As filed with the Securities and Exchange Commission on JULY 30, 1998
Registration No. 333-56181
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
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. [ ]
--------------------
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 August
28, 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. Collectively, the proposed
provisions will have both an anti-takeover effect and further secure the
positions of management. Individually, the provisions provide for the Board of
Directors having greater control over corporate governance matters, takeover
defense provisions and the elimination of monetary liabilities of directors
under applicable 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,
<PAGE>
including approval by the holders of at least two-thirds of the outstanding
shares of SFNB common 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 SFN common stock and two-thirds of
the outstanding shares of SFNB preferred stock. Approval of the additional
provisions of the holding company 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 RECOMMENDS THAT YOU VOTE "FOR"
APPROVAL OF THE PROPOSALS AT THE SPECIAL MEETING.
THE REQUIRED VOTES OF HOLDERS OF SFNB COMMON STOCK IS 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 AUGUST 28, 1998
-------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Special
Meeting") of Security First Network Bank ("SFNB") will be held on August 28,
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 Certain Provisions of the Holding Company's Certificate of
Incorporation. To consider and vote upon specified provisions of the
Holding Company's Certificate of Incorporation which will be effective
upon the Reorganization only if approved at the Special Meeting. These
provisions provide the Board of Directors greater control over
corporate governance matters, takeover defense provisions and the
elimination of monetary liabilities of directors under applicable
Delaware Law (Proposal 3).
<PAGE>
4. 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 JULY 6,
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
----------------------
10,814,215 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
August 28, 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) 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"). 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 July 6, 1998 (the "Record Date"), there were 10,904,263 shares of SFNB
Common Stock and 10,904,263 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 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,
Cover page continued...
i
<PAGE>
Cover page continued ...
respectively, into one share of Holding Company common stock, par value $0.01
per share ("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 $59.0 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 Agreemen 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."
THE HOLDING COMPANY COMMON STOCK OFFERED HEREBY INVOLVES RISK. SFNB
SHAREHOLDERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCLOSED UNDER "RISK
FACTORS"
ii
<PAGE>
COVER PAGE CONTINUED . . .
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......................................................................
The Special Meeting.....................................................
Consent of the Holders of SFNB Preferred Stock..........................
The Companies...........................................................
The Holding Company Reorganization......................................
The Sale of SFNB's Banking Business.....................................
THE CONTINGENT CERTIFICATE PROVISIONS...................................
Other Matters...........................................................
Selected Financial and Other Data.......................................
RECENT DEVELOPMENTS..........................................................
RISK FACTORS.................................................................
History of, and Anticipated Future, Operating Losses and Resulting
Additional Capital Needs.............................................
S1 Limited Operating History............................................
Fluctuations in Quarterly Operating Results.............................
Dependence on Banking Industry..........................................
Dependence upon Uncertain Market........................................
Product Concentration...................................................
Risk of Product Defects; Product Liability..............................
Customer Project Risks and Lengthy Implementation and Sales Cycles......
Ability to Manage Growth................................................
Risk of System Failure; Security Risks..................................
Year 2000...............................................................
Intense Competition.....................................................
Dependence on Proprietary Technology; Risk of Infringement..............
Government Regulation...................................................
Control by Officers, Directors and Principal Shareholders...............
Need to Expand Board of Directors and Continuity of Management..........
Dividend Policy.........................................................
THE SPECIAL MEETING..........................................................
Matters to be Considered at the Special Meeting.........................
Record Date and Voting..................................................
Vote Required; Revocability of Proxies..................................
Solicitation of Proxies.................................................
THE HOLDING COMPANY REORGANIZATION...........................................
The Companies Involved in the Reorganization............................
Description of the Reorganization.......................................
Recommendation of the SFNB Board of Directors and Reasons for the
Reorganization.......................................................
Treatment of Stock Certificates.........................................
Regulatory Approvals....................................................
Conditions to the Plan..................................................
Abandonment and Amendment of the Plan...................................
Accounting Treatment....................................................
No Dissenters' Rights...................................................
Federal Income Tax Consequences.........................................
Comparison of Shareholders' Rights......................................
Takeover Defense Provisions OF THE DGCL.................................
THE SALE OF SFNB'S BANKING BUSINESS..........................................
The Companies Involved in the Sale of SFNB's Banking Business...........
The SFNB/Royal Bank Transactions........................................
Background of the Sale..................................................
Recommendation of the SFNB Board of Directors and Reasons for the Sale..
Purpose and Effects of the Sale.........................................
Description of SFNB's Banking Business..................................
Structure of the Sale...................................................
Purchase Price and Holdback Amount......................................
Regulatory Approvals....................................................
Conditions to the Agreement.............................................
Conduct of Banking Business pending the Sale............................
Third Party Proposals...................................................
v
<PAGE>
Expenses and Operating Losses...........................................
Non-Compete and Employee Matters........................................
OTHER Provisions of the Agreement.......................................
Termination and Amendment of the Agreement..............................
Opinion of SFNB's Financial Advisor.....................................
Accounting Treatment....................................................
Federal Income Tax Consequences.........................................
No Dissenters' Rights...................................................
Indemnification.........................................................
Other Related Agreements................................................
THE CONTINGENT CERTIFICATE AMENDMENTS........................................
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS..................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................
ADDITIONAL INFORMATION ABOUT THE HOLDING COMPANY.............................
Business of the Holding Company.........................................
Financial Resources of the Holding Company..............................
Description of the Capital Stock of the Holding Company.................
Management and Compensation Information.................................
Stock Owned by Management and Principal Holders of Voting Securities....
Market for Holding Company Common Stock and Dividends...................
Regulation of the Holding Company.......................................
Capitalization..........................................................
INFORMATION ABOUT SFNB.......................................................
Description of Business.................................................
Description of Property.................................................
Legal Proceedings.......................................................
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................
Market for SFNB Common Stock and Dividends..............................
Management..............................................................
Executive and Director Compensation.....................................
Employment Contracts....................................................
Option Grants...........................................................
Option Exercises in 1997 and Year-End Option Values.....................
Certain Transactions....................................................
Stock Owned by Management...............................................
Principal Holders of Voting Securities of SFNB..........................
ADJOURNMENT OF THE SPECIAL MEETING...........................................
SHAREHOLDER PROPOSALS........................................................
OTHER MATTERS................................................................
EXPERTS......................................................................
LEGAL MATTERS................................................................
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 Provision) D-1
APPENDIX E Contingent Certificate Provisions E-1
APPENDIX F Bylaws of the Holding Company F-1
APPENDIX G Consolidated Financial Statements of SFNB 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
Contingent Certificate Provisions,
and (iv) 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 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
August 28, 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 July 6, 1998 are
entitled to notice of and to vote at
the Special Meeting and at any
adjournments thereof.
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").
1
<PAGE>
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 two
subsidiaries, S1 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 numbe 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 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.
2
<PAGE>
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 31
other financial institutions at
March 31, 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 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) 812-6300.
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
3
<PAGE>
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."
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
4
<PAGE>
"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, a
director of the Holding Company,
hold ____ shares of SFNB Common
Stock (___% 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 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."
5
<PAGE>
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 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 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,
the Board of Governors of the
Federal Reserve System (the "Federal
Reserve Board") , the Georgia
Department, and the Office of the
Superintendent of Financial
Institutions of
6
<PAGE>
Canada (the "Superintendent") . 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 CONTINGENT CERTIFICATE PROVISIONS
Description of the Contingent
Certificate Provisions ................... The Contingent Certificate
Provisions will have the effect of
increasing the number of authorized
shares of Holding Company capital
stock, limiting the liability of
Holding Company directors for
monetary damages, providing for the
Holding Company Board of Directors
to have greater control over
corporate governance matters (by
making it more difficult for
shareholders to amend the Holding
Company's Certificate of
Incorporation and Bylaws, and
restricting the ability to call
special meetings) and adding
provisions making it more difficult
to effect a business combination or
repurchase shares from a significant
shareholder. For more information,
see "The Contingent Certificate
Provisions."
Reasons for the Contingent
Certificate Provisions ................... The Board of Directors believes that
the increase in the authorized
capital 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
Board of Directors believes that the
corporate governance provisions of
the Contingent Certificate
Provisions provide necessary
flexibility to operate the Holding
Company in today's competitive
environment. 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. The Board of Directors
believes that other Contingent
Certificate Provisions, each of
which may have an anti-takeover
effect, are in the best interests of
the shareholders because the Board
of Directors believes that it is in
the best interests of the
7
<PAGE>
Holding Company, its subsidiaries
and its shareholders to encourage
potential acquirers to negotiate
directly with the Board. The
proposed changes resulting from the
Contingent Certificate Provisions
will encourage such negotiations and
discourage non-negotiated takeover
attempts. For more information, see
"The Contingent Certificate
Provisions."
OTHER MATTERS
Tax Consequences ......................... A tax opinion of KPMG Peat Marwick
LLP ("KPMG") will be 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
SFN 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
SFNB
Common
Date Stock
December 31, 1996 $10.25
December 31, 1997 7.25
March 6, 1998 (a) 13.63
August __, 1998 (b)
----------
(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 March 31, 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.
STATEMENT OF OPERATIONS DATA - CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
--------------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees.......................... $ 669 $ 673 $ 4,142 $ 512 $ --
Professional services.......................... 2,449 973 6,277 699 --
Data center fees............................... 310 24 411 56 --
----------- ----------- ----------- ----------- -----------
Total revenues............................... 3,428 1,670 10,830 1,267 --
----------- ----------- ----------- ----------- -----------
Direct costs:
Software license fees.......................... 20 490 1,605 796 --
Professional services.......................... 1,570 1,237 5,346 535 --
Data center fees............................... 1,823 1,507 6,947 2,266 --
----------- ----------- ----------- ----------- -----------
Total direct costs........................... 3,413 3,234 13,898 3,597 --
----------- ----------- ----------- ----------- -----------
Gross margin................................. 15 (1,564) (3,068) (2,330) --
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing.......................... 1,071 1,083 4,305 2,154 --
Product development............................ 3,383 2,375 10,507 4,048 --
General and administrative..................... 1,204 1,369 4,637 3,635 46
Depreciation and amortization.................. 637 310 1,741 256 --
Amortization of goodwill and acquisition
charges....................................... 2,088 341 4,525 7,072 --
----------- ----------- ----------- ----------- -----------
Total operating expenses..................... 8,383 5,478 25,715 17,165 46
----------- ----------- ----------- ----------- -----------
Operating loss............................... (8,368) (7,042) (28,783) (19,495) (46)
Interest income.................................. 255 419 1,481 1,672 101
----------- ----------- ----------- ----------- -----------
Loss from continuing operations.................. $ (8,113) $ (6,623) $ (27,302) $ (17,823) $ 55
=========== =========== =========== =========== ===========
Basic and diluted net loss per common
share from continuing operations............... $ (0.77) $ (0.80) $ (3.06) $ (3.03) $ --
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding.................................... 10,523,921 8,276,415 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>
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and investment
securities.................... $ 15,352 $ 19,951 $ 36,155 $ 3,710
Accounts receivable, net....... 5,181 4,297 1,216 --
Other current assets........... 1,083 1,141 567 --
Noncurrent assets.............. 8,660 10,803 8,003 238
Total assets................... 30,276 36,192 45,941 3,948
Current liabilities............ 14,298 12,654 6,028 581
Stockholders' equity........... 15,978 23,538 39,913 3,367
Book value per
common share................. 1.25 1.99 4.58 1.40
</TABLE>
STATEMENT OF OPERATIONS DATA - BANKING OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
--------------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income.................................. $ 892 $ 1,180 $ 3,548 $ 3,374 $ 4,294
Interest expense................................. 489 710 2,020 2,221 2,367
----------- ----------- ----------- ----------- -----------
Net interest income.......................... 403 470 1,528 1,153 1,927
Provisions for loan losses....................... 40 -- 133 -- --
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses................... 363 470 1,395 1,153 1,927
----------- ----------- ----------- ----------- -----------
Noninterest income............................... 129 114 725 238 196
Gain on sale of branch .......................... -- 1,500 1,500 -- --
Noninterest expense ............................. (957) (1,328) (4,309) (6,003) (4,161)
Income tax benefit............................... -- -- -- 376 503
----------- ----------- ----------- ----------- -----------
Net income (loss) from discontinued
operations.................................. (465) 756 (689) (4,236) (1,535)
----------- ----------- ----------- ----------- -----------
Basic and diluted net income
( loss) per common share from
discontinued operations........................ $ (0.05) $ 0.09 $ (0.08) $ (0.73) $ (0.16)
----------- ----------- ----------- ----------- -----------
</TABLE>
BALANCE SHEET DATA - BANKING OPERATIONS
<TABLE>
<CAPTION>
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and investment
securities................... $ 41,269 $ 36,051 $ 35,808 $ 11,183
Loans......................... 14,614 14,247 23,654 21,109
Total assets.................. 58,560 52,488 62,850 36,571
Deposits...................... 56,505 50,329 60,863 34,812
Advances from the Federal
Home Loan Bank............... 984 1,019 1,154 1,282
Allowances for loan
losses....................... 170 163 303 293
</TABLE>
11
<PAGE>
STATEMENT OF OPERATIONS DATA - PRO FORMA
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
Revenues:
<S> <C> <C>
Software license fees.......................... $ 789 $ 4,622
Professional services.......................... 2,699 7,277
Data center fees............................... 443 1,034
---------- -----------
Total revenues............................... 3,931 12,933
---------- -----------
Direct costs:
Software license fees.......................... 20 1,605
Professional services.......................... 1,570 5,346
Data center fees............................... 1,823 6,947
---------- -----------
Total direct costs........................... 3,413 13,898
---------- -----------
Gross margin................................. 518 (965)
---------- -----------
Operating expenses:
Selling and marketing.......................... 1,071 4,305
Product development............................ 3,383 10,507
General and administrative..................... 1,204 4,637
Depreciation and amortization.................. 637 1,741
Amortization of goodwill and acquisition
charges....................................... 2,088 4,525
---------- -----------
Total operating expenses..................... 8,383 25,715
---------- -----------
Operating loss............................... (7,865) (26,680)
Interest income.................................. 153 1,073
---------- -----------
Loss from continuing operations.................. $ (7,712) $ (25,607)
========== ===========
Basic and diluted net loss per common
share from continuing operations............... $(0.73) $ (2.84)
========== ===========
Weighted average common shares
outstanding.................................... 10,592,851 9,015,355
</TABLE>
BALANCE SHEET DATA - PRO FORMA
March 31,
1998
---------
Cash and investment
securities........................................ $ 21,802
Accounts receivable, net........................... 5,181
Other current assets............................... 1,083
Noncurrent assets.................................. 10,160
Total assets....................................... 38,226
Current liabilities................................ 21,098
Stockholders' equity............................... 17,125
Book value per common share........................ 1.36
12
<PAGE>
RECENT DEVELOPMENTS
On June 30, 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 $__ (the
average closing asking price per share of SFNB Common Stock for each of the 10
trading days preceding August _, 1998), State Farm would purchase a total of
______ shares of such Preferred Stock, and those shares would be convertible
into ______ 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 also entered into a relationship with BroadVision,
Inc., of Redwood City, California under a Stock Purchase Agreement and other
technology and licensing agreements. Pursuant to the 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-on-One" marketing suite of software
products which provide intelligent cross-selling, relationship management and
content management capabilities. Under the Stock Purchase Agreement, the Holding
Company and BroadVision also will exchange $3.0 million of each company's common
stock after the Reorganization. For the Holding Company Common Stock, the per
share purchase price will be $__, and for the BroadVision common stock, the per
share purchase price will be $__. 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
March 31, 1998, SFNB had an accumulated deficit of $60.6 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
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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 befor 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 th Holding Company Common Stock.
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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 tha 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.
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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 product 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 online. 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
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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 the 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.
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
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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 or 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 second 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 these
competitors are larger than S1 and have greater financial and other resources.
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
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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 officers, directors and 5% shareholders (and their affiliates)
will, in the aggregate, beneficially own approximately ___% of the outstanding
Common Stock (giving effect to the exercise of outstanding options under SFNB's
stock option plans and agreements 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.
If the Contingent Certificate Provisions are approved, 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
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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. In addition, the Holding Company's Certificate of Incorporation
provides that shareholders do not have cumulative voting rights in the election
of directors. These provisions 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.
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THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
This Proxy Statement/Prospectus is first being mailed to the holders of
SFNB 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 August 28, 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 Contingent Certificate Provisions, and (iv) 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 July 6,
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 10,904,263 shares of
SFNB Common Stock outstanding and entitled to vote at the Special Meeting, held
by approximately _____ 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 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, 10,904,263 shares of Holding Company
Common Stock would be issued to the holders of the 10,904,263 outstanding shares
of SFNB Common Stock, 4,329,396 shares of Holding Company Common Stock would be
reserved for issuance with respect to the exercise of options to purchase
4,329,396 shares of SFNB Common Stock pursuant to SFNB's stock option plans and
agreements, 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 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
Options (defined below) granted to RBC Holdings effective upon the Closing
(defined below) to purchase 733,818 shares of Holding Company Common Stock.
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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 and "FOR" the Contingent Certificate
Provisions.
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 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 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, (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
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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:
[GRAPHIC OMITTED]
Immediately upon the Reorganization, the corporate structure will be as follows:
[GRAPHIC OMITTED]
* 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.
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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:
[GRAPHIC OMITTED]
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.
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.
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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 the
Holding Company also serve as the members of SFNB's Board of Directors. Each of
the executive officers of the Holding Company currently serves as an officer of
SFNB and/or 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 an
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 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.
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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 that New
Bank is a "qualified thrift lender" ("QTL") under 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 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 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 wit 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 of DGCL." In
addition, if the Contingent Certificate Provisions are approved, the Holding
Company's Certificate of Incorporation, as authorized by Delaware law, will
eliminate, except in specified
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circumstances, the personal liability of directors for breach of their duty of
care to the Holding Company and its shareholders. See "The Contingent
Certificate Provisions -- Limitation of Director Liability."
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 right 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 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
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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 an 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.
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 (the "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. The Contingent Certificate
Provisions will be effective upon the Reorganization only if approved at the
Special Meeting. See
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"The Contingent Certificate Provisions." The Holding Company's Certificate of
Incorporation without the Contingent Certificate Provisions and Bylaws are
attached as Appendix D and Appendix F 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 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
Home Owners' Loan Act of 1933, as amended ("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
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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 Boar of
Directors. The DGCL provides that special meetings of shareholders may be called
by the Board of Directors or as otherwise provided in the Certificate of
Incorporation or Bylaws. The Holding Company's Certificate of Incorporation does
not otherwise make any provision for special meetings; the Bylaws provide that
the Board of Directors may call special meetings.
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
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.
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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 as permitted under the DGCL, which
requires, generally either by 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 stockholder 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 stockholder 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 stockholder who has not voted in
favor of 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 stockholder's shares, other than in connection with a merger which does not
require the stockholder 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 stockholders of the surviving corporation. Notwithstanding the
above, appraisal rights will be available if the Holding Company stockholders
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 STOCKHOLDERS' LISTS AND CORPORATE RECORDS. Any SFNB
stockholder or group of stockholders 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 stockholder or group of stockholders holding not less than five percent
of the total outstanding
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voting shares, upon making a written demand stating a proper purpose, has the
right to examine nonconfidential portions of the corporations books and records
of account, minutes and record of stockholders and to make extracts therefrom.
This right to examination may be denied if a SFNB stockholder or group of
stockholders 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 stockholder 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 stockholders of SFNB or of any other
corporation, and that such stockholder has not within said five-year period
aided or abetted any other person in procuring any list of stockholders for
purposes of selling or offering for sale such list. No SFNB stockholder has the
right to obtain or inspect a list of borrowers or depositors, their addresses,
individual deposit or loan balances, or and data from which such information
could be reasonably constructed.
Any Holding Company stockholder, 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 stockholders 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
stockholder. If the Holding Company refuses to permit the inspection, the
stockholder 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 stockholders 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
stockholders 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 an shares unless duly authorized and in
accordance with the DGCL and the Holding Company's certificate of incorporation.
TAKEOVER DEFENSE PROVISIONS OF THE DGCL
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
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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.
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."
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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 5
indications of interest and set up ____ meetings to discuss the sale with these
interested parties.
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 VCCM, for a price of $15 million,
and $5 million of 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 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
Option and the Other Agreements.
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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.
(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.
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(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 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 Investments,
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 (defined below) in the ordinary course consistent with past practice and
in accordance with the Agreement, to be 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 update
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 $59.0 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 equivalen 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.
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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 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 such approvals have been filed and are
pending. No other regulatory approvals are required to effect the Sale. 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
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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 ha
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 a notice with the Federal Reserve Board under Section
4(c)(8) of the BHC Act, and the regulations promulgated thereunder, in
connection with the acquisition of New Bank. In reviewing the notice, the
Federal Reserve Board will review and consider the financial and managerial
resources of Royal Bank and its subsidiaries and New Bank; the effect of the
proposed transaction on those resources; the management expertise, internal
control and risk management systems and capital of Royal Bank; and whether the
transaction can reasonably be expected to produce benefits to the public (such
as greater convenience, increased competition and gains in efficiency) that
outweigh possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, and unsound banking
practices). The Federal Reserve Board also will consider the relevant insured
depository institution's record of performance under the CRA. As indicated
above, neither Roya Bank nor its affiliates currently are subject to the CRA.
The notification processing procedures of the Federal Reserve Board require the
publication of notice of, and an opportunity for public comment with respect to,
the notice filed under the BHC Act, and authorize the Federal Reserve Board to
hold formal or informal hearings in connection therewith under certain
circumstances. The Federal Reserve Board has received a CRA-related comment and
a request for a hearing on the notice from the same community group that has
commented on Royal Bank's application to the OTS. The group has raised certain
procedural questions about the filing of the notice, and has requested that the
Federal Reserve Board dismiss or deny the notice, or delay taking action on the
notice until it holds a hearing on the notice, until Royal Bank provides a
detailed CRA plan for New Bank for review by the Federal Reserve Board and the
community group, or until the OTS first takes action on Royal Bank's
application. Royal Bank responded to the comment and maintained that there was
no basis for the group's requests. Royal Bank has received no indication that
the Federal Reserve Board intends to hold a hearing on the notice or to grant
any of the group's other requests.
Royal Bank, RBC Holdings (USA) Inc. and RBC Holdings have filed an
application with the Georgia Department under the Financial Institutions Code of
Georgia (the "Georgia Code") to become bank holding companies under the Georgia
Code after the acquisition of New Bank. Under the Georgia Code, the Georgia
Department is required to consider the financial and managerial resources and
future prospects of the applicants and New Bank, the competitive effects of the
transaction, and the convenience and needs of the community to be served. The
application filed with the Georgia Department is subject to public notice and
comment.
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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 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, WHICH APPROVALS HAVE NOT
YET BEEN RECEIVED. 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
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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 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.
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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
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 thir 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 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.
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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 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
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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.
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 Stock Purchase 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 date
March 9, 1998, is attached at Appendix A to this Proxy Statement/Prospectus and
is incorporated herein by reference. Stockholders 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 STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER 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 Bank Quarterly
Reports on Form 10-QSB 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 Stock Purchase 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 judgements of such managements
at the tine 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 stockholders 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 bas 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 notes that the results of such methodology are highly
dependant upon the numerous assumptions that must be made, including assets
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 notes that the results of
such methodology are highly dependant upon the numerous assumptions that must be
made, including assets 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
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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 $250,000 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 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. 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 option 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 the same 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
47
<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 Option 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 Holding Company Preferred Stock.
Also, the Holding Company shall not be required to sell any shares of
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<PAGE>
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
Strategic Tactical Advisory Relationship ("STAR") program for the initial five
year 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 S 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.
THE CONTINGENT CERTIFICATE AMENDMENTS
(Proposal 3)
The following description should be read in conjunction with the Contingent
Certificate Provisions, which are attached as Appendix E to this Proxy
Statement/Prospectus.
The Board of Directors has proposed the Contingent Certificate Provisions
for various reasons. The Board believes that the increase in the authorized
capital 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
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<PAGE>
stock ownership plans. The Board of Directors believes that the corporate
governance provisions of the Contingent Certificate Provisions provide necessary
flexibility to operate the Holding Company in today's competitive environment.
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. The Board of Directors believes that other Contingent Certificate
Provisions, each of which may have an anti-takeover effect, are in the best
interests of the shareholders because the Board of Directors believes that it is
in the best interests of the Holding Company, its subsidiaries and its
shareholders to encourage potential acquirers to negotiate directly with the
Board. The proposed changes resulting from the Contingent Certificate Provisions
will encourage such negotiations and discourage non-negotiated takeover
attempts.
Despite the belief of the Board of Directors as to the benefits of the
takeover defense provisions to shareholders of the Holding Company, these
provisions also may have the effect of discouraging a future takeover attempt
which is not approved by the Board, but which shareholders may deem to be in
their best interest or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, shareholders who
might desire to participate in such a transaction may not have an opportunity to
do so. These provisions also will render more difficult the removal of the Board
of Directors and management of the Holding Company. The Board of Directors has,
however, unanimously concluded that the potential benefits of these provisions
outweigh the possible disadvantages.
Each of the proposed Contingent Certificate Provisions is discussed in
detail below. The Contingent Certificate Provisions are attached as Appendix E
to this Proxy Statement/Prospectus.
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 Contingent Certificate Provisions authorize the Holding Company to issue
40,000,000 shares of Holding Company Common Stock and 5,000,000 shares of serial
preferred stock. The Board believes that the increase in the authorized capital
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. Except as otherwise disclosed herein,
the Holding Company has no specific plans in the foregoing regards.
CALL OF SPECIAL MEETINGS. The Contingent Certificate Provisions provide
that special meetings of shareholders may be called by the Board of Directors.
Shareholders of the Holding Company are not authorized to call a special
meeting. Provisions such as this one may serve to entrench management and to
prevent a change in control of the Holding Company even if desired by a majority
of shareholders. This provision, along with other Contingent Certificate
Provisions described herein, are designed to encourage potential acquirers to
negotiate directly with the Board of Directors of the Holding Company and to
discourage other takeover attempts.
LIMITATION OF LIABILITY. The Contingent Certificate Provisions 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. The Contingent
Certificate Provisions also provide 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
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<PAGE>
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 Contingent Certificate Provisions 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 Contingent Certificate 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.
This Contingent Certificate Provision 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 Contingent
Certificate 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 Contingent Certificate Provision, subject to
these limitations, eliminates monetary damage awards occasioned by a breach 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 the Contingent
Certificate Amendments are approved at th 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
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<PAGE>
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.
PROCEDURES FOR BUSINESS COMBINATIONS. In addition to the provisions of
Section 203 of the DGCL (see "The Reorganization - Takeover Defense Provisions
of the DGCL"), the Contingent Certificate Provisions would require that business
combinations between the Holding Company (or any majority-owned subsidiary
thereof) and a holder of 10% or more of the voting power of the outstanding
voting stock of the Holding Company, the affiliates or associates of such
shareholder or present and past affiliates of the Holding Company (collectively,
an "Interested Shareholder") either (i) be approved by the affirmative vote of
the holders of at least 80% of the total number of outstanding shares of voting
stock of the Holding Company, or (ii) be approved by at least two-thirds of the
Holding Company's continuing directors (generally persons unaffiliated with the
Interested Shareholder and serving prior to the Interested Shareholder becoming
such) at a duly constituted meeting called for such purpose or involve
consideration per share generally equal to that paid by the Interested
Shareholder when it acquired its block of stock. If one of the conditions set
forth in clause (ii) is met, the business combination shall require only such
affirmative vote as is required by law or any other provision of the Certificate
of Incorporation. The types of business combinations with an Interested
Shareholder covered by this provision include: any merger or consolidation; any
sale, lease, exchange, mortgage, pledge, transfer or other disposition other
than in the usual and regular course of business having an aggregate book value
of 10% or more of the total market value of the Holding Company's outstanding
shares or of its net worth; an issuance or transfer of any equity securities of
the Holding Company or a majority-owned subsidiary having an aggregate market
value of 5% or more of total market value of the Holding Company's outstanding
shares (with some exceptions); the adoption of any plan or proposal of
liquidation or dissolution proposed by or on behalf of an Interested
Shareholder; and any reclassification of securities, recapitalization of the
Holding Company, or any merger or consolidation of the Holding Company with any
of its majority-owned subsidiaries or any other transaction which has the effect
of increasing the proportionate ownership interest of an Interested Shareholder
of any outstanding class of equity or convertible securities of the Holding
Company or any majority-owned subsidiary. As noted above, the Board believes it
to be in the best interest of the Holding Company, its subsidiaries and its
shareholders to encourage potential acquirers to negotiate directly with the
Board. The proposed changes resulting from this Contingent Certificate Provision
will encourage such negotiations and discourage non-negotiated takeover
attempts.
ANTI-GREENMAIL. The Contingent Certificate Provisions include a requirement
that the affirmative vote of at least a majority of the total number of
outstanding shares of voting stock be obtained before the Holding Company may
directly or indirectly purchase or otherwise acquire any voting stock
beneficially owned by a holder of 5% or more of the voting power of the Holding
Company's voting stock, if such holder has owned the shares for less than two
years. Any shares beneficially held by such person would be excluded in
calculating the affirmative vote and the total number of shares outstanding.
This provision would not apply to a pro rata offer made by the Holding Company
to all of its shareholders in compliance with the Exchange Act and the rules and
regulations thereunder, or any purchase of voting stock by the Holding Company
if the Board of
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Directors has determined that the purchase price per share does not exceed the
fair market value of such voting stock.
CRITERIA FOR EVALUATING OFFERS. The Contingent Certificate Provisions
provide that the Board of Directors, when evaluating acquisition offers, shall
give due consideration to all relevant factors, including, without limitation,
the economic effects of acceptance of the offer on depositors, borrowers and
employees of any insured institution subsidiary and on the communities in which
such subsidiaries operate or are located, as well as on the ability of any such
subsidiaries to fulfill the objectives of an insured institution under
applicable federal statutes and regulations.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. If the Contingent
Certificate Provisions are approved, amendments to the Holding Company's
Certificate of Incorporation must be proposed by at least two-thirds of 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; provided, however, that approval by the
affirmative vote of the holders of at least two-thirds of the shares entitled to
vote thereon is required for the provisions related to directors,
indemnification, amending the Bylaws, criteria for evaluating offers,
anti-greenmail, the calling of special meetings of shareholders and the related
clause of the amendment provision. In addition, the provisions regarding
business combinations and the related clause of the amendment provision may be
amended only by the affirmative vote of the holders of at least 80% of the
shares entitled to vote thereon.
THE BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR" APPROVAL OF
THE CONTINGENT CERTIFICATE PROVISIONS.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma financial data set forth below as of March 31, 1998
and for the three month period ended March 31, 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 March 31, 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 three month period ended March 31, 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 three month period ended
March 31, 1998, and the year ended December 31, 1997, but will be included in
discontinued operations in the financial statements which includes the closing
of the Sale.
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.
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Pro Forma Consolidated Balance Sheet - Unaudited
<TABLE>
<CAPTION>
At March 31, 1998
---------------------------------------------
SFNB Pro forma Pro forma
historical adjustments results
---------- ----------- -------
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................................... $ 2,514 $ 11,500 (1) $ 20,014
6,000 (2)
Investment securities available for sale................ 12,838 (11,050)(3) 1,788
Accounts receivable, net................................ 5,181 -- 5,181
Banking operations held for sale, net................... -- 11,050 (3) --
(10,000)(1)
(1,050)(1)
Other current assets.................................... 1,083 -- 1,083
----------- ----------- -----------
Total current assets.................................. 21,616 6,450 28,066
Premises and equipment, net............................. 5,319 -- 5,319
Goodwill and purchased technology, net.................. 2,534 -- 2,534
Other assets............................................ 807 1,500 (1) 2,307
----------- ----------- -----------
Total assets.......................................... $ 30,276 $ 7,950 $ 38,226
=========== =========== ===========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable........................................ $ 1,667 $ -- $ 1,667
Accrued expenses........................................ 1,569 350 (1) 1,919
Accrued stock option compensation expense............... 2,287 450 (5) 2,737
Deferred revenues....................................... 8,775 6,000 (2) 14,775
----------- ----------- -----------
Total current liabilities............................. 14,298 6,800 21,098
----------- ----------- -----------
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 1,251,084
shares at March 31, 1998............................... 2,679 -- 2,679
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 10,616,518 shares
at March 31, 1998...................................... 74,004 (73,898)(4) 106
Additional paid-in capital.............................. -- 73,898 (4) 75,248
1,350 (1)
Accumulated deficit..................................... (60,613) 250 (1) (60,813)
(450)(5)
Accumulated other comprehensive income.................. (92) -- (92)
----------- ----------- -----------
Total stockholders' equity............................ 15,978 1,300 17,128
----------- ----------- -----------
Total liabilities and stockholders' equity............ $ 30,276 $ 7,950 $ 38,226
=========== =========== ===========
</TABLE>
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Pro Forma Consolidated Statements of Operations - Unaudited
<TABLE>
<CAPTION>
Three months ended March 31, 1998
--------------------------------------------
SFNB Pro forma Pro forma
historical adjustments results
---------- ----------- -------
Revenues:
<S> <C> <C> <C>
Software license fees.................................... $ 669 $ 120 (2) $ 789
Professional services.................................... 2,449 250 (2) 2,699
Data center fees......................................... 310 133 (2) 443
------------ ----------- ------------
Total revenues......................................... 3,428 503 3,931
------------ ----------- ------------
Direct costs:
Software license fees.................................... 20 -- 20
Professional services.................................... 1,570 -- 1,570
Data center fees......................................... 1,823 -- 1,823
------------ ----------- ------------
Total direct costs..................................... 3,413 -- 3,413
------------ ----------- ------------
Gross margin........................................... 15 503 518
------------ ----------- ------------
Operating expenses:
Selling and marketing.................................... 1,071 -- 1,071
Product development...................................... 3,383 -- 3,383
General and administrative............................... 1,204 -- 1,204
Depreciation and amortization............................ 637 -- 637
Amortization of goodwill and acquisition charges......... 2,088 -- 2,088
------------ ----------- ------------
Total operating expenses............................... 8,383 -- 8,383
------------ ----------- ------------
Operating loss......................................... (8,368) 503 (7,865)
Interest income............................................. 255 (102) (6) 153
------------ ----------- ------------
Loss from continuing operations............................. $ (8,113) $ 401 $ (7,712)
============ =========== ============
Basic and diluted net loss per common share from
continuing operations.................................... $ (0.77) $ (0.73)
============ ============
Weighted average common shares outstanding.................. 10,523,921 10,592,851
</TABLE>
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<PAGE>
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>
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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 three-month
period ended March 31, 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.
(1) Reflects the results of the Sale of New Bank to RBC Holdings summarized as
follows:
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 purchased technology included in banking
operations held for sale, net which is excluded from sale (1,050)(c)
Adjustment for the fair value of options granted............ (1,350)(d)
-------
Gain on sale, as adjusted................................... $ 250(e)
=======
- ----------
(a) The cash proceeds to be received 18 months after the Closing Date
bears interest at the prime commercial lending rate.
(b) A reconciliation of the amount reflected in the SFNB's March 31, 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:
Amount for banking operations held for sale, net, per
March 31, 1998 unaudited interim financial statements $ --
Adjustment to transfer $10 million in assets to satisfy
terms of transaction with RBC Holdings $10,000,000
Banking options held for sale, net, as adjusted $10,000,000
(c) The purchased technology which is excluded from the Sale 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 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. Accordingly, the gain on sale
of the Banking Business has been adjusted to reflect the write-off of
this purchased technology.
(d) 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.
(e) The gain on the Sale has not been considered in the pro forma
consolidated statement of operations for the three month period ended
March 31, 1998, and the year ended December 31, 1997, but will be
included in discontinued operations in the financial statements which
includes the closing of the Sale.
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<PAGE>
(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 Agrement and $1.0 million for the
Consulting Agreement) which is reflected as deferred revenue at March
31, 1998 . The STAR Agreement 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 revenue will be recorded using the subscription method over the
remaining term of the three-year period. The pro forma results include
recognition of revenue of $120,000 for the three months ended March
31, 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 at closing if the transaction occurred on January 1, 1997
and January 1, 1998. The remaining amount is included in deferred
revenue. 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 $250,000 for the three months ended March 31, 1998 and $1.0
million for the twelve months ended December 31, 1997 of 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 $133,000 for the three
months ended March 31, 1998 and $623,000 for the twelve months ended
December 31, 1997 is based historical usage, multiplied times the per
customer fee set out in the Data Center Agreement .
(3) Reflects the formation of New Bank and the related transfer of the
Banking Business to New Bank excluding purchased technology which is
included in the banking operations held for sale but is excluded from
the Sale, and including the $10 million of assets which qualify as
regulatory capital, provided substantially in the form of investment
securities available for sale.
(4) Reflects the formation of the Holding Company 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 adjustment for compensation expense related to the vesting of
all non-vested options of officers and employees who are anticipated
to be retained by New Bank after the Closing Date. The acceleration of
vesting of the options results in a new measurement date, therefore
compensation expense was calculated as the difference between the
market price on the new vesting date and the original exercise price
multiplied times the number of shares for which options were not
vested on that date. The measurement date occurred in the second
quarter of 1998, which resulted in a charge to discontinued operations
of approximately $450,000.
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<PAGE>
(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>
Three months
ended Year ended
March 31, 1998 December 31, 1997
Decrease from transfer of $10 million in investment
<S> <C> <C>
securities available for sale................................. $ (134) $ (536)
Increases from amount due at the end of eighteen
months from Closing ($1.5 million)............................ 32 128
--------- ---------
$ (102) $ (408)
</TABLE>
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 share 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
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<PAGE>
tax authority and ultimately sustained by a court. In rendering its opinion,
KPMG has relied upon the relevant provisions of the Internal Revenue 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 Internal Revenue 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.
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
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<PAGE>
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 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 S1 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."
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<PAGE>
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. 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.
FINANCIAL RESOURCES OF THE HOLDING COMPANY
Upon completion of the Reorganization and assuming consummation of the
Sale, on a pro forma basis at March 31, 1998, the Holding Company would have an
initial stockholders' equity of $17.1 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 10,904,263 outstanding shares of SFNB Common Stock (excluding
stock options previously granted but not exercised for 733,818 shares) and
1,174,110 outstanding shares of SFNB Preferred Stock. Upon completion of the
Reorganization and subject to adjustment, 4,329,396 shares of Holding Company
Common Stock will be reserved for the issuance of stock options under SFNB stock
option plans and agreements, 1,174,110 shares of Holding Company Common Stock
will be reserved in the event of the conversion of the outstanding Holding
Company 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 is will be authorized to issue 25,000,000 shares of
Holding Company Common Stock, par value $0.01 per share, unless the Contingent
Certificate Provisions are approved, in which case the Holding Company will be
authorized to issue 40,000,000 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
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<PAGE>
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 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 Contingent
Certificate Provisions."
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 and upon the
conversion of Holding Company Preferre Stock. 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 up to 2,500,000
shares of serial preferred stock, par value $0.01 per share, for any proper
corporate purpose, unless the Contingent Certificate Provisions are approved, in
which case the Holding Company will be authorized to issue 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.
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<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,
__________ 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.
Prior to ________, Mr. Gardner served as a partner of Hollybank Investments,
L.P. from 1993 to ________. Before joining Hollybank Investments, L.P., he
served as 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, Medusa Corporation, Filene's Basement and
Medicus Systems.
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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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 Internal Revenue Code of 1986, 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
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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
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<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
March 31, 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...................................... 2,679 $ 2,679
Common stock......................................... 74,004 106
Additional paid-in capital........................... -- 75,248
Accumulated deficit.................................. (60,613) (60,813)
Accumulated other comprehensive income............... (92) (92)
------------- -------------
Total stockholders' equity....................... $ 15,978 $ 17,128
============= =============
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.......................................... 10,616,518 (1) 10,616,518 (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.......................................... 1,251,084 1,251,084
</TABLE>
- ----------
(1) Excludes 4,420,708 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. Upon consummation of the
Reorganization, such outstanding options will become options to purchase
Holding Company Common Stock.
67
<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, Inc., ("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, the Company announced that the Royal Bank, through one of
its U.S. based subsidiaries, had agreed to acquire the banking operations of
SFNB for a premium of $3 million after the $10.0 million of regulatory total
capital of the Banking Business. $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 the summer of 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, executes
banking transactions over the Internet. The second product in the suite, Virtual
Credit Card Manager, provides customers access to a real-time credit card
account statement. Virtual Investment Manager, 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.
Future products in the suite anticipated to be developed include, among others,
Virtual Corporate Cash Manager, Virtual Loan Manager, Virtual Insurance Manager
and Virtual Bill Presentment.
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. Additionally, SFNB's
software development efforts are targeted towards transforming the entire VFM
product suite from a two-tier architecture to a three-tier architecture. SFNB
believes that the move towards a three-tier architecture for its base product
will assist it in maintaining its technological edge over its competition as
well as increase the capacity and efficiency of the VFM product.
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
69
<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 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
70
<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.
71
<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>
72
<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>
74
<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:
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
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
======= =======
</TABLE>
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>
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<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
("GNMA"), Fannie Mae or the Federal Home Loan Mortgage Corporation ("FHLMC").
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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.
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
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
========= =========
</TABLE>
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
March 31, 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 March 31,
1998 (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL ACTUAL % REQUIRED REQUIRED % EXCESS
------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Core.......................... $ 13,328 15.60% $ 2,563 3.0% $10,765
Tangible...................... 13,328 15.60 1,282 1.5 12,046
Risk-based.................... 13,497 33.13 3,259 8.0 10,238
</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
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<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 March 31, 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
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<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 Internal Revenue Code of 1986, 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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<PAGE>
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 March 25, 1998, SFNB and S1 had 14 and 231 (1 part-time) employees,
respectively, not including 25 S1 data center personnel and 21 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. The executive offices,
Atlanta City office and customer service center are leased facilities. The
customer service center houses SFNB's Internet bank server, technical staff and
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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 VFM 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, 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, Virtual Credit Card Manager, provides customers access to
an on-line credit card account statement. Virtual Investment Manager, which is
scheduled for general release in 1998, will allow customers the ability to open
brokerage accounts, enter and execute stock and mutual fund transactions and
view portfolio positions. Future products in the suite anticipated to be
developed include, among others, Virtual Corporate Cash Manager, Virtual Loan
Manager, Virtual Insurance 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.
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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.
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 set-up fee for each of
the customers of the data processor and 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 typically 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 either a fixed price or 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.
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The table below reflects quarterly information on the 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 six quarterly periods ended March 31, 1998. The
table also shows the quarterly information on completed implementations for the
past six quarters. All amounts represent totals as of the end of each respective
period.
<TABLE>
<CAPTION>
December 31, March 31, June 30, September 30, December 31, March 31,
1996 1997 1997 1997 1997 1998
------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Number of financial institutions:
S1 data center..................... 7 21 18 18 17 17
Third party data processors*....... 4 9 24 32 43 56
Direct license in-house............ 2 4 6 6 6 7
------- ------ ------- ------- ------- -------
13 34 48 56 66 80
------- ------ ------- ------- ------- -------
Completed VFM implementations:
S1 data center..................... 2 3 3 6 8 12
Financial institutions using third
party data processors*........... -- -- 3 3 11 16
Direct license in-house............ -- -- -- -- 4 4
------- ------ ------- ------- ------- -------
2 3 6 9 23 32
------- ------ ------- ------- ------- -------
Number of billable VFM customers
in S1 data center**................ 9,500 12,100 17,600 28,000 32,700 44,000
Number of accounts processed in
S1 data center**................... 12,200 15,700 21,000 37,000 49,500 69,400
Number of accounts processed in
third -- -- -- -- 700 4,400
party data processors*.............
Estimated number of accounts using
VFM though direct license.......... -- -- -- -- 2,000 26,200
</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 billable VFM customers. Each financial institution's computer
configuration, which represents a large component of data center costs, is based
on the number of accounts processed.
DISCONTINUED OPERATIONS -- PLAN TO SELL THE BANKING OPERATIONS
In 1997, SFNB announced its decision to sell its banking operations in
order to concentrate its efforts on the rapidly growing Internet software
development segment of its business. 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, SFNB will receive a $3.0 million premium
after the $10.0 million of regulatory total capital of the Banking Business,
including $1.5 million (plus accrued interest) that is not due until 18 months
from the Closing Date. The Banking Business, which will be separated from the
technology operations in the Reorganization, includes 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 the summer of 1998. In addition, S1 has entered into
technology licensing and consulting arrangements with Royal Bank affiliates to
become effective upon the Sale of the Banking Business for $6.0 million payable
upon acquisition of the Banking Business. Also, in March 1998, SFNB sold to RBC
Holdings, 92,593 shares of common stock for $1 million in a private placement.
SFNB also granted RBC Holdings Options effective upon the Closing to purchase
additional 733,818 shares of Holding Company Stock for a total of $10.0 million,
at prices ranging from $11.88 to $15.81 per share exercisable over a period of
21 months after consummation of the Sale of the Banking Business to RBC
Holdings.
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 Business to
continue to generate operating losses through the Closing Date comparable to its
historical trend. Management is
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unaware of any trends, events or uncertainties involving discontinued banking
operations that will materially impact SFNB's liquidity, financial condition or
results of operations until the Closing Date. 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.
RESULTS OF OPERATIONS - COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES AND OPERATING MARGINS
S1's total revenues increased to $3.4 million for the quarter ended March
31, 1998 from $1.7 million for the comparable period in 1997. The primary
components of first quarter 1998 revenue were $0.7 million in software license
fees, $2.4 million in professional service fees and $0.3 million in data center
fees. Direct costs associated with S1's revenues were $3.4 million in first
quarter 1998, up from $3.2 million in the comparable period in 1997.
Software Licensing. Software license fees, which accounted for
approximately 20% of first quarter 1998's total revenues, were $0.7 million
which is comparable to $0.7 million for first quarter 1997. Direct costs in
first quarter 1998 associated with software licenses were $20 thousand compared
to $490 thousand in the first quarter 1997. In previous quarters, the direct
costs associated with software license fees mainly consisted of the amortization
of purchased technology. Purchased technology includes technology acquired in
previous acquisitions and software development costs paid to an independent
contractor in 1995 and 1996. These costs have been amortized over a period of 3
years, which is the amount representing the greater of the amortization using
the straight-line method or 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
acquisitions in 1996 after determining that there were minimal future cash flows
expected to be derived from these intangible assets. Accordingly, direct costs
for software license fees decreased in the first quarter of 1998 as compared to
the first quarter of 1997. Direct costs of software license fees is expected to
approximate the level in the first quarter of 1998 in future periods as direct
software license costs in the foreseeable future are expected to be minimal.
Professional Services. Professional services revenue increased to $2.4
million in first quarter 1998 from $1.0 million in first quarter 1997. The
increase in professional services revenues is due to an increased number of
implementations occurring in first quarter 1998 compared to first quarter 1997.
The direct costs associated with professional services, which are primarily
personnel costs, were $1.6 million in first quarter 1998, resulting in a gross
margin of $879 thousand or 36%, versus a negative gross margin in the first
quarter 1997 of $264 thousand or 27%. The negative gross margin in the first
quarter of 1997 can be attributable to the fixed pricing established in 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 1997, during the course
of the initial VBM implementations, S1 experienced delays in integrating VBM
with customers' legacy mainframe systems, resulting in delays in completing
implementations. This resulted in an increase in costs to implement and the
accrual of losses related to these contracts early in 1997. Because the Company
has gained more experience in implementing VFM, and because S1 now prices its
contracts based on time and materials, management anticipates that the
professional services' margin will either remain comparable to that realized in
the first quarter of 1998 or 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 revenues, which includes revenues for technical
support provided to all institutions using VFM, increased to $310 thousand in
first quarter 1998 from $24 thousand in first quarter 1997. At the end of the
first quarter of 1998, twelve financial institutions were online through the S1
data center. Direct costs of approximately $1.8 million were associated with
data
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center operations in first quarter 1998 resulting in a negative gross margin of
$1.5 million. 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 March 31, 1998 should be adequate to meet the
anticipated growth in the number of entities using the data center in 1998.
During the month of March 1998, the data center processed, including SFNB,
in excess of 69,000 Internet banking accounts, representing approximately 44,000
billable customers. This compares to approximately 15,700 accounts and 12,100
billable customers for the month of March 1997.
OPERATING EXPENSES
Operating expenses increased to $8.4 million in first quarter 1998 from
$5.5 million in 1997. Included in the first quarter 1998 operating expenses is
$2.1 million of amortization of goodwill related to the acquisition of Solutions
by Design, Inc. ("SBD") in November 1997. During the first quarter 1997,
amortization of goodwill related to acquisitions amount to $341 thousand. The
remaining increase in operating expenses of approximately $1.2 million reflects
S1's ongoing investment in product development. Approximately $3.4 million, or
40% of the $8.4 million in operating expenses was attributable to product
development expenses. Most of these expenses relate to continued efforts in
developing the VFM products. The increase in product development costs is
primarily related 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. The Company expected to experience
significant growth in personnel based on the growing operations. The SBD
acquisition accelerated the growth in personnel costs and prevented the
additional expenses associated with using contract labor.
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 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 fees are
recognized as deferred revenue and amortized into revenue on a subscription
basis 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
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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 online 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
using 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 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
was attributable to product development expenses. During 1996, the Company
acquired Five Paces, Inc. and SecureWare which was the beginning of the software
operations for the Company. Both acquisitions were accounted for as purchases
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 commencing 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
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
was attributable to an 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 $7.3 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
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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. In
addition, S1 recorded goodwill of approximately $6.0 million from the
acquisition of Solutions By Design, Inc. ("SBD") during 1997 of which $1.4
million was amortized during the fourth quarter of 1997. A significant portion
of the remaining balance of the goodwill will be amortized over the first two
quarters of 1998. Included in the 1996 operating expenses are one-time charges
of $6.8 million for acquired in-process research and development related to
acquisitions.
RESULTS OF OPERATIONS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
S1 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 Consolidated Financial Statements.
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. 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 Virtual Credit
Card Manager, 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 the period. The
total cost of revenues was composed of $2.3 million related to the cost of
operating the data center and $796,000 of purchased technology and capitalized
software costs.
OPERATING EXPENSES
During 1996, S1 recorded a total operating cost 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 FPI
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, non-tax deductible 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 FPI, these
projects included Virtual Brokerage Managers, a new software product that
assists with investment via the Internet; Virtual Credit Card Manager, an add-on
to Virtual Brokerage 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 use 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.
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.
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 the Company, including net working capital, fixed
assets, other intangible assets, and the current technology. These estimates are
based on the following assumptions. 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.
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QUARTERLY RESULTS OF CONTINUING OPERATIONS FOR THE FIVE QUARTERS ENDED MARCH 31,
1998
The following table sets forth certain quarterly financial data for the
five quarterly periods ended March 31, 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.
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS OF CONTINUING OPERATIONS
(Dollars in thousands)
(Unaudited)
March 31, June 30, September 30, December 31, March 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees.......... $ 673 $ 1,187 $ 1,094 $ 1,188 $ 669
Professional services.......... 973 1,605 1,661 2,038 2,449
Data center fees............... 24 90 122 175 310
--------- --------- --------- --------- ---------
Total revenues........... 1,670 2,882 2,877 3,401 3,428
--------- --------- --------- --------- ---------
Direct costs:
Software license fees.......... 490 484 391 240 20
Professional services.......... 1,237 1,433 1,157 1,519 1,570
Data center fees............... 1,507 1,717 1,854 1,869 1,823
--------- --------- --------- --------- ---------
Total direct costs....... 3,234 3,634 3,402 3,628 3,413
--------- --------- --------- --------- ---------
Gross margin............. (1,564) (752) (525) (227) 15
--------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing.......... 1,083 1,088 992 1,142 1,071
Product development............ 2,375 2,524 2,696 2,912 3,383
General and administrative..... 1,369 1,098 991 1,179 1,204
Depreciation and amortization.. 310 370 401 660 637
Amortization of goodwill
and acquisition charges..... 341 346 346 3,492 2,088
--------- --------- --------- --------- ---------
Total operating expenses. 5,478 5,426 5,426 9,385 8,383
--------- --------- --------- --------- ---------
Operating loss........... (7,042) (6,178) (5,951) (9,612) (8,368)
Interest income..................... 419 351 346 365 255
--------- --------- --------- --------- ---------
Loss from continuing operations..... $ (6,623) $ (5,827) $ (5,605) $ (9,247) $ (8,113)
========= ========= ========= ========= ==========
</TABLE>
REVENUES AND OPERATING MARGINS
Software Licensing. Software license fees decreased from $1.2 million in
the fourth quarter of 1997 to $669 thousand in the first quarter 1998. The
decrease is the result of completion of the installation of the VFM software for
the direct licensees in the fourth quarter of 1997. The first 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. As
third party data processors, which are offering the S1 software to their
financial institution customers, bring those sites online, software license fees
should increase in future quarters.
Direct costs for software license fees decreased to $20 thousand in the
first quarter 1998 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 $2.4 million in
the first quarter of 1998, compared to $2.0 million in the fourth quarter of
1997. Gross margins for professional services increased to $879 thousand, or
36%, in the first quarter of 1998 from $519 thousand, or 25%, in the fourth
quarter 1997. The increase in the professional services' margin is primarily
related to stabilizing pricing for professional services and the efficiencies
gained from previous implementations. In addition, the increase in margin is
attributable to the completion of the majority of contracts with relatively low
revenue caps.
Data Center. Data center fees, which represented 9% of first quarter 1998
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
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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 77% in the first quarter 1998 and 43% between the third and fourth
quarter 1997. This increase is attributable to the increased number of
institutions implemented in the data center, from three at the beginning of the
third quarter to eight at the end of the fourth quarter 1997 and twelve at the
end of the first quarter 1998.
Gross margins for data center remained negative in the first quarter due to
the limited revenues generated and the significant costs associated with
establishing the necessary infrastructure to process the banks online.
Management anticipates that the data center and technical support will reach a
break-even level when approximately 330,000 - 360,000 billable customers are
processed on a monthly basis. As banks are converted to the newest version of
the VBM software, which is anticipated to occur over the second half of 1998 and
first half of 1999, management anticipates that processing efficiencies will be
obtained which may result in a reduction in the estimated number of billable
customers needed to reach break even in the data center. As of March 31, 1998,
the data center was processing approximately 69,000 Internet accounts, which
represented approximately 44,000 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 35% growth in the number of billable customers from 32,700
at the end of the fourth quarter 1997 to 44,000 at the end of the first quarter
1998, which can be attributed to the additional financial institutions brought
online. The average quarterly revenue per billable customer processed in the
data center, including customers processed for SFNB, amounted to $9.64 for the
first quarter of 1998 compared to $9.55 in the fourth quarter of 1997.
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 44,000 billable customers being
processed in the S1 data center were attributable to five of the twelve
institutions that had been implemented as of March 31, 1998.
OPERATING EXPENSES
Total operating expenses decreased to $8.4 million in the first quarter
1998 from $9.4 million in the fourth quarter 1997. Included in the fourth
quarter 1997 operating expenses are charges of approximately $1.9 million which
represent the write-off of goodwill and purchased technology from previous
acquisitions and an amount equal to the incremental difference between the cost
of services provided by SBD as contractors for the two month period prior to the
acquisition and those same individuals as employees of S1. Net of these charges,
operating expenses for the fourth quarter 1997 were $7.5 million. The increase
in operating expenses over the normalized prior quarter is primarily
attributable to the increase in amortization of goodwill resulting from the SBD
acquisition. The amortization expense increased to $2.1 million in the first
quarter 1998 compared to $1.4 million in the fourth quarter 1997. The majority
of the remaining balance of goodwill from the acquisition of SBD will be
expensed during the second quarter. Net of these charges and amortization of
goodwill, operating expenses increased slightly from $5.9 million in the fourth
quarter 1997 to $6.3 million in the fourth quarter 1998.
Product development costs also increased in the first quarter 1998 to $3.4
million compared to $2.9 million in the fourth quarter. The increase is mainly
attributable to non-cash personnel expenses. Management anticipates that the
cost of product development will continue to increase over the next several
quarters. The increase represents management's commitment to enhancing the
current VFM products by migrating the existing products to a more efficient
software architecture and to developing new VFM applications, including the
Virtual Investment Manager, for VFM. General and administrative expenses were
comparable with prior quarters, at $1.2 million in the first quarter 1998.
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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.
<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 institutions 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.
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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 online 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 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 these intangible assets. In the fourth
quarter, S1 made the strategic decision to refocus the resources which had been
involved in the development and marketing of these products 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. In addition,
the most recent version of VBM, which is scheduled to be released in the first
quarter of 1998, constituted a significant revision to the acquired technology.
Accordingly, the fair value of those products was considered to be minimal.
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
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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 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 online.
Management anticipates that the data center and technical support will reach a
break-even level when approximately 330,000 - 360,000 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 online for the entire year,
one was brought online during the first quarter of 1997 and five were brought
online 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 online 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 online 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 online, 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 from the SBD acquisition and
certain other non-recurring charges. S1 recorded goodwill of approximately $6.0
million from the acquisition of SBD of which $1.4 million was amortized in the
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fourth quarter. A significant portion of the remaining balance of 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 the Virtual Investment Manager, for
VFM. General and administrative expenses were comparable with prior quarters, at
$1.2 million in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES AS OF MARCH 31, 1998
Total stockholders' equity decreased to $16.0 million as of March 31, 1998
from $23.5 million at December 31, 1997. The decrease in stockholders' equity is
primarily attributable to the $8.6 million net loss incurred during the first
three months of 1998. This decrease was partially offset by the issuance of an
aggregate 92,593 shares of common stock to RBC Holdings, as discussed above.
SFNB has previously committed to the OTS, its primary regulator, that it
will create a holding company structure. As part of this reorganization, New
Bank will become a wholly-owned subsidiary of the Holding Company resulting in a
complete segregation of SFNB's Banking Business (including cash and related
investment securities), deposit liabilities, other liabilities and the capital
necessary to support its operating activities. 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 and SFNB's minimum capital requirement. As discussed above, SFNB has
announced that Royal Bank has agreed to acquire the Banking Business.
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 of SFNB. 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 agreements and the equity sales during the third quarter of 1997.
As of March 31, 1998, SFNB had approximately $15.4 million in cash and liquid
assets. As of that date, the transactions with Royal Bank, upon consummation,
would provide an additional $7.5 million in cash available to the Holding
Company. Management anticipates that this level of cash resources after the
Sale, along with anticipated increases in revenues, will provide sufficient
capital to fund software operations for the foreseeable future. The Holding
Company believes it will become cash-flow positive from operations during 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. 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. If additional capital is needed, the Company intends to
continue to pursue capital raising opportunities similar to the STAR
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program through which it has raised capital in the past. S1 did not have any
material capital commitments at March 31, 1998; however, S1 does expect to make
approximately $3.0 million in capital expenditures during the remainder of 1998.
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 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 March 31, 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. A company wide task force,
with representation from all major business units, was established in 1997 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 SFNB licenses 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
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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. Accordingly, management anticipates
that all financial institution customers will be converted to the new version by
June 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 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 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 has 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 quarter ended
March 31, 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
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<PAGE>
SOP 97-2 did not have a material effect on the interim financial statements for
the quarter ended March 31, 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
As of the Record Date, there were _____ 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.
102
<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
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<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 $100,000 (the
"named executive officers") for the fiscal year ended December 31, 1997. SFNB
has not granted any stock appreciation rights ("SARs").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Awards
Other annual Securities All other
Name and Annual Compensation compensation underlying options compensation
Principal Position Year Salary ($) 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.
104
<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
$3,100 for Mr. Stockwell in 1996 and 1997, respectively.
Directors of SFNB do not receive any fees or other compensation for their
service as directors. Directors, however, are reimbursed for travel and other
expenses incurred in connection with attending meetings of the SFNB Board of
Directors.
EMPLOYMENT CONTRACTS
SFNB currently does not have any employment contracts or other compensatory
plans or arrangements pertaining to resignation, retirement or any other
termination of its executive officers' employment with SFNB or S1 or from a
change in control of SFNB or a change of responsibilities following a change in
control of SFNB.
105
<PAGE>
OPTION GRANTS
The following table contains information concerning the grant of stock
options to the named executive officers during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
Number Percent of Potential realizable value
of securities total options at assumed annual rates
underlying granted to Exercise of stock price appreciation
options employees or base Expiration for option term
Name granted (#) in fiscal year price ($/Sh) date 5% 10%
- ---- ----------- -------------- ------------ ----------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Robert F. Stockwell 20,000 1.7% $6.06 Dec. 12, 2007 $76,222 $193,162
</TABLE>
OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
The following table sets forth on an aggregated basis certain information
concerning each exercise of stock options during fiscal year 1997 by the named
executive officers and the value of unexercised options.
AGGREGATED OPTION EXERCISES IN 1997 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of securities
Shares underlying unexercised Value of unexercised in-the
acquired on Value options at FY-end (#) money options at FY-end ($)(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 Bancshares, Inc.
("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
106
<PAGE>
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 $713,000 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 $400,000, SFNB's Board of Directors determined not to proceed with
Webtone, primarily because of 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.
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<PAGE>
STOCK OWNED BY MANAGEMENT
The following table sets forth certain information as of July 6, 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 July 6, 1998, there were 10,904,263 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) 6.7%
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) 9.6%
SFNB and Director of S1
Howard J. Runnion, Jr.
Director of SFNB and S1 110,424 (e) 1.0%
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 18.0%
</TABLE>
- ----------
* Less than one percent.
(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 July 6, 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 July 6, 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 July 6, 1998, 75,124 shares held by his wife Marguerite, and
4,218 shares held in SFNB's 401(k) plan.
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<PAGE>
(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 May 28, 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 May 28, 1998.
(f) The share ownership of Mr. Stockwell includes 74,978 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 July 6, 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 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) 9.6%
3390 Peachtree Road, NE
Atlanta, GA 30326
James S. Mahan, III 776,854 (c) 6.7%
3390 Peachtree Road, NE
Atlanta, GA 30326
Hollybank Investments, LP/Dorsey R. Gardner 687,100 (d) 6.3%
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 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.
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<PAGE>
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 July 6, 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, the first annual meeting of
shareholders the Holding Company will be held in 1999. Therefore, 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 ______________ __, 199_.
If the Plan is not approved and consummated, SFNB anticipates that its 1998
annual meeting will be held in the third quarter of 1998.
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.
110
<PAGE>
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.
111
<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.
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<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
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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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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
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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.
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<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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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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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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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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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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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
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on 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.
4.3.1.4. LIQUIDATION
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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
Class III: Terms of office expire at the third annual meeting of shareholders:
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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. 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.
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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.
7. AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred
by the Delaware General Corporation Law, the Board of Directors or the
shareholders may from time to time amend the bylaws of the Corporation. Such
action by the board of directors shall require the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
board of directors called for such purpose. Such action by the shareholders
shall require the affirmative vote of at leas two-thirds of the total votes
eligible to be voted at a duly constituted meeting of shareholders called for
such purpose.
8. CRITERIA FOR EVALUATING CERTAIN OFFERS
The board of directors of the Corporation, when evaluating any
offer to (i) make a tender or exchange offer for the Common Stock of the
Corporation, (ii) merge or consolidate the Corporation with another institution,
or (iii) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, shall, in connection with the exercise
of its judgment in determining what is in the best interests of the Corporation
and its shareholders, give due consideratio to all relevant factors, including
without limitation the economic effects of acceptance of such offer on (a)
depositors, borrowers and employees of any insured institution subsidiary or
subsidiaries of the Corporation, and on the communities in which such subsidiary
or subsidiaries operate or are located and (b) the ability of any such
subsidiary or subsidiaries to fulfill the objectives of an insured institution
under applicable federal statutes and regulations.
9. CERTAIN BUSINESS COMBINATIONS
The votes of shareholders and directors required to approve
any Business Combination shall be as set forth in this Section 9. The term
"Business Combination" is used as defined in Section 9.1.2. All other
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capitalized terms not otherwise defined in this Section 9 or elsewhere in this
Certificate of Incorporation are used as defined in Section 9.3.
9.1. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS
9.1.1. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS
In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in
Section 9.2:
(i) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (a) any Interested Shareholder
(as hereinafter defined) or (b) any other corporation (whether or not
itself an Interested Shareholder) which is, or after the merger or
consolidation would be, an Affiliate or Associate (as those terms are
hereinafter defined) of such Interested Shareholder prior to the
transaction; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition other than in the usual and regular course of
business (in one transaction or a series of transactions in any
twelve-month period) to any Interested Shareholder or any Affiliate or
Associate of such Interested Shareholder, other than the Corporation or
any of its Subsidiaries, of any assets of the Corporation or any
Subsidiary having, measured at the time the transaction or transactions
are approved by th board of directors of the Corporation, an aggregate
book value as of the end of the Corporation's most recent fiscal
quarter of ten percent or more of the total Market Value (as
hereinafter defined) of the outstanding shares of the Corporation or of
its net worth as of the end of its most recent fiscal quarter; or
(iii) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any
equity securities of the Corporation or any Subsidiary having an
aggregate Market Value of five percent or more of the total Market
Value of the outstanding shares of the Corporation to any Interested
Shareholder or any Affiliate or Associate of any Interested
Shareholder, other than the Corporation or any of its Subsidiaries,
except pursuant to the exercise of warrants, rights or options to
subscribe for or purchase securities offered, issued or granted pro
rata to all holders of the Voting Stock (as hereinafter defined) of the
Corporation or any other method affording substantially proportionate
treatment to the holders of Voting Stock; or
(iv) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation or any Subsidiary proposed by or on
behalf of an Interested Shareholder or any Affiliate or Associate of
such Interested Shareholder, other than the Corporation or any of its
Subsidiaries; or
(v) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an Interested Shareholder) which has the effect, directly or
indirectly, in one transaction or a series of transaction, of
increasing the proportionate amount of the outstanding shares of any
class of equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any Interested
Shareholder or any Affiliate or Associate of any Interested
Shareholder, other than the Corporation or any of its Subsidiaries;
shall be approved by affirmative vote of the holders of at least 80 percent of
the total number of outstanding shares of Voting Stock. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law.
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9.1.2. DEFINITION OF "BUSINESS COMBINATION"
The term "Business Combination" as used in this Section 9
shall mean any transaction which is referred to in any one or more of clauses
(i) through (v) of Section 9.1.1.
9.2. WHEN HIGHER VOTE IS NOT REQUIRED
The provisions of Section 9.1.1 shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by law and any other provision of this
Certificate of Incorporation, if all of the conditions specified in either
Section 9.2.1 or 9.2.2 are met:
9.2.1. APPROVAL BY CONTINUING DIRECTORS
The Business Combination shall have been approved by at least
two-thirds of the Continuing Directors (as hereinafter defined) then in office
at a duly constituted meeting of the board of directors of the Corporation
called for such purpose.
9.2.2. PRICE AND PROCEDURE REQUIREMENTS
All of the following conditions shall have been met:
(i) The aggregate amount of the cash and the Market Value as
of the Valuation Date (as hereinafter defined) of the Business
Combination of consideration other than cash to be received per share
by holders of Common Stock in such Business Combination shall be at
least equal to the highest of the following:
(a) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Shareholder for any shares of
Common Stock acquired by it (1) within the two-year period immediately
prior to the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or (2) in the transaction in
which it became an Interested Shareholder, whichever is higher; or
(b) the Market Value per share of Common Stock of the
same class or series on the Announcement Date or on the date on which
the Interested Shareholder became an Interested Shareholder (such
latter date is referred to in this Section 9 as the "Determination
Date"), whichever is higher; or
(c) the price per share equal to the Market Value per
share of Common Stock of the same class or series determined pursuant
to subdivision (i)(b) hereof, multiplied by the fraction of (1) the
highest per share price (including brokerage commissions, transfer
taxes and soliciting dealers fees) paid by the Interested Shareholder
for any shares of Common Stock of the same class or series acquired by
it within the two-year period immediately prior to the Announcement
Date, over (2) the Market Value per share of Common Stock of the same
class or series on the first day in such two-year period on which the
Interested Shareholder acquired shares of Common Stock.
(ii) The aggregate amount of the cash and the Market Value as
of the Valuation Date of consideration other than cash to be received
per share by holders of shares of any class or series of outstanding
Voting Stock, other than Common Stock, shall be at least equal to the
highest of the following (it being intended that the requirements of
this Section 9.2.2(ii) shall be required to be met with respect to
every class of outstanding Voting Stock, whether or not the Interested
Shareholde has previously acquired any shares of a particular class of
Voting Stock):
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(a) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Shareholder for any shares of
such class or series of Voting Stock acquired by it: (1) within the
two-year period immediately prior to the Announcement Date or (2) in
the transaction in which it became an Interested Shareholder, whichever
is higher; or
(b) (if applicable) the highest preferential amount
per share to which the holders of shares of such class or series of
Voting Stock are entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; or
(c) the Market Value per share of such class or series
of Voting Stock on the Announcement Date or on the Determination Date,
whichever is higher; or
(d) the price per share equal to the Market Value per
share of such class or series of stock determined pursuant to
subdivision (ii)(c) hereof multiplied by the fraction of (1) the
highest per share price (including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by the Interested Shareholder
for any shares of any class of series of Voting Stock acquired by it
within the two-year period immediately prior to the Announcement Date
over (2) the Market Value per share of the same class or series of
Voting Stock on the first day in such two-year period on which the
Interested Shareholder acquired any shares of the same class or series
of Voting Stock.
(iii) The consideration to be received by holders of a
particular class or series of outstanding Voting Stock shall be in cash
or in the same form as the Interested Shareholder has previously paid
for shares of such class or series of Voting Stock. If the Interested
Shareholder has paid for shares of any class or series of Voting Stock
with varying forms of consideration, the form of consideration for such
class or series of Voting Stock shall be either cash or the form used
to acquire the largest number of shares of such class or series of
Voting Stock previously acquired by it. If the Interested Person has
not previously acquired shares of such class or series, the form of
consideration for such class or series shall either be cash for the
form of consideration used to acquire the largest number of shares of
Voting Stock previously acquired by the Interested Person.
(iv) After such Interested Shareholder has become an
Interested Shareholder and prior to the consummation of such Business
Combination: (a) there shall have been no failure to declare and pay at
the regular date therefor any full quarterly dividends (whether or not
cumulative) on any outstanding Preferred Stock of the Corporation,
except as approved by a majority of the Continuing Directors; (b) there
shall have been (1) no reduction in the annual rate of dividends paid
on any class or series of the capital stock of the Corporation (except
as necessary to reflect any subdivision of the capital stock), except
as approved by a majority of the Continuing Directors, and (2) an
increase in such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of
reducing the number of outstanding shares of Common Stock, unless the
failure to increase such annual rate is approved by a majority of the
Continuing Directors; and (c) such Interested Shareholder shall have
not become the beneficial owner of any additional shares of capital
stock except as part of the transaction which results in such
Interested Shareholder becoming an Interested Shareholder or by virtue
of proportionate stock splits or stock dividends.
The provisions of subdivisions (iv)(a) and (iv)(b) of this
Section 9.2.2 do not apply if the Interested Shareholder or any Affiliate or
Associate of the Interested Shareholder voted as a director of the Corporation
in a manner inconsistent with such subdivisions, and the Interested Shareholder,
within ten days after any act or failure to act inconsistent with such
subdivisions, notifies the board of directors of the Corporation in writing that
the Interested Shareholder disapproves thereof and requests in good faith that
the board of directors rectify such act or failure to act.
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(v) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit directly or indirectly (except proportionately as a
shareholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Corporation or any of its Subsidiaries (whether in
anticipation of or in connection with such Business Combination or
otherwise).
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to public shareholders of the Corporation
at least 20 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant t such Act or subsequent provisions).
9.3. CERTAIN DEFINITIONS
For the purposes of this Section 9:
A. "Interested Shareholder" shall mean any person (other than
the Corporation or any Subsidiary or any employee stock purchase plan or other
employee benefit plan of the Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding Voting Stock;
(ii) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then outstanding Voting Stock; OR ====
(iii) is an assignee of or has otherwise succeeded to the
beneficial ownership of any shares of voting stock that were at any
time within the two-year period immediately prior to any such date
beneficially owned by an interested person, if such assignment or
succession shall have occurred in the course of a transaction or series
of transactions not utilizing the facilities of a national securities
exchange, occurring on the nasdaq stock market, inc., or involving a
public distribution.
B. "Beneficial Owner," when used with respect to any Voting
Stock, means a person:
(i) that, individually or with any of its Affiliates or
Associates, beneficially owns Voting Stock directly or indirectly; or
(ii) that, individually or with any of its Affiliates or
Associates, has (a) the right to acquire Voting Stock (whether such
right is exercisable immediately or only after passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise; (b) the right to vote or direct the voting of Voting Stock
pursuant to any agreement, arrangement or understanding; or (c) the
right to dispose of or to direct the disposition of Voting Stock
pursuant to any agreement, arrangement or understanding; or
(iii) that, individually or with any of its Affiliates or
Associates, has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting, or disposing of Voting Stock
with any other person that beneficially owns, or whose Affiliates or
Associates beneficially own, directly or indirectly, such shares of
Voting Stock.
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C. For the purposes of determining whether a person is an
Interested Shareholder pursuant to paragraph A of this Section 9.3, the number
of shares of Voting Stock deemed to be outstanding shall include shares deemed
owned through application of paragraph B of this Section 9.3 but shall not
include any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
D. "Affiliate" means a person that directly or indirectly
through one or more intermediaries controls, or is controlled by, or is under
common control with, a specified person.
E. "Associate," when used to indicate a relationship with any
person, means: (1) any domestic or foreign corporation or organization, other
than the Corporation or a subsidiary of the Corporation, of which such person is
an officer OR director or is, directly or indirectly, the beneficial owner of
ten percent or more of any class of equity securities; (2) any trust or other
estate in which such person has a ten percent or more beneficial interest or as
to which such person serves as a trustee or in a similar fiduciary capacity; (3)
any relative or spouse of such person, or any relative of such spouse who has
the same home as such person or who is a director or officer of the Corporation
or any of its Affiliates; and (4) any other manager, member or partner in a
limited liability company, partnership, limited partnership, joint venture,
syndicate or other entity or group, formal or informal, of which the specified
person is a manager, member or partner and which is acting together for the
purpose of acquiring, holding or disposing of securities of the corporation.
F. "Subsidiary" means any corporation of which Voting Stock
having a majority of the votes entitled to be cast is owned, directly or
indirectly, by the Corporation.
G. "Continuing Director" means any member of the board of
directors of the Corporation who is unaffiliated with the Interested Shareholder
and was a member of the board of directors of the Corporation prior to the time
that the Interested Shareholder (including any Affiliate or Associate of such
Interested Shareholder) became an Interested Shareholder, and any successor of a
Continuing Director who is unaffiliated with the Interested Shareholder and is
recommended to succeed a Continuing Director by a majority of Continuing
Directors then on the board of directors of the Corporation.
H. "Market Value" means:
(i) in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the date in question of
a share of such stock on the composite tape for New York Stock Exchange
- listed stocks, or, if such stock is not quoted on the composite tape,
or the New York Stock Exchange, or, if such stock is not listed on such
exchange, the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the
highest closing sales price or bid quotation with respect to a share of
such stock during the 30-day period preceding the date in question on
the National Association of Securities Dealers, Inc. Automated
Quotation System or any system then in use, or if no such quotations
are available, the fair market value on the date in question of a share
of such stock as determined by the board of directors of the
Corporation in good faith; and
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(ii) in the case of property other than cash or stock, the
fair market value of such property on the date in question as
determined by a majority of the board of directors of the Corporation
in good faith.
I. "Valuation Date" means: (A) for a Business Combination
voted on by shareholders, the latter of the day prior to the date of the
shareholders' vote or the date twenty days prior to the consummation of the
Business Combination; and (B) for a Business Combination not voted upon by the
shareholders, the date of the consummation of the Business Combination.
J. "Voting Stock" means the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors.
K. In the event of any Business Combination in which the
Corporation is the surviving corporation, the phrase "consideration other than
cash to be received" as used in Section 9.2.2(i) or Section 9.2.2(ii) shall
include the shares of Common Stock and/or the shares of any other class or
series of outstanding Voting Stock retained by the holders of such shares.
9.4. POWERS OF THE BOARD OF DIRECTORS
A majority of the Corporation's directors then in office shall
have the power and duty to determine for the purposes of this Section 9, on the
basis of information known to them after reasonable inquiry, (A) whether a
person is an Interested Shareholder, (B) the number of shares of Voting Stock
beneficially owned by any person, (C) whether a person is an Affiliate or
Associate of another, and (D) whether the requirements of Section 9.2.2 have
been met with respect to any Business Combination; and the good faith
determination of a majority of the board of directors on such matters shall be
conclusive and binding for all the purposes of this Section 9.
9.5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS
Nothing contained in this Section 9 shall be construed to
relieve any Interested Shareholder from any fiduciary obligation imposed by law.
10. ANTI-GREENMAIL
Any direct or indirect purchase or other acquisition by the
Corporation of any Voting Stock (as defined at Section 9.3) from any Significant
Shareholder (as hereinafter defined) who has been the beneficial owner (as
defined at Section 9.3) of such Voting Stock for less than two years prior to
the date of such purchase or other acquisition shall, except as herein after
expressly provided, require the affirmative vote of the holders of at least a
majority of the total number of outstanding shares of Voting Stock, excluding in
calculating such affirmative vote and the total number of outstanding shares of
all Voting Stock beneficially owned by such Significant Shareholder. Such
affirmative vote shall not be required with respect to a pro rata offer made by
the Holding Company to all of its shareholders in compliance with the provisions
of the Securities Exchange Act of 1934 and the rules and regulations thereunder
or (ii) with respect to any purchase of Voting Stock, where the Board of
Directors has determined that the purchase price per share of the Voting Stock
does not exceed the fair market value of the Voting Stock. Such fair market
value shall be calculated on the basis of the average closing price or the mean
of the bid and ask prices of a share of Voting Stock for the 20 trading days
immediately preceding the execution of a definitive agreement to purchase the
Voting Stock from a Significant Shareholder.
For the purposes of this Section 10, "Significant Shareholder"
shall mean any person (other than the Corporation or any corporation of which a
majority of any class of Voting Stock is owned, directly or indirectly, by the
Corporation) who or which is the beneficial owner, directly or indirectly, of
five percent or more of the voting power of the outstanding Voting Stock.
11. SPECIAL MEETINGS
Special meetings of shareholders may be called at any time but
only by a majority of the Board of Directors of the Corporation.
12. AMENDMENT OF CERTIFICATE OF INCORPORATION
Except as set forth in this Section 12 or as otherwise
specifically required by law, no amendment of any provision of this Certificate
of Incorporation shall be made unless such amendment has been first proposed by
the board of directors of the Corporation upon the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
board of directors called for such purpose and thereafter approved by the
shareholders of the Corporation by the affirmative
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vote of the holders of at least a majority of the shares entitled to vote
thereon at a duly called annual or special meeting; provided, however, that if
such amendment is to the provisions set forth in this clause of Section 12 or in
Sections 5, 6, 7, 8, 10 or 11 hereof, such amendment must be approved by the
affirmative vote of the holders of at least two-thirds of the shares entitled to
vote thereon rather than a majority; provided, further, that if such amendment
is to the provisions set forth in this clause of Section 12 or to Section 9
hereof, such amendment must be approved by the affirmative vote of the holders
of at least 80 percent of the shares entitled to vote thereon rather than a
majority.
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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 by or upon the
authority of the Board of Directors.
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 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
F-2
<PAGE>
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), an 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.
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.
F-3
<PAGE>
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.
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,
F-4
<PAGE>
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.
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.
F-5
<PAGE>
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 La 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 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.
F-6
<PAGE>
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.
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.
F-7
<PAGE>
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
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
F-8
<PAGE>
Board of Directors) the record date for determining shareholders entitled to
consent to corporate action without 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 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.
F-9
<PAGE>
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.
F-10
<PAGE>
* * * * *
The foregoing Bylaws were adopted by the Board of Directors on June 3,
1998.
SECURITY FIRST TECHNOLOGIES CORPORATION
/s/ Robert F. Stockwell
---------------------------------------
Robert F. Stockwell
Secretary
F-11
<PAGE>
APPENDIX G
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998 and December
31, 1997 (Unaudited)............................................... G-2
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 (Unaudited)................................ G-3
Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1998 (Unaudited).................................. G-4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (Unaudited)............................... G-5
Notes to Consolidated Financial Statements for the three months ended
March 31, 1998 (Unaudited)........................................ G-6
Independent Auditors' Report......................................... G-9
Consolidated Balance Sheets as of December 31, 1997 and 1996......... G-10
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................................. G-11
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.................................. G-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................. G-13
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995.................................. G-14
G-1
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------
ASSETS
<S> <C> <C>
Current assets:
Cash................................................................................ $ 2,514 $ 3,137
Investment securities available for sale (amortized cost of $12,776
at March 31, 1998 and $16,759 at December 31, 1997, respectively).................. 12,838 16,814
Accounts receivable, net of allowance for doubtful accounts of
$235 at March 31, 1998 and $257 at December 31, 1997............................... 5,181 4,297
Banking operations held for sale, net............................................... -- --
Other current assets................................................................ 1,083 1,141
--------- ---------
Total current assets.............................................................. 21,616 25,389
Premises and equipment, net......................................................... 5,319 5,797
Goodwill and purchased technology, net of accumulated amortization
of $3,457 at March 31, 1998 and $1,368 at December 31, 1997........................ 2,534 4,622
Other assets........................................................................ 807 384
--------- ---------
Total assets...................................................................... $ 30,276 $ 36,192
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 1,667 $ 486
Accrued expenses.................................................................... 1,569 1,550
Accrued stock option compensation expense........................................... 2,287 1,602
Deferred revenues................................................................... 8,775 9,016
--------- ---------
Total current liabilities......................................................... 14,298 12,654
--------- ---------
Stockholders' equity:
Class A convertible preferred stock, no par value. Authorized 2,500,000
shares. Issued and outstanding 1,251,084 shares at March 31, 1998
and December 31, 1997.............................................................. 2,679 2,679
Common stock, no par value. Authorized, 25,000,000 shares. Issued and
outstanding 10,616,518 and 10,487,245 shares at March 31, 1998 and
December 31, 1997, respectively.................................................... 74,004 72,990
Accumulated deficit................................................................. (60,613) (52,035)
Accumulated other comprehensive income:
Net unrealized gains on investment securities available for sale................... 62 55
Cumulative foreign currency translation adjustment................................. (154) (151)
--------- ----------
Total stockholders' equity........................................................ 15,978 23,538
--------- ---------
Total liabilities and stockholders' equity........................................ $ 30,276 $ 36,192
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
G-2
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- ------
<S> <C> <C>
Revenues:
Software license fees........................................... $ 669 $ 673
Professional services........................................... 2,449 973
Data center fees................................................ 310 24
---------- -----------
Total revenues................................................ 3,428 1,670
---------- -----------
Direct costs:
Software license fees........................................... 20 490
Professional services........................................... 1,570 1,237
Data center fees................................................ 1,823 1,507
---------- -----------
Total direct costs............................................. 3,413 3,234
---------- -----------
Gross margin................................................... 15 (1,564)
---------- ------------
Operating expenses:
Selling and marketing........................................... 1,071 1,083
Product development............................................. 3,383 2,375
General and administrative...................................... 1,204 1,369
Depreciation and amortization................................... 637 310
Amortization of goodwill and acquisition charges................ 2,088 341
---------- -----------
Total operating expenses...................................... 8,383 5,478
---------- -----------
Operating loss................................................ (8,368) (7,042)
Interest Income.................................................... 255 419
---------- -----------
Loss from continuing operations.................................... (8,113) (6,623)
Income (loss) from discontinued operations......................... (465) 755
----------- -----------
Net loss........................................................... $ (8,578) $ (5,868)
=========== ============
Basic and diluted net loss per common share
from continuing operations...................................... $ (0.77) $ (0.80)
Basic and diluted net loss per common share from
discontinued operations......................................... (0.05) 0.09
--------- ----------
Basic and diluted net loss per common share........................ $ (0.82) $ (0.71)
=========== ===========
Weighted average number of shares of common stock outstanding...... 10,523,921 8,276,415
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------- AMOUNT
CLASS A ------------------- RETAINED
CONVERTIBLE EARNINGS
PREFERRED COMMON PREFERRED COMMON (ACCUMULATED
STOCK STOCK STOCK STOCK DEFICIT)
----------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,251,084 10,487,245 $ 2,679 $ 72,990 $(52,035)
Net loss -- -- -- -- (8,578)
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- --
Change in cumulative for eign
currency translation
adjustment -- -- -- -- --
Proceeds from sale of common
stock, net of expenses -- 92,593 -- 970 --
Common stock issued upon
exercise of stock options -- 36,680 -- 44 --
--------- ---------- ---------- --------- -------
Balance at March 31, 1998 1,251,084 10,616,518 $ 2,679 $ 74,004 $(60,613)
--------- ---------- ---------- --------- --------
Comprehensive income
<CAPTION>
ACCUMULATED
OTHER TOTAL COMPRE-
COMPREHENSIVE STOCKHOLDER'S HENSIVE
INCOME EQUITY INCOME
-------- -------- ------
<S> <C> <C> <C>
Balance at December 31, 1997 $ (96) $ 23,538
Net loss -- (8,578) (8,578)
Change in net unrealized
gains on investment
securities available for sale 7 7 7
Change in cumulative for eign
currency translation
adjustment (3) (3) (3)
Proceeds from sale of common
stock, net of expenses -- 970
Common stock issued upon
exercise of stock options -- 44
------- ----------
Balance at March 31, 1998 $ (92) $ 15,978
--------- ----------- ---------
Comprehensive income $ (8,574)
==========
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (8,578) $ (5,868)
Adjustments to reconcile net loss to net cash used in
operating activities:
(Income) loss from discontinued operations........................ 465 (755)
Depreciation and amortization including acquisition charges....... 2,725 651
Compensation expense for stock options............................ 706 132
Provision for doubtful accounts receivable........................ 30 --
Increase in accounts receivable................................... (914) (1,300)
Increase in other assets.......................................... (365) (292)
Increase (decrease) in accounts payable........................... 1,181 (957)
Increase in accrued expenses...................................... 19 257
(Decrease) increase in deferred revenue........................... (241) 157
------------ ---------
Net cash used in continuing operating activities.............. (4,972) (7,975)
Net cash (used in) provided by discounted operations................ (39) 755
------------ ---------
(5,011) (7,220)
----------- ----------
Cash flows from investing activities:
Sales of investment securities available for sale................... 1,983 5,981
Maturities of investment securities available for sale.............. 2,000 1,074
Purchases of premises and equipment................................. (585) (1,581)
------------ ----------
Net cash provided by investing activities......................... 3,398 5,474
----------- ---------
Cash flows from financing activities:
Sale of common stock, net of expenses............................... 970 --
Proceeds from exercise of common stock options...................... 23 6
----------- ---------
Net cash provided by financing activities.......................... 993 6
----------- ---------
Effect of exchange rate changes on cash................................ (3) --
----------- ---------
Net decrease in cash................................................... (623) (1,740)
Cash at beginning of period............................................ 3,137 4,122
----------- ---------
Cash at end of period.................................................. $ 2,514 $ 2,382
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<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 three month period
ended March 31, 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 three months ended March
31, 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.
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 the summer 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.
G-6
<PAGE>
The following represents condensed balance sheets and statements of
operations for the banking operations for the periods indicated.
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(in thousands)
(Unaudited)
<S> <C> <C>
Cash and due from banks.............................. $ 8,098 $ 1,346
Interest-earning deposit in other bank............... 1,000 1,000
U.S. Treasury and U.S. Government agency
securities available for sale....................... 6,162 6,063
Mortgage-backed securities available for sale........ 26,009 27,642
Federal Home Loan Bank stock, at cost................ 656 652
Loans, net of allowance for loan losses.............. 14,444 14,084
Premises and equipment, net.......................... 928 499
Purchased technology, net............................ 1,050 1,050
Other assets......................................... 213 152
------- -------
Total assets........................................ $ 58,560 $ 52,488
====== ======
Deposits............................................. $ 56,505 $ 50,329
Advances from the Federal Home Loan Bank............. 984 1,019
Other liabilities.................................... 604 703
Unrealized gains on investment securities and
mortgage-backed securities available for sale....... 467 437
------- -------
Total liabilities $ 58,560 $ 52,488
====== ======
</TABLE>
Statements of Operations
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Interest income...................................... $ 892 $ 1,180
Interest expense..................................... 489 710
------ ------
Net interest income................................. 403 470
Provision for loan losses............................ 40 --
------ -------
Net interest income after provision for loan losses. 363 470
Noninterest income................................... 129 114
Gain on sale of branch............................... -- 1,500
Noninterest expense.................................. (957) (1,328)
------ ------
Net income (loss) from discontinued operations...... $ (465) $ 756
======= ======
</TABLE>
3. 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
three months ended March 31, 1998 and 1997 was ($8.6) million and ($6.3)
million, respectively. The term "comprehensive income" is used in SFAS 130 to
describe the total of all components of
G-7
<PAGE>
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
requirement 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.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 supercedes 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 the Company's current segment information that is presented in the 1997
annual report and did not impact interim financial statements for the quarter
ended March 31, 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
superceding 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
quarter ended March 31, 1998.
G-8
<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
G-9
<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-10
<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 processing fees....................................... 411 56 --
----------- ----------- -----------
Total revenues.................................................. 10,830 1,267 --
----------- ----------- -----------
Direct costs:
Software license fees............................................. 1,605 796 --
Professional services............................................. 5,346 535 --
Data center processing 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 net loss per common share from continuing operations.......... $ (3.06) $ (3.03) $ --
Basic net loss per common share from discontinued operations........ (0.08) (0.73) (0.16)
----------- -------- -------
Basic 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-11
<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>
Net
Number of shares unrealized
---------------- gains on Cumulative
Class A Amount Retained investment foreign
convertible ------ earnings securities currency
preferred Common Preferred Common (accumulated available for translation
stock stock stock stock deficit) sale adjustment
--------- ------ --------- ------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 ........................ -- 2,400,000 $ -- $ 2,352 $ 2,795 $ (72) $ --
Net loss ...................... -- -- -- -- (1,480) -- --
Cash dividend declared ........ -- -- -- -- (300) -- --
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- -- 102 --
--------- --------- ----------- ----------- ----------- ----------- -----------
Comprehensive income, 1995 ....
Balance at December 31,
1995 ........................ -- 2,400,000 $ -- $ 2,352 $ 1,015 $ 30 $ --
Net loss ...................... -- -- -- -- (22,059) -- --
Cash dividend declared
(note 6(a)) ................. -- -- -- -- (3,000) -- --
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- -- 99 --
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) $ 129 $ --
Net loss ...................... -- -- (27,991) -- --
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- -- (74) --
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 ...... -- -- -- -- -- -- (151)
--------- --------- ----------- ----------- ----------- ----------- -----------
Comprehensive income, 1997 ....
Balance at December 31,
1997 ........................ 1,251,084 10,487,245 $ 2,679 $ 72,990 $ (52,035) $ 55 $ (151)
========= ========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Compre-
stockholders' hensive
equity Income
------------- -------
<S> <C> <C>
Balance at December 31,
1994 ........................ $ 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
----------- -----------
Comprehensive income, 1995 .... $ (1,378)
Balance at December 31,
1995 ........................ $ 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
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 ........................ $ 39,913
Net loss ...................... (27,991) $ (27,991)
Change in net unrealized
gains on investment
securities available for sale (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)
----------- -----------
Comprehensive income, 1997 .... $ (28,216)
Balance at December 31,
1997 ........................ $ 23,538
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-12
<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
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 provided by (used in) 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-13
<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
G-14
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
date to estimated total contract costs for each contract. Provisions for
estimated losses on 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 a 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 such
software development costs in the accompanying consolidated financial
statements.
G-15
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(f) Purchased Technology and Goodwill
Goodwill relates to the Company's acquisitions and is amortized over its
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 purchased 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 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
G-16
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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.
(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 o 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 will include the disclosure of comprehensive
income in accordance with the provisions of SFAS No. 130 beginning in the
first quarter of 1998.
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.
G-17
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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 equalize the
assets and liabilities. The following represents condensed balance sheets
at December 31, 1997 and 1996 and statements of operations for the banking
operations for the years then ended:
Balance Sheets
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Cash and due from banks $ 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
========== ==========
</TABLE>
G-18
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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>
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.
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.
Net charge-offs (recoveries) on loans were approximately $46,000, ($10,000)
and $63,000 in 1997, 1996 and 1995, respectively.
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.
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.
(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 BY 25% to
reflect such restrictions. The Company recorded approximately $6.0 million
in goodwill in conjunction with the transaction which is being amortized
primarily over an 8 month period, reflecting the length of the employment
G-19
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
agreements with the 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. These amounts represent 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 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 these intangible assets. 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 these products 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. in addition, the
most recent version of VBM, which is scheduled to be released in the first
quarter of 1998, constituted a significant revision to the acquired
technology. Accordingly, the fair value of those products was considered to
be minimal.
G-20
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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 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>
<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 $ 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>
G-21
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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.
Amortized Fair
cost value
---- -----
(in thousands)
Due within one year $ 13,828 $ 13,819
Due after one year through five years 8,974 9,058
---------- ----------
$ 22,802 $ 22,877
========== ==========
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:
1997 1996
---- ----
(in thousands)
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
========== ==========
(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.
(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.
G-22
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(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 NEED TO
HAVE a minimum capital level of $10 million . THIS REQUIREMENT WILL
NOT BE APPLICABLE upon the completion of the sale of the banking
operations. (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-23
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The components of income tax benefit, all of which relates to the
discontinued operations, are as follows:
1996 1995
---- ----
(in thousands)
Current income tax benefit $ (87) $ (890)
Deferred income tax benefit (289) 387
---------- ----------
Total income tax benefit $ (376) $ 503
========== ==========
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 asset before valuation
allowance 16,932 7,077
Valuation allowance (16,932) (7,077)
---------- ---- -----
Net deferred income tax asset $ -- $ --
========== ==========
</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.
G-24
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(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 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
G-25
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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 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 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 and 1996,
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> <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>
G-26
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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 investmen funds
$.25 for each dollar contributed by the 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 Event - Sale of Banking Operations, Technology Licensing
Agreements, and Sale of Common Stock (Unaudited)
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
G-27
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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 the summer 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.
G-28
<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 5.3 and Section 6 of the Holding Company's Certificate of
Incorporation limit the liability of the Holding Company's directors and provide
for indemnification of the Holding Company's directors, officers, employees and
agents under certain circumstances. Section 5.3 and 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, are 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.*
3.2 Bylaws of the Holding Company.*
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.
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.**
99 Form of SFNB proxy card.
----------
* Previously filed.
** Filed on signature page of Form S-4, as filed on June 5, 1998.
II-2
<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-3
<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-4
<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 29th day of July, 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 29th day of July, 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-5
<PAGE>
EXHIBIT INDEX
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.*
3.2 Bylaws of the Holding Company.*
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.
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.**
99 Form of SFNB proxy card.
----------
* Previously filed.
** Filed on signature page of Form S-4, as filed on June 5, 1998.
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
[LOGO]
SC-
SECURITY FIRST TECHNOLOGIES CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE SIDE FOR
CERTAIN LEGENDS
CUSIP 814279 10 5
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE
$0.01 PER SHARE, OF
Security First Technologies Corporation (the "Corporation"), a Delaware
corporation with its principal executive office located in Atlanta, Georgia. The
shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his or
her duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the signature of its duly authorized officers and has caused its
corporate seal to be hereunto affixed.
Dated: SECURITY FIRST TECHNOLOGIES CORPORATION
[SEAL] BY:
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
WACHOVIA BANK, N.A.
(WINSTON-SALEM, NC) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
SECURITY FIRST TECHNOLOGIES CORPORATION
The Corporation is authorized to issue more than one class or series of
stock. The Corporation will furnish to any shareholder, upon request and without
charge, a full statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Corporation at its principal
executive office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-__________Custodian__________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[RECTANGULAR BOX APPEARS HERE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING POSTAL CODE, OF ASSIGNEE)
___________________________________________________________ shares represented
by the within certificate, and do hereby irrevocably constitute and appoint
_________________________________ Attorney to transfer the said shares on the
books of the Corporation with full power of substitution in the premises.
Dated ________________________
_____________________________________________________
<PAGE>
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.
Exhibit 4.2
ERIES A PREFERRED SERIES A PREFERRED
NUMBER SHARES
[LOGO]
SPA-
SECURITY FIRST TECHNOLOGIES CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE SIDE FOR
CERTAIN LEGENDS
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF SERIES A CONVERTIBLE PREFERRED
STOCK, PAR VALUE $0.01 PER SHARE, OF
Security First Technologies Corporation (the "Corporation"), a Delaware
corporation with its principal executive office located in Atlanta, Georgia. The
shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his or
her duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the signature of its duly authorized officers and has caused its
corporate seal to be hereunto affixed.
Dated: SECURITY FIRST TECHNOLOGIES CORPORATION
[SEAL] BY:
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
WACHOVIA BANK, N.A.
(WINSTON-SALEM, NC) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
SECURITY FIRST TECHNOLOGIES CORPORATION
The Corporation is authorized to issue more than one class or series of
stock. The Corporation will furnish to any shareholder, upon request and without
charge, a full statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Corporation at its principal
executive office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-__________Custodian__________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[RECTANGULAR BOX APPEARS HERE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING POSTAL CODE, OF ASSIGNEE)
___________________________________________________________ shares represented
by the within certificate, and do hereby irrevocably constitute and appoint
_________________________________ Attorney to transfer the said shares on the
books of the Corporation with full power of substitution in the premises.
Dated ________________________
_____________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.
Exhibit 8
[KPMG PEAT MARWICK LLP LETTERHEAD]
June 17, 1998
The Board of Directors
Security First Network Bank
3390 Peachtree Street, NE
Atlanta, GA 30326
Dear Members of Board:
You have requested the opinion of KPMG Peat Marwick LLP ("KPMG") regarding
certain federal income tax consequences resulting from the proposed holding
company reorganization of Security First Network Bank ("SFNB"), as described
below. Specifically, an opinion is requested regarding the qualification of the
proposed holding company reorganization as a reorganization under section 368 of
the Internal Revenue Code of 1986, as amended (the "Code") (hereinafter, all
section references are to the Code unless otherwise indicated).
You have submitted for our consideration certain facts and representations
as to the proposed holding company reorganization, which are specifically
described below, and a copy of the Second Amended and Restated Plan of
Reorganization, dated March 9, 1998, by and among SFNB, Security First
Technologies Corporation (the "Holding Company"), and New Security First Network
Bank ("New Bank"), as amended by Amendment No. 1 dated June _, 1998 (the
"Plan"), the Stock Purchase Agreement, dated March 9, 1998, by and among Royal
Bank of Canada, RBC Holdings (Delaware) Inc. ("Buyer"), and SFNB, as amended by
Amendment No. 1 dated June _, 1998 (the "Stock Purchase Agreement"), and the
Common Stock Purchase and Option Agreement, dated March 9, 1998, by and between
SFNB and Buyer, as amended by Amendment No. 1 dated June _, 1998 (the
"Stock/Option Agreement", and collectively with the "Stock Purchase Agreement",
the "Agreements").
We have included below the Facts and Representations upon which KPMG will
rely in the issuance of our opinion. We ask that you contact us immediately if
any facts or representations are not entirely complete or accurate, as the
incompleteness or inaccuracy could cause us to change our opinion. KPMG has not
independently verified the completeness and accuracy of any of the following
facts and representations.
FACTS
SFNB is a publicly traded federal savings bank headquartered in Atlanta,
Georgia. SFNB provides deposit and lending products and services to business and
retail customers through its home office and Internet banking operations. SFNB
was the first FDIC-insured financial institution to execute traditional banking
services on the Internet. Through SFNB's Internet banking operations, customers
can apply for accounts, access account information, transfer funds, pay bills,
and conduct other banking activity from anywhere in the world over the Internet.
The authorized capital stock of SFNB consists of (i) 25,000,000 shares of
common stock, without par value ("SFNB Common Stock"), of which 10,487,245
shares were issued and outstanding as of December 31, 1997, and (ii) 2,500,000
shares of nonvoting preferred stock, without
<PAGE>
par value, of which 1,251,084 shares of Class A Preferred Stock ("SFNB Preferred
Stock") were issued and outstanding as of December 31, 1997. SFNB also has
outstanding non-qualified stock options ("SFNB NQOs") exercisable into SFNB
Common Stock and incentive stock options ("SFNB ISOs") exercisable into SFNB
Common Stock that were previously granted to directors, officers, and employees
of SFNB and its subsidiary, S1 (described and defined below). As described
below, SFNB also has outstanding options to acquire SFNB Common Stock that were
granted in connection with its acquisition of Secureware, Inc. in November 1996,
its acquisition of Solutions By Design, Inc. in November 1997, and that were
granted to Buyer pursuant to the Stock/Option Agreement. SFNB has no other
outstanding classes of stock or outstanding warrants, options, convertible
securities, or any other type of right pursuant to which any person could
acquire stock of SFNB.
Pursuant to the terms of the SFNB Preferred Stock, shares of SFNB Preferred
Stock do not have any preference with respect to dividends over shares of SFNB
Common Stock, but participate fully and equally, on a share for share basis,
with shares of SFNB Common Stock, with respect to the payment of any and all
dividends or other distributions (including liquidating distributions), whenever
declared. In addition, shares of SFNB Preferred Stock are convertible into
shares of SFNB Common Stock and a significant number of holders have exercised
those conversion rights.
Prior to May 23, 1996, SFNB was a wholly owned subsidiary of Cardinal
Bancshares, Inc. ("Cardinal"). On May 23, 1996, Cardinal distributed all of the
stock of SFNB to its shareholders in a nontaxable distribution pursuant to
section 355 (the "Spinoff "). The Spinoff was undertaken to, among other things,
facilitate a recapitalization of SFNB, and to provide SFNB with the requisite
managerial expertise and capital structure to pursue its business plan.
Immediately following the Spinoff, SFNB sold 967,884 shares of SFNB Common
Stock and 1,637,832 shares of SFNB Preferred Stock for $6,000,000 cash. Shortly
thereafter, SFNB sold 2,806,000 additional shares of SFNB Common Stock for
$52,800,000 cash, net of offering expenses, in an underwritten public offering.
Concurrent with the Spinoff and prior to the public offering, SFNB acquired
Five Paces, Inc. ("Five Paces"), an unrelated Georgia corporation. In the
acquisition, a wholly owned subsidiary of SFNB merged with and into Five Paces
and the shareholders of Five Paces exchanged their Five Paces stock for
1,920,000 shares of SFNB Common Stock in a reorganization described in sections
368(a)(1)(A) and 368(a)(2)(E). Shortly thereafter, Five Paces amended its
charter to change its name to Security First Technologies, Inc. ("S1"). S1 has
continued Five Paces' historic business of developing software applications for
on-line banking transactions. On November 4, 1996, Secureware, Inc. was merged
with and into S1 in exchange for cash and options to acquire SFNB Common Stock
(the "Secureware Shareholders SFNB Options").
On August 4, 1997, SFNB sold 569,978 shares of SFNB Common Stock and
159,952 shares of SFNB Preferred Stock in a private placement for approximately
$6,000,000.
In November 1997, Solutions By Design, Inc., an unrelated Georgia
corporation, was merged with and into S1 in exchange solely for SFNB Common
Stock and options to acquire SFNB Common Stock (the "SBD Shareholders SFNB
Options"). The merger was intended to qualify as a tax-free reorganization
pursuant to sections 368(a)(1)(A) and 368(a)(2)(D). The acquisition of Solutions
By Design, Inc. was for several valid corporate business purposes, none of which
is related to the proposed holding company reorganization described in this
opinion letter.
On March 9, 1998, SFNB and Buyer entered into the Stock/Option Agreement.
Pursuant to the Stock/Option Agreement, SFNB issued 92,593 shares of SFNB Common
Stock to Buyer in a private placement at a price of $10.80 per share and granted
Buyer four separate options (each, a "Buyer SFNB Option" and collectively, the
"Buyer SFNB Options") to purchase an aggregate
<PAGE>
of $10 million in additional SFNB Common Stock. The Buyer SFNB Options for $2.5
million of SFNB Common Stock are exercisable during the following time periods:
(i) from the closing date under the Agreement (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 option price of each installment is $11.88, $13.07, $14.38, and
$15.81, respectively. The Buyer SFNB Options terminate if the transactions
pursuant to the Stock Purchase Agreement are not consummated. Collectively, the
Buyer SFNB Options, the Secureware Shareholders SFNB Options, and the SBD
Shareholders SFNB Options are referred to as the "SFNB Investment Options".
SFNB is currently negotiating for the Holding Company to raise an
additional $10 million in equity capital through the issuance to an unrelated
third party of either approximately 1,000,000 shares of Holding Company Common
Stock or approximately 1,000,000 shares of Holding Company Preferred Stock (the
"Additional Equity Issuance").
The proposed holding company reorganization, which is the subject of this
opinion letter, is being undertaken pursuant to a requirement of the Office of
Thrift Supervision and the FDIC to separate the banking and non-banking
activities of SFNB. Pursuant to the Plan, the proposed holding company
reorganization will involve the following steps.
1. SFNB has organized the Holding Company, a Delaware corporation which will
be the ultimate holding company. SFNB will cause to be organized New Bank,
a new federally chartered savings bank. The authorized capital stock of the
Holding Company will consist of 40,000,000 shares of common stock, par
value $0.01 per share ("Holding Company Common Stock"), and 5,000,000
shares of preferred stock, par value $0.01 per share, of which 1,637,832
shares have been designated Series A Convertible Preferred Stock ("Holding
Company Preferred Stock"). Other than the change in issuer, the Holding
Company Common Stock and the Holding Company Preferred Stock will have
substantially the same terms and conditions as the SFNB Common Stock and
the SFNB Preferred Stock, respectively. In particular, the Holding Company
Preferred Stock will be nonvoting and will have no preference over the
Holding Company Common Stock with respect to dividends, but will
participate fully and equally, on a share for share basis, with the Holding
Company Common Stock, with respect to the payment of any and all dividends
or other distributions (including liquidating distributions), whenever
declared. The authorized capital stock of New Bank will consist of 1,000
shares of common stock ("New Bank Common Stock").
2. SFNB will transfer the "Acquired Assets" (as defined more specifically in
the Agreement, but which generally include the assets of SFNB related to
its banking business and which exclude the stock of S1, an intercompany
accounts receivable due from S1 to SFNB (the "S1 Receivable"), and certain
cash or cash equivalent assets) to its wholly owned subsidiary, New Bank.
In exchange for the Acquired Assets, New Bank will (i) issue to SFNB 1,000
shares of New Bank Common Stock, and (ii) assume the "Acquired Liabilities"
of SFNB (as defined more specifically in the Agreement, but which generally
include the liabilities of SFNB related to its banking business). The
transaction described in this step 2 is referred to herein as the "New Bank
Subsidiary Formation".
3. SFNB will transfer all of the "Non-Banking Business Assets" (which include
all of the assets of SFNB that are not Acquired Assets, including the stock
of New Bank) to the Holding Company. In exchange for the Non-Banking
Business Assets, Holding Company will (i) issue to SFNB a 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
<PAGE>
Preferred Stock then outstanding, and (ii) assume any remaining liabilities
of SFNB (the "Non-Banking Business Liabilities").
4. Immediately after the transfer of the Non-Banking Business Assets to the
Holding Company, SFNB will prepare and file a certificate of dissolution
with the Office of Thrift Supervision after declaring a distribution to its
shareholders of the shares of Holding Company Common Stock and Holding
Company Preferred Stock issued in its name so that a share of Holding
Company Common Stock or a share of Holding Company Preferred Stock will be
distributed in exchange for each outstanding share of SFNB Common Stock or
SFNB Preferred Stock, respectively. SFNB will immediately thereafter
dissolve and cease to exist. The transactions described in step 3 and step
4 are collectively referred to herein as the "Holding Company Formation".
In addition, as part of the Holding Company Formation, (i) non-qualified
stock options to acquire Holding Company Common Stock ("Holding Company NQOs")
will be substituted for the SFNB NQOs, (ii) incentive stock options to acquire
Holding Company Common Stock ("Holding Company ISOs") will be substituted for
SFNB ISOs, and (iii) the SFNB Investment Options will become exercisable (under
the same terms and conditions) into an equal amount of shares of Holding Company
Common Stock (the "Holding Company Investment Options").
SFNB entered into the Agreement subsequent to its decision to undertake the
Holding Company Formation. Pursuant to the terms of the Agreement, upon
completion of the Holding Company Formation, the Holding Company will sell to
Buyer all the outstanding shares of New Bank for an aggregate purchase price of
$13,000,000, subject to adjustment pursuant to Section 1.2(b) of the Agreement
(the "Sale"). Pursuant to Section 4.15 of the Agreement, SFNB and Buyer will
make a section 338(h)(10) election with respect to the Sale.
REPRESENTATIONS
You have also made the following additional representations to KPMG
regarding the proposed transaction:
1. At the time of the Spinoff, SFNB had no plan or intention to undertake the
Holding Company Formation (or similar transaction), the New Bank Subsidiary
Formation (or similar transaction), the Sale, nor to otherwise dispose of
any of its assets (other than in the ordinary course of business). The
Spinoff was undertaken for several valid corporate business purposes, none
of which is related to the Holding Company Formation, the New Bank
Subsidiary Formation, or the Sale. Neither the Holding Company Formation,
the New Bank Subsidiary Formation, nor the Sale is part of a plan that
includes the Spinoff.
2. At the time of the acquisition of Five Paces, SFNB had no plan or intention
to undertake the Holding Company Formation (or similar transaction) or to
otherwise dispose of any of its assets (other than in the ordinary course
of business). The acquisition of Five Paces was undertaken for several
valid corporate business purposes, none of which is related to the Holding
Company Formation. The Holding Company Formation is not part of a plan that
includes the acquisition of Five Paces.
3. The Holding Company has no plan or intention to distribute the net proceeds
from the Sale to its shareholders. Rather, the Holding Company will
reinvest the net proceeds from the Sale in the business of S1.
4. The fair market value of the Holding Company Common Stock and/or Holding
Company Preferred Stock received by each SFNB shareholder will be
approximately equal to the fair
<PAGE>
market value of the SFNB Common Stock and/or SFNB Preferred Stock
surrendered in the Holding Company Formation.
5. There is no plan or intention by the shareholders of SFNB who own five
percent or more of the stock of SFNB, and to the best of the knowledge of
the management of SFNB, there is no plan or intention on the part of the
remaining shareholders of SFNB to sell exchange, or otherwise dispose of
any shares of Holding Company Common Stock and/or Holding Company Preferred
Stock received in the Holding Company Formation.
6. Neither the Holding Company nor a person related to the Holding Company
(nor any person acting on behalf of, as agent for, or as a nominee of the
Holding Company or a person related to the Holding Company) has a plan or
intention to reacquire any of the Holding Company Common Stock or the
Holding Company Preferred Stock issued in the Holding Company Formation.
For this purpose, a related person is as defined in section 1.368-1(e)(3).
7. SFNB will not have made any distributions to its stockholders nor redeemed
any of its stock prior to, and in connection with, the Holding Company
Formation, other than the distribution of Holding Company Common Stock and
Holding Company Preferred Stock in dissolution of SFNB pursuant to the
Holding Company Formation.
8. Immediately following the Holding Company Formation, the shareholders of
SFNB will own all of the outstanding stock of the Holding Company and will
own such stock solely by reason of their ownership of stock of SFNB
immediately prior to the transaction.
9. The Holding Company has no plan or intention to issue additional shares of
its stock following the Holding Company Formation, except through the
exercise of the Holding Company NQOs, the Holding Company ISOs, the Holding
Company Investment Options, or pursuant to the Additional Equity Issuance.
10. Immediately following the Holding Company Formation and the New Bank
Subsidiary Formation, Holding Company and New Bank will, in the aggregate,
possess the same assets and liabilities (except for assets used to pay
expenses incurred in connection with the transactions) as those possessed
by SFNB immediately prior to the Holding Company Formation and the New Bank
Subsidiary Formation.
11. No dissenters' rights are available to holders of SFNB Common Stock or SFNB
Preferred Stock in connection with the Holding Company Formation.
12. At the time of the Holding Company Formation, SFNB will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock of SFNB
(other than the SFNB NQOs, the SFNB ISOs, and the SFNB Investment Options).
13. The Holding Company has no plan or intention to sell or otherwise dispose
of any of the Non-Banking Business Assets of SFNB acquired in the
transaction, except for dispositions made in the ordinary course of
business and except for the disposition of the 1,000 shares of New Bank
Common Stock in the Sale.
14. The liabilities of SFNB assumed by the Holding Company plus the
liabilities, if any, to which the transferred Non-Banking Business Assets
are subject were incurred by SFNB in the ordinary course of its business
and are associated with the Non-Banking Business Assets transferred.
<PAGE>
15. Following the transaction, S1 will continue the historic business of S1.
The gross assets and the net assets of the historic business of S1
represent at least 50 percent of the aggregate gross assets and the
aggregate net assets, respectively, of S1 and New Bank. For this purpose,
the historic business of S1 is that business that was conducted by S1
before SFNB had a plan or intention to undertake the Holding Company
Formation (or similar transaction).
16. The Holding Company, SFNB, and the shareholders of SFNB will pay their
respective expenses, if any, incurred in connection with the Holding
Company Formation.
17. The total fair market value of the Non-Banking Business Assets of SFNB
transferred to the Holding Company will equal or exceed the sum of the
liabilities assumed by the Holding Company, plus the amount of liabilities,
if any, to which the transferred NonBanking Business Assets are subject.
18. The total adjusted basis of the Non-Banking Business Assets of SFNB
transferred to the Holding Company will equal or exceed the sum of the
liabilities to be assumed by the Holding Company, plus the amount of
liabilities, if any, to which the transferred Non-Banking-Related Assets
are subject.
19. There is no intercompany indebtedness between SFNB and any member of the
consolidated group of which SFNB is the common parent that will be
transferred to or assumed by the Holding Company in the Holding Company
Formation. Any balance that may exist in the S1 Receivable will be repaid
by S1 immediately prior to the Holding Company Formation.
20. There is no material tax benefit to be derived by effecting the Sale
following the proposed New Bank Subsidiary Formation and/or Holding Company
Formation as compared to effecting the Sale without having first undertaken
the proposed New Bank Subsidiary Formation and/or Holding Company
Formation.
21. Following the Holding Company Formation, the Holding Company and S1 will
comprise an affiliated group as defined in section 1504(a) and will file a
federal consolidated tax return.
22. SFNB would have undertaken the Holding Company Formation and the New Bank
Subsidiary Formation even if the Sale were not contemplated.
23. All shares of SFNB Preferred Stock outstanding were issued in exchange for
cash.
24. The SFNB NQOs and SFNB ISOs and the Holding Company NQOs and Holding
Company ISOs:
a) consist of nonqualified stock options and incentive stock options;
b) are not and will not be actively traded on an established securities
market, and
c) are not and will not be transferred by the optionees other than by the
laws of descent and distribution, and are exercisable, during his or
her lifetime, only by the designated optionee.
1. The substitution of Holding Company NQOs for SFNB NQOs and Holding Company
ISOs for SFNB ISOs does not increase the economic benefit to the optionees.
In part, this means that the excess of the aggregate fair market value of
the shares subject to the options over the aggregate option price and the
ratio of the option price to stock fair market value before and after the
substitution will not give the optionees benefits other than those provided
in the SFNB NQOs and SFNB ISOs prior to the substitution.
<PAGE>
2. The SFNB Investment Options were acquired by the optionholders solely in
exchange for property. The SFNB Investment Options were not received by the
optionholders as compensation for services and not subject to the
provisions of section 83 or sections 421 through 424 and the regulations
thereunder.
Please sign below to confirm that KPMG may rely upon the above Facts and
Representations and the information contained in the Plan and the Agreements,
and amendments thereto, in the issuance of the opinion letter. Please return the
signed letter to me and keep the copy for your files. If you have any questions,
please do not hesitate to contact us.
Very truly yours,
/s/ Jerry M. Weil
KPMG Peat Marwick LLP
Jerry M. Weil
Partner/Tax
cc: Stuart Stein
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 granted or 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 under
the Plan shall not exceed in the aggregate 648,000 shares. The foregoing number
of shares are subject to adjustment as provided in Section 17 below. If any
<PAGE>
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 250,000 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.
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.
<PAGE>
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, 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.
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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
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 72,000. 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 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
<PAGE>
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 $5.00 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 24,000 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 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
<PAGE>
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.
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
<PAGE>
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
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.
<PAGE>
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 10.3
SECURITY FIRST TECHNOLOGIES CORPORATION
1998 DIRECTORS' STOCK OPTION PLAN
Security First Technologies Corporation (the "Corporation") sets forth
herein the terms of this 1998 Directors' Stock Option Plan (the "Plan") as
follows:
1. PURPOSE; TYPES OF OPTIONS
The purposes of the Plan are to enhance the Corporation's ability to
attract and retain highly qualified individuals to serve as members of the
Corporation's Board of Directors (the "Directors") and to provide additional
incentives to Directors to promote the success of the Corporation. The Plan
provides Directors an opportunity to purchase shares of the Stock of the
Corporation pursuant to options (the "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 (the "Code").
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the Board of Directors
(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 7 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 Corporation's Certificate of Incorporation and Bylaws,
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 Directors. In the
discretion of the Board, the Committee may be comprised of members each of whom
qualifies as a "non-employee director" as defined in Rule 16b-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934
(the "Exchange Act") and an "outside director" for purposes of Section 162(m) of
the Code, in order to qualify grants under the Plan for the exemption provided
by such Rule and as "qualified performance-based compensation" under such
Section, respectively. 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 Bylaws of the Corporation 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 Corporation's
Certificate of Incorporation and Bylaws, 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.
<PAGE>
(c) No Liability. No member of the Board or 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 granted or 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.
3. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be shares of common stock, par value $.01 per share, of the Corporation
(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 under the Plan shall not exceed in the aggregate 150,000 shares. The
foregoing number of shares are subject to adjustment as provided in Section 16
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) Directors. Options may be granted under the Plan to any individual
who is a member of the Board (a "Director") as the Board shall determine and
designate from time to time prior to expiration or termination of the Plan.
(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 and approval by Security First Network Bank, as sole
stockholder of the Corporation.
(b) Term. The Plan shall terminate on the date 10 years from the
effective date.
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. 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. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by the Corporation 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
<PAGE>
Option Agreements shall comply with all terms of the Plan. Any amendment or
modification to an Option Agreement shall be made by a written instrument
approved by the Board and executed by or on behalf of the Corporation and the
Optionee (or permitted transferee of the Optionee).
8. 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,
and shall be not less than the par value of a share of the Stock.
9. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall terminate and all
rights to purchase shares of Stock thereunder shall cease upon the expiration of
10 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.
(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.
(c) Method of Exercise. An Option that is exercisable hereunder may be
exercised by delivery to the Corporation 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. Payment of the Option Price
for the shares of Stock purchased pursuant to the exercise of an Option shall be
made (i) in cash or in cash equivalents; (ii) through the tender to the
Corporation 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 on the date of exercise; (iii) by delivering a written
direction to the Corporation that the Option be exercised pursuant to a
"cashless" exercise/sale procedure (pursuant to which funds to pay for exercise
of the option are delivered to the Corporation by a broker upon receipt of stock
certificates from the Corporation) or a cashless exercise/loan procedure
(pursuant to which the optionees would obtain a margin loan from a broker to
fund the exercise) through a licensed broker acceptable to the Corporation
whereby the stock certificate or certificates for the shares of Stock for which
the Option is exercised will be delivered to such broker as the agent for the
individual exercising the Option and the broker will deliver to the Corporation
cash (or cash equivalents acceptable to the Corporation) 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 that the Corporation, may,
in its judgment, be required to withhold with respect to the exercise of the
Option; or (iv) by a combination of the methods described in (i), (ii), and
(iii); 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. Payment in full of
the Option Price need not accompany the
<PAGE>
written notice of exercise if the Option is exercised pursuant to the cashless
exercise/sale procedure described above. 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 Corporation are surrendered in payment of
the Option Price, the Stock surrendered in payment must have been held by the
Optionee for more than six months at the time of surrender. 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. 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 16 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 date of grant of the Option and a sale
of the shares of Stock acquired thereby would subject the individual exercising
the Option to liability under Section 16 of the Exchange Act, then the
certificate or certificates representing such shares shall bear a legend
restricting the transfer of the Stock covered thereby until the expiration of
six months from such date, or for such other period during which such a transfer
would subject such individual to such liability.
10. TRANSFERABILITY OF OPTIONS
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, except that
the Optionee may transfer a Nonqualified Option by gift: to a member of his
"Family" (as defined below), to or for the benefit of one or more organizations
qualifying under Code ss.ss. 501(c)(3) and 170(c)(2) (a "Charitable
Organization") or to a trust for the exclusive benefit of the Optionee, one or
more members of the Optionee's Family, one or more Charitable Organizations, or
any combination of the foregoing, provided that any such transferee shall enter
into a written agreement to be bound by the terms of the Plan. For this purpose,
"Family" shall mean the siblings, lineal ancestors and descendants and spouse of
the Optionee.
11. TERMINATION OF SERVICE
Upon the termination of an Optionee's service as a Director 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 ("Disability"), any Option
granted to an Optionee pursuant to the Plan shall terminate one year after the
date of such termination of service, unless earlier terminated pursuant to
Section 9(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, in
the event of such a termination of service, the Optionee may (subject to the
general limitations on exercise set forth in Section 9(b) above) exercise an
Option, in whole or in part, at any time subsequent to such termination of
service and prior to termination of the Option pursuant to Section 9(a) above,
either subject to or without regard to any installment limitation on exercise
imposed pursuant to Section 9(b) above.
12. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) Death. If an Optionee dies while serving as a Director or within
the period following termination of such service during which the Option is
exercisable under Section 11 above or Section 12(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
9(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 Section 9(a) above, to
exercise any Option held by such
<PAGE>
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 9(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 9(a)
above, either subject to or without regard to any installment limitation on
exercise imposed pursuant to Section 9(b) above.
(b) Disability. If an Optionee's service as a Director terminates by
reason of the Disability of such Optionee, then such Optionee shall have the
right (subject to the general limitations on exercise set forth in Section 9(b)
above), at any time within one year after such termination of service and prior
to termination of the Option pursuant to Section 9(a) above, to exercise, in
whole or in part, any Option held by such Optionee at the date of such
termination of service, whether or not such Option was exercisable immediately
prior to such termination of service; 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 9(b) above), in the event of the termination of service of the Optionee
as a Director by reason of the Disability of such Optionee, exercise an Option
in whole or in part, at any time subsequent to such termination of service and
prior to termination of the Option pursuant to Section 9(a) above, either
subject to or without regard to any installment limitation on exercise imposed
pursuant to Section 9(b) above. Whether a termination of service 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.
13. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock pursuant to
Options granted under the Plan shall constitute general funds of the
Corporation.
14. REQUIREMENTS OF LAW
The Corporation 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 Corporation 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 Corporation 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. Specifically in connection with the Securities Act of 1933 (as now in
effect or as hereafter amended) (the "1933 Act"), upon exercise of any Option,
unless a registration statement under such Act is in effect with respect to the
shares of Stock covered by thereby, the Corporation shall not be required to
sell or issue such shares unless the Board has received evidence satisfactory to
it that the holder of such Option may acquire such shares pursuant to an
exemption from registration under the 1933 Act. Any determination in this
connection by the Board shall be final, binding, and conclusive. The Corporation
may, but shall in no event be obligated to, register any securities covered
hereby pursuant to the 1933 Act. The Corporation 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.
<PAGE>
15. 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. Except as permitted under Section 16 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.
16. 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 Corporation 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 decrease in such shares effected without receipt of consideration by
the Corporation, 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 Corporation. 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 Corporation ("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
Corporation 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 Corporation Is the Surviving
Corporation. Subject to Subsection (c) hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Corporation with one or more other corporations, 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 Corporation Is Not the Surviving
Corporation or Sale of Assets or Stock. Upon the dissolution or liquidation of
the Corporation, or upon a merger, consolidation, reorganization or other
business combination of the Corporation with one or more other entities in which
the Corporation is not the surviving entity, or upon a sale of all or
substantially all of the assets of the Corporation to another entity, or upon
any transaction (including, without limitation, a merger or reorganization in
which the Corporation is the surviving corporation) 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 Corporation, 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 theretofore granted, or for the
<PAGE>
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 9(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
9(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 Corporation gives notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 16 related to stock or
securities of the Corporation 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 Corporation. The grant of an Option pursuant to
the Plan shall not affect or limit in any way the right or power of the
Corporation 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.
17. 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 service or employ of the Corporation or
any Subsidiary, or to interfere in any way with the right and authority of the
Corporation 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 Corporation or any Subsidiary.
18. NONEXCLUSIVITY OF THE PLAN
The adoption of the Plan shall not 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 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 23.2
The Board of Directors
Security First Network Bank:
We consent to the use of our report 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
July 29, 1998
REVOCABLE PROXY EXHIBIT 99
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 11:00 a.m. on August 28,
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 SPECIFIED PROVISIONS OF THE
HOLDING COMPANY'S CERTIFICATE OF INCORPORATION, WHICH WILL BE EFFECTIVE UPON THE
REORGANIZATION OF SFNB AND SECURITIES FIRST TECHNOLOGIES, INC., WHICH PROVIDE
THE BOARD OF DIRECTORS GREATER CONTROL OVER CORPORATE GOVERNANCE MATTERS,
TAKEOVER DEFENSE PROVISIONS AND THE ELIMINATION OF MONETARY LIABILITIES OF
DIRECTORS UNDER APPLICABLE DELAWARE LAW AND (4) 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 certain provisions of the Holding Company's
Certificate of Incorporation, which will be effective upon
the reorganization of SFNB and Securities First Technologies,
Inc., which provide the Board of Directors greater control
over corporate governance matters, takeover defense
provisions and the elimination of monetary liabilities of
directors under applicable 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.
