30, 1998 and
December 31, 1997, respectively.................................................... 74,609 72,990
Accumulated deficit................................................................. (69,581) (52,035)
Accumulated other comprehensive income:
Net unrealized gains on investment securities available for sale................... 43 55
Cumulative foreign currency translation adjustment................................. (217) (151)
--------- ----------
Total stockholders' equity........................................................ 7,437 23,538
--------- ---------
Total liabilities and stockholders' equity........................................ $ 22,519 $ 36,192
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Software license fees $ 1,439 $ 1,860
Professional services 5,634 2,578
Data center fees 904 114
------------ ------------
Total revenues 7,977 4,552
------------ ------------
Direct costs:
Software license fees $ 40 $ 974
Professional services 3,800 2,670
Data center fees 3,648 3,224
------------ ------------
Total direct costs 7,488 6,868
------------ ------------
Gross margin 489 (2,316)
------------ ------------
Operating expenses:
Selling and marketing $ 2,208 $ 2,171
Product development 6,990 4,899
General and administrative 2,440 2,467
Depreciation and amortization 1,289 680
Amortization of goodwill and
acquisition charges 4,171 687
------------ ------------
Total operating expenses 17,098 10,904
------------ ------------
Operating loss (16,609) (13,220)
Interest Income 390 770
------------ ------------
Loss from continuing operations (16,219) (12,450)
Income (loss) from discontinued
operations (1,327) 49
------------ ------------
Net loss $ (17,546) $ (12,401)
------------ ------------
Basic and diluted net loss per common share
from continuing operations $ (1.52) $ (1.49)
Basic and diluted net (loss) income per
common share from discontinued
operations (0.13) 0.01
------------ ------------
Basic and diluted net loss per common share
$ (1.65) $ (1.48)
------------ ------------
Weighted average number of shares of
common stock outstanding 10,644,196 8,360,660
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT
CLASS A
CONVERTIBLE
PREFERRED COMMON PREFERRED COMMON
STOCK STOCK STOCK STOCK
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31,
1997................ 1,251,084 10,487,245 $ 2,679 $ 72,990
Net loss................ -- -- -- --
Change in net unrealized
gains on investment
securities available
for sale............ -- -- -- --
Change in cumulative
foreign currency
translation adjustment -- -- -- --
Conversion of preferred
stock to common stock (76,974) 76,974 (96) 96
Proceeds from sale of
common stock, net of
expenses............ -- 92,593 -- 970
Common stock issued upon
exercise of stock
options............. -- 187,104 -- 553
--------- ---------- ---------- ----------
Balance at June 30, 1998 1,174,110 10,843,916 $ 2,588 $ 74,609
--------- ---------- ---------- ----------
Comprehensive income....
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER TOTAL
(ACCUMULATED COMPREHENSIVE STOCKHOLDER COMPREHENSIVE
DEFICIT) INCOME EQUITY INCOME
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
Balance at December 31,
1997................ $ (52,035) $ (96) $ 23,538
Net loss................ (17,546) -- (17,546) $ (17,546)
Change in net unrealized
gains on investment
securities available
for sale............ -- (12) (12) (12)
Change in cumulative
foreign currency
translation adjustment -- (66) (66) (66)
Conversion of preferred
stock to common stock -- -- --
Proceeds from sale of
common stock, net of
expenses............ -- -- 970
Common stock issued upon
exercise of stock
options............. -- -- 553
------------- ------------ ------------
Balance at June 30, 1998 $ (69,581) $ (174) $ 7,437
------------- ------------ ----------
Comprehensive income.... $ (17,624)
=============
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1998 1997
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ 17,546 $ 12,401
Adjustments to reconcile net loss to net cash used in
operating activities:
(Income) loss from discontinued operations............................ 1,327 (49)
Depreciation and amortization including acquisition charges........... 5,460 1,851
Compensation expense for stock options................................ 1,354 264
Provision for doubtful accounts receivable............................ 190 --
Increase in accounts receivable....................................... (459) (3,674)
Increase in other assets.............................................. (335) (556)
Increase (decrease) in accounts payable............................... 1,617 (1,620)
Increase in accrued expenses.......................................... 390 379
(Decrease) increase in deferred revenue............................... (949) 340
------------ -----------
Net cash used in continuing operating activities.................. (8,951) (15,466)
Net cash provided by discounted operations.............................. 423 49
----------- -----------
(8,528) (15,417)
----------- ------------
Cash flows from investing activities:
Sales of investment securities available for sale....................... 1,983 5,981
Maturities of investment securities available for sale.................. 8,000 12,004
Purchases of premises and equipment..................................... (2,708) (2,063)
------------ ------------
Net cash provided by investing activities............................. 7,275 15,922
----------- -----------
Cash flows from financing activities:
Sale of common stock, net of expenses................................... 970 --
Proceeds from exercise of common stock options.......................... 123 27
----------- -----------
Net cash provided by financing activities............................. 1,093 27
----------- -----------
Effect of exchange rate changes on cash.................................... (66) --
----------- -----------
Net (decrease) increase in cash............................................ (226) 532
Cash at beginning of period................................................ 3,137 4,122
----------- -----------
Cash at end of period...................................................... $ 2,911 $ 4,654
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-6
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Security
First Network Bank ("SFNB" or the "Bank") and its wholly-owned subsidiary,
Security First Technologies, Inc. ("S1") (collectively, the "Company").
Significant intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements for the six month periods
ended June 30, 1998 and 1997 are unaudited and do not include information or
footnotes necessary for a complete presentation of financial condition, results
of operations and cash flows. The interim financial statements include all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to present fairly the Company's consolidated
financial statements. The results of operations for the six months ended June
30, 1998 are not necessarily indicative of the expected results for the year
ending December 31, 1998.
As more fully discussed in note 2, the Company has adopted a formal plan to
discontinue its banking operations. As a result, the Company's financial
statement presentation reflects the continuing operations of S1 with the banking
operations reflected as discontinued operations.
2. DISCONTINUED OPERATIONS AND SALE OF BANKING OPERATIONS, TECHNOLOGY
LICENSING AGREEMENTS, AND SALE OF COMMON STOCK
During 1997, the Company adopted a formal plan to sell its banking
operations. The banking assets held for sale are presented net of the related
liabilities in the accompanying consolidated balance sheets and the losses from
the banking operations are reflected in the accompanying consolidated statements
of operations as discontinued operations. The Company invests available funds in
U.S. Treasury and agency securities, but does not specifically identify such
investments as banking operations or continuing operations as such amounts are
available for funding the operations of either. For purposes of presenting the
discontinued operations, the Company has allocated investment securities so that
the assets remain equal to liabilities, since it is expected that upon the sale
of the banking operations, certain cash amounts and investment securities
available for sale will be transferred to the purchaser to equalize the assets
and liabilities.
In March 1998, the Company announced that the Royal Bank of Canada, through
one of its U.S. based subsidiaries ("Royal Bank"), has agreed to acquire the
banking operations of the Company. Pursuant to the terms of the agreement, the
Company will receive $3 million in excess of the net assets sold including $1.5
million which will be received eighteen months from the closing date. The
banking operations, which will be legally separated from the technology
operations through a holding company formation and the contribution of $10
million in capital, will include substantially all of the Company's loans and
investment securities as well as its deposit relationships. The agreement is
subject to regulatory approval in Canada and the United States, and the
formation of the holding company subject to SFNB shareholder approval. The
transaction is expected to close in September of 1998.
In addition to the sale of the banking operations, Royal Bank has entered
into technology licensing and consulting arrangements with the Company for $6
million effective upon closing of the sale. Also, Royal Bank purchased 92,593
shares of the Company's common stock for $1 million in cash on March 9, 1998 and
received an option to purchase an additional 733,818 shares of common and
preferred stock for $10 million at prices ranging from $11.88 to $15.81 per
share over a period of 21 months from the date of closing, subject to completion
of the sale of banking operations to Royal Bank. The options were valued as of
March 9, 1998, with the assistance of an investment banker using the Black
Scholes model. This value is considered a cost of the sale of the banking
business since the options are exercisable only upon closing of the sale. The
value of the options, of $1.5 million, will be recorded as a reduction in the
gain on sale of the banking operations
G-7
<PAGE>
The following represents condensed financial information for the banking
operations as of and for the periods indicated.
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Cash and due from banks $11,024 $ 1,346
Interest-earning deposit in other banks -- 1,000
U.S. Treasury and U.S. Government agency
securities available for sale 7,001 6,063
Mortgage-backed securities available for sale 23,833 27,642
Federal Home Loan Bank stock, at cost 660 652
Loans, net of allowance for loan losses 14,792 14,084
Premises and equipment, net 776 499
Purchased technology, net 1,050 1,050
Other assets 320 152
------- -------
Total assets $59,456 $52,488
======= =======
Deposits $57,562 $50,329
Advances from the Federal Home Loan Bank 948 1,019
Other liabilities 478 703
Unrealized gains on investment securities and
mortgage-backed securities available for sale 468 437
------- -------
Total liabilities $59,456 $52,488
------- -------
Divisional equity $ -- $ --
------- -------
Total divisional equity $ -- $ --
------- -------
Total liabilities and divisional equity $59,456 $52,488
======= =======
<CAPTION>
Statements of Operations
Six months ended
June 30,
-----------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Interest income $ 1,906 $ 1,881
Interest expense 1,053 1,120
------- -------
Net interest income 853 761
Provision for loan losses 84 33
------- -------
Net interest income after provision for loan losses 769 728
Noninterest income 291 216
Gain on sale of branch -- 1,500
Noninterest expense (2,387) (2,395)
------- -------
Net income (loss) from discontinued operations $(1,327) $ 49
======= =======
</TABLE>
G-8
<PAGE>
Statement of Divisional Equity
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
(IN THOUSANDS)
<S> <C>
Balance at December 31, 1997.............................. $ --
Net loss.................................................. (1,327)
Capital contribution in the form of investment
securities available for sale.......................... 1,327
---------
Balance at June 30, 1998.................................. $ --
=========
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,327) $ 49
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for loan losses 84 33
Depreciation, amortization and accretion, net 243 201
Compensation expense for stock options 446 --
(Increase) decrease in other assets (168) 468
Decrease in other liabilities (225) (276)
-------- --------
Net cash (used in) provided by operating activities (947) 475
Cash flows from investing activities:
Decrease in interest-earning deposits with banks 1,000 --
Sale of loans and deposits, net -- (11,515)
Purchases of investment securities available for sale (34) (2,115)
Proceeds from maturities and principal collections on mortgage backed
securities available for sale 3,809 2,116
Net increase in loans (792) (3,195)
Purchases of premises and equipment (520) (286)
-------- --------
Net cash provided by (used in) investing activities 3,463 (14,995)
Cash flows from financing activities:
Net increase in deposits $ 7,233 $ 13,647
Repayment of advances from Federal Home Loan Bank (71) (67)
-------- --------
Net cash provided by financing activities 7,162 13,580
Net increase (decrease) in cash and cash equivalents 9,678 (940)
Cash and cash equivalents at beginning of year 1,346 1,409
-------- --------
Cash and cash equivalents at end of year $ 11,024 $ 469
-------- --------
</TABLE>
3. STOCK PURCHASE AGREEMENTS
On June 29, 1998, the Company entered into a Stock Purchase Agreement and
other technology and license agreements with State Farm Mutual Automobile
Insurance Company ("State Farm"). Pursuant to the Stock Purchase Agreement,
State Farm agreed to purchase $10.0 million of non-voting, zero coupon preferred
stock at a per share price equal to the average closing price per share of the
Company's common stock for each of the 10 trading days preceding the closing.
The preferred stock is convertible after two years into shares of common stock
at a 40% premium to the per share price paid for the
G-9
<PAGE>
preferred stock. The sale of the preferred stock will occur immediately
following the formation of a holding company by SFNB which is expected to occur
in September 1998.
On June 30, 1998, the Company entered into a relationship with BroadVision,
Inc. under a Stock Purchase Agreement and other technology and licensing
agreements. Under the Stock Purchase Agreement, BroadVision purchased on July
15, 1998, 181,610 shares of SFNB common stock by granting to SFNB a license
agreement which grants SFNB the right to use and resell BroadVision's marketing
suite of software products. The issuance of 181,610 shares of SFNB Common Stock
on July 15, 1998 for $2 million (based upon the average closing price for ten
business days prior to July 15, 1998) will be recorded as an increase in common
stock and an addition to purchased technology ($1.5 million) with respect to the
developer license acquired under the license agreement and as an addition to
prepaid royalties ($0.5 million) with respect to prepaid royalties under the
reseller agreement. S1 will amortize the amount for the developer license using
the straight-line method over the estimated useful life (3 years) and the amount
for the prepaid royalties will be charged to cost of software license fees as S1
licenses BroadVisions products to its customers. In addition, the companies will
exchange $3 million of each company's common stock amounting to 129,702 shares
of the new holding company for 123,001 shares of BroadVision, based upon the
average of the closing price of the respective stock for the ten business days
preceding July 31, 1998. The issuance of $3 million of Holding Company Common
Stock in exchange for $3 million of BroadVision's common stock will be recorded
at closing by an increase in common stock and an addition to non-current
marketable equity securities available for sale. The exchange will occur
following the formation of a holding company by SFNB which is expected to occur
in September 1998.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 130 requires all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in an annual financial statement that is displayed in equal
prominence with the other annual financial statements. For interim period
financial statements, enterprises are required to disclose a total for
comprehensive income in those financial statements. Comprehensive income for the
six months ended June 30, 1998 and 1997 was ($17.6) million and ($12.8) million,
respectively. The term "comprehensive income" is used in SFAS 130 to describe
the total of all components of comprehensive income including net income. "Other
comprehensive income" refers to revenues, expenses, gains, and losses that are
included in comprehensive income but excluded from earnings under current
accounting standards. Currently, "other comprehensive income" for the Company
consists solely of items previously recorded as a component of stockholders'
equity under SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" and SFAS 52, "Foreign Currency Translation". The Company has adopted
the interim-period disclosure requirements of SFAS 130 and will adopt the annual
financial statement reporting and disclosure requirements of SFAS 130 effective
December 31, 1998.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS 14,
"Financial Reporting in Segments of a Business Enterprise," and establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected financial information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The adoption of this new standard would not require significant
changes to the Company's current segment information that is presented in the
1997 annual financial statements and did not impact interim financial statements
for the quarter ended June 30, 1998 as the interim disclosures are not required
in the first year of adoption.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition." SOP No.
97-2, which revises the rules for accounting for software transactions by
superseding SOP 91-1, "Software Revenue Recognition," is effective for financial
statements for years beginning after December 15, 1997. The adoption of SOP 97-2
did not have a material effect on the interim financial statements for the six
months ended June 30, 1998.
G-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Security First Network Bank:
We have audited the accompanying consolidated balance sheets of Security First
Network Bank and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security First
Network Bank and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
January 30, 1998
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash................................................................................ $ 3,137 $ 4,122
Investment securities available for sale (amortized cost of $16,759
and $31,904 at December 31, 1997 and 1996 respectively)-(note 4)................... 16,814 32,033
Accounts receivable, net of allowance for doubtful accounts of
$257 at December 31, 1997.......................................................... 4,297 1,216
Banking operations held for sale, net (note 2)...................................... -- --
Other current assets................................................................ 1,141 567
--------- ---------
Total current assets.............................................................. 25,389 37,938
Premises and equipment, net (note 5)................................................ 5,797 5,190
Goodwill and purchased technology, net of accumulated amortization
of $1,368 and $254 at December 31, 1997 and 1996 respectively...................... 4,622 2,667
Other assets........................................................................ 384 146
--------- ---------
Total assets...................................................................... $ 36,192 $ 45,941
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 486 $ 2,219
Accrued expenses.................................................................... 1,550 1,256
Accrued stock option compensation expense........................................... 1,602 946
Deferred revenues................................................................... 9,016 1,607
--------- ---------
Total current liabilities......................................................... 12,654 6,028
--------- ---------
Stockholders' equity (notes 6 and 9):
Class A convertible preferred stock, no par value. Authorized 2,500,000
shares. Issued and outstanding 1,251,084 and 1,637,832 shares at
December 31, 1997 and 1996, respectively........................................... 2,679 2,047
Common stock, no par value. Authorized, 25,000,000 shares. Issued and
outstanding 10,487,245 and 8,260,023 shares at December 31, 1997 and
1996, respectively................................................................. 72,990 61,781
Accumulated deficit................................................................. (52,035) (24,044)
Accumulated other comprehensive income:
Net unrealized gains on investment securities available for sale.................. 55 129
Cumulative foreign currency translation adjustment................................ (151) --
--------- ---------
Total stockholders' equity........................................................ 23,538 39,913
--------- ---------
Commitments (note 8)
Total liabilities and stockholders' equity........................................ $ 36,192 $ 45,941
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
G-12
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software license fees .......................................... $ 4,142 $ 512 $ --
Professional services .......................................... 6,277 699 --
Data center fees ............................................... 411 56 --
----------- ----------- -----------
Total revenues ............................................... 10,830 1,267 --
----------- ----------- -----------
Direct costs:
Software license fees .......................................... 1,605 796 --
Professional services .......................................... 5,346 535 --
Data center fees ............................................... 6,947 2,266 --
----------- ----------- -----------
Total direct costs ........................................... 13,898 3,597 --
----------- ----------- -----------
Gross margin ................................................. (3,068) (2,330) --
Operating expenses:
Selling and marketing .......................................... 4,305 2,154 --
Product development ............................................ 10,507 4,048 --
General and administrative ..................................... 4,637 3,635 46
Depreciation and amortization .................................. 1,741 256 --
Amortization of goodwill and acquisition charges ............... 4,525 7,072 --
----------- ----------- -----------
Total operating expenses ..................................... 25,715 17,165 46
----------- ----------- -----------
Operating loss ............................................... (28,783) (19,495) (46)
Interest income .................................................. 1,481 1,672 101
----------- ----------- -----------
Income (loss) from continuing operations ......................... (27,302) (17,823) 55
Loss from discontinued operations (note 2) ....................... (689) (4,236) (1,535)
----------- ----------- -----------
Net loss ......................................................... $ (27,991) $ (22,059) $ (1,480)
=========== =========== ===========
Basic and diluted net loss per common share from
continuing operations .......................................... $ (3.06) $ (3.03) $ --
Basic and diluted net loss per common share from
discontinued operations ........................................ (0.08) (0.73) (0.16)
----------- ----------- -----------
Basic and diluted net loss per common share ...................... $ (3.14) $ (3.76) $ (0.16)
=========== =========== ===========
Weighted average number of shares of common stock
outstanding .................................................... 8,922,762 5,874,000 9,451,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-13
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------
CLASS A AMOUNT RETAINED
CONVERTIBLE ---------------------- EARNINGS
PREFERRED COMMON PREFERRED COMMON (ACCUMULATED
STOCK STOCK STOCK STOCK DEFICIT)
----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994 ........................ -- 2,400,000 $ -- $ 2,352 $ 2,795
Net loss ...................... -- -- -- -- (1,480)
Cash dividend declared ........ -- -- -- -- (300)
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- --
--------- ---------- ----------- ----------- -----------
Comprehensive income, 1995 ....
Balance at December 31,
1995 ........................ -- 2,400,000 $ -- $ 2,352 $ 1,015
Net loss ...................... -- -- -- -- (22,059)
Cash dividend declared
(note 6(a)) ................. -- -- -- -- (3,000)
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- --
Proceeds from preferred and
common stock offering, net
of offering expense (note 6) 1,637,832 3,772,792 2,047 56,821 --
Issuance of common stock in
acquisition (note 3) ........ -- 1,920,000 -- 2,400 --
Common stock issued upon
exercise of stock options ... -- 167,231 -- 208 --
--------- ---------- ----------- ----------- -----------
Comprehensive income, 1996 ....
Balance at December 31,
1996 ........................ 1,637,832 8,260,023 $ 2,047 $ 61,781 $ (24,044)
Net loss ...................... -- -- (27,991)
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- --
Conversion of preferred
stock to common stock ....... (546,700) 546,700 (683) 683 --
Proceeds from issuance of
preferred and common
stock, net of expenses
(note 6) ................... 159,952 569,978 1,315 4,676 --
Issuance of common stock
in acquisition (note 3) .... -- 1,000,000 -- 5,701 --
Common stock issued upon
exercise of stock options ... -- 110,544 -- 149 --
Cumulative foreign currency
translation adjustment ...... -- -- -- -- --
--------- ---------- ----------- ----------- -----------
Comprehensive income, 1997 ....
Balance at December 31,
1997 ........................ 1,251,084 10,487,245 $ 2,679 $ 72,990 $ (52,035)
=========== =========== =========== =========== ===========
<CAPTION>
NET
UNREALIZED
GAINS ON CUMULATIVE
INVESTMENT FOREIGN
SECURITIES CURRENCY TOTAL COMPRE-
AVAILABLE FOR TRANSLATION STOCKHOLDERS' HENSIVE
SALE ADJUSTMENT EQUITY INCOME
---- ---------- ------ -------
<S> <C> <C> <C> <C>
Balance at December 31,
1994 ........................ $ (72) $ -- $ 5,075
Net loss ...................... -- -- (1,480) $ (1,480)
Cash dividend declared ........ -- -- (300)
Change in net unrealized
gains on investment
securities available for sale 102 -- 102 102
----------- ----------- ----------- -----------
Comprehensive income, 1995 .... $ (1,378)
===========
Balance at December 31,
1995 ........................ $ 30 $ -- $ 3,397
Net loss ...................... -- -- (22,059) $ (22,059)
Cash dividend declared
(note 6(a)) ................. -- -- (3,000)
Change in net unrealized
gains on investment
securities available for sale 99 -- 99 99
Proceeds from preferred and
common stock offering, net
of offering expense (note 6) -- -- 58,868
Issuance of common stock in
acquisition (note 3) ........ -- -- 2,400
Common stock issued upon
exercise of stock options ... -- -- 208
----------- ----------- ----------- -----------
Comprehensive income, 1996 .... $ (21,960)
===========
Balance at December 31,
1996 ........................ $ 129 $ -- $ 39,913
Net loss ...................... -- -- (27,991) $ (27,991)
Change in net unrealized
gains on investment
securities available for sale (74) -- (74) (74)
Conversion of preferred
stock to common stock ....... -- -- --
Proceeds from issuance of
preferred and common
stock, net of expenses
(note 6) ................... -- -- 5,991
Issuance of common stock
in acquisition (note 3) .... -- -- 5,701
Common stock issued upon
exercise of stock options ... -- -- 149
Cumulative foreign currency
translation adjustment ...... -- (151) (151) (151)
----------- ----------- ----------- -----------
Comprehensive income, 1997 .... $ (28,216)
===========
Balance at December 31,
1997 ........................ $ 55 $ (151) $ 23,538
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-14
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (27,991) $ (22,059) $ (1,480)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Loss from discontinued operations....................................... 689 4,236 1,535
Depreciation and amortization including acquisition charges............. 4,996 1,471 --
Write-down of goodwill and purchased technology......................... 1,400 -- --
Charge for in-process research and development.......................... -- 6,800 --
Compensation expense for stock options.................................. 656 946 --
Provision for doubtful accounts receivable.............................. 257 -- --
Increase in accounts receivable......................................... (3,252) (1,216) --
(Increase) decrease in other assets..................................... (807) 880 29
Decrease in accounts payable............................................ (1,920) (2,423) --
(Decrease) increase in accrued expenses................................. (6) 674 111
Increase in deferred revenue............................................ 7,409 1,607 --
----------- ----------- -----------
Net cash provided by (used in) operating activities of
continuing operations................................................. (18,569) (9,084) 195
Net cash (used in) provided by discontinued operations................... 3,213 (5,895) 3,311
----------- ----------- -----------
(15,356) (14,979) 3,506
----------- ----------- -----------
Cash flows from investing activities:
Purchases of investment securities available for sale................... (8,736) (58,330) --
Sales of investment securities available for sale....................... 14,979 8,956 --
Maturities of investment securities available for sale.................. 5,000 19,000 --
Business acquisitions, net of cash and cash equivalents
acquired............................................................... -- (4,876) --
Purchases of premises and equipment..................................... (2,861) (5,435) --
----------- ----------- -----------
Net cash provided by (used in) investing activities.................... 8,382 (40,685) --
----------- ----------- -----------
Cash flows from financing activities:
Sale of preferred stock................................................. 1,315 2,047 --
Sale of common stock.................................................... 4,676 56,821 --
Proceeds from exercise of common stock options.......................... 149 208 --
Dividends paid.......................................................... -- (3,000) --
----------- ----------- -----------
Net cash provided by financing activities.............................. 6,140 56,076 --
----------- ----------- -----------
Effect of exchange rate changes on cash.................................... (151) -- --
----------- ----------- -----------
Net (decrease) increase in cash............................................ (985) 412 3,506
Cash at beginning of year.................................................. 4,122 3,710 204
----------- ----------- -----------
Cash at end of year........................................................ $ 3,137 $ 4,122 $ 3,710
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-15
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Business, Presentation, and Summary of Significant Accounting Policies
(a) Business and Presentation
Security First Network Bank ("SFNB") and subsidiaries (the "Company")
is the first FDIC insured financial institution to execute traditional
banking services on the Internet, and began offering such services in
October 1995. Security First Technologies, Inc. ("S1") is a
wholly-owned subsidiary of SFNB and develops integrated Internet
software applications that enable financial service companies to offer
products, services and transactions over the Internet in a secure
environment. S1 also offers product integration, training and data
center processing services.
As more fully discussed in note 2, the Company has adopted a formal
plan to discontinue its banking operations. As a result, the Company's
financial statement presentation reflects the continuing operations of
S1 with the banking operations reflected as discontinued operations.
The consolidated financial statements include the accounts of Security
First Network Bank and its wholly owned subsidiaries, S1 and SFNB
Investment, Inc. Significant intercompany accounts and transactions
have been eliminated in consolidation. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of
the consolidated balance sheets and revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
The technology market for Internet related banking services is
characterized by significant risk as a result of rapid, evolving
industry standards, emerging competition and frequent new product and
service introductions. To a great extent, the Company's success is
dependent on the evolution of the technology markets for Internet
related banking services and on its successful implementation of
technology for Internet related banking services for certain large
customers. Negative developments related to technology for Internet
related banking services or problems in implementations for large
customers could have an adverse impact on the Company's financial
position and results of operations.
(b) Revenue Recognition and Deferred Revenues
The Company derives revenues from licensing its software to customers,
providing professional services to customers, and providing data
center processing services to customers.
The Company recognizes revenue from software licensing agreements on a
subscription basis using the straight-line method over a period of
three years, which is either the term of the agreement or the
estimated useful life of the Company's software products. The Company
recognizes revenues from software licensing agreements using the
percentage of completion method of accounting if the software license
fees are fixed price agreements and bundled with implementation
services.
Revenues from professional services, provided on a fixed fee basis,
are recognized using the percentage of completion method, measured by
the percentage of contract costs incurred to date to estimated total
contract costs for each contract. Provisions for estimated losses on
G-16
<PAGE>
uncompleted contracts are made in the period in which such losses are
determined. Revenues derived from contracts to provide services on a
time and materials basis are recognized as the related services are
performed.
Data center revenues are recognized as the services are performed and
are determined based on the number of billable customer accounts
processed during the period.
Deferred revenues represent either billings rendered to or payments
received from customers for software licenses or services in advance
of revenue recognition.
(c) Investment Securities
The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Under SFAS No. 115, investments in equity and debt securities are
classified as held to maturity, trading or available for sale. Trading
securities are reported at fair value, with changes in fair value
included in the statement of operations, while available-for-sale
securities are reported at fair value, with net unrealized gains or
losses included as a component of stockholders' equity. Held to
maturity securities are reported at amortized cost. Unrealized losses
on all securities that are other than temporary are reported in the
statement of operations upon determination that the loss is other than
temporary. Amortization of premiums and accretion of discounts are
computed using the effective interest method and assumed prepayment
speeds. The specific identification method is used in determining
gains and losses on the sale of securities.
Investment securities include U.S. Treasury bills and debt securities
of certain other U.S. government agencies with original maturities of
greater than 90 days and ranging up to five years.
(d) Premises and Equipment
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line and accelerated methods over the
estimated useful lives of the related assets ranging from 3 to 5
years. Leasehold improvements are amortized using the straight-line
method over the estimated useful life of the improvement or the lease
term, whichever is shorter.
(e) Product Development
Product development includes all research and development expenses and
software development costs. All research and development expenses are
expensed as incurred. The Company's policy is to expense all software
development costs associated with establishing technological
feasibility, which the Company defines as completion of beta testing.
Because of the insignificant amount of costs incurred by the Company
between completion of beta testing and customer release, the Company
has not capitalized any software development costs in the accompanying
consolidated financial statements.
(f) Purchased Technology, Intangible Assets and Goodwill
Goodwill and intangible assets relate to the Company's acquisitions
and are amortized over their estimated useful life (ranging from eight
months to three years) using the straight-line method. Purchased
technology includes technology acquired in and allocated as part of
the purchase price of the Company's acquisitions. Estimated useful
lives for purchase technology are equal to three years. The purchased
technology is amortized over the greater of the useful life of the
software or the ratio of current revenues to anticipated total
revenues. The Company evaluates the recoverability of these intangible
assets at the end of each period using the
G-17
<PAGE>
undiscounted estimated future net operating cash flows expected to be
derived from such assets. If such evaluation indicates a potential
impairment, the Company uses fair value in determining the amount of
these intangible assets that should be written off.
(g) Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which encourages entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income (loss) and net income (loss) per share disclosures
for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures required by SFAS
No. 123.
(h) Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share," which specifies the
computation, presentation, and disclosure requirements for earnings
per share ("EPS"). SFAS No. 128 replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. SFAS No. 128 also requires dual presentation of
basic and diluted EPS on the face of the statement of operations for
all entities with complex capital structures. The Company has only
presented basic EPS because the effect of including potential common
stock resulting from outstanding stock options and convertible
preferred stock would be antidilutive. All prior period EPS data has
been restated to conform with SFAS No. 128. The number of Common Stock
Equivalents excluded from the computation of earnings per share
because they were antidilutive was 3,545,516 in 1997 and 4,285,355 in
1996
(i) Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss
and tax credit carryforwards. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) Fair Values of Financial Instruments
The Company uses financial instruments in the normal course of its
business. The carrying values of accounts receivable, accounts
payable, accrued expenses, and deferred revenues approximate fair
value due to the short-term maturities of these assets and
liabilities. The fair values of the Company's investment securities
available for sale are included in Note 4 and are based on quoted
market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities or dealer quotes.
G-18
<PAGE>
(k) Foreign Currency Translation
Foreign currency financial statements of the Company's Australian
operations are translated into U.S. dollars at current exchange rates,
except for revenues, costs and expenses, and net income which are
translated at average exchange rates during each reporting period. Net
exchange gains or losses resulting from the translation of assets and
liabilities are accumulated in a separate section of stockholders'
equity titled Cumulative Foreign Currency Translation Adjustment.
(l) Reclassifications
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the presentation adopted in 1997.
(m) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires companies to display, with the same
prominence as other financial statements, the components of
comprehensive income. SFAS No. 130 requires that an enterprise
classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid in capital in the equity section of a statement of financial
position. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The
Company's financial statements include the disclosure of comprehensive
income in accordance with the provisions of SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes
standards for the way public business enterprises are to report
information about operating segments in annual financial statements
and requires those enterprises to report selected financial
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company has not
determined the impact that SFAS No. 131 will have on its disclosures
and plans to implement SFAS No. 131 during the year ended December 31,
1998.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition". SOP No. 97-2 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company has not
determined the impact that adoption of SOP No. 97-2 will have on its
results of operations.
(2) Discontinued Operations
During 1997, the Company adopted a formal plan to sell its banking
operations. The banking assets held for sale are presented net of the
related liabilities in the accompanying consolidated balance sheets and the
losses from the banking operations are reflected in the accompanying
consolidated statements of operations as discontinued operations. The
Company invests available funds in U.S. Treasury and agency securities, but
does not specifically identify such investments as SFNB or S1 investments
since such amounts are available for funding the operations of either. For
purposes of presenting the discontinued operations information, the Company
has allocated investment securities to the banking operations so that
assets remain equal to liabilities, since it is expected that upon sale of
the banking operations, certain cash amounts and investment securities
available for sale will be transferred to the purchaser to
G-19
<PAGE>
equalize the assets and liabilities. The following represents condensed
financial statements for the banking operations as of and for the periods
indicated:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Cash and due from banks, including reserve
requirements of $25 for 1997 and 1996 $ 1,346 $ 1,409
Interest-earning deposit in other bank 1,000 --
U.S. Treasury and U.S. Government agency
securities available for sale 6,063 1,877
Mortgage-backed securities available for sale 27,642 32,522
Federal Home Loan Bank stock, at cost 652 214
Loans, net of allowance for loan losses of $163 in
1997 and $303 in 1996 14,084 23,351
Premises and equipment, net 499 802
Purchased technology, net 1,050 1,945
Other assets 152 730
---------- ----------
Total assets $ 52,488 $ 62,850
========== ==========
Deposits:
Noninterest-bearing demand deposits $ 15,380 $ 8,690
NOW accounts 1,517 3,966
Money market accounts 19,557 10,752
Savings accounts 1,534 6,102
Certificates of deposit 12,341 31,353
Advances from the Federal Home Loan Bank 1,019 1,154
Other liabilities 703 682
Unrealized gains on investment securities and
mortgage-backed securities available for sale 437 151
---------- ----------
Total liabilities $ 52,488 $ 62,850
---------- ----------
Total divisional equity $ -- $ --
Total liabilities and divisional equity $ 52,488 $ 62,850
</TABLE>
G-20
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Interest income $ 3,548 $ 3,374 $ 4,294
Interest expense 2,020 2,221 2,367
--------- --------- ---------
Net interest income 1,528 1,153 1,927
Provision for loan losses 133 -- --
--------- --------- ---------
Net interest income after provision for loan losses 1,395 1,153 1,927
Noninterest income 725 238 196
Gain on sale of branch 1,500 -- --
Noninterest expense (4,309) (6,003) (4,161)
--- ----- --- ----- ---------
Loss before income taxes 689 4,612 2,038
Income tax benefit -- 376 503
--------- --------- ---------
Net loss from discontinued operations $ 689 $ 4,236 $ 1,535
========= ========= =========
</TABLE>
Statements of Divisional Equity
<TABLE>
<CAPTION>
For the years ended
December 31, 1997, 1996 and 1995
--------------------------------
(in thousands)
<S> <C>
Balance at December 31, 1994.................................. $ --
Net loss...................................................... (1,535)
Capital contribution in the form of investment
securities available for sale............................ 1,535
---------
Balance at December 31, 1995.................................. $ --
Net loss...................................................... (4,236)
Capital contribution in the form of
investment securities available for sale.................. 4,236
-----
Balance at December 31, 1996.................................. --
Net loss...................................................... (689)
Capital contribution in the form of
investment securities available for sale.................. 689
---
Balance at December 31, 1997.................................. $ --
=========
</TABLE>
G-21
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................................ $ (689) $ (4,236) $ (1,535)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for loan losses .................................. 133 -- --
Depreciation, amortization and accretion, net .............. 354 711 109
Investment securities losses, net .......................... -- 8 50
Decrease (increase) in other assets ........................ 578 (129) (334)
Increase in other liabilities .............................. 21 303 365
-------- -------- --------
Net cash provided by (used in) operating activities . 397 (3,343) (1,345)
-------- -------- --------
Cash flows from investing activities:
(Increase) decrease in interest-earning deposits with banks ..... (1,000) 1,264 (2,918)
Sale of loans and deposits, net ................................. (11,515) -- (6,534)
Purchases of investment securities
and mortgage-backed securities ............................. (3,028) (28,760) (5,516)
Proceeds from maturities of investment securities and
principal collections on mortgage-backed securities ........ 5,194 8,353 7,097
Proceeds from sales of investment securities
and mortgage-backed securities ............................. -- -- 1,563
Net (increase) decrease in loans ................................ (9,386) (2,535) 5,870
Purchases of premises and equipment ............................. (454) (342) (2,982)
-------- -------- --------
Net cash used in investing activities ............... (20,189) (22,020) (3,420)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits ........................................ $ 19,864 $ 26,051 $ 4,348
Repayment of advances from Federal Home Loan Bank ............... (135) (128) (112)
-------- -------- --------
Net cash provided by financing activities .................. 19,729 25,923 4,236
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 63 560 (529)
Cash and cash equivalents at beginning of year ........................ 1,409 849 1,378
-------- -------- --------
Cash and cash equivalents at end of year .............................. $ 1,346 $ 1,409 $ 849
======== ======== ========
Supplemental cash flow information:
Cash paid for interest .......................................... $ 1,997 $ 1,981 $ 2,374
======== ======== ========
Noncash financing and investing activities:
Loans transferred to other assets .......................... $ -- $ -- $ 50
======== ======== ========
Securities transferred from held to maturity to
available for sale ....................................... $ -- $ -- $ 4,877
======== ======== ========
</TABLE>
The loss from discontinued operations from the date the Company adopted a
formal plan to sell the banking operations through December 31, 1997 was
approximately $521,000.
Investment Securities Available for Sale
The amortized cost of mortgage-backed securities at December 31, 1997 and
1996 was approximately $27.2 million and $32.3 million, respectively. In
addition, these mortgage-backed securities had gross unrealized gains of
$418,000 in 1997 and $330,000 in 1996 and gross unrealized losses of $1,000
in 1997 and $85,000 in 1996. See footnote 4 for the amortized cost, fair
value and gross unrealized gains and losses of investment securities
G-22
<PAGE>
available for sale that were allocated to the banking operations at
December 31, 1997 and 1996.
Loans
The composition of loans at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Real estate mortgage loans $ 7,786 $ 18,928
Consumer loans 4,811 2,748
Commercial business loans 1,650 2,004
--------- ---------
14,247 23,680
Less unearned income -- 26
--------- ---------
Loans, net $ 14,247 $ 23,654
========= =========
</TABLE>
A majority of the loans are secured by residential or commercial real
estate or other personal property. The loans are expected to be repaid from
cash flow of the borrowers. The Company estimates an allowance for loan
losses based on the credit worthiness of its customers as well as general
economic conditions. Consequently, an adverse change in those factors could
effect the Company's estimate of loss.
An analysis of the changes in the allowance for loan losses for the years
ended December 31, 1997, 1996, and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Balance at January 1 $ 303 $ 293 $ 556
Provision for loan losses 133 -- --
-------- -------- -------
436 293 556
-------- -------- -------
Allowance applicable to loans sold (227) -- (200)
Loan charge-offs (47) (15) (80
Recoveries 1 25 17
-------- -------- -------
Net loan (charge-offs) recoveries (46) 10 (63
-------- -------- -------
Balance at December 31 $ 163 $ 303 $ 293
======== ======== =======
</TABLE>
Deposits
Certificates of deposit maturities at December 31, 1997 are summarized
below:
(In thousands)
Under 12 months $ 7,800
12 months to 24 months 3,898
24 months to 36 months 643
-----------
$ 12,341
===========
G-23
<PAGE>
Interest expense on deposits for the years ended December 31, 1997, 1996,
and 1995 was as follows:
1997 1996 1995
(in thousands)
NOW accounts $ 59 $ 141 $ 107
Money market deposit accounts 798 215 67
Savings accounts 70 185 291
Certificates of deposit 1,033 1,612 1,825
-------- -------- -------
$ 1,960 $ 2,153 $ 2,290
======== ======== =======
At December 31, 1997 and 1996, the aggregate amount of certificates of
deposit with balances of $100,000 or more was approximately $1,031,000 and
$5,457,000, respectively.
Advances from the Federal Home Loan Bank
The Company is a member of the Federal Home Loan Bank of Cincinnati (FHLB)
and, accordingly, is eligible to borrow from the FHLB. As of December 31,
1997 and 1996, the Bank had one advance outstanding with the FHLB amounting
to $1,019,000 and $1,154,000, respectively. The advance matures on February
1, 2004 and bears interest at a rate of 5.45%.
Scheduled principal repayments as of December 31, 1997 on the advance are
$143,000, $151,000, $159,000, and $168,000 for 1998 through 2001,
respectively, and $398,000 thereafter.
Financial Instruments
The banking operations use financial instruments in the ordinary course of
business. Because of the short maturities and/or the adjustable rate nature
of the financial instruments, fair value approximates carrying value.
Branch Sale and Purchase and Assumption Transaction
On March 31, 1997, the Company sold all of the assets and liabilities
associated with its Pineville, Kentucky banking operations to The First
State Bank of Pineville, Pineville, Kentucky. The Company recorded a gain
of $1.5 million upon the disposition of these operations which included
approximately $29.0 million in loans, cash and other assets and $30.5
million in deposits and other liabilities.
On June 12, 1995, the Company entered into a purchase and assumption
transaction with Alliance Bank ("Alliance"), an affiliate of Cardinal,
whereby Alliance purchased all the assets, excluding classified loans, and
assumed all the liabilities of the Company's branch offices. All amounts
were sold/transferred at book value on date of transfer. Net amounts
sold/transferred to Alliance were as follows (in thousands):
Loans (net of allowance for estimated losses of $200) $ 32,642
Deposits (39,933)
Premises and equipment 981
Accrued interest receivable 164
Borrowers' taxes and insurance (42)
Accrued interest payable (346)
--------
Net cash paid $ (6,534)
========
G-24
<PAGE>
Summarized results of operations of the branch offices included in the
accompanying 1995 consolidated statement of operations through the date of
the sale are as follows (in thousands):
Total interest income $ 1,531
Net interest income 698
Net income 34
(3) Business Acquisitions
On November 24, 1997, the Company completed the acquisition of Solutions By
Design, Inc. ("SBD"), a technology consulting firm. The Company exchanged
999,999 shares of restricted common stock with a value of approximately
$5,700,000 for all of the outstanding shares of SBD. The recipients of the
shares issued in the transaction are contractually restricted from selling
any of the common stock received for six months after issuance after which
time they are able to sell up to 25% of the total shares received annually
thereafter. The value of the common stock issued was discounted to reflect
such restrictions. Of the $6.2 million total purchase price, which included
common stock valued at $6.0 million, and transaction costs and liabilities
assumed of $200,000, $4.2 million was assigned to identifiable intangible
assets and $2.0 million was assigned to goodwill. The identifiable
intangibles include employment contracts, which are amortized over the
contract life of eight months, exclusivity and non-solicitation agreements
which are amortized over the term of the contract of 18 months, and
assembled workforce which is being amortized over three years. S1 is
amortizing goodwill over a period of two years which is the period S1
estimates that it will receive benefit from the projects that were
developed by the former SBD employees. Additionally, the Company has
included $489,000 of nonrecurring charges associated with the SBD
acquisition in amortization of goodwill and acquisition charges in the
accompanying 1997 consolidated statement of operations. This amount
represents the premium paid to SBD for services rendered during the fourth
quarter of 1997 prior to consummation of the SBD acquisition. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of SBD have been included in the
results of operations of the Company since the effective date of the
acquisition.
On November 4, 1996, the Company completed the acquisition of SecureWare,
Inc. ("SecureWare"), a computer software company which develops security
and encryption technology allowing users to conduct safe transactions over
the Internet. SecureWare was merged into Five Paces, Inc. ("FPI") after the
acquisition. The Company exchanged cash consideration in the amount of
$5,000,000 and stock options for all of the outstanding stock and stock
options of SecureWare. Of the total purchase price, which included $5.0
million in cash and liabilities assumed of approximately $477,000, $3.3
million was allocated to in-process research and development and charged to
the statement of operations at the acquisition date; $1.4 million was
allocated to purchased technology; and $777,000 was allocated to goodwill.
Prior to the acquisition, SecureWare was substantially owned by the
Company's Chairman. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations of
SecureWare have been included in the results of operations of the Company
since the effective date of the acquisition.
On May 23, 1996, the Company completed the acquisition of FPI, a computer
software company which develops computer banking technology. The Company
exchanged 1,920,000 shares of common stock with a value of $2,400,000 for
all of the outstanding common stock of FPI. Of the total purchase price,
which included common stock valued at $2.4 million and liabilities assumed
of approximately $1.8 million, $3.5 million was allocated to in-process
research and development and charged to the consolidated statement of
operations at the acquisition date; $420,000 was allocated to purchased
technology; and $234,000 was allocated to goodwill. Prior to the
acquisition, FPI was substantially owned by a related party who was
affiliated with the Chairman and Chief Executive Officer of the Company at
the time of the acquisition, but was not under common control of the
Company. The majority shareholder of
G-25
<PAGE>
FPI was appointed Chairman of the Company subsequent to the acquisition.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of FPI have been included in
the results of operations of the Company since the effective date of the
acquisition.
During 1997, the Company expensed the unamortized balance of goodwill and
purchased technology resulting from these acquisitions of approximately
$1.4 million which has been included in amortization of goodwill and
acquisition charges in the accompanying 1997 consolidated statement of
operations. The Company made this assessment after determining that there
was limited future cash flows associated with the intangible assets
acquired in the SecureWare and FPI acquisitions. Fair value was determined
as the present value of the future cash flows. S1 made the strategic
decision to refocus the resources which had been involved in the
development and marketing of the network security products acquired from
SecureWare towards the VFM suite of products and related services and,
therefore, it did not believe there would be significant future revenues
from the acquired products. As a result, the unamortized balances for
purchased technology and goodwill related to the SecureWare acquisition of
$0.6 million and $0.4 million, respectively, were charged off in the 1997
Statement of Operations. Because of a significant rewrite of S1's VBM
product, management did not anticipate that there would be any future sales
of the version of VBM which was acquired from Five Paces. As a result, the
Company wrote off the balance of $0.2 million of purchased technology and
$0.2 million of goodwill related to the FPI acquisition.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, SBD, SecureWare, and FPI as
if the acquisitions had occurred as of January 1, 1997 with respect to the
1997 amounts and January 1, 1996 with respect to the 1996 amounts. The
unaudited pro forma results do not necessarily represent results of
operations which would have occurred if the acquisitions had occurred on
the dates indicated nor are they necessarily indicative of the results of
future operations.
Year ended December 31,
-----------------------
1997 1996
---- ----
(in thousands)
Revenues $ 13,838 $ 5,118
Net loss (28,602) (25,100)
Basic and diluted net loss per common share (2.93) (3.59)
(4) Investment Securities Available for Sale
The amortized cost and fair value of investment securities available for
sale and gross unrealized gains and losses at December 31, 1997 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Amortized Unrealized Fair
cost Gains Losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 22,802 $ 97 $ 22 $ 22,877
Less investment securities
allocated to banking operations (6,043) (30) (10) (6,063)
----------- ------- ------- -----------
U.S. Treasury and U.S.
government agencies allocated
to continuing operations $ 16,759 $ 67 $ 12 $ 16,814
=========== ======= ======= ===========
</TABLE>
G-26
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
Amortized Unrealized Fair
cost Gains Losses value
----------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 33,703 $ 225 $ 18 $ 33,910
Less investment securities
allocated to banking operations (1,799) (78) -- (1,877)
----------- ------- ------- -----------
U.S. Treasury and U.S.
government agencies allocated
to continuing operations $ 31,904 $ 147 $ 18 $ 32,033
=========== ======= ======= ===========
</TABLE>
A summary of investment securities available for sale at December 31, 1997
based on contractual maturities is presented below. Expected maturities may
differ from contractual maturities because the issuers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
cost value
---------- ----------
(in thousands)
<S> <C> <C>
Due within one year $ 13,828 $ 13,819
Due after one year through five years 8,974 9,058
---------- ----------
$ 22,802 $ 22,877
========== ==========
</TABLE>
Proceeds from the sales of investment securities were $14,979,000,
$9,617,000 and $1,484,000 in 1997, 1996 and 1995, respectively. Gross gains
of approximately $5,000 in 1997, $6,000 in 1996 and $3,000 in 1995 and
gross losses of approximately $4,000 in 1997, $14,000 in 1996 and $53,000
in 1995 were realized on sales of investment securities.
(5) Premises and Equipment
A summary of premises and equipment at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Leasehold improvements $ 1,758 $ 1,339
Furniture and fixtures 1,572 1,399
Computer equipment and software 5,363 2,949
---------- ----------
8,693 5,687
Accumulated depreciation and amortization (2,896) (497)
---------- ----------
$ 5,797 $ 5,190
========== ==========
</TABLE>
(6) Stockholders' Equity
(a) Spin-Off from Cardinal Bancshares, Inc. ("Cardinal")
A spin-off of the Company from Cardinal occurred on May 23, 1996. The
spin-off was effected pursuant to the Cardinal Bancshares, Inc.
Amended and Restated Plan of Distribution ("Plan of Distribution").
Under the Plan of Distribution, following a payment of a $3.0 million
cash dividend from the Company to Cardinal, Cardinal distributed pro
rata to each Cardinal stockholder of record on the record date
2,398,908 shares of the Company's common stock and paid cash in lieu
of fractional shares.
G-27
<PAGE>
(b) Initial Public Offering
On May 23, 1996, the Company sold 2,806,000 shares of common stock for
$52.8 million, net of offering expenses, in an underwritten initial
public offering.
(c) Sales of Common and Preferred Stock
During 1997, the Company sold 569,978 shares of common stock and
159,952 shares of Class A convertible preferred stock for
approximately $6 million.
Immediately following the spin-off and distribution described in (a)
above, the Company sold 967,884 shares of common stock and 1,637,832
shares of Class A convertible preferred for approximately $6 million.
(d) Preferred Stock
The terms of the Class A convertible preferred stock provide the
holders with identical rights as common stockholders with respect to
dividends and distributions in the event of liquidation, dissolution,
or winding up of the Company. Subject to certain limitations related
to ownership, each share of preferred stock is convertible into one
share of common stock at the option of the holder. Except as described
below, the Class A convertible preferred stock is nonvoting. The
preferred stock shall vote as a single class on the following matters:
(i) any amendment to any charter provision which would adversely
affect the terms of the Class A preferred stock and (ii) the merger or
consolidation of the Company with another corporation or the sale,
lease, or conveyance (other than by mortgage or pledge) of the
properties or business of the Company in exchange for securities of
another corporation if the Class A preferred stock is to be exchanged
for securities of such other corporation and if the terms of such
securities are less favorable in any respect. Action requiring the
separate approval of the preferred stockholders shall require the
approval of two-thirds of the shares of Class A preferred stock then
outstanding voting as a separate class. In addition, the Class A
preferred stock shall be entitled to one vote per share, voting with
the holders of common stock as if a single class, on any voluntary
dissolution or liquidation of the Company.
(e) Capital Requirement
The Company has entered into an agreement with the regulatory
authorities which requires that, upon the planned holding company
reorganization of the Company, the banking operations will be required
to have a minimum capital level of $10 million. This requirement will
not impact the Company because of the sale of the banking operations
at the same time as the planned holding company reorganization. (See
note 12).
(7) Income Taxes
The Company was included in the consolidated Federal income tax returns
filed by Cardinal Bancshares, Inc. through the effective date of the
spin-off of May 23, 1996. The Company has filed its own separate
consolidated Federal income tax returns since that time. Income tax
benefits applicable to the Company through the date of the spin-off were
paid to the Company by Cardinal. The Company has provided for income taxes
for all periods included herein as if it were filing separate income tax
returns.
The Company has not recorded an income tax expense (benefit) relating to
continuing operations for 1997 or 1996 because operating losses were
incurred and a full valuation allowance has been recorded against deferred
income tax assets, primarily comprised of the net operating loss
carryforwards.
G-28
<PAGE>
The components of income tax benefit, all of which relates to the
discontinued operations, are as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Current income tax benefit $ (87) $ (890)
Deferred income tax benefit (289) 387
---------- ----------
Total income tax benefit $ (376) $ (503)
========== ===========
</TABLE>
The income tax effects of the temporary differences that give rise to the
Company's deferred income tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 13,577 $ 4,615
Deferred compensation 742 520
Intangible assets -- 1,418
Deferred revenue 3,426 610
Other 96 187
---------- ----------
Total gross deferred income tax assets 17,841 7,350
---------- ----------
Deferred income tax liabilities - other 909 273
---------- ----------
Net deferred income tax assets before valuation
allowance 16,932 7,077
Valuation allowance (16,932) (7,077)
---------- ---- -----
Net deferred income tax assets $ -- $ --
========== ==========
</TABLE>
The valuation allowance of $16,932,000 and $7,077,000 at December 31, 1997
and 1996 offsets the full amount of the net deferred income tax assets.
Deferred income tax assets and liabilities are recognized for differences
between the financial statement carrying amounts and the tax bases of
assets and liabilities which will result in future deductible or taxable
amounts and for net operating loss and tax credit carryforwards. A
valuation allowance is then established to reduce the deferred income tax
assets to the level at which it is "more likely than not" that the tax
benefits will be realized. Realization of tax benefits of deductible
temporary differences and operating loss and tax credit carryforwards
depends on having sufficient taxable income within the carryback and
carryforward periods. Sources of taxable income that may allow for the
realization of tax benefits include (1) taxable income in the current year
or prior years that is available through carryback, (2) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (3) future taxable income generated by future operations.
Because of the uncertainties with respect to the Company's ability to
sustain profitable operations in the future, the Company has recorded a
valuation allowance to offset all of its net deferred income tax assets.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $35 million which begin to expire in the year 2012 unless
utilized.
(8) Commitments
(a) Lease Commitment
The Company leases office facilities under noncancelable operating lease
agreements which expire in 2001. Future minimum annual payments under all
operating lease agreements with
G-29
<PAGE>
remaining terms greater then one year for the next four years and in the
aggregate as of December 31, 1997 are as follows:
1998 $ 1,006,000
1999 1,036,000
2000 1,067,000
2001 733,000
-------------
$ 3,842,000
=============
Rent expense under all noncancelable operating lease agreements for the
years ended December 31, 1997 and 1996 was approximately $1,004,000 and
$250,000, respectively.
(b) Contractual Commitments
In the normal course of its business, the Company enters into contracts
with customers. These contracts contain commitments, including, but not
limited to, minimum standards and time frames against which the Company's
performance is measured. In the event the Company does not meet its
contractual commitments with its customers, the Company may incur penalties
and/or certain customers may have the right to terminate their contracts
with the Company. The Company does not believe that it will fail to meet
its contractual commitments to an extent that will result in a material
adverse effect on its financial position or results of operations.
(9) Stock Option Plans
The Company maintains certain stock option plans providing for the grant of
stock options to officers, directors and employees. The plans provide for
4,325,889 shares of the Company's common stock to be reserved for issuance
under the plans. All stock options granted under the plans have ten-year
terms and generally vest and become exercisable ratably over four years
from the date of grant. At December 31, 1997, there were 167,033 shares
available for future grants under the plans.
Upon the acquisition of SBD, the Company granted 275,000 stock options to
the former SBD employees which are exercisable upon the achievement of
certain performance and software development goals. In the event that the
performance and software development goals are not achieved, the options
will vest at the end of a five year period.
For stock options granted where the exercise price was less than the market
price of the stock on the date of grant, the per share weighted-average
exercise price was $1.04 and $7.15 and the per share weighted average grant
date fair value was $6.60 and $13.51 for stock options granted during 1997
and 1996, respectively. For stock options granted where the exercise price
equaled the market price of the stock on the date of grant, the per share
weighted-average exercise price was $6.55 and $13.58 and the per share
weighted-average grant date fair value was $4.33 and $12.28 for stock
options granted during 1997 and 1996, respectively. The fair values were
determined using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield -0-%, risk-free
interest rate of 6.5%, expected volatility 79.2% in 1997 and 70.4% in 1996,
and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, compensation cost in the amount of approximately
$656,000 and $946,000 has been recognized in 1997 and 1996, respectively,
relating to stock options granted with exercise prices less than the market
price. At December 31, 1997 and December 31, 1996, the remaining amount of
deferred compensation expense to be recognized in future periods related to
the stock options granted with exercise prices less than market price on
the date of the grant is approximately $2,165,000 and $2,506,000,
respectively. Had the Company determined
G-30
<PAGE>
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $ (27,991) $ (22,059) $ (1,480)
Pro forma (29,749) (22,366) (2,480)
Basic and diluted net loss per common share:
As reported $ (3.14) $ (3.76) $ (0.16)
Pro forma (3.33) (3.81) (0.26)
</TABLE>
A summary of the Company's stock options as of December 31, 1997, 1996 and
1995 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
Fixed options (000) price (000) price (000) price
------------- -------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,334 $ 3.59 2,690 $ 0.83 -- $ --
Granted 1,203 6.55 816 12.16 2,690 0.83
Exercised (111) 1.27 (167) 1.21 -- --
Forfeited/canceled (743) 12.26 (5) 1.25 -- --
----- --------- ----- --------- ----- --------
Outstanding at end of year 3,683 $ 2.88 3,334 $ 3.59 2,690 $ 0.83
===== ========= ===== ========= ===== ========
Exercisable at end of year 1,444 $ 2.18 712 $ 0.86 -- --
===== ========= ===== ========= ===== ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding
------------------- Options exercisable
Weighted- -------------------
average Weighted- Weighted-
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices (000) life price (000) price
--------------- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$0.625 -1.89 2,574 7.60 $0.86 1,224 $0.81
4.46 -7.00 613 9.35 5.93 83 6.11
7.50 -12.92 496 6.66 9.47 137 12.04
----------------- ------- ---- ---- ------- -----
$0.625 -12.92 3,683 7.77 $2.88 1,444 $2.18
================== ======= ==== ===== ======= =====
</TABLE>
(10) Employee Benefit Plan
The Company provides a 401(k) Retirement Savings Plan (the "Plan") for
substantially all of its full-time employees. Each participant in the Plan
may elect to contribute from 1% to 15% of his or her annual compensation to
the Plan. The Company, at its discretion, may make matching contributions
to the Plan. The Company is currently matching up to 4% of the employees
compensation first to the Company's stock fund $1 for each dollar
contributed by the employee and second to the remaining investment funds
$.25 for each dollar contributed by the
G-31
<PAGE>
employee. The Company's contributions to the Plan charged to expense for
1997 and 1996 were $171,000 and $83,000, respectively.
(11) Major Customers and International Revenues
(a) Major Customers
For the year ended December 31, 1997, two customers represented 18%
and 10% of total revenues, respectively. For the year ended December
31, 1996, three customers represented 13%, 16%, and 16% of total
revenues, respectively.
(b) International Revenues
Revenues from international customers represented 19% and 6% of total
revenues and are serviced primarily from the United States for the
years ended December 31, 1997 and 1996, respectively.
(12) Subsequent Events (Unaudited)
(a) Sale of Banking Operations
In March 1998, the Company announced that the Royal Bank of Canada, through
one of its U.S. based subsidiaries ("Royal Bank"), has agreed to acquire
the banking operations of the Company. Pursuant to the terms of the
agreement, the Company will receive $3 million in excess of the net assets
sold including $1.5 million which will be received eighteen months from the
closing date. The banking operations, which will be legally separated from
the technology operations through a holding company formation and the
contribution of $10 million in capital, will include substantially all of
the Company's loans and investment securities as well as its deposit
relationships. The agreement is subject to regulatory approval in Canada
and the United States, in addition to SFNB shareholder approval. The
transaction is expected to close in September of 1998.
In addition to the sale of the banking operations, Royal Bank has entered
into technology licensing and consulting arrangements with the Company for
$6 million effective upon closing of the sale. Also, Royal Bank purchased
92,593 shares of the Company's common stock for $1 million in cash on March
9, 1998 and will receive an option to purchase an additional 733,818 shares
of common and preferred stock for $10 million at prices ranging from $11.88
to $15.82 per share over a period of 21 months.
(b) Sale of Preferred Stock to State Farm
On June 29, 1998, the Company entered into a Stock Purchase Agreement and
other technology and license agreements with State Farm Mutual Automobile
Insurance Company ("State Farm"). Pursuant to the Stock Purchase Agreement,
State Farm agreed to purchase $10.0 million of non-voting, zero coupon
preferred stock at a per share price equal to the average closing price per
share of the Company's common stock for each of the 10 trading days
preceding the closing. The preferred stock is convertible after two years
into shares of common stock at a 40% premium to the per share price paid
for the preferred stock. The sale of the preferred stock will occur
immediately following the formation of a holding company by SFNB which is
expected to occur in September 1998.
(c) Sale of Common Stock to BroadVision
On June 30, 1998, the Company entered into a relationship with BroadVision,
Inc. under a Stock Purchase Agreement and other technology and licensing
agreements.
G-32
<PAGE>
Under the Stock Purchase Agreement, BroadVision purchased on July 15,
1998, 181,610 shares of SFNB common stock by granting to SFNB a license
agreement which grants SFNB the right to use and resell BroadVision's
marketing suite of software products. The issuance of 181,610 shares of
SFNB Common Stock on July 15, 1998 for $2 million (based upon the average
closing price for ten business days prior to July 15, 1998) will be
recorded as an increase in common stock and an addition to purchased
technology ($1.5 million) with respect to the developer license acquired
under the license agreement and as an addition to prepaid royalties ($0.5
million) with respect to prepaid royalties under the reseller agreement.
S1 will amortize the amount for the developer license using the
straight-line method over the estimated useful life (3 years) and the
amount for the prepaid royalties will be charged to cost of software
license fees as S1 licenses BroadVision's product to its customers. In
addition, the companies will exchange $3 million of each company's common
stock amounting to 129,702 shares of the new holding company for 123,001
shares of BroadVision, based upon the average of the closing price of the
respective stock for the ten business days preceding July 31, 1998. The
issuance of $3 million of Holding Company Common Stock in exchange for $3
million of BroadVision's common stock will be recorded at closing by an
increase in common stock and an addition to non-current marketable equity
securities available for sale. The exchange will occur following the
formation of a holding company by SFNB which is expected to occur in
September 1998.
G-33
<PAGE>
FIVE PACES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED MAY 23, YEAR ENDED
1996 DECEMBER 31, 1995
----------------------- --------------------------
<S> <C> <C>
Income:
Software development and
consulting fees ............................... $ 848 $ 143
------- -------
Total income ........................... 848 143
Expenses:
Salaries and employee benefits .................. 1,552 264
Occupancy and equipment ......................... 169 9
Professional fees ............................... 44 20
Travel .......................................... 159 53
Conventions and tradeshows ...................... 68 49
Advertising and marketing ....................... 103 6
Data processing ................................. 136 --
Other ........................................... 112 27
------- -------
Total expenses ......................... 2,343 428
------- -------
Net loss ............................... $(1,495) $ (285)
======= =======
</TABLE>
See accompanying note to financial statements.
G-34
<PAGE>
FIVE PACES, INC.
NOTE TO STATEMENTS OF OPERATIONS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited statements of operations for Five Paces, Inc. for the periods
prior to its acquisition by Security First Network Bank have been presented for
purposes of understanding the continuing operations of Security First Network
Bank as presented in another section of this Appendix G. The statements of
operations for the period ended May 23, 1996 and the year ended December 31,
1995 are unaudited and do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and cash
flows. These unaudited statements of operations include all adjustments,
consisting only of normal recurring accruals, which in the opinion of management
are necessary to present fairly Five Paces, Inc.'s statements of operations.
G-35
<PAGE>
SECUREWARE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
NOVEMBER 4, 1996 DECEMBER 31, 1995
---------------- -----------------
<S> <C> <C>
Income:
Software development and
consulting fees ............................ $ 2,362 $ 1,641
Interest income .................................. 11 50
Gain (loss) on sale of investment securities .....
(39) (29)
Other income ..................................... 15 --
------- -------
Total income ............................ 2,349 1,662
------- -------
Expenses:
Salaries and employee benefits ................... 2,748 1,053
Occupancy and equipment .......................... 412 577
Interest expense ................................. 3 --
Professional fees ................................ 108 9
Advertising and marketing ........................ 111 --
Travel ........................................... 64 --
Other ............................................ 222 37
------- -------
Total expenses .......................... 3,668 1,676
------- -------
Net loss ................................ $(1,319) $ (14)
======= =======
</TABLE>
See accompanying note to financial statements.
G-36
<PAGE>
SECUREWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited statements of operations for SecureWare, Inc. for the periods
prior to its acquisition by Security First Network Bank have been presented for
purposes of understanding the continuing operations of Security First Network
Bank as presented in another section of this Appendix G. The statements of
operations for the period ended November 4, 1996 and the year ended December 31,
1995 are unaudited and do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and cash
flows. These unaudited statements of operations include all adjustments,
consisting only of normal recurring accruals, which in the opinion of management
are necessary to present fairly SecureWare, Inc.'s statements of operations.
G-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL sets forth certain circumstances under which
directors, officers, employees and agents may be indemnified against liability
that they may incur in their capacity as such.
Section 6 of the Holding Company's Certificate of Incorporation
provides for indemnification of the Holding Company's directors, officers,
employees and agents under certain circumstances. Section 6 of the Holding
Company's Certificate of Incorporation, which is attached as Appendix D to the
Proxy Statement/Prospectus and filed as Exhibit 3.1 to this Registration
Statement, is incorporated herein by reference.
The Holding Company also has the power to purchase and maintain
insurance on behalf of its directors, officers, employees and agents and certain
other persons. The Holding Company has in effect a policy of liability insurance
covering its directors and officers, the effect of which is to reimburse the
directors and officers of the Holding Company against certain damages and
expenses resulting from certain claims made against them caused by their
negligent act, error or omission.
The foregoing indemnity and insurance provisions have the effect of
reducing directors' and officers' exposure to personal liability for actions
taken in connection with their respective positions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Holding Company pursuant to the foregoing provisions, or otherwise, the Holding
Company has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Holding Company of expenses incurred
or paid by a director, officer or controlling person of the Holding Company 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 Holding Company 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 Securities Act and will be governed by
the final adjudication of such issue.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit
No. Exhibit
--- -------
2.1 Second Amended and Restated Plan of Reorganization, dated as
of March 9, 1998, by and among Security First Network Bank
("SFNB"), Security First Technologies Corporation (the
"Holding Company") and upon organization, New Security First
Network Bank, as amended on June 4, 1998, attached as Appendix
B to the Proxy Statement/Prospectus.*
2.2 Stock Purchase Agreement, dated as of March 9, 1998, by and
among Royal Bank of Canada ("Royal Bank"), RBC Holdings
(Delaware) Inc. ("RBC Holdings"), SFNB and the Holding
Company, as amended on June 5, 1998, attached as Appendix C to
the Proxy Statement/Prospectus.*
2.3 Common Stock Purchase and Option Agreement, dated as of March
9, 1998, by and among SFNB, RBC Holdings and the Holding
Company, as amended on June 5, 1998.*
3.1 Certificate of Incorporation of the Holding Company, attached
as Appendix D to the Proxy Statement/Prospectus.
3.2 Bylaws of the Holding Company, attached as Appendix F to the
Proxy Statement/Prospectus.
4.1 Specimen certificate for the Holding Company common stock.*
4.2 Specimen certificate for the Holding Company Series A
Convertible Preferred Stock.*
5 Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities registered hereunder, including the consent of that
firm.
8 Opinion of KPMG Peat Marwick LLP as to certain tax matters.*
10.1 Security First Network Bank, FSB Employee Stock Option Plan.
10.2 Security First Network Bank Amended and Restated Directors'
Stock Option Plan.
10.3 Security First Technologies Corporation 1998 Directors' Stock
Option Plan.*
10.4 Stock Purchase Agreement, dated as of June 29, 1998, by and
among Security First Network Bank, Security First Technologies
Corporation and State Farm Mutual Automobile Insurance
Company.
21 Subsidiaries of the Holding Company.*
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
5).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Friedman, Billings, Ramsey & Co., Inc.*
24 Power of Attorney.**
II-2
<PAGE>
99 Form of SFNB proxy card.
----------
* Previously filed.
** Filed on signature page of Form S-4, as filed on June 5, 1998.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the Registration Statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the Registration
Statement. Notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not exceed
that which was registered) and any deviation
from the low or high end of the estimated
maximum offering range may be reflected in
the form of prospectus filed with the SEC
pursuant to Rule 424(b) (ss. 230.424(b) of
this chapter) if, in the aggregate, the
changes in volume and price represent no
more than a 20% change in the maximum
aggregate offering price set forth in the
"Calculation of the Registration Fee" table
in the effective Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement 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.
(c) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
II-4
<PAGE>
underwriters, in addition to the information called for by the
other Items of the applicable form.
(d) The Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Securities Act and is used in connection with an offering
of securities subject to Rule 415 (ss. 230.415 of this
chapter), will be filed as a part of an amendment to the
Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) The undertaking concerning indemnification is included as part
of the response to Item 20.
(f) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on the 21st day of August, 1998.
SECURITY FIRST TECHNOLOGIES CORPORATION
By: /s/James S. Mahan, III
-----------------------------------
James S. Mahan, III
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 21st day of August, 1998.
Signature Title
- --------- -----
/s/ James S. Mahan, III Chief Executive Officer and Director
- ---------------------- (Principal Executive Officer)
James S. Mahan, III
/s/ Robert F. Stockwell Chief Financial Officer, Treasurer and Secretary
- ---------------------- (Principal Financial Officer and
Robert F. Stockwell Principal Accounting Officer)
/s/ Robert F. Stockwell* Director
- ----------------------
Robert W. Copelan
/s/ Robert F. Stockwell* Chairman of the Board and Director
- ----------------------
Michael C. McChesney
/s/ Robert F. Stockwell* Director
- ----------------------
Howard J. Runnion, Jr.
Director
- ----------------------
Dorsey R. Gardner
- ----------------------
* As power of attorney.
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
-------
Exhibit
No.
---
2.1 Second Amended and Restated Plan of Reorganization, dated as
of March 9, 1998, by and among Security First Network Bank
("SFNB"), Security First Technologies Corporation (the
"Holding Company") and upon organization, New Security First
Network Bank, as amended on June 4, 1998, attached as Appendix
B to the Proxy Statement/Prospectus.*
2.2 Stock Purchase Agreement, dated as of March 9, 1998, by and
among Royal Bank of Canada ("Royal Bank"), RBC Holdings
(Delaware) Inc. ("RBC Holdings"), SFNB and the Holding
Company, as amended on June 5, 1998, attached as Appendix C to
the Proxy Statement/Prospectus.*
2.3 Common Stock Purchase and Option Agreement, dated as of March
9, 1998, by and among SFNB, RBC Holdings and the Holding
Company, as amended on June 5, 1998.*
3.1 Certificate of Incorporation of the Holding Company, attached
as Appendix D to the Proxy Statement/Prospectus.
3.2 Bylaws of the Holding Company, attached as Appendix F to the
Proxy Statement/Prospectus.
4.1 Specimen certificate for the Holding Company common stock.*
4.2 Specimen certificate for the Holding Company Series A
Convertible Preferred Stock.*
5 Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities registered hereunder, including the consent of that
firm.
8 Opinion of KPMG Peat Marwick LLP as to certain tax matters.*
10.1 Security First Network Bank, FSB Employee Stock Option Plan.
10.2 Security First Network Bank Amended and Restated Directors'
Stock Option Plan.
10.3 Security First Technologies Corporation 1998 Directors' Stock
Option Plan.*
10.4 Stock Purchase Agreement, dated as of June 29, 1998, by and
among Security First Network Bank, Security First Technologies
Corporation and State Farm Mutual Automobile Insurance
Company.
21 Subsidiaries of the Holding Company.*
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
5).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Friedman, Billings, Ramsey & Co., Inc.*
II-7
<PAGE>
24 Power of Attorney.**
99 Form of SFNB proxy card.
----------
* Previously filed.
** Filed on signature page of Form S-4, as filed on June 5, 1998.
II-8
Exhibit 5
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
August 21, 1998
Board of Directors
Security First Technologies Corporation
3390 Peachtree Road, NE
Suite 1700
Atlanta, Georgia 30326
Ladies and Gentlemen:
We are acting as special counsel to Security First Technologies
Corporation, a Delaware corporation (the "Company"), in connection with its
registration statement on Form S-4 (the "Registration Statement") (File No.
333-56181) filed with the Securities and Exchange Commission, as amended by
Pre-Effective Amendments Nos. 1 and 2 thereto, relating to the proposed issuance
of up to 15,289,269 shares of the Company's common stock, par value $0.01 per
share, all of which shares (the "Shares") are to be issued by the Company in
accordance with the terms of the Second Amended and Restated Plan of
Reorganization, dated as of March 9, 1998, by and among Security First Network
Bank ("SFNB"), the Company and upon organization, New Security First Network
Bank, as amended by Amendment No. 1 thereto dated June 4, 1998 (together, the
"Plan"). This opinion letter is furnished to you at your request to enable you
to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. ss.
229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. Executed copies of the Registration Statement and
Pre-Effective Amendments Nos. 1 and 2 thereto.
2. An executed copy of the Plan.
3. The Certificate of Incorporation of the Company, as certified
by the Secretary of the Company on the date hereof as then
being complete, accurate and in effect.
4. The Bylaws of the Company, as certified by the Secretary of
the Company on the date hereof as then being complete,
accurate and in effect.
5. Resolutions of the Board of Directors of the Company, adopted
at a meeting held on June 3, 1998, as certified by the
Secretary of the Company on the date hereof as then being
complete, accurate and in effect, relating to the issuance of
the Shares and arrangements in connection therewith.
<PAGE>
Board of Directors
Security First Technologies Corporation
August 21, 1998
Page 2
6. Resolutions of the Board of Directors of SFNB, the organizer
of the Company, adopted at meetings held on October 5, 1995,
December 22, 1995, January 10, 1997, January 28, 1997, June
25, 1997, September 18, 1997, January 28, 1998, March 9, 1998
and June 3, 1998 and by a unanimous written consent of
directors dated as of July 9, 1998, as certified by the
Secretary of the Company on the date hereof as then being
complete, accurate and in effect, relating to the issuance of
the Shares and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter is
given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the General
Corporation Law of the State of Delaware. We express no opinion herein as to any
other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) effectiveness of the Registration Statement, as
amended, and (ii) issuance of the Shares pursuant to the terms of the Plan and
the resolutions of the Boards of Directors of the Company and SFNB, the Shares
will be validly issued, fully paid and nonassessable under the General
Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of Pre-Effective
Amendment No. 2 to the Registration Statement on the date of this opinion letter
and should not be quoted in whole or in part or otherwise be referred to, nor
filed with or furnished to any governmental agency or other person or entity,
without the prior written consent of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 5 to
Pre-Effective Amendment No. 2 to the Registration Statement and to the reference
to this firm under the caption "Legal Matters" in the proxy statement/prospectus
constituting a part of the Registration Statement. In giving this consent, we do
not thereby admit that we are an "expert" within the meaning of the Securities
Act of 1933, as amended.
Very truly yours,
HOGAN & HARTSON L.L.P.
Exhibit 10.1
SECURITY FIRST NETWORK BANK, FSB
EMPLOYEE STOCK OPTION PLAN
Security First Network Bank, FSB (the "Bank") sets forth
herein the terms of this Employee Stock Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Bank by
providing eligible individuals (as designated pursuant to Section 4 below) with
an opportunity to acquire or increase a proprietary interest in the Bank, which
thereby will create a stronger incentive to expend maximum effort for the growth
and success of the Bank and its subsidiaries, and will encourage such eligible
individuals to remain in the employ of the Bank or one or more of its
subsidiaries. Each stock option granted under the Plan (an "Option") is intended
to be an "incentive stock option" within the meaning of Section 422 of the
Internal Revenue Code of 1986, or the corresponding provision of any
subsequently-enacted tax statute, as amended from time to time (the "Code")
("Incentive Stock Option"), except (i) to the extent that any such Option would
exceed the limitations set forth in Section 7 below; and (ii) for Options
specifically designated at the time of grant as not being "incentive stock
options."
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the
Board of Directors of the Bank (the "Board"), which shall have the full power
and authority to take all actions, and to make all determinations required or
provided for under the Plan or any Option granted or Option Agreement (as
defined in Section 8 below) entered into hereunder and all such other actions
and determinations not inconsistent with the specific terms and provisions of
the Plan deemed by the Board to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Board executed in accordance with the Bank's
Certificate of Incorporation and By-Laws, and with applicable law. The
interpretation and construction by the Board of any provision of the Plan or of
any Option granted or Option Agreement entered into hereunder shall be final and
conclusive.
(b) Committee. The Board may from time to time
appoint a Stock Option Committee (the "Committee") consisting of not less than
two members of the Board, none of whom shall be an officer or other salaried
employee of the
<PAGE>
Bank or any of its subsidiaries, and each of whom shall qualify in all respects
as a "disinterested person" as defined in Rule l6b-3 of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Board, in its sole discretion, may provide that the role of
the Committee shall be limited to making recommendations to the Board concerning
any determinations to be made and actions to be taken by the Board pursuant to
or with respect to the Plan, or the Board may delegate to the Committee such
powers and authorities related to the administration of the Plan, as set forth
in Section 2(a) above, as the Board shall determine, consistent with the
Certificate of Incorporation and By-Laws of the Bank and applicable law. The
Board may remove members, add members, and fill vacancies on the Committee from
time to time, all in accordance with the Bank's Certificate of Incorporation and
By-Laws, and with applicable law. The majority vote of the Committee, or acts
reduced to or approved in writing by a majority of the members of the Committee,
shall be the valid acts of the Committee.
(c) No Liability. No member of the Board or of
the Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option granted or Option Agreement entered into
hereunder.
(d) Delegation to the Committee. In the event
that the Plan or any Option grantedor Option Agreement entered into hereunder
provides for any action to be taken by or determination to be made by the Board,
such action may be taken by or such determination may be made by the Committee
if the power and authority to do so has been delegated to the Committee by the
Board as provided for in Section 2(b) above. Unless otherwise expressly
determined by the Board, any such action or determination by the Committee shall
be final and conclusive.
(e) Action by the Board. The Board may act under
the Plan with respect to any Option granted to or Option Agreement entered into
with an officer, director or shareholder of the Bank who is subject to Section
16 of the Exchange Act other than by, or in accordance with the recommendations
of, the Committee, constituted as set forth in Section 2(b) above, only if all
of the members of the Board are "disinterested persons" as defined in Rule 16b-3
of the Securities and Exchange Commission under the Exchange Act.
3. STOCK
The stock that may be issued pursuant to Options
granted under the Plan shall be shares of common stock, without par value, of
the Bank (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted
<PAGE>
under the Plan shall not exceed in the aggregate 2,601,240 */ shares. The
foregoing number of shares are subject to adjustment as provided in Section 17
below. If any Option expires, terminates, or is terminated or canceled for any
reason prior to exercise in full, the shares of Stock that were subject to the
unexercised portion of such Option shall be available for future Options granted
under the Plan.
4. ELIGIBILITY
(a) Employees. Options may be granted under the
Plan to any employee of the Bank or any "subsidiary corporation" (a
"Subsidiary") thereof within the meaning of Section 424(f) of the Code
(including any such employee who is an officer or director of the Bank or any
Subsidiary) as the Board shall determine and designate from time to time prior
to expiration or termination of the Plan. The maximum number of shares of Stock
subject to Options that may be granted under the Plan to any executive officer
or other employee of the Bank or any Subsidiary is 1,000,000 **/ shares (subject
to adjustment as provided in Section 17 hereof).
(b) Multiple Grants. An individual may hold
more than one Option, subject to such restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective
as of the date of adoption by the Board, which date is set forth below, subject
to approval of the Plan within one year of such effective date by the sole
corporate shareholder of the Bank; provided, however, that upon approval of the
Plan by the shareholder of the Bank as set forth above, all Options granted
under the Plan on or after the effective date shall be fully effective as if the
shareholder of the Bank had approved the Plan on the effective date. If the
shareholder fails to approve the Plan within one year of such effective date,
any options granted hereunder shall be null and void and of no effect.
(b) Term. The Plan shall terminate on the date ten
years from the effective date.
- --------
*/ Restated to reflect amendments to the Plan adopted in October 1995
and December 1995 and to reflect the 4 for 1 stock split in May 1996.
**/ Restated to reflect the 4 for 1 stock split in May 1996.
<PAGE>
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, prior to the date of termination of the
Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions which may be necessary to qualify such Options as Incentive Stock
Options. The date on which the Board approves the grant of an Option (or such
later date as is specified by the Board) shall be considered the date on which
such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) of
Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value (determined at the time the option is granted) of
the stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations within the meaning of Section 422(d) of the Code) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"), to be executed by the Bank and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same time
need not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement, except that the Option Price of a share of Stock subject to an
Option that is intended to constitute an Incentive Stock Option shall be not
less than 100 percent of the fair market value of a share of the Stock on the
date the Option is granted (as determined in good faith by the Board); provided,
however, that in the event the Optionee would otherwise be ineligible to receive
an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than ten percent), the
Option Price of an Option that is intended to be an Incentive Stock Option shall
be not less than 110 percent of the fair market value of a share of Stock at the
time such Option is granted. In the event that the Stock is listed on an
established national or regional stock exchange,
<PAGE>
is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System, or is publicly traded on an established securities
market, in determining the fair market value of the Stock, the Board shall use
the closing price of the Stock on such exchange or System or in such market (the
highest such closing price if there is more that one such exchange or market) on
the trading date immediately before the Option is granted (or, if there is no
such closing price, then the Board shall use the mean between the high and low
prices on such date), or, if no sale of the Stock had been made on such day, on
the next preceding day on which any such sale shall have been made.
10. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan
shall terminate and all rights to purchase shares thereunder shall cease upon
the expiration of ten years from the date such Option is granted, or on such
date prior thereto as may be fixed by the Board and stated in the Option
Agreement relating to such Option; provided, however, that in the event the
Optionee would otherwise be ineligible to receive an Incentive Stock Option by
reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating
to stock ownership of more than ten percent), an Option granted to such Optionee
that is intended to be an Incentive Stock Option shall in no event be
exercisable after the expiration of five years from the date it is granted.
(b) Option Period and Limitations on Exercise.
Each Option shall be exercisable, in whole or in part, at any time and from time
to time, over a period commencing on or after the date of grant and ending upon
the expiration or termination of the Option, as the Board shall determine and
set forth in the Option Agreement relating to such Option. Without limiting the
foregoing, the Board, subject to the terms and conditions of the Plan, may in
its sole discretion provide that an Option may not be exercised in whole or in
part for any period or periods of time during which such Option is outstanding;
provided, however, that any such limitation on the exercise of an Option
contained in any Option Agreement may be rescinded, modified or waived by the
Board, in its sole discretion, at any time and from time to time after the date
of grant of such Option, so as to accelerate the time at which the Option may be
exercised. Each Option shall be exercisable, in whole or in part, at any time
and from time to time, over a period commencing on the date of grant and ending
upon the expiration of the Option. Notwithstanding any other provision of the
Plan, no Option granted to an Optionee under the Plan shall be exercisable in
whole or in part prior to the date the Plan is approved by the shareholders of
the Bank as provided in Section 5 above.
(c) Method of Exercise. An Option that is
exercisable here-under may be exercised by delivery to the Bank on any business
day, at its principal office, addressed to the attention of the Committee, of
written notice of exercise, which notice shall specify the number of shares with
respect to which the Option is being exercised. The minimum number of shares of
Stock with respect to which an Option may be exercised, in whole or in part, at
any time shall be the lesser of 100 shares or the maximum number of shares
available for purchase under the Option at the time of exercise. Except as
provided below, payment in full of the Option Price of the shares for which the
Option is
<PAGE>
being exercised shall accompany the written notice of exercise of the Option and
shall be made either (i) in cash or in cash equivalents; (ii) through the tender
to the Bank of shares of Stock, which shares shall be valued, for purposes of
determining the extent to which the Option Price has been paid thereby, at their
fair market value (determined in the manner described in Section 9 above) on the
date of exercise; or (iii) by a combination of the methods described in (i) and
(ii); provided, however, that the Board may in its discretion impose and set
forth in the Option Agreement such limitations or prohibitions on the use of
shares of Stock to exercise Options as it deems appropriate. If shares of Stock
that are acquired by the Optionee through exercise of an Option or an option
issued under another stock option plan maintained by the Bank are surrendered in
payment of the Option Price, the Stock surrendered in payment must have been (i)
held by the Optionee for more than six months at the time of surrender, or (ii)
acquired under an Option granted not less than six months prior to the time of
surrender. Unless the Board shall provide otherwise in the case of an Option
Agreement, payment in full of the Option Price need not accompany the written
notice of exercise provided the notice of exercise directs that the Stock
certificate or certificates for the shares for which the Option is exercised be
delivered to a licensed broker acceptable to the Bank as the agent for the
individual exercising the Option and, at the time such Stock certificate or
certificates are delivered, the broker tenders to the Bank cash (or cash
equivalents acceptable to the Bank) equal to the Option Price for the shares of
Stock purchased pursuant to the exercise of the Option plus the amount (if any)
of federal and other taxes which the Bank may, in its judgment, be required to
withhold with respect to the exercise of the Option. An attempt to exercise any
Option granted hereunder other than as set forth above shall be invalid and of
no force and effect. Promptly after the exercise of an Option and the payment in
full of the Option Price of the shares of Stock covered thereby, the individual
exercising the Option shall be entitled to the issuance of a Stock certificate
or certificates evidencing his ownership of such shares. A separate Stock
certificate or certificates shall be issued for any shares purchased pursuant to
the exercise of an Option which is an Incentive Stock Option, which certificate
or certificates shall not include any shares which were purchased pursuant to
the exercise of an Option which is not an Incentive Stock Option. An individual
holding or exercising an Option shall have none of the rights of a shareholder
until the shares of Stock covered thereby are fully paid and issued to him and,
except as provided in Section 17 below, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date of such
issuance.
(d) Restrictions on Transfer of Stock. If an
Option is exercised prior to the date that is six months from the later of (i)
the date of grant of
<PAGE>
the Option or (ii) the date of shareholder approval of the Plan and the
individual exercising the Option is a reporting person under Section 16(a) of
the Exchange Act, then such certificate or certificates shall bear a legend
restricting the transfer of the Stock covered thereby until the expiration of
six months from the later of the date specified in clause (i) above or the date
specified in clause (ii) above.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is
granted, only such Optionee (or, in the event of legal incapacity or
incompetence, the Optionee's guardian or legal representative) may exercise the
Option. No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.
12. TERMINATION OF EMPLOYMENT
Upon the termination of the employment of an
Optionee with the Bank or a Subsidiary, other than by reason of the death or
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, any Option granted to an Optionee pursuant to the Plan
shall terminate three months after the date of such termination of employment,
unless earlier terminated pursuant to Section 10(a) above, and such Optionee
shall have no further right to purchase shares of Stock pursuant to such Option;
provided, however, that the Board may provide, by inclusion of appropriate
language in any Option Agreement, that the Optionee may (subject to the general
limitations on exercise set forth in Section 10(b) above), in the event of
termination of employment of the Optionee with the Bank or a Subsidiary,
exercise an Option, in whole or in part, at any time subsequent to such
termination of employment and prior to termination of the Option pursuant to
Section 10(a) above, either subject to or without regard to any installment
limitation on exercise imposed pursuant to Section 10(b) above. Whether a leave
of absence or leave on military or government service shall constitute a
termination of employment for purposes of the Plan shall be determined by the
Board, which determination shall be final and conclusive. For purposes of the
Plan, a termination of employment with the Bank or a Subsidiary shall not be
deemed to occur if the Optionee is immediately thereafter employed by the Bank
or any Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) Death of an Employee. If an Optionee dies
while in the employ of the Bank or a Subsidiary or within the period following
the termination of employment during which the Option is exercisable under
Section 12 above or Section 13(b) below, the executors or administrators or
legatees or distributees of such Optionee's estate shall have the right (subject
to the general limitations on exercise set forth in Section 10(b) above), at any
time within one year after the date of such Optionee's death and prior to
termination of the Option pursuant to
<PAGE>
Section 10(a) above, to exercise any Option held by such Optionee at the date of
such Optionee's death, whether or not such Option was exercisable immediately
prior to such Optionee's death; provided, however, that the Board may provide by
inclusion of appropriate language in any Option Agreement that, in the event of
the death of the Optionee, the executors or administrators or legatees or
distributees of such Optionee's estate may exercise an Option (subject to the
general limitations on exercise set forth in Section 10(b) above), in whole or
in part, at any time subsequent to such Optionee's death and prior to
termination of the Option pursuant to Section 10(a) above, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above.
(b) Disability of an Employee. If an Optionee
terminates employment with the Bank or a Subsidiary by reason of the "permanent
and total disability" (within the meaning of Section 22(e)(3) of the Code) of
such Optionee, then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
one year after such termination of employment and prior to termination of the
Option pursuant to Section 10(a) above, to exercise, in whole or in part, any
Option held by such Optionee at the date of such termination of employment,
whether or not such Option was exercisable immediately prior to such termination
of employment; provided, however, that the Board may provide, by inclusion of
appropriate language in any Option Agreement, that the Optionee may (subject to
the general limitations on exercise set forth in Section 10(b) above), in the
event of the termination of employment of the Optionee with the Bank or a
Subsidiary by reason of the "permanent and total disability" (within the meaning
of Section 22(e)(3) of the Code) of such Optionee, exercise an Option in whole
or in part, at any time subsequent to such termination of employment and prior
to termination of the Option pursuant to Section 10(a) above, either subject to
or without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above. Whether a termination of employment is to be considered by
reason of "permanent and total disability" for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by the Bank from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of the
Bank.
15. REQUIREMENTS OF LAW
(a) Violations of Law. The Bank shall not be
required to sell or issue any shares of Stock under any Option if the sale or
issuance of such shares would constitute a violation by the individual
exercising the Option or the Bank of any provisions of any law or regulation of
any governmental authority, including without limitation any federal or state
securities laws or regulations. Any
<PAGE>
determination in this connection by the Board shall be final, binding, and
conclusive. The Bank shall not be obligated to take any affirmative action in
order to cause the exercise of an Option or the issuance of shares pursuant
thereto to comply with any law or regulation of any governmental authority. As
to any jurisdiction that expressly imposes the requirement that an Option shall
not be exercisable unless and until the shares of Stock covered by such Option
are registered or are subject to an available exemption from registration, the
exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
(b) Compliance with Rule 16b-3. The intent of
this Plan is to qualify for the exemption provided by Rule 16b-3 under the
Exchange Act. To the extent any provision of the Plan does not comply with the
requirements of Rule 16b-3, it shall be deemed inoperative to the extent
permitted by law and deemed advisable by the Board and shall not affect the
validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board,
or the Committee acting on behalf of the Board, may exercise discretion to
modify this Plan in any respect necessary to satisfy the requirements of the
revised exemption or its replacement.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been granted; provided, however, that no amendment by the Board shall,
without approval by a majority of the votes present and entitled to vote at a
duly held meeting of the shareholders of the Bank at which a quorum representing
a majority of all outstanding voting stock is, either in person or by proxy,
present and voting on the amendment, or by written consent in accordance with
applicable state law and the Certificate of Incorporation and By-Laws of the
Bank, materially increase the benefits accruing to participants under the Plan,
change the requirements as to eligibility to receive Options or increase the
maximum number of shares of Stock in the aggregate that may be sold pursuant to
Options granted under the Plan (except as permitted under Section 17 hereof).
Except as permitted under Section 17 hereof, no amendment, suspension or
termination of the Plan shall, without the consent of the holder of the Option,
alter or impair rights or obligations under any Option theretofore granted under
the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares
of Stock are increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of the Bank by reason of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or
<PAGE>
decrease in such shares effected without receipt of consideration by the Bank,
occurring after the effective date of the Plan, the number and kinds of shares
for the purchase of which Options may be granted under the Plan shall be
adjusted proportionately and accordingly by the Bank. In addition, the number
and kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the holder
of the Option immediately following such event shall, to the extent practicable,
be the same as immediately prior to such event. Any such adjustment in
outstanding Options shall not change the aggregate Option Price payable with
respect to shares subject to the unexercised portion of the Option outstanding
but shall include a corresponding proportionate adjustment in the Option Price
per share. If there is a distribution payable in the capital stock of a
subsidiary corporation of the Bank ("Spin-off Shares"), to the extent consistent
with Treasury Regulation Section 1.425-1(a)(6) or the corresponding provision of
any subsequent regulation, each outstanding Option shall thereafter additionally
pertain to the number of Spin-off Shares that would have been received in such
distribution by a shareholder of the Bank who owned a number of shares of Common
Stock equal to the number of shares that are subject to the Option at the time
of such distribution, and the aggregate Option Price of the Option shall be
allocated between the Spin-off Shares and the Common Stock in proportion to the
relative fair market values of a Spin-off Share and a share of Common Stock
immediately after the distribution of Spin-off Shares.
(b) Reorganization in Which the Bank Is the
Surviving Bank. Subject to Subsection (c) hereof, if the Bank shall be the
surviving bank in any reorganization, merger, or consolidation of the Bank with
one or more other banks, any Option theretofore granted pursuant to the Plan
shall pertain to and apply to the securities to which a holder of the number of
shares of Stock subject to such Option would have been entitled immediately
following such reorganization, merger, or consolidation, with a corresponding
proportionate adjustment of the Option Price per share so that the aggregate
Option Price thereafter shall be the same as the aggregate Option Price of the
shares remaining subject to the Option immediately prior to such reorganization,
merger, or consolidation.
(c) Reorganization in Which the Bank Is Not the
Surviving Bank or Sale of Assets or Stock. Upon the dissolution or liquidation
of the Bank, or upon a merger, consolidation, reorganization or other business
combination of the Bank with one or more other entities in which the Bank is not
the surviving entity, or upon a sale of all or substantially all of the assets
of the Bank to another entity, or upon any transaction (including, without
limitation, a merger or reorganization in which the Bank is the surviving bank)
approved by the Board which results in any person or entity (or persons or
entities acting as a group or otherwise in concert) owning 80 percent or more of
the combined voting power of all classes of stock of the Bank, the Plan and all
Options outstanding hereunder shall terminate, except to the extent provision is
made in writing in connection with such transaction for the continuation of the
Plan and/or the assumption of the Options
<PAGE>
theretofore granted, or for the substitution for such Options of new options
covering the stock of a successor entity, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kinds of shares and exercise
prices, in which event the Plan and Options theretofore granted shall continue
in the manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have the right
(subject to the general limitations on exercise set forth in Section 10(b) above
and except as otherwise specifically provided in the Option Agreement relating
to such Option), immediately prior to the occurrence of such termination and
during such period occurring prior to such termination as the Board in its sole
discretion shall determine and designate, to exercise such Option in whole or in
part, whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on exercise
imposed pursuant to Section 10(b) above. The Board shall send written notice of
an event that will result in such a termination to all individuals who hold
Options not later than the time at which the Bank gives notice thereof to its
shareholders.
(d) Adjustments. Adjustments under this Section
17 related to stock or securities of the Bank shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) No Limitations on Bank. The grant of an
Option pursuant to the Plan shall not affect or limit in any way the right or
power of the Bank to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ of the Bank or any Subsidiary,
or to interfere in any way with the right and authority of the Bank or any
Subsidiary either to increase or decrease the compensation of any individual at
any time, or to terminate any employment or other relationship between any
individual and the Bank or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of the Bank for approval shall be construed as creating
any limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
<PAGE>
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
Exhibit 10.2
SECURITY FIRST NETWORK BANK
AMENDED AND RESTATED
DIRECTORS' STOCK OPTION PLAN
1. NAME AND PURPOSE.
1.1 This plan is the SECURITY FIRST NETWORK BANK AMENDED AND
RESTATED DIRECTORS' STOCK OPTION PLAN (the "Plan").
1.2 The purposes of the Plan are to enhance the Bank's ability
to attract and retain highly qualified individuals to serve as members of the
Bank's Board of Directors and to provide additional incentives to Directors to
promote the success of the Bank. The Plan provides Directors of the Bank an
opportunity to purchase shares of the Stock of the Bank pursuant to Options.
Options granted under the Plan shall not constitute "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended.
1.3 This Plan is intended to constitute a "formula plan" and
the Directors are intended to be "disinterested administrators" of Other Plans
for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
2. DEFINITIONS.
For purposes of interpreting the Plan and related documents (including
Stock Option Agreements), the following definitions shall apply:
2.1 "Bank" means Security First Network Bank, a federal
savings bank.
2.2 "Board" means the Board of Directors of the Bank.
2.3 "Director" means a member of the Bank's Board who is
not an officer or employee of the Bank or any of its subsidiaries, or of
Cardinal Bancshares, Inc. or any of its subsidiaries.
2.4 "Effective Date" means the date the Plan was adopted
by the Board.
2.5 "Exercise Price" means the Option Price multiplied
by the number of shares of Stock purchased pursuant to exercise of an Option.
<PAGE>
2.6 "Expiration Date" means the 10th anniversary of the
day following the date on which the Plan is approved by stockholders pursuant to
Section 17.1 below. Notwithstanding the foregoing, the Expiration Date shall
also mean the date on which the Option is terminated pursuant to Section 4.2(c)
below.
2.7 "Fair Market Value" means the value of each share of
Stock subject to this Plan determined by the Board in good faith.
2.8 "Grant Date" means the date on which an Option takes
effect pursuant to Section 7 of this Plan, which shall be the date of the
Spin-off.
2.9 "Option" means any option to purchase one or more
shares of Stock pursuant to this Plan.
2.10 "Optionee" means a person who holds an Option under
this Plan.
2.11 "Option Period" means the period during which
Options may be exercised as defined in Section 9.
2.12 "Option Price" means the purchase price for each
share of Stock subject to an Option.
2.13 "Other Plan" means the Security First Network Bank,
Employee Stock Option Plan and any other stock option plan adopted by the Bank
or any of its subsidiaries.
2.14 "Spin-off" means the spin-off of the Bank by
Cardinal Bancshares, Inc. pursuant to the Amended and Restated Plan of
Distribution of Cardinal Bancshares, Inc.
2.15 "Stock" means the Common Stock, without par value,
of the Bank.
2.16 "Stock Option Agreement" means the written agreement
evidencing the grant of an Option hereunder.
3. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board. The Board's
responsibilities under the Plan shall be limited to taking all legal actions
necessary to document the Options provided herein, to maintain appropriate
records and reports regarding those Options, and to take all acts authorized by
this Plan.
<PAGE>
4. STOCK SUBJECT TO THE PLAN.
4.1 Subject to adjustments made pursuant to Section 4.2, the
maximum number of shares of Stock which may be issued pursuant to the Plan shall
not exceed 278,760. */ If any Option expires, terminates or is canceled for any
reason before it is exercised in full, the shares of Stock that were subject to
the unexercised portion of the Option shall not be available for future Options
granted under the Plan.
4.2 (a) If the outstanding shares of Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Bank by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable on capital stock, or other increase
or decrease in such shares effected without receipt of consideration by the
Bank, occurring after the effective date of the Plan, the number and kinds of
shares for the purchase of which Options may be granted under the Plan shall be
adjusted proportionately and accordingly by the Bank. In addition, the number
and kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the holder
of the Option immediately following such event shall, to the extent practicable,
be the same as immediately prior to such event. Any such adjustment in
outstanding Options shall not change the aggregate Option Price payable with
respect to shares subject to the unexercised portion of the Option outstanding
but shall include a corresponding proportionate adjustment in the Option Price
per share. If there is a distribution payable in the capital stock of a
subsidiary corporation of the Bank ("Spin-off Shares"), to the extent consistent
with Treasury Regulation Section 1.425-1(a)(6) or the corresponding provision of
any subsequent regulation, each outstanding Option shall thereafter additionally
pertain to the number of Spin-off Shares that would have been received in such
distribution by a shareholder of the Bank who owned a number of shares of Common
Stock equal to the number of shares that are subject to the Option at the time
of such distribution, and the aggregate Option Price of the Option shall be
allocated between the Spin-off Shares and the Common Stock in proportion to the
relative fair market values of a Spin-off Share and a share of Common Stock
immediately after the distribution of Spin-off Shares.
(b) Subject to Subsection (c) hereof, if the
Bank shall be the surviving bank in any reorganization, merger or consolidation
of the Bank with one or more other banks, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such
- ----------
*/ Restated to reflect the 4 for 1 stock split as of the Spin-off in May 1996.
<PAGE>
reorganization, merger or consolidation, with a corresponding proportionate
adjustment of the Option Price per share so that the aggregate Option Price
thereafter shall be the same as the aggregate Option Price of the shares
remaining subject to the Option immediately prior to such reorganization, merger
or consolidation.
(c) Upon the dissolution or liquidation of the
Bank, or upon a merger, consolidation or reorganization of the Bank with one or
more other banks in which the Bank is not the surviving bank, or upon a sale of
all or substantially all of the assets of the Bank to another bank, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Bank is the surviving bank) approved by the Board which results in any
person or entity owning 80 percent or more of the combined voting power of all
classes of stock of the Bank, the Plan and all Options outstanding hereunder
shall terminate, except to the extent provision is made in writing in connection
with such transaction for the continuation of the Plan, the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor bank, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
exercise prices, in which event the Plan (if applicable) and Options theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan and Options, each individual holding
an Option shall have the right immediately prior to the occurrence of such
termination and during such period occurring prior to such termination as the
Board in its sole discretion shall determine and designate, to exercise such
Option to the extent that such Option was otherwise exercisable at the time such
termination occurs. The Board shall send written notice of an event that will
result in such a termination to all individuals who hold Options not later than
the time at which the Bank gives notice thereof to its shareholder.
(d) Adjustments under this Section 4.2 related
to stock or securities of the Bank shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) The grant of an Option pursuant to the Plan
shall not affect or limit in any way the right or power of the Bank to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve or liquidate, or to sell
or transfer all of any part of its business or assets.
5. ELIGIBILITY.
Eligibility under this Plan is limited to Directors of the Bank.
<PAGE>
6. THE OPTION PRICE.
The Option Price of the Stock covered by each Option granted under this
Plan shall be $1.25 */ per share. The Option Price shall be subject to
adjustment as provided in Section 4.2 hereof.
7. NUMBER OF SHARES AND GRANT DATE.
On the date of the Spin-off, each of the following Directors shall be
granted an Option to purchase 92,920 */ shares of Stock:
Carol M. Gatton,
Howard J. Runnion, Jr., and
Robert W. Copelan.
8. VESTING OF OPTIONS.
Subject to the provisions of Section 9, the Options shall be vested
upon the Grant Date (but shall not be exercisable before approval of the Plan by
stockholders).
9. OPTION PERIOD.
An Option shall be exercisable only during the Option Period. The
Option Period shall commence on the date on which the Plan is approved by the
stockholders of the Bank and shall end at the close of business on the
Expiration Date. Termination of the Optionee's status as a Director for any
reason shall not cause an Option to terminate.
10. TIMING AND METHOD OF EXERCISE.
Subject to the limitations of Sections 8 and 9, an Optionee may, at any
time, exercise an Option with respect to all or any part of the shares of Stock
then subject to such Option by giving the Bank written notice of exercise,
specifying the number of shares as to which the Option is being exercised. Such
notice shall be addressed to the Secretary of the Bank at its principal office,
and shall be effective when actually received (by personal delivery, fax or
other delivery) by the Secretary of the Bank. Such notice shall be accompanied
by an amount equal to the Exercise Price of such shares, in the form of any one
or combination of the following: cash or cash equivalents, or shares of Stock
valued at Fair Market Value in accordance with the Plan. If shares of Stock that
are acquired by the Optionee through exercise of an Option or an option issued
under an Other Plan are surrendered in payment of the
- ----------
*/ Restated to reflect the 4 for 1 stock split as of the Spin-off in May 1996.
<PAGE>
Exercise Price of Options, the Stock surrendered in payment must have been (i)
held by the Optionee for more than six months at the time of surrender, or (ii)
acquired under an Option granted not less than six months prior to the time of
surrender. However, payment in full of the Exercise Price need not accompany the
written notice of exercise provided the notice of exercise directs that the
Stock certificate or certificates for the shares for which the Option is
exercised be delivered to a licensed broker acceptable to the Bank as the agent
for the individual exercising the Option and, at the time such Stock certificate
or certificates are delivered, the broker tenders to the Bank cash (or cash
equivalents acceptable to the Bank) equal to the Exercise Price. If an Option is
exercised prior to the date that is six months from the later of (i) the date of
grant of the Option or (ii) the date of shareholder approval of the Plan and the
individual exercising the Option is a reporting person under Section 16(a) of
the Exchange Act, then such certificate or certificates shall bear a legend
restricting the transfer of the Stock covered thereby until the expiration of
six months from the later of the date specified in clause (i) above or the date
specified in clause (ii) above.
11. NO SHAREHOLDER RIGHTS UNDER OPTION.
No Optionee shall have any of the rights of a shareholder with respect
to the shares of Stock subject to an Option except to the extent the
certificates for such shares shall have been issued upon the exercise of the
Option.
12. CONTINUATION OF SERVICE.
Nothing in the Plan shall confer upon any person any right to continue
to serve as a Director.
13. STOCK OPTION AGREEMENT.
Each Option granted pursuant to the Plan shall be evidenced by a
written Stock Option Agreement notifying the Optionee of the grant and
incorporating the terms of this Plan. The Stock Option Agreement shall be
executed by the Bank and the Optionee.
14. WITHHOLDING.
The Bank shall have the right to withhold, or require an Optionee to
remit to the Bank, an amount sufficient to satisfy any applicable federal,
state, local or foreign withholding tax requirements imposed with respect to
exercise of Options. To the extent permissible under applicable tax, securities,
and other laws, the Optionee may satisfy a tax withholding requirement by
directing the Bank to apply shares of Stock to which the Optionee is entitled as
a result of the exercise of an Option to satisfy withholding requirements under
this Section 14.
<PAGE>
15. NONTRANSFERABILITY OF OPTIONS.
Each Option granted pursuant to this Plan shall, during Optionee's
lifetime, be exercisable only by Optionee, and neither the Option nor any right
thereunder shall be transferable by the Optionee by operation of law or
otherwise other than by will or the laws of descent and distribution, or
pursuant to a qualified domestic relations order as defined in Section
414(p)(1)(B) of the Internal Revenue Code of 1986, as amended and shall not be
pledged or hypothecated (by operation of law or otherwise) or subject to
execution, attachment or similar processes.
16. USE OF PROCEEDS.
Cash proceeds realized from the sale of Stock pursuant to Options
granted under the Plan shall constitute general funds of the Bank.
17. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION
OF THE PLAN.
17.1 The Plan shall be effective as of the date of adoption by
the Board, subject to approval of the Plan within one year of its adoption by
the Board by the affirmative votes of the holders of a majority of the Stock of
the Bank present, or represented, and entitled to vote at a meeting duly held in
accordance with applicable law, provided, that upon approval of the Plan by the
stockholders of the Bank, all Options granted under the Plan on or after the
Effective Date shall be fully effective as if the stockholders had approved the
Plan on the Effective Date.
17.2 Subject to the limitation of Section 17.4, the Board may
at any time suspend or terminate the Plan, and may amend it from time to time in
such respects as the Board may deem advisable; provided, however, the Board
shall not amend the Plan in the following respects without the approval of
stockholders then sufficient to approve the Plan in the first instance:
(a) To materially increase the benefits
accruing to participants under the Plan (for example, to increase the number of
Options that may be granted to any Director).
(b) To materially increase the maximum number
of shares of Stock that may be issued under the Plan;
(c) To materially modify the requirements as to
eligibility for participation in the Plan.
17.3 No Option may be granted during any suspension or after
the termination of the Plan, and no amendment, suspension or termination of the
Plan
<PAGE>
shall, without the Optionee's consent, alter or impair any rights or obligations
under any Stock Option Agreement previously entered into under the Plan. This
Plan shall terminate upon the earlier of the expiration or exercise of all of
the Options granted hereunder or the Expiration Date, unless previously
terminated pursuant to Section 4.2 or by the Board pursuant to this Section 17.
17.4 Notwithstanding the provisions of Section 17.2, the
formula provisions of this Plan shall not be amended more than once in any
six-month period.
18. REQUIREMENTS OF LAW.
18.1 The Bank shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the individual exercising the Option or the Bank of
any provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations. Any
determination in this connection by the Board shall be final, binding, and
conclusive. The Bank shall not be obligated to take any affirmative action in
order to cause the exercise of an Option or the issuance of shares pursuant
thereto to comply with any law or regulation of any governmental authority. As
to any jurisdiction that expressly imposes the requirement that an Option shall
not be exercisable unless and until the shares of Stock covered by such Option
are registered or are subject to an available exemption from registration, the
exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
18.2 The intent of this Plan is to qualify for the exemption
provided by Rule 16b-3 under the Exchange Act and to qualify the Directors as
disinterested administrators of the Other Plan for purposes of such Rule. To the
extent any provision of the Plan or action by the Plan administrators does not
comply with the requirements of Rule 16b-3, it shall be deemed inoperative, to
the extent permitted by law and deemed advisable by the Plan administrators, and
shall not affect the validity of the Plan. In the event Rule 16b-3 is revised or
replaced, the Board may exercise discretion to modify this Plan in any respect
necessary to satisfy the requirements of the revised exemption or its
replacement.
19. GOVERNING LAW.
The validity, interpretation and effect of this Plan, and the rights of
all persons hereunder, shall be governed by and determined in accordance with
the laws of Kentucky, other than the choice of law rules thereof.
Exhibit 10.4
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement"), dated as of the
29th day of June, 1998, is entered into by and among Security First Network
Bank, a federal savings bank ("SFNB"), Security First Technologies Corporation,
a Delaware corporation (the "Corporation") and State Farm Mutual Automobile
Insurance Company, an Illinois corporation (the "Purchaser").
WHEREAS, SFNB is the parent company of Security First
Technologies, Inc. ("S1") and the Corporation;
WHEREAS, at a special meeting (the "Special Meeting"), the
stockholders of SFNB will vote upon a proposed holding company reorganization of
SFNB (the "Reorganization"), pursuant to the Second Amended and Restated Plan of
Reorganization, dated as of March 9, 1998, by and among SFNB, the Corporation
and New Security First Network Bank ("New Bank"), as amended (the "Plan");
WHEREAS, subject to stockholder approval of the Plan and the
other terms and conditions of the Plan, the Reorganization will be effected
pursuant to the following steps: (1) New Bank will be organized as a wholly
owned subsidiary of SFNB, (2) SFNB will contribute its banking business to New
Bank, (3) the Corporation will purchase and assume all of SFNB's other assets
and liabilities in exchange for the issuance to SFNB of the Corporation's common
stock, par value $0.01 per share (the "Common Stock"), (4) SFNB will declare a
distribution to its shareholders of the Common Stock of the Corporation that it
owns, and (5) SFNB will dissolve voluntarily;
WHEREAS, after the Reorganization is consummated, the
Corporation will wholly own New Bank and S1, and the holders of each issued and
outstanding share of SFNB common stock, no par value per share ("SFNB Common
Stock") and SFNB preferred stock, no par value per share ("SFNB Preferred
Stock"), will own, respectively, the Corporation's Common Stock and the
Corporation's Series A preferred stock, par value $0.01 per share (the "Series A
Preferred Stock") to the same extent they owned such securities of SFNB prior to
the Reorganization;
<PAGE>
WHEREAS, the stockholders of SFNB will also consider and vote
upon the proposed sale of SFNB's banking business to RBC Holdings (Delaware)
Inc. immediately following the Reorganization;
WHEREAS, Purchaser desires to subscribe for, and acquire from
the Corporation, shares of the Corporation's Series B preferred stock (the
"Preferred Shares"), having the specific terms, relative rights and preferences
set forth in the Certificate of Designation attached hereto as Exhibit I (the
"Series B Preferred Stock"), on the terms and under the conditions specified
herein;
WHEREAS, the Corporation desires to sell and issue to
Purchaser Preferred Shares on the terms and under the conditions specified
herein;
WHEREAS, the number of Preferred Shares to be sold and issued
by the Corporation and subscribed for by the Purchaser shall equal (i)
10,000,000, divided by (ii) the average closing asking price per share of SFNB
Common Stock (or the Corporation's Common Stock if SFNB is then dissolved, or a
combination of both), as quoted on the Nasdaq Stock Market National Market Tier,
for each of the 10 trading days preceding the business day immediately before
the Closing Date under this Agreement; and
WHEREAS, SFNB, the Corporation and the Purchaser desire that
the transactions contemplated hereby be consummated immediately following the
Reorganization.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the sufficiency of which is hereby acknowledged, the parties mutually
agree as follows:
SECTION 1. PURCHASE AND SALE OF THE PREFERRED SHARES.
1.1 SALE AND ISSUANCE OF THE PREFERRED SHARES.
At the Closing (as defined below in section 1.2(a)) and
subject to the terms and conditions of this Agreement, Purchaser does hereby
subscribe for, and agree to purchase, that number of Preferred Shares equal to
(i) 10,000,000, divided by (ii) the average closing asking price per share of
SFNB Common Stock (or the Corporation's Common Stock if SFNB is then dissolved,
or a combination of both), as quoted on the Nasdaq Stock Market National Market
Tier, for each of the 10 trading days preceding the business day immediately
before the Closing Date under
<PAGE>
this Agreement, for a total purchase price of $10,000,000 (the "Purchase
Price"), and the Corporation agrees to sell and issue to Purchaser at the
Closing for the Purchase Price, such Preferred Shares (the "Transaction").
1.2 CLOSING.
1.2(a). The closing (the "Closing") of the Transaction shall
take place within three business days after the Reorganization.
1.2(b). The Closing shall take place at 10:00 a.m.,
Washington, D.C. time, at the offices of Hogan & Hartson L.L.P., 555 13th
Street, N.W., Washington, D.C. 20004, or at such other time and place as the
parties shall mutually agree (the "Closing Date").
SECTION 2. REGISTRATION RIGHTS.
2.1 PIGGYBACK REGISTRATION RIGHTS.
2.1(a). Except as provided at Section 2.1(b) below, if at any
time or times beginning two years after the Closing Date through four years
following the Closing Date the Corporation proposes to make a public offering of
its Common Stock, which requires registration under applicable rules and
regulations of the Securities and Exchange Commission ("SEC") (or any successor
regulator thereto as to federal securities laws), other than an offering not
suitable for inclusion of shares of selling stockholders for offer to the
public, such as shares being offered in connection with an employment benefit
plan or in connection with a merger, the Corporation shall give written notice
of the proposed registration to Purchaser not less than 14 business days prior
to the proposed filing date of the registration form with the SEC, and at the
written request of Purchaser delivered to the Corporation within 10 days after
the receipt of such notice, the Corporation shall include in such registration
and offering, and in any underwriting of such offering, the Converted Common
Shares (as defined below) that have been designated for registration in
Purchaser's request. The Corporation may withdraw any proposed registration
statement or offering of securities under this Section 2 at any time without any
liability to Purchaser hereunder. For purposes of this Agreement, the term
"Converted Common Shares" shall mean the shares of the Corporation's Common
Stock into which the Preferred Shares are convertible pursuant to the terms of
the Preferred Shares.
2.1(b). If a registration in which Purchaser has the right to
participate pursuant to this Section 2 is an underwritten public offering
<PAGE>
and the managing underwriter advises the Corporation in writing that in its
opinion the number of securities requested to be included in such registration
exceeds the number that can be sold in such offering consistent with the pricing
expectations of the Corporation, then the Corporation first shall include in
such offering the Common Stock proposed to be sold by the Corporation if
consistent with the aforementioned opinion of the managing underwriter, and
second shall include the Converted Common Shares requested to be included in
such registration by Purchaser and any other Common Stock requested to be
included by other selling stockholders who hold registration rights pursuant to
pre-existing written agreements with the Corporation, if any, pro rata based
upon the number of shares of Common Stock requested by Purchaser and each such
selling stockholder to be included in such registration, or in such other
amounts upon which the Corporation, Purchaser and the other selling stockholders
may agree. The two year limitation on registration rights set forth in Section
2.1(a) shall not apply to any shares of Purchaser's Converted Common Shares
excluded from registration by virtue of this Section 2.1(b).
2.2 DEMAND REGISTRATION RIGHTS.
2.2(a). At any time two years after the Closing Date,
Purchaser may request registration for sale under the Securities Act of 1933, as
amended (the "Securities Act") of any Converted Common Shares owned by Purchaser
(a "Demand Registration"), provided, however, that (i) the Corporation shall
only be obligated to effect one Demand Registration for Purchaser, (ii) the
Corporation shall not be obligated to effect a Demand Registration unless
Purchaser requests registration for sale of Converted Common Shares that
represent at least 50% of the aggregate amount of Converted Common Shares then
owned by Purchaser, and (iii) the Corporation shall not be required to conduct
an underwritten offering. A Demand Registration shall specify the approximate
number of Converted Common Shares requested to be registered and the anticipated
per share price range for such offering.
2.2(b). A Demand Registration shall be deemed to occur when
such registration becomes effective under the Securities Act, except that if,
after it becomes effective, such Demand Registration is interfered with by any
stop order, injunction or other order or requirement of the SEC (or any
successor regulator thereto as to federal securities laws) or any other
governmental authority, such registration shall not be deemed to have been
effected unless such stop order, injunction or other order shall have been
subsequently vacated or removed.
<PAGE>
2.3 REGISTRATION PROCEDURES.
2.3(a). The Corporation shall have no obligation to include
Converted Common Shares owned by Purchaser in a registration statement pursuant
to Section 2.1 or Section 2.2 hereof unless and until Purchaser has furnished
the Corporation with all information and statements about or pertaining to
Purchaser in such reasonable detail and on such timely basis as is reasonably
deemed by the Corporation to be necessary or appropriate for the preparation of
the registration statement.
2.3(b). Whenever Purchaser has requested that its Converted
Common Shares be registered pursuant to Section 2.1 or Section 2.2 hereof, the
Corporation shall, subject to its rights under Section 2.1(a) to withdraw the
registration statement and the other provisions of Section 2.1 and Section 2.2:
(1) prepare and file with the SEC a
registration statement with respect to such Converted Common Shares and use its
reasonable efforts to cause such registration statement to become effective as
soon as practicable after the filing thereof (provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Corporation shall furnish counsel for Purchaser with copies of all such
documents proposed to be filed);
(2) prepare and file with the SEC such
amendments and supplements to such registration statement and prospectus
contained therein as may be necessary to keep such registration statement
effective for a period of not less than three months or until Purchaser has
completed the distribution described in such registration statement, whichever
occurs first;
(3) furnish to Purchaser the number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus contained in such registration statement (including each preliminary
prospectus), and such other documents as Purchaser may reasonably request;
(4) use reasonable efforts to register or
qualify such shares under the state blue sky or securities or banking laws
("Blue Sky Laws") of such jurisdictions as Purchaser reasonably requests (and to
keep such registrations and qualifications effective for a period of three
months, or until Purchaser has completed the distribution of such shares,
whichever occurs first), and to do any and all other acts and things that may be
reasonably necessary or advisable to enable Purchaser to consummate the
disposition of such shares in such jurisdictions; provided, however, that the
Corporation will not be required to do any of the
<PAGE>
following: (i) qualify generally to do business in any jurisdiction where it
would not be required but for this Section 2.3(b), (ii) subject itself to
taxation in any such jurisdiction, or (iii) file any general consent to service
of process in any such jurisdiction;
(5) promptly notify Purchaser at any time when
a prospectus relating thereto is required to be delivered under applicable
federal securities laws during the period that the Corporation is required to
keep the registration statement effective, of the occurrence of any event as a
result of which the prospectus included in such registration statement contains
an untrue statement of a material fact or omits any fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and prepare a supplement or amendment to the prospectus so
that, as thereafter delivered to the purchasers of such shares, the prospectus
will not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(6) use reasonable efforts to cause all such
Converted Common Shares to be listed on a securities exchange or the Nasdaq
Stock Market, if the Corporation's Common Stock is then listed on a securities
exchange or the Nasdaq Stock Market; and
(7) provide a transfer agent and registrar (if
the Corporation does not already have such an agent) for all such Converted
Common Shares not later than the effective date of such registration statement.
2.4 REGISTRATION EXPENSES.
2.4(a). If, pursuant to Section 2.1 or Section 2.2 hereof,
Converted Common Shares owned by Purchaser are included in a registration
statement, then Purchaser shall pay all transfer taxes, if any, relating to the
sale of its Converted Common Shares, the fees and expenses of its own counsel,
and its pro rata portion of any underwriting discounts or commissions or the
equivalent thereof.
2.4(b). Except for the fees and expenses specified in Section
2.4(a) hereof and except as provided below in this Section 2.4(b), the
Corporation shall pay all expenses incident to the registration and to the
Corporation's performance of or compliance with this Agreement, including,
without limitation, all registration and filing fees, fees and expenses of
compliance, with Blue Sky Laws, underwriting discounts, fees, and expenses
(other than Purchaser's pro rata portion of any
<PAGE>
underwriting discounts or commissions or the equivalent thereof), printing
expenses, messenger and delivery expenses, and fees and expenses of counsel for
the Corporation and all independent certified public accountants and other
persons retained by the Corporation. With respect to any registration pursuant
to Section 2.4 hereof, the Corporation shall pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties) and the expenses and fees for
listing the securities to be registered on an exchange or on the Nasdaq Stock
Market, if applicable.
2.5 INDEMNITY AND CONTRIBUTION.
2.5(a). In the event that any Converted Common Shares owned by
Purchaser are sold by means of a registration statement pursuant to Section 2.1
or Section 2.2 hereof, Purchaser (for the purposes of this paragraph 2.5(a), the
"Indemnifying Person") agrees to indemnify and hold harmless the Corporation,
each of the Corporation's officers and directors, and each person, if any, who
controls or may control the Corporation within the meaning of the Securities Act
(for the purposes of this paragraph 2.5(a), the Corporation, its officers and
directors, and any such other persons being hereinafter referred to individually
as an "Indemnified Person" and collectively as "Indemnified Persons") from and
against all demands, claims, actions or causes of action, assessments, losses,
damages, liabilities, costs, and expenses, including, without limitation,
interest, penalties, and reasonable attorneys' fees and disbursements, asserted
against, resulting to, imposed upon, or incurred by such Indemnified Person,
directly or indirectly (collectively, hereinafter referred to in the singular as
a "Claim" and in the plural as "Claims"), based upon, arising out of, or
resulting from any untrue statement of a material fact contained in the
registration statement or any omission to state therein a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, to the extent that
such Claim is based upon, arises out of or results from information furnished to
the Corporation by Purchaser in a written document provided by Purchaser for use
in connection with the registration statement.
2.5(b). The Corporation (for the purposes of this paragraph
2.5(b), the "Indemnifying Person") agrees to indemnify and hold harmless
Purchaser, its officers and directors, each person, if any, who controls or may
control Purchaser within the meaning of the Securities Act and any underwriters
participating in the distribution of Converted Common Shares pursuant to a
registration statement (for the purposes of this paragraph 2.5(b), Purchaser,
its officers and directors, and any such other persons also being hereinafter
referred to individually as an "Indemnified Person" and collectively as
"Indemnified
<PAGE>
Persons") from and against all Claims based upon, arising out of, or resulting
from any untrue statement of a material fact contained in the registration
statement or any omission to state therein a material fact necessary in order to
make the statement made therein, in the light of the circumstances under which
they were made, not misleading, to the extent that such Claim is based upon,
arises out of or results from information furnished by the Corporation in a
written document provided by the Corporation for use in connection with the
registration statement.
2.5(c). The indemnification set forth herein shall be in
addition to any liability the Corporation or Purchaser may otherwise have in
connection with any registration of its Common Stock. Within a reasonable time
after receiving definitive notice of any Claim in respect of which an
Indemnified Person may seek indemnification under this Section 2.5, such
Indemnified Person shall submit written notice thereof to Indemnifying Person.
The failure of the Indemnified Person so to notify the Indemnifying Person of
any such Claim shall not relieve the Indemnifying Person from any liability it
may have hereunder except to the extent that (a) such liability was caused or
increased by such omission, or (b) the ability of the Indemnifying Person to
reduce such liability was materially adversely affected by such omission. In
addition, the omission of the Indemnified Person so to notify the Indemnifying
Person of any such Claim shall not relieve the Indemnifying Person from any
liability it may have otherwise than hereunder. The Indemnifying Person shall
have the right to undertake, by counsel or representatives of its own choosing,
the defense, compromise, or settlement (without admitting liability of the
Indemnifying Person) of any such Claim asserted, such defense, compromise, or
settlement to be undertaken at the expense and risk of the Indemnifying Person,
and the Indemnified Person shall have the right to engage separate counsel, at
its own expense, which counsel for the Indemnifying Person shall keep informed
and consult with in a reasonable manner. In the event the Indemnifying Person
shall fail to undertake such defense by its own representatives, the
Indemnifying Person shall give prompt written notice of such election to the
Indemnified Person, and the Indemnified Person shall undertake the defense,
compromise, or settlement (without admitting liability of the Indemnified
Person) thereof on behalf of and for the account and risk of the Indemnifying
Person by counsel or other representatives designated by the Indemnified Person.
In the event that any Claim shall arise out of a transaction or cover any period
or periods wherein the Corporation and Purchaser shall each be liable hereunder
for part of the liability or obligation arising therefrom, then the parties
shall, each choosing its own counsel and bearing its own expenses, defend such
Claim, and no settlement or compromise of such Claim may be made without the
joint consent or approval of the
<PAGE>
Corporation and Purchaser. Notwithstanding the foregoing, no Indemnifying Person
shall be obligated hereunder with respect to amounts paid in settlement of any
Claim if such settlement is effected without the consent of such Indemnifying
Person (which consent shall not be unreasonably withheld).
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SFNB.
SFNB represents and warrants to Purchaser as follows:
3.1 ORGANIZATION AND STANDING.
SFNB is a Federal savings bank organized and existing under
the Home Owners' Loan Act of 1933, as amended ("HOLA"). SFNB has the full
corporate power and authority to own and operate its properties and assets, to
carry on its business as currently conducted, to execute and deliver this
Agreement, and, subject to the conditions specified herein, to carry out and
perform its obligations under the terms of this Agreement. SFNB has furnished to
Purchaser a true and complete copy of SFNB's federal stock charter, as currently
in effect, and a true and complete copy of SFNB's bylaws, as currently in
effect, in both cases, certified by its corporate secretary.
3.2 AUTHORIZATION; BINDING OBLIGATION.
SFNB has all requisite corporate power and authority to enter
into and to deliver this Agreement. Except as contemplated herein, all corporate
action on the part of SFNB and its directors, officers and stockholders
necessary for the authorization, execution, delivery and performance of this
Agreement by SFNB, and the performance of SFNB's obligations hereunder have been
taken or will be taken prior to the Closing Date. This Agreement, when executed
and delivered by SFNB, shall constitute a valid and binding obligation of SFNB
enforceable in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
effecting the enforcement of creditor's rights.
3.3 SUBSIDIARIES.
As of the date hereof, SFNB's direct subsidiaries are Security
First Technologies, Inc. and Security First Investments, Inc., and SFNB does not
otherwise directly own any other corporation, association or business entity.
Upon consummation of the Reorganization, SFNB will be dissolved voluntarily.
<PAGE>
3.4 CAPITALIZATION.
3.4(a). The authorized capital stock of SFNB consists of
25,000,000 shares of SFNB Common Stock, of which 10,843,715 are issued and
outstanding as of June 26, 1998, and 2,500,000 shares of preferred stock, no par
value per share ("SFNB Preferred Stock"), of which 1,637,832 shares have been
designated as Class A and 1,174,110 shares are issued and outstanding as of
March 31, 1998.
3.4(b). As of March 31, 1998, there are options (the "SFNB
Options") outstanding to purchase 4,605,907 shares of SFNB Common Stock, and
except for the SFNB Options and the SFNB Preferred Stock, there are no
outstanding securities convertible into or exchangeable for SFNB Common Stock
and there are no outstanding options, rights (preemptive or otherwise), or
warrants to purchase or to subscribe for any shares of such stock or other
securities of SFNB.
3.5 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance
with, this Agreement will not (a) violate any provision of the federal stock
charter or bylaws of SFNB; (b) conflict with or result in a breach of, or
default under, or result in the creation of any lien, claim, charge or other
encumbrance upon any of the assets or properties of SFNB pursuant to the
provisions of any agreement, mortgage, indenture or other document or instrument
to which SFNB is a party or by which SFNB or any of its properties or assets is
bound, or (c) violate any existing statutes, laws, ordinances, regulations,
orders and other rules of law applicable to SFNB or any of its properties or
assets, or applicable to SFNB's power or authority to perform its obligations
under this Agreement.
3.6 FINANCIAL STATEMENTS.
SFNB has previously delivered or made available to Purchaser
accurate and complete copies of its audited consolidated financial statements as
of and for the years ended December 31, 1996 and 1997, and the unaudited
consolidated financial statements as of and for the three months ended March 31,
1997 and 1998 (together, all such financial statements are referred to as the
"SFNB Financial Statements"). The consolidated statements of financial condition
of SFNB referred to herein (including the related notes, where applicable)
fairly present (subject, in the case of the unaudited statements, to recurring
audit adjustments normal in nature and amount), the results of the consolidated
operations and consolidated financial condition of SFNB for the respective
fiscal periods or as of the respective dates therein set forth; each of such
statements (including the related notes, where applicable) comply with
applicable accounting requirements and with the published rules and regulations
of the Office of Thrift Supervision (the "OTS") with respect thereto and each of
such
<PAGE>
statements (including the related notes, where applicable) has been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied during the periods involved, except in each case as indicated in such
statements or in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q. SFNB's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997 and all reports filed under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act") since
December 31, 1997 comply in all material respects with the appropriate
requirements for such reports under the Exchange Act, and SFNB has previously
delivered or made available to Purchaser true, correct and complete copies of
such reports. Since January 1, 1998, SFNB has filled all reports required to be
filed by it under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act. The
books and records of SFNB have been, and are being, maintained in all material
respects in accordance with GAAP and any other applicable legal and accounting
requirements.
3.7 ASSETS.
SFNB (for purposes of this section, including its
subsidiaries) has good, valid and marketable title to all properties and assets
owned by it, including, without limitation, all properties and assets included
in the SFNB Financial Statements and all properties and assets purchased by SFNB
since December 31, 1997 (except for leased or licensed assets and for properties
or assets reflected in such SFNB Financial Statements which have been sold or
otherwise disposed of in the ordinary course of business), free and clear of all
encumbrances. All personal property of SFNB is in good operating condition and
repair and is suitable and adequate for the uses for which it is intended or is
being used.
3.8 REORGANIZATION.
SFNB has approved the Reorganization, subject to the terms and
conditions specified in the Plan.
3.9 GOVERNMENTAL CONSENT.
No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority on the part of SFNB is
required in connection with the valid execution and delivery of this Agreement.
<PAGE>
3.10 LITIGATION; DISPUTES.
There are no actions, suits, claims, arbitrations, proceedings
or investigations pending, or to the knowledge of SFNB, threatened against,
affecting or involving SFNB in connection with the transactions contemplated by
this Agreement, at law or in equity, or before or by any court, arbitrator or
governmental authority, domestic or foreign.
3.11 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as disclosed in its reports filed under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, since December 31, 1997 neither SFNB nor
any of its subsidiaries has incurred any material liability, except as
contemplated hereby or in the ordinary course of their business consistent with
their past practices. Since December 31, 1997 SFNB and its subsidiaries have
carried on their respective businesses in the ordinary and usual course
consistent with their past practices.
3.12 COMPLIANCE WITH APPLICABLE LAWS.
Each of SFNB and it subsidiaries have complied in all material
respects with all laws applicable to it or to the operation of its business.
Neither SFNB nor any subsidiary thereof has received any notice of any material
alleged or threatened claim, violation, or liability under any such laws that
has not heretofore been cured and for which there is no remaining liability.
3.13 NO MISREPRESENTATION.
None of the representations and warranties of SFNB set forth
in this Section 3 contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
The Corporation represents and warrants to Purchaser as
follows:
<PAGE>
4.1 ORGANIZATION AND STANDING.
The Corporation is a Delaware corporation in good standing in
the State of Delaware, and has the full corporate power and authority to own and
operate its properties and assets, to carry on its business as currently
conducted, to execute and deliver this Agreement, to sell and issue the
Preferred Shares hereunder, and, subject to the conditions specified herein, to
carry out and perform its obligations under the terms of this Agreement. The
Corporation has furnished to Purchaser a true and complete copy of the
Corporation's certificate of incorporation, as currently in effect, and a true
and complete copy of the Corporation's bylaws, as currently in effect, in both
cases, certified by its corporate secretary.
4.2 AUTHORIZATION; BINDING OBLIGATION.
The Corporation has all requisite corporate power and
authority to enter into and to deliver this Agreement. Except as contemplated
herein, all corporate action on the part of the Corporation and its directors,
officers and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement by the Corporation, the authorization, sale,
issuance and delivery of the Preferred Shares, and the performance of the
Corporation's obligations hereunder have been taken or will be taken prior to
the Closing Date. This Agreement, when executed and delivered by the
Corporation, shall constitute a valid and binding obligation of the Corporation
enforceable in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
effecting the enforcement of creditor's rights.
4.3 CAPITALIZATION.
The authorized capital stock of the Corporation consists of
40,000,000 shares of Common Stock, of which 1,000 are issued and outstanding as
of the date hereof, and 5,000,000 shares of preferred stock, of which none of
the 1,637,832 shares designated Series A Preferred Stock are issued and
outstanding as of the date hereof.
4.4 VALIDITY OF SHARES; ISSUANCE.
The Preferred Shares, when issued in compliance with the
provisions of this Agreement, and the Common Stock, if and when issued to
Purchaser upon conversion of the Preferred Shares into Common Stock, will be
validly issued, fully paid and nonassessable, and free of any
<PAGE>
liens or encumbrances, and will be issued in compliance with all applicable
federal banking laws.
4.5 REORGANIZATION.
The Board of Directors of the Corporation approved the
Reorganization, subject to the terms and conditions specified in the Plan.
4.6 NO MISREPRESENTATION.
None of the representations and warranties of the Corporation
set forth in this Section 4 contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading.
4.7 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance
with, this Agreement will not (a) violate any provision of the articles of
incorporation or bylaws of the Corporation; (b) conflict with or result in a
breach of, or default under, or result in the creation of any lien, claim,
charge or other encumbrance upon any of the assets or properties of the
Corporation pursuant to the provisions of any agreement, mortgage, indenture or
other document or instrument to which the Corporation is a party or by which the
Corporation or any of its properties or assets is bound, or (c) violate any
existing statutes, laws, ordinances, regulations, orders and other rules of law
applicable to the Corporation or any of its properties or assets, or applicable
to the Corporation's power or authority to perform its obligations under this
Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents and warrants to SFNB and the Corporation
as follows:
5.1 ORGANIZATION AND STANDING.
Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the State of Illinois. Purchaser has the
full corporate power and authority to own and operate its properties and assets,
to carry on its business as currently conducted, to execute and deliver this
Agreement and, subject to the conditions specified herein, to carry out and
perform its obligations under the terms of this Agreement.
<PAGE>
5.2 AUTHORIZATION.
Purchaser has all requisite corporate power and authority to
enter into and to deliver this Agreement. All corporate action on the part of
Purchaser and its directors and members necessary for the authorization,
execution, delivery and performance of this Agreement by Purchaser and the
performance of Purchaser's obligations hereunder have been taken. This
Agreement, when executed and delivered by Purchaser, shall constitute a valid
and binding obligation of Purchaser enforceable in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws effecting the enforcement of creditor's rights.
5.3 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance
with, this Agreement will not (a) violate any provision of the articles of
incorporation or bylaws of Purchaser; (b) conflict with or result in a breach
of, or default under, or result in the creation of any lien, claim, charge or
other encumbrance upon any of the assets or properties of Purchaser pursuant to
the provisions of any agreement, mortgage, indenture or other document or
instrument to which Purchaser is a party or by which Purchaser or any of its
properties or assets is bound, or (c) violate any existing statutes, laws,
ordinances, regulations, orders and other rules of law applicable to Purchaser
or any of its properties or assets, or applicable to Purchaser's power or
authority to perform its obligations under this Agreement.
5.4 GOVERNMENTAL CONSENT.
No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority on the part of Purchaser
is required in connection with the valid execution and delivery of this
Agreement.
5.5 ADEQUATE RESOURCES.
Purchaser has sufficient cash and other resources to perform
its obligations hereunder.
5.6 INVESTMENT REPRESENTATIONS.
5.6(a). Purchaser has had an opportunity to discuss the
Corporation's business, management and financial affairs with the
<PAGE>
Corporation's management. Purchaser is capable of evaluating the merits and
risks of its investment in the Corporation and has the capacity to protect its
own interests.
5.6(b). Purchaser is acquiring the Preferred Shares for
investment for its own account and not with a view to, or for resale in
connection with, any distribution. Purchaser understands that the Preferred
Shares have not been registered under the Securities Act by reason of a specific
exemption from the registration provisions thereof which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
5.6(c). Purchaser acknowledges that the Preferred Shares must
be held indefinitely unless they are subsequently registered under applicable
rules and regulations of the SEC or an exemption from registration is available.
5.6(d). Purchaser understands that no public market now exists
for the Preferred Shares and that a public market may never exist for the
Preferred Shares.
5.7 LITIGATION; DISPUTES.
There are no actions, suits, claims, arbitrations, proceedings
or investigations pending, or to the knowledge of Purchaser, threatened against,
affecting or involving Purchaser in connection with the transactions
contemplated by this Agreement, at law or in equity, or before or by any court,
arbitrator or governmental authority, domestic or foreign.
5.8 NO MISREPRESENTATION.
None of the representations and warranties of Purchaser set
forth in this Section 5 contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading.
SECTION 6. COVENANTS.
6.1 REGULATORY APPLICATIONS; THIRD PARTY CONSENTS.
If applicable, upon the execution and delivery of this
Agreement, Purchaser shall cause to be prepared and filed, as soon as is
<PAGE>
reasonably practical, all required applications and notices and any other
filings with governmental authorities which are necessary or contemplated for
consummation of the purchase of the Preferred Shares contemplated hereby. Such
applications and filings shall be in such forms as may be prescribed by the
respective governmental authorities and shall contain such information as they
may require.
6.2 DESIGNATION OF PREFERRED STOCK AND MATTERS AS TO THE
CORPORATION.
The Corporation agrees to take all such action required of the
Corporation to consummate the transactions contemplated hereby.
6.3 REORGANIZATION.
6.3(a). Necessary Actions.
(1) Subject to the terms and conditions of the
Plan, SFNB will take such actions necessary to consummate the Reorganization,
including causing the Corporation to take such actions necessary for the
Corporation to consummate the Reorganization and obtaining required third party
consents; and
(2) SFNB will also cause the Corporation to
file the Certificate of Designation in the form attached hereto as Exhibit I,
and, as the sole stockholder of the Corporation, will cause the Corporation to
take other actions necessary to cause the Corporation to consummate the
transactions contemplated hereby.
6.3(b). Necessary Actions.
(1) Subject to the terms and conditions of the
Plan, the Corporation will take such actions necessary to consummate the
Reorganization, including obtaining required third party consents; and
(2) The Corporation will file the Certificate
of Designation with the Secretary of State of the State of Delaware in the form
attached hereto as Exhibit I.
6.4 OTHER APPROVALS.
The parties shall cooperate and use their best efforts to
obtain all written consents and approvals of other persons in connection with
the purchase of the Preferred Shares contemplated hereby.
<PAGE>
SECTION 7. CONDITIONS TO CLOSING.
7.1 CONDITIONS TO OBLIGATIONS OF ALL PARTIES.
The obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, on or before the
Closing Date, of each of the following conditions precedent:
7.1(a). Termination. This Agreement shall not have been
terminated in accordance with its terms.
7.1(b). Regulatory Approvals. All regulatory approvals sought
shall have been obtained and all notice periods shall have expired; no
regulatory approval shall contain any condition that would require any material
modification or nonperformance of the terms of this Agreement; all regulatory
approvals shall remain in full force and effect and all conditions and
requirements set forth in any regulatory approvals that are required to be
satisfied on or before the Closing Date, including the expiration of any waiting
periods, shall have been satisfied or properly waived.
7.1(c). No Governmental Action. No action or proceeding by or
before any governmental authority shall have been instituted or threatened (and
not subsequently dismissed, settled or otherwise terminated) which is reasonably
expected to restrain, prohibit or invalidate the transactions contemplated by
this Agreement or to affect adversely the financial condition and business
prospects of the Corporation.
7.1(d). Reorganization. The consummation of the
Reorganization, including the receipt by SFNB and the Corporation of third party
consents necessary to consummate the Reorganization.
7.1(e). Third Party Consents. Receipt by the parties hereto
of all third party consents required by this Agreement.
7.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER.
The obligations of Purchaser to purchase the Preferred Shares
contemplated by this Agreement are subject to the satisfaction, on or before the
Closing Date, of each of the following conditions precedent, any one or more of
which may be waived by Purchaser, in its sole and absolute discretion:
<PAGE>
7.2(a). Representations and Warranties. The representations
and warranties of SFNB and the Corporation contained in this Agreement shall be
true, correct and complete in all material respects when made and shall be true
and correct on the date of the Reorganization, in the case of SFNB, and the
Closing Date, in the case of the Corporation, with the same force and effect as
if made on the date of the Reorganization and Closing Date, as the case, may be,
except insofar as such Representations and Warranties are rendered inapplicable
as a result of the Reorganization.
7.2(b). Compliance. SFNB and the Corporation shall have in all
material respects performed all obligations and agreements and complied with all
covenants contained in this Agreement to be performed and complied with by SFNB
and the Corporation on or prior to the Closing Date.
7.3 CONDITIONS TO OBLIGATIONS OF SFNB.
The obligations of SFNB to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, on or before the
Closing Date, of each of the following conditions precedent, any one or more of
which may be waived by SFNB, in its sole and absolute discretion:
7.3(a). Representations and Warranties. The representations
and warranties of Purchaser contained in this Agreement shall be true, correct
and complete in all material respects when made and shall be true and correct as
of the Closing Date with the same force and effect as if made on the Closing
Date.
7.3(b). Compliance. Purchaser shall have in all material
respects performed all obligations and agreements and complied with all
covenants contained in this Agreement to be performed and complied with by it on
or prior to the Closing Date.
7.4 CONDITIONS TO OBLIGATIONS OF THE CORPORATION.
The obligations of the Corporation to consummate the
transactions contemplated by this Agreement are subject to the satisfaction, on
or before the Closing Date, of each of the following conditions precedent, any
one or more of which may be waived by the Corporation, in its sole and absolute
discretion:
7.4(a). Representations and Warranties. The representations
and warranties of Purchaser contained in this Agreement shall be true, correct
and complete in all material respects when made and shall be true
<PAGE>
and correct as of the Closing Date with the same force and effect as if made on
the Closing Date. 7.4(b). Compliance. Purchaser shall have in all material
respects performed all obligations and agreements and complied with all
covenants contained in this Agreement to be performed and complied with by it on
or prior to the Closing Date.
SECTION 8. CLOSING.
8.1 DELIVERIES BY THE SFNB.
At the Closing, SFNB shall deliver to Purchaser the following:
(1) A copy of the resolutions of the Board of
Directors of SFNB certified by the Secretary of SFNB, as being true, correct and
complete and then in full force and effect, authorizing the execution, delivery
and performance of this Agreement by SFNB, and the performance of SFNB's
obligations hereunder.
(2) A certificate of SFNB signed by the
President of SFNB certifying that the representations and warranties of SFNB
made herein are true, complete and correct in all material respects as of the
date of this Agreement and are true and correct as of the Closing Date, and SFNB
has in all material respects performed all obligations and agreements and
complied with all covenants required to be performed or complied with by SFNB on
or prior to the Closing.
(3) Such other certificates, instruments or
documents as Purchaser may reasonably request in order to effect and document
the transactions contemplated hereby.
8.2 DELIVERIES BY THE CORPORATION.
At the Closing, the Corporation shall deliver to Purchaser the
following:
(1) Certificates registered in Purchaser's
name, representing all of the Preferred Shares.
(2) A copy of the resolutions of the Board of
Directors of the Corporation certified by the Secretary of the Corporation, as
being true, correct and complete and then in full force and effect, authorizing
the execution, delivery and performance of this Agreement by the Corporation,
the authorization, sale, issuance and delivery of the
<PAGE>
Preferred Shares, and the performance of the Corporation's obligations
hereunder.
(3) A certificate of the Corporation signed by
the President of the Corporation certifying that the representations and
warranties of the Corporation made herein are true, complete and correct in all
material respects as of the date of this Agreement and are true and correct as
of the Closing Date, and the Corporation has in all material respects performed
all obligations and agreements and complied with all covenants required to be
performed or complied with by the Corporation on or prior to the Closing.
(4) Such other certificates, instruments or
documents as Purchaser may reasonably request in order to effect and document
the transactions contemplated hereby.
8.3 DELIVERIES BY PURCHASER.
At the Closing, Purchaser shall deliver to the Corporation the
following:
(1) The Purchase Price, in cash or by wire
transfer or certified or bank cashier's check, payable to the order of the
Corporation.
(2) A certificate of Purchaser signed by the
President of Purchaser, or such other officer satisfactory to the Corporation,
certifying that the representations and warranties of Purchaser made herein are
true, complete and correct in all material respects as of the date of this
Agreement and are true and correct as of the Closing Date, and Purchaser has in
all material respects performed all obligations and agreements and complied with
all covenants required to be performed or complied with by Purchaser on or prior
to the Closing.
(3) Such other certificates, instruments or
documents as the Corporation and/or SFNB may reasonably request in order to
effect and document the transaction contemplated hereby.
SECTION 9. LEGEND.
9.1 ENDORSEMENT.
Each certificate representing the Preferred Shares or the
Converted Common Shares, as the case may be, shall be endorsed with the
following legend (in addition to any legend required by applicable state
securities laws):
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
OR ANY OTHER FEDERAL OR STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER APPLICABLE FEDERAL SECURITIES LAWS
COVERING SUCH SECURITIES OR THE CORPORATION RECEIVES AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
9.2 REMOVAL OF LEGEND.
The legend endorsed on a stock certificate pursuant to Section
9.1 of this Agreement shall be removed and the Corporation shall issue a
certificate without such legend to the holder of such Preferred Shares or
Converted Common Shares, as the case may be, if such Preferred Shares or
Converted Common Shares, are registered under applicable federal securities laws
and a prospectus meeting the requirements of the rules and regulations of the
SEC is available or if such holder provides to the Corporation an opinion of
counsel for such holder of the Preferred Shares or Converted Common Shares
reasonably satisfactory to the Corporation, to the effect that a public sale,
transfer or assignment of such Preferred Shares or Converted Common Shares may
be made without registration and without compliance with any restrictions.
SECTION 10. TERMINATION.
10.1 MUTUAL CONSENT.
The parties may terminate this Agreement at any time by mutual
written agreement.
10.2 OTHER TERMINATION.
SFNB, the Corporation or the Purchaser may terminate this
Agreement by giving notice (a "Termination Notice") to the other parties at the
time designated in this Section or, in the absence of such designation, at any
time up to and including the Closing Date, if any one or more of the following
shall have occurred and be continuing:
<PAGE>
10.2(a). Termination By Any Party. Any party may terminate
this Agreement under any one or more of the following circumstances:
(1) at any time after December 31, 1998, if the
Closing shall not have occurred for any reason other than a default or
non-performance of its obligations hereunder by the party giving such notice;
(2) any application for regulatory approval or
notice with any regulatory agency or authority (in each case, in connection with
this Agreement) is denied or withdrawn;
(3) a court or other governmental authority of
competent jurisdiction shall have issued an order, writ, injunction or decree or
shall have taken any other action permanently restraining or otherwise
prohibiting the purchase of Preferred Shares contemplated hereby and such order,
writ, injunction, decree or other action shall have become final and
nonappealable;
(4) the Reorganization is not approved by the
stockholders of SFNB at the Special Meeting.
10.2(b). Termination By Purchaser. Purchaser may terminate
this Agreement on the Closing Date, if any condition precedent set forth in
Sections 7.1 or 7.2 shall not have been satisfied.
10.2(c). Termination By SFNB. SFNB may terminate this
Agreement on the Closing Date, if any condition precedent set forth in Sections
7.1 or 7.3 shall not have been satisfied.
10.2(d). Termination By the Corporation. The Corporation may
terminate this Agreement on the Closing Date, if any condition precedent set
forth in Sections 7.1 or 7.4 shall not have been satisfied.
10.3 EFFECT OF TERMINATION.
Termination of this Agreement pursuant to this Section shall
not relieve any party of any liability for a default or other breach, default or
nonperformance under this Agreement. Notwithstanding the foregoing, no party
hereto shall be liable for consequential or punitive damages in connection with
such termination.
<PAGE>
SECTION 11. MISCELLANEOUS.
11.1 ADDITIONAL ACTIONS AND DOCUMENTS.
Each of the parties hereto agrees that it will, at any time,
prior to, at or after the Closing, take or cause to be taken such further
actions, and execute, deliver and file or cause to be executed, delivered and
filed such further documents and instruments (including export license
applications) as may be necessary or reasonably requested in connection with the
consummation of the purchase and sale contemplated by this Agreement or in order
to fully effectuate the purposes, terms and conditions of this Agreement.
11.2 EXPENSES.
Each party hereto shall pay its own expenses incurred in
connection with this Agreement and in the preparation for and consummation of
the transactions contemplated hereby.
11.3 NOTICES.
All notices, demands, requests, or other communications which
may be or are required to be given or made by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered,
mailed by first-class registered or certified mail, return receipt requested,
postage prepaid, or delivered by overnight air courier, addressed as follows:
(i) if to SFNB or the Corporation:
Security First Network Bank/Security First Technologies
Corporation 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Attn.: President
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attn.: Stuart G. Stein, Esq.
<PAGE>
(iii) if to Purchaser:
State Farm Mutual Automobile Insurance Company
One State Farm Plaza
Corporate Law -- E7
Bloomington, Illinois 61710
Attn.: J. Scott Shaffer, Esq.
or such other address as the addressee may indicate by written notice to the
other parties. Each notice, demand, request, or communication which shall be
given or made in the manner described above shall be deemed sufficiently given
or made for all purposes at such time as it is delivered to the addressee (with
the return receipt, the delivery receipt, or the affidavit of messenger being
deemed conclusive but not exclusive evidence of such delivery) or at such time
as delivery is refused by the addressee upon presentation.
11.4. WAIVER.
No waiver by any party of any failure or refusal of any other
party to comply with its obligations under this Agreement shall be deemed a
waiver of any other or subsequent failure or refusal to so comply by such other
party. No waiver shall be valid unless in writing signed by the party to be
charged and only to the extent therein set forth.
11.5 BINDING EFFECT.
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
11.6 ENTIRE AGREEMENT; AMENDMENT.
This Agreement, including the other instruments and documents
referred to herein or delivered pursuant hereto, contains the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior oral or written agreements, commitments or understandings with respect to
such matters. No amendment, modification or discharge of this Agreement shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification or discharge is sought.
11.7 SEVERABILITY.
<PAGE>
If any part of any provision of this Agreement shall be
invalid or unenforceable under applicable law, such part shall be ineffective to
the extent of such invalidity or unenforceability only, without in any way
affecting the remaining parts of such provisions or the remaining provisions of
said Agreement.
11.8 HEADINGS.
The headings of the sections and subsections contained in this
Agreement are inserted for convenience only and do not form a part or affect the
meaning, construction or scope thereof.
11.9 GOVERNING LAW.
This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto, shall be governed by and
construed under and in accordance with the laws of the State of Georgia,
excluding the choice of law rules thereof.
11.10 SIGNATURE IN COUNTERPARTS.
This Agreement may be executed in separate counterparts, none
of which need contain the signatures of all parties, each of which shall be
deemed to be an original, and all of which taken together constitute one and the
same instrument. It shall not be necessary in making proof of this Agreement to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
11.11 NO THIRD PARTY BENEFICIARIES.
Except as expressly provided herein, this Agreement is made
and entered into for the sole protection and benefit of the parties hereto, and
no other person or entity shall have any right of action hereon, right to claim
any right or benefit from the terms contained herein or be deemed a third party
beneficiary hereunder.
11.12 ASSIGNABILITY.
All terms and provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto, and their respective
transferees, successors and assigns; provided, however, that neither this
Agreement nor any rights, privileges, duties and obligations of the parties
hereto may be assigned or delegated by any party hereto without the prior
<PAGE>
written consent of all the parties to this Agreement and any such purported or
attempted assignment shall be null and void ab initio and of no force or effect
provided, further that Purchaser may assign this Agreement, including rights,
privileges, duties and obligations hereunder to any affiliate of Purchaser which
is wholly or substantially owned directly or indirectly by Purchaser so long as
such assignment does not in any way materially delay or otherwise materially
adversely impact the ability of the parties hereto to effect the transactions
contemplated hereby.
11.13 PARTIES NOT PARTNERS.
Nothing contained in this Agreement shall constitute any party
as a partner with, agent for or principal of any one or more of the other
parties or their successors and assigns
[SIGNATURE PAGE FOLLOWS].
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the date first above written.
SECURITY FIRST NETWORK BANK
By: /s/ Robert F. Stockwell
Name: Robert F. Stockwell
Title: Treasurer
SECURITY FIRST TECHNOLOGIES CORPORATION
By: /s/ Robert F. Stockwell
Name: Robert F. Stockwell
Title: Treasurer
STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY
By: /s/ Darrell Kehl
Darrell Kehl
Title: Systems Vice President
And
By: /s/ Richard Shellito
Richard Shellito
Title: Vice President - Systems
<PAGE>
Exhibit I
FORM OF
CERTIFICATE OF DESIGNATION
OF
SECURITY FIRST TECHNOLOGIES CORPORATION
The undersigned DOES HEREBY CERTIFY that the following
resolution was duly adopted on ___________, 1998, by the Board of Directors (the
"Board") of SECURITY FIRST TECHNOLOGIES CORPORATION, a Delaware corporation (the
"Corporation") acting pursuant to the authority granted to the Board in
accordance with the provisions of Section 151(g) of the General Corporation Law
of the State of Delaware:
RESOLVED, that pursuant to authority expressly granted to, and
vested in, the Board by the provisions of the certificate of incorporation of
the Corporation (the "Certificate of Incorporation"), there is hereby created a
Series B Preferred Stock, as set forth below in this Certificate of Designation.
SERIES B REDEEMABLE, CONVERTIBLE PREFERRED STOCK
The Corporation is hereby authorized to issue up to _______
shares of preferred stock, authorized pursuant to Section 4.3 of the
Corporation's Certificate of Incorporation, as a series of preferred stock,
which series shall be designated "Series B Redeemable, Convertible Preferred
Stock" (hereinafter referred to as the "Series B Preferred Stock") and shall
have the following rights and preferences:
1. Dividends
The holders of record of shares (the "Holders") of the Series
B Preferred Stock shall not have any preference with respect to dividends over
the holders of the Common Stock, but shall participate fully and equally, on a
share for share basis, with the Common Stock, with respect to the payment of any
and all dividends or other distributions, whenever declared and whether paid or
payable in cash, the capital stock of the Corporation, the capital stock of any
other entity, or any other property.
2. Voting
<PAGE>
Except as otherwise provided by law and except as hereinafter
provided, the Holders of the Series B Preferred Stock shall have no voting
rights and shall not be entitled to notice of meetings of shareholders, and the
exclusive voting power of the Corporation shall be vested in the holders of the
Common Stock. Notwithstanding the foregoing, the Holders of the Series B
Preferred Stock shall be entitled to the following specific limited voting
rights:
(a) The Holders of the Series B Preferred Stock
shall be entitled to vote, as a separate class, with respect to (i) any
amendment or repeal of any of the provisions of the Certificate of Incorporation
or this Certificate of Designation, which would change the specific terms of the
Series B Preferred Stock, as set forth in this Certificate of Designation (or in
any supplementary sections hereto) so as to have an adverse effect on the rights
of the Series B Preferred Stock, including any amendment which would create or
enlarge any class or series ranking prior to the Series B Preferred Stock in
rights and preferences (provided, however, that an amendment which increases the
number of authorized shares of any class or series of capital stock, or
substitutes the surviving entity in a merger or consolidation for the
Corporation, shall not be considered to be such an adverse effect), and (ii) the
approval of a merger or consolidation of the Corporation with another
corporation or the sale, lease, or conveyance (other than by mortgage or pledge)
of the properties or business of the Corporation in exchange for securities of a
corporation other than the Corporation if the Series B Preferred Stock is to be
exchanged for securities of such other corporation and if the terms of such
securities are less favorable in any respect to the holders thereof than the
specific terms of the Series B Preferred Stock as set forth in this Certificate
of Designation (or any supplementary section hereto). No such amendment, repeal,
merger, consolidation, sale, lease, or conveyance shall be approved or adopted
without the affirmative vote, at a meeting duly called for that purpose and upon
notice duly given to the Holders of the Series B Preferred Stock, or the written
consent with or without a meeting, of the Holders of at least two-thirds of the
shares of the Series B Preferred Stock then outstanding, together with any other
vote or consent of the holders of other classes of the capital stock of the
Corporation as may be required; and
(b) The Holders of the Series B Preferred Stock
shall be entitled to vote, along with the holders of the shares of Common Stock,
on the basis as if the Series B Preferred Stock had been converted to shares of
Common Stock pursuant to Section 4 hereof, on (i) any merger, acquisition,
consolidation or other business combination involving the Corporation and
another business entity, (ii) the sale, lease or conveyance (other than by
mortgage or pledge) of all or substantially all of the assets
<PAGE>
or properties of the Corporation and (iii) any voluntary dissolution or
liquidation of the Corporation; it being understood, however, that the Holders
of Series B Preferred Stock shall be entitled to vote under the circumstances
described in (i) and (ii) above only if the holders of Common Stock are so
entitled.
3. Redemption.
(a) At any time before the second anniversary
of the Closing Date (as defined in the Stock Purchase Agreement, by and among
Security First Network Bank ("SFNB"), Security First Technologies Corporation
and State Farm Mutual Life Insurance Company, dated as of June 29, 1998)(the
"Agreement), the Corporation shall have the option to redeem this Series B
Preferred Stock by (a) providing the Holder with written notice of its intention
to redeem this Series B Preferred Stock, which notice shall state the redemption
date (the "Redemption Date") and which shall be delivered to the Holder 10
business days prior to the Redemption Date, and (b) delivering to the Holder on
the Redemption Date by wire transfer of immediately available U.S. funds the
amount of cash (the "Redemption Price") equal to (i) the product of (x)
$10,000,000, multiplied by (y) the Two-Year Interest Rate (defined below),
multiplied by (z) the Annualization Factor (defined below), plus (ii)
$10,000,000. For purposes of this section 3(a), the term "Two-Year Interest
Rate" means the percentage rate for the two-year U.S. Treasury Bill set forth in
the Wall Street Journal at the Closing Date, and the term "Annualization Factor"
means a fraction, the numerator of which is the number of days between the
Closing Date and the Redemption Date and the denominator of which is 365.
(b) Upon the mailing of the notice pursuant to section 3(a) of
this Certificate of Designation and after the Redemption Date (unless default
shall be made by the Corporation in providing money for the payment of the
Redemption Price and subject to the provisions of this Certificate of
Designation) such shares shall no longer be deemed to be outstanding, and all
rights of the Holders thereof as shareholders of the Corporation (except the
right to receive from the Corporation the Redemption Price) shall cease.
4. Conversion
At any time after the second anniversary of the Closing Date,
the Holders of the Series B Preferred Stock shall have the option to convert all
(but not fewer than all) of such shares into shares of Common Stock of the
Corporation, pursuant to the following terms and conditions:
<PAGE>
(a) The shares of Series B Preferred Stock
shall be convertible into that number of shares of the Corporation's Common
Stock equal to (x) 10,000,000, divided by (y) the "Conversion Price," which is
the product of (i) 1.4 and (ii) $_______________ which amount equals the average
closing asking price per share of SFNB's common stock (or the Corporation's
Common Stock if SFNB is then dissolved, or a combination of both), as quoted on
the Nasdaq Stock Market National Market Tier, for each of the 10 trading days
preceding the business day immediately before the Closing Date under the
Agreement.
(b) The option to convert shares of the Series
B Preferred Stock into shares of Common Stock of the Corporation shall be
exercisable by delivering the certificate or certificates for the shares to be
converted, properly endorsed to the Corporation or in blank, along with a
written notice of its intention to convert such shares, to the Secretary of the
Corporation at the home office of the Corporation. The conversion of the shares
of Series B Preferred Stock shall be effective as of the date on which the
Corporation receives such both certificate or certificates and such notice of
conversion.
(c) All shares of Common Stock issued upon the
conversion of any shares of Series B Preferred Stock shall be fully paid and
non-assessable.
(d) The number of shares of Common Stock of the
Corporation into which the shares of Series B Preferred Stock can be converted
shall be subject to adjustment from time to time as follows:
(i) If, at any time after the issuance
of any shares of Series B Preferred Stock, the Corporation pays or makes a
dividend or other distribution on any class of capital stock of the Corporation
in Common Stock of the Corporation, then the number of shares of Common Stock
into which each share of Series B Preferred Stock may be converted shall be
increased by multiplying such number by a fraction, the denominator of which is
the number of shares of such Common Stock outstanding at the close of business
on the day immediately preceding the date of such distribution and the numerator
of which is the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such increase to become
effective immediately after the opening of business on the day following such
distribution.
(ii) If, at any time after the issuance
of any shares of Series B Preferred Stock, the outstanding shares of Common
Stock of the Corporation are subdivided into a greater number of
<PAGE>
such shares, then the number of shares of Common Stock into which each share of
Series B Preferred Stock may be converted shall be proportionately increased,
and, conversely, if, at any time after the issuance of any shares of Series B
Preferred Stock, the outstanding shares of Common Stock of the Corporation are
combined into a smaller number of such shares, then the number of shares of
Common Stock into which each share of Series B Preferred Stock may be converted
shall be proportionately decreased, such increase or decrease, as the case may
be, to become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes effective.
(iii) The reclassification (including any
reclassification upon a merger in which the Corporation is the continuing
corporation) of the Common Stock of the Corporation into securities, including
other than shares of such Common Stock, shall be deemed to involve a subdivision
or combination, as the case may be, of the number of shares of the Common Stock
of the Corporation outstanding immediately prior to such reclassification into
the number of shares of such Common Stock outstanding immediately thereafter and
the effective date of such reclassification shall be deemed to be the day upon
which such subdivision or combination becomes effective, within the meaning of
subparagraph (ii) above.
5. Liquidation
In the event of the liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the Holders of the shares of
Series B Preferred Stock shall be entitled to share ratably, without distinction
as to class, in all of the assets of the Corporation available for distribution
to shareholders.
6. Reservation of Common Stock
So long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall maintain a sufficient number of authorized
but unissued shares of Common Stock to provide for the conversion of all
outstanding shares of Series B Preferred Stock into shares of Common Stock.
IN WITNESS WHEREOF, SECURITY FIRST TECHNOLOGIES CORPORATION
has caused this Certificate of Designation to be made under the seal of the
Corporation and signed by _________________, its
<PAGE>
President, and attested by _____________, its Secretary, this ____ day of
________, 1998.
SECURITY FIRST TECHNOLOGIES CORPORATION
By:_________________________________________
President
[SEAL]
Attest:
_________________________
Secretary
Exhibit 23.2
The Board of Directors
Security First Network Bank:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Experts" and "Certain Federal Income Tax Consequences"
in the Proxy Statement/Prospectus.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
August 21, 1998
Exhibit 99
REVOCABLE PROXY
SECURITY FIRST NETWORK BANK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Security First Network Bank
("SFNB") hereby appoints James S. Mahan, III and Robert F. Stockwell, or any of
them, with full power of substitution in each, as proxies to cast all votes
which the undersigned shareholder is entitled to cast at the special meeting of
shareholders (the "Special Meeting") to be held at 9:00 a.m. on September 25,
1998, at SFNB's Atlanta City Office, 3390 Peachtree Road, NE, Atlanta, Georgia
30326, and at any adjournments thereof, upon the following matters. The
undersigned shareholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted as directed by the undersigned
shareholder. UNLESS CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED: (1)
TO APPROVE THE PROPOSED HOLDING COMPANY REORGANIZATION OF SFNB AND SECURITY
FIRST TECHNOLOGIES, INC. BY APPROVING THE SECOND AMENDED AND RESTATED PLAN OF
REORGANIZATION, DATED AS OF MARCH 9, 1998, BY AND AMONG SFNB, SECURITY FIRST
TECHNOLOGIES CORPORATION (THE "HOLDING COMPANY") AND UPON ORGANIZATION, NEW
SECURITY FIRST NETWORK BANK, AS AMENDED, AND THE TRANSACTIONS CONTEMPLATED
THEREBY; (2) TO APPROVE THE PROPOSED SALE OF SFNB'S BANKING BUSINESS BY
APPROVING THE STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 9, 1998, BY AND AMONG
ROYAL BANK OF CANADA, RBC HOLDINGS (DELAWARE) INC., SFNB AND THE HOLDING
COMPANY, AS AMENDED, AND THE TRANSACTIONS CONTEMPLATED THEREBY; (3) TO APPROVE
THE PROPOSED INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND
SERIAL PREFERRED STOCK OF THE HOLDING COMPANY; (4) TO APPROVE THE PROPOSED
ELIMINATION OF MONETARY LIABILITIES EXCEPT IN SPECIFIED CIRCUMSTANCES FOR THE
HOLDING COMPANY DIRECTORS UNDER DELAWARE LAW, (5) IN ACCORDANCE WITH THE
DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS OF SFNB AS TO OTHER
MATTERS. The undersigned shareholder may revoke this proxy at any time before it
is voted by (i) filing with the Assistant Secretary of SFNB a written notice of
revocation prior to the Special Meeting, (ii) delivering to SFNB prior to the
Special Meeting a duly executed proxy bearing a later date, or (iii) attending
the Special Meeting and voting in person. The undersigned shareholder hereby
acknowledges receipt of SFNB's Notice of Special Meeting and the Proxy
Statement/Prospectus.
If you receive more than one proxy card, please sign and
return all cards in the accompanying envelope.
(continued and to be signed and dated on reverse side)
------------------------
SEE
REVERSE SIDE
------------------------
<PAGE>
X
Please mark your
votes as this.
------------
COMMON
Proposal 1: To approve the proposed holding company
reorganization of Security First Network Bank and
Security First Technologies, Inc. by approving the
Second Amended and Restated Plan of Reorganization,
as amended, and the transactions contemplated
thereby.
FOR AGAINST ABSTAIN
|_| |_| |_|
Proposal 2: To approve the proposed sale of the banking
business of Security First Network Bank to RBC
Holdings (Delaware) Inc. by approving the Stock
Purchase Agreement, as amended, and the transactions
contemplated thereby.
FOR AGAINST ABSTAIN
|_| |_| |_|
Proposal 3: To approve the proposed increase in the number of
shares of Holding Company common stock that the
Holding Company is authorized to issue from
25,000,000 to 60,000,000 shares and to approve the
proposed increase in the number of authorized shares
of Holding Company serial preferred stock that the
Holding Company is authorized to issue from
2,500,000 to 5,000,000 shares.
FOR AGAINST ABSTAIN
|_| |_| |_|
Proposal 4: To approve the proposed elimination of monetary
liabilities except in specified circumstances for
the Holding Company directors under Delaware law.
FOR AGAINST ABSTAIN
|_| |_| |_|
<PAGE>
Other Matters: The proxies are authorized to vote upon such other
business as may properly come before the Special
Meeting, or any adjournments thereof, including,
without limitation, a motion to adjourn the Special
Meeting to another time and/or place for the purpose
of soliciting additional proxies in order to approve
the proposed holding company reorganization of
Security First Network Bank and Security First
Technologies, Inc. by approving the Second Amended
and Restated Plan of Reorganization, as amended, the
sale of the banking business of Security First
Network Bank by approving the Stock Purchase
Agreement, as amended, or otherwise, in accordance
with the determination of a majority of SFNB's Board
of Directors.
Date:___________________________
___________________________
___________________________
Signature of Shareholder or
Authorized Representative
Please date and sign exactly as name appears hereon. Each executor,
administrator, trustee, guardian, attorney-in-fact and other fiduciary should
sign and indicate his or her full title. When stock has been issued in the name
of two or more persons, all should sign.
