As filed with the Securities and Exchange Commission on June 5, 1998
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
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)
(To be applied for)
(I.R.S. Employer Identification No.)
Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
(404) 812-6300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Robert F. Stockwell
Chief Financial Officer
Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
(404) 812-6780
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copy to:
Stuart G. Stein, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-8575
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
Title of each class of Proposed maximum Proposed maximum Amount of
securities to be registered Amount to be registered offering price per unit aggregate offering price registration fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 10,814,215 $ 9.8125* $ 106,114,485* $ 31,304*
par value $0.01 per share
=================================================================================================================================
</TABLE>
* Estimated pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities
Act of 1933 based upon the average of the high and low prices for shares of
common stock of Security First Network Bank as reported on The Nasdaq Stock
Market's National Market Tier calculated on the basis of June 2, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
SECURITY FIRST NETWORK BANK
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
_________ __, 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
________ __, 1998, at ___ 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, will continue as directors of the
holding company until that meeting.
As described in the enclosed Proxy Statement/Prospectus, at the Special
Meeting you will be asked to approve the proposed holding company reorganization
(the "Reorganization") of SFNB and its wholly owned subsidiary, Security First
Technologies, Inc. ("S1"). 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), which is equivalent to $3 million in excess of the required
regulatory total capital of SFNB's banking business on the closing date of the
Sale. SFNB has received an opinion from Friedman, Billings, Ramsey & Co., Inc.,
financial advisor to SFNB, 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 Reorganization and the Sale. Consummation of the Reorganization is
subject to certain conditions, including approval by the holders of at least
two-thirds of the outstanding shares of SFNB common stock and SFNB preferred
stock. Consummation of the Sale also is subject to certain conditions, including
approval by the holders of at least a majority of the outstanding shares of SFNB
common stock and two-thirds of the outstanding shares of SFNB preferred stock.
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 VOTE OF HOLDERS OF SFNB COMMON STOCK WITH RESPECT TO THE
REORGANIZATION AND THE SALE 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
<PAGE>
ABSTENTION FROM VOTING BY A SHAREHOLDER WILL HAVE THE SAME EFFECT AS A VOTE
"AGAINST" THE PROPOSED REORGANIZATION AND THE PROPOSED SALE.
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 _______ __, 1998
-------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Special Meeting") of Security First Network Bank ("SFNB") will be held on
________ __, 1998, at ___ 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 (Proposal 2).
3. 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
________ __, 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.
<PAGE>
By Order of the Board of Directors
James S. Mahan, III
Chief Executive Officer
Atlanta, Georgia
____________ ___, 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
____________ ___, 1998, at ___ 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
____________ ___, 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"), (Proposal 1); and (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"). 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. As of
________ ___, 1998 (the "Record Date"), there were __________ shares of SFNB
Common Stock and __________ 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, 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
Cover page continued . . .
i
<PAGE>
Cover page continued . . .
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 million (subject to
adjustment), which is equivalent to $3 million in excess of the required
regulatory total capital of SFNB's Banking Business on the closing date of the
Sale.
The principal steps in the Reorganization will include the contribution
by SFNB of all its Banking Business (including at least $10.0 million of
regulatory capital) to New Bank, the purchase and assumption by the Holding
Company of all of SFNB's remaining assets and liabilities in exchange for the
issuance of Holding Company Stock to SFNB, the declaration by SFNB of a
distribution of the Holding Company Stock to holders of SFNB Stock, and the
subsequent voluntary dissolution of SFNB pursuant to the rules and regulations
of the Office of Thrift Supervision (the "OTS"). Subject to shareholder and
regulatory approvals, the Reorganization was a condition to the approval by the
OTS of SFNB's 1996 acquisition of SecureWare, Inc. ("SecureWare"). After the
Reorganization, the activities of S1 no longer will be limited to those
permissible for a federal savings bank. Because S1 is deemed to be controlled by
bank holding companies, S1's activities will be limited to those permissible to
bank holding companies, but this restriction will not apply to other
subsidiaries that may be established by the Holding Company.
If the Agreement is approved, immediately after the Reorganization, New
Bank, which will then own SFNB's Banking Business, will be sold to RBC Holdings
and New Bank will become a wholly owned subsidiary of RBC Holdings. If the
Agreement is not approved, the Holding Company still intends to discontinue all
banking operations. No determination has been made as to how the Holding Company
would implement the discontinuation of banking operations if the Agreement is
not consummated. If the Agreement is approved but the Plan is not, the Agreement
will not be consummated, as completion of the Plan is a condition to
consummation of the Agreement.
After the Reorganization and the Sale, the Holding Company will continue
as the publicly owned and traded company and will be the parent of S1. The
Holding Company will apply to The Nasdaq Stock Market ("Nasdaq") 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 Agreement 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" BEGINNING AT PAGE 12 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
ii
<PAGE>
Cover page continued...
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 _______________ __, 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. Statements contained in this Proxy
Statement/Prospectus as to the contents of any contract or other document are
not necessarily complete and, in each instance where such contract or other
document is filed as an exhibit to the Registration Statement, each such
statement is qualified in all respects by such reference.
The Registration Statement and the exhibits forming a part thereof
filed by the Holding Company 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
iv
<PAGE>
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 within the meaning of the Securities Act and the Exchange Act. 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.
v
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION .....................................................
FORWARD LOOKING INFORMATION ...............................................
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 ....................................
Other Matters ..........................................................
Selected Financial and Other Data ......................................
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......................................
Limitation of Director Liability........................................
Takeover Defense Provisions.............................................
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.............................................
vi
<PAGE>
Conduct of Banking Business pending the Sale............................
Third Party Proposals...................................................
Expenses and Operating Losses...........................................
Non-Compete and Employee Matters........................................
Certain 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................................................
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..............................
Regulation..............................................................
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........... D-1
Appendix E Bylaws of the Holding Company................................. E-1
Appendix F Consolidated Financial Statements of SFNB .................... F-1
vii
<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,
and (iii) 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. 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 ___________ ___, 1998, at _____
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 _____________ __, 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 Jeannie Morrill,
Assistant Secretary 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 three holders of SFNB
Preferred Stock are Huntington
Bancshares, Incorporated
("Huntington"), Wachovia
Corporation ("Wachovia") and Area
Bancshares Corporation ("Area").
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 number is
(404) 812-6300. SFNB can be found
on the World Wide Web at
http://www.SFNB.com. For
additional information about SFNB,
see "Information about SFNB" and
Appendix F.
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. If the Sale is
consummated, New Bank will be sold
to RBC Holdings and the primary
business activities of the Holding
Company initially will consist of
the operation of S1 as a wholly
owned subsidiary. The principal
executive office of the Holding
Company is located at 3390
Peachtree Road, NE, Suite 1700,
Atlanta, Georgia
2
<PAGE>
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 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
3
<PAGE>
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 and the
Georgia Department of Banking and
Finance (the "Georgia Department")
for the Reorganization were
approved prior to the announcement
of the proposed Sale. The Georgia
Department has
4
<PAGE>
confirmed that its approval
remains in effect, and SFNB has
requested confirmation from the
OTS as to the continued
effectiveness of its approval in
light of the decision to sell the
Banking Business to RBC Holdings.
The required regulatory approval
of the FDIC in connection with the
Reorganization has been received.
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. See "The
Holding Company Reorganization --
Regulatory Approvals."
Stock Owned by Management ............. The directors and executive
officers of SFNB and their
affiliates hold ____ shares of
SFNB Common Stock (___% of the
outstanding SFNB Common Stock as
of the Record Date). 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 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 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 will be held
in 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. Unlike SFNB's
Amended and Restated Charter
("Charter"), the Holding Company's
Certificate of Incorporation
includes provisions which may have
a significant anti-takeover
effect. See "The Holding Company
Reorganization --
5
<PAGE>
Comparison of Shareholders'
Rights" and "-- Takeover Defense
Provisions." As permitted by the
DGCL, the Holding Company's
Certificate of Incorporation
eliminates, except in certain
circumstances, the personal
liability for monetary damages of
directors for breach of their duty
of care to the Holding Company and
its shareholders. See "The Holding
Company Reorganization --
Limitation of Director Liability."
THE SALE OF SFNB'S BANKING BUSINESS
Description of the Sale ................ If the Plan and the Agreement are
approved, immediately after
consummation of the
Reorganization, the Holding
Company will sell the New Bank
Shares to RBC Holdings. As a
result of the contribution of
SFNB's Banking Business to New
Bank in the Reorganization and the
purchase by RBC Holdings of the
New Bank Shares, New Bank will
become a wholly owned subsidiary
of RBC Holdings and RBC Holdings
will acquire SFNB's Banking
Business. For more information,
see "The Sale of SFNB's Banking
Business."
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. 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") and the
Georgia Department. Royal Bank
also intends to file an
application with the Office of the
Superintendent of Financial
Institutions of Canada (the
"Superintendent") for approval,
upon the recommendation of the
Superintendent, of the Minister of
Finance under the Bank Act
(Canada) to indirectly acquire the
New Bank Shares. 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."
6
<PAGE>
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 SFNB's
Banking Business pursuant to the
Agreement, however, is a fully
taxable transaction for federal
income tax purposes, and the SFNB
consolidated group (or as
successor, the Holding Company
consolidated group) will recognize
gain for federal income tax
purposes as a result of the Sale.
See "Certain Federal Income Tax
Consequences."
No Dissenters'Rights .................... No dissenters' rights are
available to holders of SFNB Stock
in connection with the Plan or the
Agreement. See "The Holding
Company Reorganization -- No
Dissenters' Rights" and "The Sale
of SFNB's Banking Business -- No
Dissenter's Rights."
Market Prices of Common Stock .......... The Holding Company will apply to
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. At the present
time, only 1,000 shares of Holding
Company Common Stock are issued to
SFNB and currently there is no
public market for Holding Company
Common Stock.
SFNB Common Stock is traded on the
Nasdaq Stock Market under the
symbol "SFNB." The following table
sets forth the per share closing
price of SFNB Common Stock on the
Nasdaq Stock Market as of the
dates specified:
Last Reported Sale Price
<TABLE>
<CAPTION>
SFNB
Common
Date Stock
---- ------
<S> <C>
December 31, 1996 ....... $10.25
December 31, 1997 ....... 7.25
March 6, 1998 (a) ....... 13.63
________ __, 1998 (b)....
</TABLE>
(a) Last trading date prior to
announcement of execution of
the Plan and the Agreement.
(b) The most recent practicable
date prior to the date of this
Proxy Statement/Prospectus.
7
<PAGE>
For additional information about
SFNB Common Stock, see
"Information about SFNB -- Market
for SFNB Common Stock and
Dividends."
8
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth certain financial information for SFNB
and certain 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 F 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
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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 ........................... 1.50 2.24 4.83 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)
------- ------- ------- ------- -------
BALANCE SHEET DATA - BANKING OPERATIONS
</TABLE>
<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>
10
<PAGE>
STATEMENT OF OPERATIONS DATA - PRO FORMA
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Revenues:
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 ........................................................ 368 2,065
------ ---------
Loss from continuing operations ........................................ $ (7,497) $ (24,615)
====== =========
Basic and diluted net loss per common
share from continuing operations .................................... $ (0.71) $ (2.73)
====== =========
Weighted average common shares
outstanding ......................................................... 10,592,851 9,015,355
</TABLE>
BALANCE SHEET DATA - PRO FORMA
<TABLE>
<CAPTION>
March 31,
1998
---------
<S> <C>
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 ..................................... 20,948
Stockholders' equity .................................... 17,278
Book value per common share ............................. 1.63
</TABLE>
11
<PAGE>
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
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.
In addition to its operating losses, the Holding Company's future
capital needs will depend on many factors, including S1's ability to
successfully market and sell its products. Although the Holding Company does not
currently believe that it will require additional cash resources prior to
break-even cash flow, SFNB is, and the Holding Company will continue to explore
other opportunities to raise capital, taking into consideration capital needs
and market conditions. In the event that SFNB before the Reorganization, or the
Holding Company after the Reorganization, raises additional funds, through
public or private financings or otherwise, any equity or debt financings, if
available at all, may be on terms which are not favorable to the Holding Company
and, in the case of equity financings, could result in dilution to the Holding
Company's shareholders. Also, as additional capital is needed, the Holding
Company intends to continue to pursue capital raising opportunities similar to
the Strategic Tactical Advisory Relationship program, through which SFNB has
raised capital. If adequate capital is not available, the Holding Company may be
required to curtail its operations significantly.
S1 LIMITED OPERATING HISTORY
Although SFNB commenced its banking operations over 50 years ago, it
acquired S1 and commenced its current technology operations in May 1996. The
Holding Company is newly formed, solely to facilitate the Reorganization.
Accordingly, the Holding Company will have only a limited operating history upon
which to base an evaluation of its business and prospects. Operating results for
future periods are subject to numerous uncertainties, and there can be no
assurance that the Holding Company will achieve or sustain profitability on an
annual or quarterly basis. The Holding Company's prospects must be considered in
light of the risks encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. Future operating
results will depend upon many factors, including the demand for S1's software
products, the level of product and price competition, the Holding Company's
success in attracting and retaining motivated and qualified personnel, and in
particular, the growth of activity on the Internet World Wide Web as it relates
to the financial services industry.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
SFNB has experienced in the past, and the Holding Company expects to
experience in the future, significant fluctuations in quarterly operating
results. Such fluctuations may be caused by many factors, including but not
limited to the extent and timing of revenues recognized and costs incurred, the
degree of customer acceptance of new technology, the introduction of new or
enhanced products by S1 or its competitors, budget concerns of customers,
competitive conditions in the
12
<PAGE>
industry, bank purchasing cycles, timing of consolidation decisions by banks and
general economic conditions. See "-- Customer Project Risks and Lengthy
Implementation and Sales Cycles." In addition, the volume and timing of contract
signings during a quarter are difficult to forecast. It is possible that the
Holding Company's future quarterly results of operations from time to time will
not meet the expectations of securities analysts or investors, which could have
a material adverse effect on the market price of the Holding Company Common
Stock.
DEPENDENCE ON BANKING INDUSTRY
For the foreseeable future, the Holding Company expects to derive
substantially all of its revenues from products and services provided to banks
and other participants in the banking industry, and to a lesser extent, other
financial services firms such as insurance companies. Accordingly, the Holding
Company's future success significantly depends upon the continued demand for
S1's solutions within this industry. The Holding Company believes that an
important factor in its growth will be the willingness of the banking industry
to pursue technological innovation and customer demand and acceptance of such
innovation. If this environment of change were to slow, the Holding Company
could experience reduced demand for S1's products and services. In addition,
changes in economic conditions and unforeseen events, such as recession,
inflation or other adverse occurrences, may result in a significant decline in
the utilization of bank services or demand for S1's products and services. Any
event that results in decreased consumer or corporate use of bank services, or
increased pressures on banks toward the in-house development and implementation
of revenue enhancement or cost reduction measures, could have a material adverse
effect on the Holding Company's business, financial condition and results of
operations.
DEPENDENCE UPON UNCERTAIN MARKET
The market for Internet-based financial services only has recently begun
to develop and market demand for S1's products and services is uncertain.
Certain 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. Accordingly, 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,
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<PAGE>
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.
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' products with other hardware and software.
Furthermore, should new releases of products and systems occur before S1
develops products compatible with such new releases, any resulting decline in
demand for S1's products could have a material adverse effect on the Holding
Company's business, financial condition and results of operations.
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by S1 and testing and
use by current and potential customers, errors will not be found in new products
after commencement of commercial shipments. The occurrence of such errors could
result in loss of or delay in market acceptance of S1's products, which could
have a material adverse effect on the Holding Company's business, financial
condition and results of operations. S1's product also may be vulnerable to
break-ins and similar disruptive problems caused by Internet or other users.
Such computer break-ins and other disruptions would jeopardize the security of
information stored in and transmitted through the computer systems of S1's
customers, which may result in significant liability to the Holding Company and
deter potential customers. S1's license agreements with its customers typically
contain provisions designed to limit its exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in S1's license agreements may not be effective under the laws of
certain 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
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<PAGE>
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 certain of
the VFM applications and the associated hardware, software and consulting
expenditures, potential customers tend to be cautious in making 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.
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
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 and determining whether they are Year 2000 compliant. In
addition, S1 is developing plans of action for
15
<PAGE>
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 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 fully certified as Year 2000
compliant through complete "end to end" testing. Due to the near term release of
this version, prior releases will not be certified as Year 2000 compliant.
Management anticipates that all S1 financial institution customers will be
converted to the new version by the second quarter 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 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-part 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.
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<PAGE>
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 four directors, two of whom also are
executive officers. 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.
Certain provisions of the Certificate of Incorporation and Bylaws of the
Holding Company may be deemed to have the effect of making difficult an
acquisition of control of the Holding Company in a transaction not approved by
the Holding Company's Board of Directors. These provisions include the ability
of the Holding Company's Board of Directors to issue shares of preferred stock
in one or more series without further authorization of the Holding Company
shareholders. The Holding Company s Certificate of Incorporation authorizes the
issuance of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by its Board of Directors.
Accordingly, the Holding Company's Board of Directors is empowered, without
shareholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of Holding Company Common Stock. In the event of
such issuance, the preferred stock could also be utilized, under certain
circumstances, 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.
17
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
This Proxy Statement/Prospectus is first being mailed to the
holders of SFNB Stock on or about _________ ___, 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 ______________ ___, 1998, at _____ 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), and (iii) 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
______________ __, 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 _____________
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. If the
Reorganization is consummated, as of the Record Date, _________ shares of
Holding Company Common Stock would be issued to the holders of the _________
outstanding shares of SFNB Common Stock, ________ shares of Holding Company
Common Stock would be reserved for issuance with respect to the exercise of
outstanding options to purchase _________ shares of SFNB Common Stock pursuant
to SFNB's stock option plans and agreements, 1,080,754 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 1,080,754 shares of
Holding Company Preferred Stock would be issued to the holders of the 1,080,754
outstanding shares of SFNB Preferred Stock. If the Sale is consummated, an
additional ________ 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 ________ shares of
Holding Company Common Stock.
If a quorum is not obtained, or if fewer shares of SFNB Common Stock are
voted in favor of the Plan or the Agreement than the number required for
approval, it is expected that the Special Meeting will be adjourned for the
purpose of allowing additional time for obtaining additional
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<PAGE>
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 AND "FOR" APPROVAL OF THE AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY.
The Board of Directors of SFNB is not aware of any matters other than
approval of the Plan and the Agreement (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 REQUIRED VOTE OF THE HOLDERS OF SFNB COMMON STOCK WITH RESPECT TO
THE APPROVAL OF THE PLAN AND THE AGREEMENT 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 AND THE AGREEMENT.
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 Jeannie Morrill,
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 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.
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<PAGE>
THE HOLDING COMPANY REORGANIZATION
(Proposal 1)
The following description is qualified in its entirety by reference to
the Plan and the Certificate of Incorporation and Bylaws of the Holding Company,
which are attached as Appendices B, D and E, 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:
----------------------------
Security First Network Bank
(a federal savings bank)
----------------------------
*
*
*************************************
* *
* *
------------------------- ---------------------------------
SFNB Investment, Inc. Security First Technologies, Inc.
(a Kentucky corporation) (a Kentucky corporation)
------------------------- ---------------------------------
Immediately upon the Reorganization, the corporate structure will be as follows:
---------------------------------------
Security First Technologies Corporation
(a Delaware corporation)
---------------------------------------
*
*
*************************************
* *
* *
---------------------------- ----------------------------------
Security First Network Bank* Security First Technologies, Inc.
(a federal savings bank) (a Kentucky corporation)
---------------------------- ----------------------------------
* 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:
---------------------------------------
Security First Technologies Corporation
(a Delaware corporation)
---------------------------------------
*
*
*
---------------------------------
Security First Technologies, Inc.
(a Kentucky corporation)
---------------------------------
For more information about the Sale, see "The Sale of SFNB's Banking Business."
SFNB has organized the Holding Company as a Delaware corporation and a
wholly owned subsidiary of SFNB. The remaining steps to the Reorganization are
as follows:
Step 1. Immediately prior to the Reorganization, New Bank will be organized by
SFNB as a federal savings bank and a wholly owned subsidiary of SFNB.
In connection with its organization, New Bank will issue the New Bank
Stock (1,000 shares of common stock) to SFNB.
Step 2. At the Effective Time, SFNB will contribute its Banking Business
(including at least $10.0 million of regulatory capital) 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 at the time (the "Effective
Time") when all of the conditions set forth in the Plan are satisfied,
including, but not limited to, receipt of all shareholder and regulatory
approvals and the expiration of any applicable waiting periods. The Effective
Time will not occur until the moment immediately prior to the Closing under the
Agreement, unless the Agreement is not consummated, in which case the Effective
Time will occur at the later of the satisfaction of all conditions set forth in
the Plan or the termination of the Agreement.
Under the terms of the Plan, the stock option plans and agreements of
SFNB will become the stock option plans and agreements of the Holding Company.
At the Effective Time, the unexercised portion of the options outstanding under
SFNB's existing stock option plans and agreements will be assumed by the Holding
Company and thereafter will be exercisable only for shares of Holding Company
Common Stock, with each option being exercisable for a number of shares of
Holding Company Common Stock equal to the number of shares of SFNB Common Stock
that were available thereunder immediately prior to the Effective Time, with no
change in the option exercise price or any other term or condition of such
option. The Holding Company and SFNB will make appropriate amendments to SFNB's
existing stock option plans and agreements to reflect the adoption of those
plans and agreements as the stock option plans and agreements of the Holding
Company without adverse effect upon the options outstanding under such plans and
agreements. Upon the Closing under the Agreement, the Options granted by SFNB to
RBC Holdings effective upon the Closing shall be deemed to be options to acquire
Holding Company Stock.
Whether or not the Reorganization is consummated, all expenses that are
incurred in connection with the Reorganization, including the cost of organizing
the Holding Company and New Bank, will be paid by SFNB.
RECOMMENDATION OF THE SFNB BOARD OF DIRECTORS AND REASONS
FOR THE REORGANIZATION
The Reorganization is being undertaken to separate the banking
activities of SFNB from the computer software activities of S1. Subject to
shareholder and regulatory approvals, the 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, the 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 approved and consummated, the Holding Company and S1 will be free
from regulation by the OTS 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.
SFNB's Board of Directors chose Delaware as the state of incorporation
of the Holding Company for several reasons. Delaware has a substantial body of
corporate laws which are periodically updated and revised to meet changing
business needs. Many major corporations are incorporated in that state. The
Delaware courts have developed considerable expertise in dealing with corporate
issues, and a substantial body of case law has developed construing Delaware law
and establishing public policies with respect to Delaware corporations, thereby
providing greater predictability with respect to corporate legal affairs. The
organization of the Holding Company in Delaware also allows the Holding Company
to make use of certain protective features permitted by Delaware law. See "--
Comparison of Shareholders' Rights" and "-- Takeover Defense Provisions." In
addition, the Holding Company's Certificate of Incorporation, as authorized by
Delaware law, eliminates, except in certain circumstances, the personal
liability of directors for breach of their duty of care to the Holding Company
and its shareholders. See "-- 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 rights of an owner thereof as
provided by the terms of the Holding Company Stock. As soon as practicable and
in any event not more than 30 days after the Effective Time, the Holding Company
shall make available a certificate or certificates for the aggregate number of
shares of Holding Company stock to which such holders are entitled. Shareholders
will be entitled to surrender their present stock certificates for new
certificates for an equal number of shares of Holding Company Common Stock
and/or Holding Company Preferred Stock, as applicable. Until so surrendered,
their present stock certificates will for all corporate purposes represent the
same number of shares of Holding Company Common Stock and Holding Company
Preferred Stock which the holders would be entitled to receive upon surrender. A
letter of transmittal and instructions with respect to the exchange of stock
certificates will be sent to all holders of record of shares of SFNB Stock at
the Effective Time as soon as practicable after the consummation of the
Reorganization. After the Effective Time, no holder of a certificate for SFNB
Stock shall be entitled to vote the shares of SFNB Stock formerly represented by
such certificate, or to receive dividends thereon or to exercise any other
rights of ownership. Wachovia Bank, N.A., the transfer agent and registrar for
SFNB Stock, will act in the same capacity for the Holding Company Stock.
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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 and the Georgia Department were approved prior to
the announcement of the proposed Sale. The Georgia Department has confirmed that
its approval remains in effect. SFNB has requested confirmation from the OTS as
to the continued effectiveness of its approval in light of the decision to sell
the Banking Business to RBC Holdings. The required regulatory approval of the
FDIC in connection with the Reorganization has been received. 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. SFNB is not aware of any reason
why all regulatory approvals required in connection with the Reorganization
should not be obtained.
The FDIC approval requires New Bank to have beginning paid-in capital
funds of not less than $10 million and a Tier 1 capital to total assets ratio of
not less than 8 percent, in addition to a fully funded loan loss reserve, for
the first 3 years of operations. In addition, during the first three years of
operations, New Bank will be able to pay cash dividends only from net operating
profits after an appropriate allowance for loan and lease losses has been
established. If the Sale is not consummated, New Bank will be required to have
beginning paid-in capital funds of not less than $12 million.
CONDITIONS TO THE PLAN
The Plan and the transactions provided for therein will not become
effective unless all of the following conditions have occurred: (i) the Plan is
approved by the holders of at least two-thirds of the outstanding shares of SFNB
Common Stock and SFNB Preferred Stock; (ii) the required approvals of the OTS
have been received and all waiting periods have expired; (iii) the shares of
Holding Company Common Stock to be issued to the holders of SFNB Common Stock
pursuant to the Plan have been registered or qualified for issuance under the
Securities Act and all applicable state securities laws or are exempt therefrom;
(iv) the Holding Company Common Stock is approved for listing on the Nasdaq
Stock Market; and (v) SFNB and the Holding Company have obtained all other
consents, permissions and approvals and taken all actions required by law or
agreement deemed necessary for the consummation of the transactions provided for
in the Plan.
If the Plan is approved by the holders of SFNB Stock, the Reorganization
is expected to become effective as soon as possible thereafter upon satisfaction
of all the conditions to the Plan and the expiration of any applicable waiting
periods, and, if the Agreement is approved, immediately prior to the Sale unless
the Agreement is terminated or the conditions to the Agreement are not
satisfied. See "The Sale of SFNB's Banking Business -- Conditions to the
Agreement." If the Plan is not approved by the holders of SFNB Common Stock or
SFNB Preferred Stock or if the required regulatory approvals are not received,
SFNB will continue to operate without a holding company structure. Approval of
the Agreement is not a condition to approval of the Plan, but approval of the
Plan is a condition to consummation of the Sale pursuant to the Agreement.
ABANDONMENT AND AMENDMENT OF THE PLAN
The Plan may be abandoned by any of the parties at any time before the
Effective Time in the event that: (i) any action, suit, proceeding or claim has
been instituted, made or threatened relating to the Plan, which makes
consummation of the actions contemplated by the Plan inadvisable in the opinion
of the parties, or (ii) for any reason, consummation of the actions contemplated
by the Plan is inadvisable in the opinion of the parties. In the event of such
abandonment, SFNB will pay the fees and expenses incurred in connection with the
Plan and the proposed Reorganization.
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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 certain 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 the Charter and the Amended and Restated Bylaws (the
"Bylaws") of SFNB and federal law. The following comparison is based on the
current terms of the governing documents of SFNB and the Holding Company and on
the provisions of federal law and the DGCL. The following discussion is a
general summary of certain provisions of SFNB's Charter and Bylaws and the
Holding Company's Certificate of Incorporation and Bylaws. The discussion is
necessarily general and, with respect to provisions contained in the Holding
Company's Certificate of Incorporation and Bylaws, reference should be made to
the document in question, which are attached as Appendix D and Appendix E to
this Proxy Statement/Prospectus. Certain provisions included in the Holding
Company's Certificate of Incorporation and Bylaws may serve to entrench
management and to prevent a change in control of the Holding Company even if
desired by a majority of shareholders. These provisions are designed to
encourage potential acquirers to negotiate directly with the Board of Directors
of the Holding Company and to discourage other takeover attempts.
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 and initially
shall be four.
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
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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 40,000,000 shares of Holding Company Common Stock and 5,000,000
shares of serial preferred stock. SFNB Common Stock and preferred stock is
without par value. Holding Company Common Stock and preferred stock has a par
value of $0.01 per share.
CALL OF SPECIAL MEETINGS. SFNB's Bylaws provide that special meetings of
shareholders may be called at any time by the Chairman of the Board, the
President or the Board of Directors, and shall be called upon written request of
the holders of not less than one-tenth of all of the outstanding capital stock
of SFNB entitled to vote at the meeting. However, SFNB's Charter provides that
special meetings related to changes in control of SFNB or amendments to its
charter may only be called by the Board of Directors. The Holding Company's
Certificate of Incorporation provides 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.
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 no
director shall be liable to the Holding Company or its shareholders for monetary
damages for breach of fiduciary duty as a director except (i) for any breach of
the director's duty of loyalty to the Holding Company or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for the types of liability set forth in
Section 174 of the DGCL, or (iv) for any transaction from which a director
received an improper personal benefit. It also provides that any repeal or
modification of this provision by shareholders shall not adversely affect any
right or protection of a director for acts or omissions occurring prior to the
date of such repeal or modification. The Holding
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Company's Certificate of 26 Incorporation further provides that the Holding
Company generally shall fully indemnify directors, officers, employees and
agents to the extent permitted by law with respect to certain 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.
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.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The Holding Company's
Certificate of Incorporation requires that certain 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 certain 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
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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. SFNB's Charter and Bylaws do not
contain a similar provision.
ANTI-GREENMAIL. The Holding Company's Certificate of Incorporation
generally requires the affirmative vote of at least a majority of the total
number of outstanding shares of voting stock 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 Directors has determined that the purchase price per share does
not exceed the fair market value of such voting stock. SFNB's Charter and Bylaws
do not contain a similar provision.
CRITERIA FOR EVALUATING CERTAIN OFFERS. The Holding Company's
Certificate of Incorporation provides that the Board of Directors, when
evaluating certain 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. SFNB's Charter and bylaws do not contain a similar provision.
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 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
certain provisions (the provisions related to directors, indemnification,
amending the Bylaws, criteria for evaluating certain offers, anti-greenmail, the
calling of special meetings of shareholders and the related clause of the
amendment provision). In addition, the provisions regarding certain 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.
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SFNB's Bylaws provide that the Bylaws may be amended in a manner consistent
with the regulations of the OTS by a majority vote of the full Board of
Directors or a majority vote of the votes cast by shareholders at a legal
meeting. The Holding Company's Certificate of Incorporation provides that the
Bylaws of the Holding Company may be amended by the affirmative vote of at least
two-thirds of the Board of Directors at a duly called meeting or at least
two-thirds of the total votes eligible to be voted at a duly called meeting of
shareholders.
LIMITATION OF DIRECTOR LIABILITY
The Holding Company's Certificate of Incorporation contains a provision
which eliminates, except in certain circumstances, the personal liability of
directors for monetary damages for breach of their duty of care to the Holding
Company. See "-- Comparison of Shareholders Rights -- Limitation of Liability."
SFNB's Charter does not contain a comparable provision.
Under Delaware law, the fiduciary duties of a corporate director fall into
two broad categories: the duty of care and the duty of loyalty. The fiduciary
duty of care is the duty of directors to exercise diligence and care in managing
the business and affairs of the corporation. The fiduciary duty of loyalty
requires that, in making a business decision, directors act in good faith and in
the honest belief that the action was taken in the best interests of the
corporation. Liability of directors of a Delaware corporation to the corporation
or its shareholders for breach of the duty of care requires a finding by a court
that the directors were grossly negligent.
The DGCL permits a Delaware corporation to include in its certificate of
incorporation a provision that eliminates or limits a director's personal
liability for monetary damages for breach of his or her fiduciary duty of care,
subject to certain limitations. 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 Holding Company's Certificate of Incorporation provides 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. The Certificate of Incorporation 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. The Certificate of Incorporation 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, the Holding Company's
Certificate of Incorporation 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, under certain circumstances, for willful or
negligent violation of certain 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 the Holding Company's Certificate of Incorporation, 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
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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 the limitation on liability in the Holding
Company's Certificate of Incorporation and accordingly, in approving the
provision, the board of directors may be subject to a conflict of interest. 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. The Certificate of Incorporation provides that
any repeal or modification of the provision by the shareholders will not
adversely affect any right or protection of a director for acts or omissions
occurring prior to the effective date of such repeal or modification. At
present, there are no pending or completed actions or proceedings against any
director of the Holding Company, and the Holding Company knows of no threatened
litigation against the Holding Company's directors which would be affected by
the provision.
There has been little or no judicial guidance as to the scope of the
limitation on liability afforded by similar provisions in certificates of
incorporation under Delaware law; as a result, the effects of such provisions
are uncertain. There may be liabilities which a court would hold are unaffected
by such provisions. The Holding Company has been advised that the provision will
not limit a director's liability for violations of the federal securities laws.
The Board of Directors of the Holding Company believes that the
limitation on liability in its Certificate of Incorporation will significantly
increase the Holding Company's ability to attract and retain qualified
individuals to serve as outside directors by providing additional protection for
directors in making good faith business decisions. The Board of Directors
strongly believes that the potential benefits to the Holding Company outweigh
the potential limitations the provision places on shareholder remedies.
TAKEOVER DEFENSE PROVISIONS
The Holding Company's Certificate of Incorporation and Bylaws
contain various takeover defense provisions, some of which are similar to
provisions of SFNB's Charter and Bylaws. They are intended to encourage any
acquirer to negotiate the terms of an acquisition with the Board of Directors of
the Holding Company. These provisions will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by the Board of Directors. The Board of
Directors believes these provisions provide necessary protection to the Holding
Company and are in the best interests of the shareholders. In the Board of
Directors' judgment, the Board is in the best position to determine the true
value of the Holding Company and its subsidiaries and to negotiate more
effectively for a fair price or do whatever else may be in the best interests of
the shareholders. Accordingly, 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 holding company formation will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
Board of Directors' view that these provisions should not discourage persons
from proposing mergers or other transactions at prices reflective of the true
value of the Holding Company and its subsidiaries and which are in the best
interests of all shareholders.
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
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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.
For a description of some of the takeover defense provisions of the
Holding Company's Certificate of Incorporation, see "-- Comparison of
Shareholders' Rights -- Criteria for Evaluating Certain Offers," "-- Certain
Business Combinations" and "-- Anti-Greenmail." Also, certain provisions of the
Holding Company's Certificate of Incorporation previously discussed in other
sections of "-- Comparison of Shareholders' Rights" may have a takeover
defensive effect. These include provisions (which are in both the Holding
Company's Certificate of Incorporation and SFNB's Charter) that provide for
staggered terms for members of the board of directors and authorize additional
shares of common and preferred stock.
Section 203 of the DGCL is intended to discourage hostile takeovers by
impeding the ability of a hostile acquirer to consummate a merger with the
target company. In general, Section 203 provides that a person who owns 15% or
more of the outstanding voting stock of a Delaware corporation (an "Interested
Stockholder") may not consummate a merger or other business combination
transaction with the company at any time during the three-year period following
the date such person became an Interested Stockholder. The term "business
combination" is defined broadly to cover a wide range of corporate transactions
including mergers, sales of assets, issuances of stock, transactions with
subsidiaries and the receipt of disproportionate financial benefits. The statute
exempts the following transactions from the requirements of Section 203: (1) any
business combination if, prior to the date a person became an Interested
Stockholder, the board of directors approved either the business combination or
the transaction in which such person became an Interested Stockholder; (2) any
business combination involving a person who acquired at least 85% of the
outstanding voting stock in the transaction in which he became an Interested
Stockholder; (3) any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of the shares not
owned by the Interested Stockholder; and (4) certain 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, subject to certain exemptions, 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
certain 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 BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR" APPROVAL OF
THE PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY.
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THE SALE OF SFNB'S BANKING BUSINESS
(PROPOSAL 2)
The following description is qualified in its entirety by reference to
the Agreement, which is attached as Appendix C to this Proxy
Statement/Prospectus.
THE COMPANIES INVOLVED IN THE SALE OF SFNB'S BANKING BUSINESS
For information about SFNB, the Holding Company, New Bank, S1, Royal
Bank and RBC Holdings, see "Summary -- The Companies," "Information about SFNB,"
"The Holding Company Reorganization" and "Additional Information about the
Holding Company."
THE SFNB/ROYAL BANK TRANSACTIONS
In March 1998, SFNB and S1 entered into several agreements with Royal
Bank and RBC Holdings, including the Agreement. The Agreement was entered into
on March 9, 1998 among Royal Bank, RBC Holdings and SFNB. The Agreement was
amended on June 5, 1998. After its organization, the Holding Company became a
party to the Agreement. The Agreement provides for, among other things, the Sale
of SFNB's Banking Business to RBC Holdings. For information about the other
agreements entered into among SFNB, S1 and RBC Holdings in March 1998, see "--
Other Related Agreements" below.
BACKGROUND OF THE SALE
In the third quarter of 1997, SFNB adopted a formal plan to sell its $52
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. The Board of Directors also determined that to continue
in the Banking Business could be viewed by S1 customers as inappropriate
competition, and that such circumstances, coupled with the regulatory burdens of
the Banking Business, were not in the best long-term interests of shareholders.
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 F and the losses from the banking operations are reflected in the
consolidated statements of operations as discontinued operations.
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. 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;
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(ii) The current and prospective environment in which SFNB operates,
including national and local economic conditions, the highly
competitive environment for financial institutions generally, the
increased regulatory burden on financial institutions, and the trend
toward consolidation in the financial services industry;
(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;
(iv) The fact that the Sale would not result in any significant current
taxes payable;
(v) The potential for appreciation and growth in the market and book
value of the Holding Company Stock after the Reorganization and the
Sale;
(vi) The oral presentation and opinion of FBR that the sale price of
SFNB's Banking Business is fair to SFNB's common shareholders from a
financial point of view; and
(vii) The advantages and disadvantages of SFNB retaining its Banking
Business.
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 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 updated schedule of such liabilities delivered to RBC Holdings
prior to the Closing. The Agreement provides that the Assumed Liabilities will
not include any liabilities of SFNB or the Holding Company that are not included
in the initial or updated schedule to the Agreement, including but not limited
to litigation and environmental matters. As of the date of the Agreement, the
Acquired Assets and Assumed Liabilities consisted of all of the assets and
liabilities used in the Banking Business except for certain loans of SFNB
related to the former
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Pineville, Kentucky operations. The Agreement 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"). The Agreement also provides
that the Banking Business will not include (i) any capital stock of S1, (ii)
inter-company accounts payable from S1 to SFNB or (iii) the amount of cash or
cash equivalent assets on the books of SFNB immediately prior to the Sale in
excess of the Transferred Capital. Also, the New Bank Shares will not be
included in the Banking Business.
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 adjustment as described below, which is equivalent
to $3 million in excess of the required regulatory total capital of SFNB's
Banking Business on the Closing Date of the Sale. On the Closing Date, RBC
Holdings shall pay the Holding Company $11.5 million in immediately available
funds. On a date 18 months from the Closing, 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 of the OTS, the Federal
Reserve Board and the Georgia Department have been filed and are pending. Royal
Bank also intends to file an application with the Superintendent for approval
upon recommendation of the Superintendent of the Minster of Finance (discussed
below). 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
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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. The Community Reinvestment Act of 1977, as amended (the "CRA"),
requires that the OTS, in deciding whether to approve the acquisition of New
Bank, also assess the records of performance of the relevant insured depository
institutions under 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. It is not unusual for the OTS to receive protests and other
adverse comments from community groups and others on an application filed under
the HOLA.
In connection with the proposed acquisition of New Bank by RBC Holdings,
an application has been filed with the OTS under the HOLA and the regulations
promulgated thereunder in regard to the designated home and branch offices of
New Bank. This application also is subject to public notice and the opportunity
for comment. In reviewing that application, the OTS will assess the overall
policies, condition and operation of the applicant and will take into account
the applicant's record of performance under the CRA. Since New Bank has not been
formed yet and will be continuing SFNB's Banking Business, the OTS could review
the policies, condition and operation and CRA performance of SFNB in its review
of the application. SFNB currently has a "satisfactory" CRA rating from the OTS.
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 Royal 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. It is not unusual for the Federal Reserve Board to receive
protests and other adverse comments from community groups and others with
respect to a notice filed under the BHC Act to acquire a savings institution.
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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As noted above, Royal Bank intends to file 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 certain conditions, including the following:
(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 third party takeover proposal, and that the
Holding Company, SFNB and New Bank shall not assist in the preparation of or
file a regulatory application related to a third party takeover proposal unless
otherwise required by a government agency.
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.
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.
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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 retained by
New Bank after the Closing Date, which will result in a charge to income that
will be recorded in the second quarter of 1998.
CERTAIN PROVISIONS OF THE AGREEMENT
Under the Agreement, SFNB and the Holding Company have made certain
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 certain representations and
warranties to SFNB and the Holding Company. The material representations and
warranties of RBC Holdings are those with regard to (i) organization and
authority; (ii) conflicting instruments; (iii) litigation; (iv) regulatory
approvals; (v) statements in the proxy statement/prospectus; and (vi) regulatory
matters.
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;
39
<PAGE>
(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. The full text of the executed opinion of FBR, dated March 9, 1998,
is attached to this Proxy Statement/Prospectus as Appendix A. For a description
of the materials reviewed by FBR in preparing this opinion and other matters,
see Appendix A. In connection with the Sale, FBR will receive a fee of $90,000.
ACCOUNTING TREATMENT
The Holding Company expects to record a gain of $1,750,000 on the Sale.
See "Pro Forma Consolidated Financial Statements."
40
<PAGE>
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 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
41
<PAGE>
(the "Options") to purchase an aggregate of $10 million of Holding Company
Common Stock (733,818 shares) effective upon Closing. 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
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. 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 S1 software programs. Pursuant
to the Data Center Agreement, S1 will provide data processing, maintenance and
support, technical support and service level agreement services for the initial
five year term of that agreement, which services will be used by New Bank and
its affiliates to provide such services to their customers through the VFM
software. Both the STAR Agreement and the Data Center Agreement contain various
provisions limiting liability, providing indemnification and related to Year
2000 matters, and permit termination of the agreement in certain instances. The
STAR Agreement provides for $5 million of licensing fees payable at Closing and
potential additional licensing fees under certain circumstances. The Data Center
Agreement provides for monthly processing support and maintenance fees based on
the number of customers using the software. Through the Consulting Agreement, S1
will provide various transition and consulting services related to the Banking
Business as requested by RBC Holdings and/or New Bank for one year following the
Closing Date for a fee of $1 million payable on the Closing Date. S1 has agreed
to indemnify RBC Holdings and SFNB against damages and losses related to certain
employee matters. For information about the other participants in the STAR
program, see "Information about SFNB -- Description of Business -- Strategic
Investors in SFNB."
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<PAGE>
THE BOARD OF DIRECTORS OF SFNB RECOMMENDS A VOTE "FOR" APPROVAL OF
THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
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 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 F 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. Dollars are in thousands except share and per share data.
43
<PAGE>
Pro Forma Consolidated Balance Sheet - Unaudited
<TABLE>
<CAPTION>
At March 31, 1998
----------------------------------------------
SFNB Pro forma Pro forma
historical adjustments results
---------- ----------- -------
<S> <C> <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 .......................................... 1,569 200(1) 1,769
Accrued stock option compensation expense ................. 2,287 450(6) 2,737
Deferred revenues ......................................... 8,775 6,000(2) 14,775
----------- ----------- -----------
Total current liabilities ............................... 14,298 6,650 20,948
----------- ----------- -----------
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
for SFNB, 5,000,000 shares for the Holding
Company. Issued and outstanding 1,251,084
shares at March 31, 1998 and December 31,
1997, respectively ...................................... 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 for SFNB,
40,000,000 shares for the Holding Company
Issued and outstanding 10,616,518 and
10,487,245 shares at March 31, 1998 and
December 31, 1997, respectively .......................... 74,004 (73,898)(4) 106
Additional paid-in capital ................................ -- 73,898 (4) 74,473
575 (5)
Accumulated deficit ....................................... (60,613) 1,750 (1) (59,888)
(575)(5)
(450)(6)
Accumulated other comprehensive income .................... (92) -- (92)
----------- ---------- -----------
Total stockholders' equity ............................. 15,978 1,300 17,278
----------- ---------- -----------
Total liabilities and stockholders' equity.............. $ 30,276 $ 7,950 $ 38,226
=========== ========== ===========
</TABLE>
44
<PAGE>
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> <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 .................................. 255 113(7) 368
------------ ------------ ------------
Loss from continuing operations .................. $ (8,113) $ 616 $ (7,497)
============ ============ ============
Basic and diluted net loss per common share from
continuing operations .......................... $ (0.77) $ (0.71)
============ ============
Weighted average common shares outstanding ....... 10,523,921 10,592,851
</TABLE>
45
<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 ................................ 1,481 584(7) 2,065
------ ------ -------
Loss from continuing operations................. $ (27,302) $ 2,687 $ (24,615)
======= ====== =======
Basic and diluted net loss per common share from
continuing operations ...................... $ (3.06) $ (2.73)
======== =======
Weighted average common shares outstanding 8,922,762 9,015,355
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The historical consolidated financial data is derived from the audited
consolidated financial statements of SFNB for the year ended December 31, 1997
and the unaudited consolidated financial statements of SFNB for the 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
--------
Total consideration.............................................. 13,000
Less estimated transaction costs-accrued expenses................ 200
--------
Net consideration................................................ 12,800
Banking operations held for sale, net, as adjusted............... 10,000
--------
Gain on sale..................................................... 2,800
Adjustment for purchased technology included in banking
operations held for sale, net which is excluded from sale..... 1,050
--------
Gain on sale, as adjusted ....................................... $ 1,750
========
(2) Reflects the Other Agreements entered into between S1, SFNB and RBC
Holdings including the $6 million in cash to be received at Closing which
is reflected as deferred revenue at March 31, 1998 and revenues recognized
from license fees for SFNB's VBM and Virtual Credit Card Manager products
and from the Consulting Agreement totaling $0.4 million in the three months
ended March 31, 1998 and $1.5 million for the year ended December 31, 1997.
Revenue for professional services is recognized ratably over the period the
services are to be provided and based on pricing in the Consulting
Agreement. Data center revenue is recognized based on the pricing in the
Data Center Agreement and transaction volumes processed for the banking
operations during the respective periods.
(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 in 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 the fair value of the Options granted under the
Stock/Option Agreement entered into between SFNB, RBC Holdings and the
Holding Company.
(6) Reflects adjustment for compensation expense related to the vesting of all
non-vested options of officers and employees who are retained by New Bank
after the Closing Date.
(7) 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
47
<PAGE>
the consummation of the Plan and increases in interest income attributable to:
(i) cash proceeds received from the Sale of SFNB's Banking Business and the
Other Agreements (using average 1997 yield of 5.36%) (ii) 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%), and (iii) the interest income that would have been
recorded related to the sale of 92,593 shares of SFNB Common Stock to RBC
Holdings for $1.0 million which occurred on March 9, 1998. The interest income
adjustments are summarized as follows:
<TABLE>
<CAPTION>
Three months
ended Year ended
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Decrease from transfer of $10 million in investment
securities available for sale.......................... $ (134) $ (536)
Increases from:
Cash proceeds from sale of bank and the
Other Agreements..................................... 235 938
Amount due at the end of eighteen months
from Closing ($1.5 million).......................... 32 128
Interest on proceeds from sale of $1 million in
common stock......................................... 10 54
-------- --------
$ 113 $ 584
========= ========
</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 shares of SFNB Common Stock and SFNB Preferred
Stock then outstanding and the assumption by the Holding Company of the
liabilities of the Non-Banking-Business, (ii) the declaration by SFNB of a
distribution of its Holding Company Common Stock and Holding Company Preferred
Stock to SFNB shareholders, (iii) the conversion of the Options granted to RBC
Holdings and options granted in connection with the SecureWare and SBD
acquisitions (the "SFNB Investment Options") into options of the Holding Company
(the "Holding Company Investment Options")and the substitution of non-qualified
options to acquire Holding Company Common Stock and incentive stock options to
acquire Holding Company Common Stock for non-qualified options to acquire SFNB
Common Stock and incentive stock options to acquire SFNB Common Stock,
respectively, and (iv) the voluntary dissolution of SFNB. The opinion of KPMG
takes into consideration the effect of the Sale of the Banking Business to RBC
Holdings on the tax consequences of the Holding Company Formation. The opinion
of KPMG, dated _______, 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.
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<PAGE>
KPMG's opinion is rendered with respect to the specific matters discussed
herein and KPMG expresses no opinion, and no inferences should be drawn, with
respect to any other federal, state, or local tax aspect or any legal or
regulatory aspect of these transactions.
KPMG's opinion is not binding upon any tax authority (including the
Internal Revenue Service) or any court and no assurance can be given that a
contrary position will not be asserted by a tax authority and ultimately
sustained by a court. In rendering its opinion, KPMG has relied upon the
relevant provisions of the Internal Revenue Code, 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
49
<PAGE>
Stock and/or SFNB Preferred Stock surrendered in exchange therefor.
Section 358(a)(1).
10. The holding period of the Holding Company Common Stock and/or
Holding Company Preferred Stock received by a shareholder of SFNB
pursuant to the Holding Company Formation will include the
shareholder's holding period of the SFNB Common Stock and/or SFNB
Preferred Stock surrendered in exchange therefor, provided that the
SFNB stock is held as a capital asset in the hands of the
shareholder of SFNB on the date of the transaction. Section
1223(1).
11. The Holding Company Preferred Stock received pursuant to the
Holding Company Formation will not be "section 306 stock" in the
hands of the former holders of SFNB Preferred Stock. Rev. Rul.
79-287, 1979-2 C.B. 130; Rev. Rul. 88-100, 1988-2 C.B. 46.
12. No gain or loss will be recognized by the Holding Company, SFNB, or
the option holders on the substitution of Holding Company
non-qualified stock options, Holding Company incentive stock
options and Holding Company 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
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<PAGE>
of banking operations if the Agreement is not consummated. In the future, the
Holding Company may become an operating company or acquire companies engaged in
related business activities. Initially, the Holding Company will neither own nor
lease any real property. For more information about S1, see "Summary -- The
Companies -- Security First Technologies, Inc.," "Information about SFNB --
Description of Business" and "-- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Following the Reorganization and the Sale, the competitive conditions to be
faced by the Holding Company initially will be the same as those faced by S1. At
the present time, the Holding Company does not intend to employ any persons
other than its management. 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 $18.1 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 __________ outstanding shares of SFNB Common Stock (excluding
stock options previously granted but not exercised for 733,818 shares) and
_________ outstanding shares of SFNB Preferred Stock. Upon completion of the
Reorganization and subject to adjustment, __________ shares of Holding Company
Common Stock will be reserved for the issuance of stock options under SFNB stock
option plans and agreements, _________ 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 authorized to issue 40,000,000 shares of Holding
Company Common Stock, par value $0.01 per share. 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,
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<PAGE>
the holders of Holding Company Common Stock initially will possess exclusive
voting power in the Holding Company. Holders of Holding Company Common Stock do
not have the right to cumulate their votes for the election of directors, and
they have no preemptive or conversion rights with respect to any shares that may
be issued. Holding Company Common Stock is not subject to additional calls or
assessments by the Holding Company, and upon receipt by the Holding Company of
the full purchase price therefor, each share of Holding Company Common Stock
will be fully paid and nonassessable. For a discussion of the voting rights of
Holding Company Common Stock, classification of the Holding Company's Board of
Directors and provisions of the Holding Company's 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."
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.
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 Preferred 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 authorizes its Board of
Directors, without further shareholder approval, to issue up to 5,000,000 shares
of serial preferred stock, par value $0.01 per share, for any proper corporate
purpose. 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
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<PAGE>
preferences may include voting, dividend, conversion and liquidation rights that
may rank prior to the Holding Company Common Stock.
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
The 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 four executive officers of the Holding
Company currently serves as an officer of SFNB and/or S1. Michael C. McChesney,
the Chairman of the Board of the Holding Company, currently serves as the
Chairman of the Board of SFNB and a director of S1. James S. Mahan, III, the
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. Reese Jacobs, the Chief Operating Officer and President
of the Holding Company, currently serves as Chief Operating Officer of S1. 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. Jacobs is provided
below.
REESE JACOBS has served as the Chief Operating Officer of S1 since January
28, 1998 and as the President and Chief Operating Officer of the Holding Company
since its organization in the second quarter of 1988. Prior to January 1998, Mr.
Jacobs served as the Research and Development Lab Director for Hewlett-Packard's
Internet and System Security Lab (ISSL) from February 1996 to January 1998.
Before joining Hewlett-Packard, he served as the Vice President of Software
Development for SecureWare, the developer of among other things, the trusted
operating system upon which S1's VFM is built. Mr. Jacobs also was co-founder of
SecureWare in September 1987 and remained with the company until the acquisition
of its system software business by Hewlett-Packard in February 1996.
STOCK OWNED BY MANAGEMENT AND PRINCIPAL HOLDERS OF VOTING SECURITIES
The 1,000 outstanding shares of Holding Company Common Stock presently are
held by SFNB. If the Reorganization is consummated, the holders of SFNB Stock
will own Holding Company Stock in the same proportion as they owned SFNB Stock
immediately prior to the Reorganization. For information about SFNB Stock held
by SFNB officers, directors and principal shareholders, see "Information about
SFNB -- Stock Owned by Management" and "-- Principal Holders of Voting
Securities of SFNB."
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<PAGE>
MARKET FOR HOLDING COMPANY COMMON STOCK AND DIVIDENDS
SFNB Common Stock presently is traded on the Nasdaq Stock Market under the
symbol "SFNB." The Holding Company will apply to the Nasdaq Stock Market to
change the listing of SFNB Common Stock to Holding Company Common Stock under
the symbol "SONE" subject to consummation of the Reorganization. Approval of the
listing of the Holding Company Common Stock on the Nasdaq Stock Market is a
condition to consummation of the Plan. For information about the market price of
SFNB Common Stock, see "Information about SFNB -- Market for SFNB Common Stock
and Dividends."
If the Reorganization and the Sale are approved and consummated, the source
of funds for payment of dividends by the Holding Company initially will be
dividends paid to it by S1, if any. The declaration of dividends by the Holding
Company and S1 is subject to favorable operating results, the financial
condition of the Holding Company or S1, as applicable, tax limitations and other
factors. SFNB has not paid dividends on SFNB Common Stock or SFNB Preferred
Stock since its initial public offering in May 1996. If the Reorganization and
the Sale are consummated, the Holding Company does not presently intend to pay
cash dividends to shareholders for the foreseeable future, as any earnings are
expected to be retained for use in developing and expanding its business. There
can be no assurance as to the amount or timing of future dividend payments, if
any.
REGULATION OF THE HOLDING COMPANY
If the Reorganization is consummated but the Sale is not, the Holding
Company would be a unitary savings and loan holding company, subject to OTS
regulations, examination, supervision and reporting requirements pursuant to
certain provisions of the HOLA and the Federal Deposit Insurance Act. In
addition, New Bank, as an insured savings association, 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
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<PAGE>
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.
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................... -- 74,473
Accumulated deficit.......................... (60,613) (59,888)
Accumulated other comprehensive income....... (92) (92)
---------- ---------
Total stockholders' equity................. $ 15,978 $ 17,278
========== ===========
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 40,000,000
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 5,000,000
Outstanding................................. 1,251,084 1,251,084
</TABLE>
- ------------
(1) Excludes 4,682,921 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.
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<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. 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.
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
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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 F to this Proxy Statement/Prospectus.
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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>
60
<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
61
<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>
62
<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 loan 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.
63
<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>
64
<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").
65
<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 Carryin % 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.
66
<PAGE>
Maturity information regarding SFNB's deposit accounts of $100,000 or more
is shown below.
December 31,
--------------
1997 1996
---- ----
(In thousands)
Three months or less.................................. -- $ 849
Over three through six months......................... -- 949
Over six through twelve months........................ $ 425 1,926
Over twelve months.................................... 606 1,733
--- -----
Total time deposits of $100,000 or more............ $ 1,031 $ 5,457
======= ========
Since the sale of the assets and liabilities of SFNB's Pineville, Kentucky
branch, SFNB's deposit gathering strategy has been focused on its Internet
banking activities. Beginning in December 1996, upon the opening of its Atlanta
City Office, SFNB began to focus its deposit gathering strategy on the local
Atlanta metropolitan area. In addition to traditional marketing programs, SFNB
anticipates that it will offer above market interest rates to attract deposits.
Management anticipates that the higher cost of deposits will be offset by other
efficiencies gained through the Internet delivery channel.
Borrowings. The Federal Home Loan Bank System (the "FHLB System") functions
in a reserve credit capacity for savings associations and certain other home
financing institutions. Members of the FHLB System are required to own capital
stock in a Federal Home Loan Bank ("FHLB"). Members are authorized to apply for
advances on the security of such stock and certain of their home mortgages and
other assets (principally securities which are obligations of, or guaranteed by,
the United States) provided certain creditworthiness standards have been met.
Under its current credit policies, the FHLB limits advances based on a member's
assets, total borrowings and net worth.
SFNB may use FHLB advances as an alternative source of funds to deposits in
order to fund its lending activities when it determines that it can profitably
invest the borrowed funds over their term. Pursuant to SFNB's asset/liability
management strategy, it has used FHLB advances to fund adjustable rate and fixed
rate mortgage loan originations. SFNB had outstanding FHLB advances of $1.0
million at December 31, 1997.
ASSET AND LIABILITY MANAGEMENT
Net interest income, the primary component of net income of the banking
operations, is derived from the difference or "spread" between the yield on
interest-earning assets and the cost of interest-bearing liabilities. SFNB has
sought to reduce its exposure to changes in interest rates by matching more
closely the effective maturities and repricings of its interest-sensitive assets
and liabilities. At the same time, SFNB's asset and liability management
strategies also must accommodate customer demands for particular types of
deposit and loan products.
While much of SFNB's asset and liability management efforts involve
strategies which increase the rate sensitivity of its loans and investments such
as originations of adjustable rate loans and purchases of adjustable-rate
mortgage-backed securities and short term investments, it also uses certain
techniques to reduce the rate sensitivity of its deposits and borrowed money.
Those techniques include attracting longer term certificates of deposit when the
market will permit and emphasizing core deposits which are less sensitive to
changes in interest rates.
SFNB measures its exposure to rate fluctuations on a quarterly basis
primarily by using a computer modeling system to quantify the approximate impact
that increases and decreases in interest rates would have on net interest
income. Under the model, interest rates are assumed to move to specified levels
on an immediate or "shock" basis. SFNB's Board-approved tolerance for
67
<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.
68
<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 4-12 1-5 over
Amount months months 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. Set forth below is a description
of certain recent regulatory 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
69
<PAGE>
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 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.
During 1997, the OTS continued its comprehensive review of its regulations
to eliminate duplicative, unduly burdensome and unnecessary regulations. The OTS
revised or has proposed revising regulations addressing electronic banking
operations, capital distributions, liquidity requirements, deposit accounts and
application processing. The proposal on electronic banking operations 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 recently proposed revisions to the OTS capital distribution regulation
would conform the definition of "capital distribution" to the definition used in
the OTS prompt corrective action regulations, and would delete the three
classifications of institutions. Under the proposal, there would be no specific
limitation 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 corrective 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. The proposal would eliminate any requirement for prior
notice or application to the OTS for cash dividends that do not exceed an amount
equal to the institution's net income for that year plus retained net income for
the preceding two years paid by an institution that would remain at least
adequately capitalized following the capital distribution and
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<PAGE>
that met other specified requirements indicating that the institution was well
managed. However, the elimination of a prior notice or application filing for
cash dividends would not apply to an institution that was owned by a holding
company. Therefore, even if the proposal is adopted by the OTS, New Bank would
have to file a notice or application prior to paying cash dividends since it
would be owned by the Holding Company after the Reorganization. In any event,
New Bank also would be subject to the dividend restrictions contained in the
FDIC approval issued in connection with the Reorganization. See "The Holding
Company Reorganization -- Regulatory Approvals."
The recently adopted revisions to the OTS liquidity requirements lowered
the minimum liquidity requirement for a federal savings institution from 5% to
4%, but made clear that an institution must maintain sufficient liquidity to
ensure its safe and sound operation. The revisions also added certain
mortgage-related securities and mortgage loans to the types of assets that can
be used to meet liquidity requirements, and provided alternatives for measuring
compliance with the requirements.
The FDIC also 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.
The following table sets forth the actual and required minimum levels of
regulatory capital for SFNB under applicable OTS regulations as of December 31,
1997:
<TABLE>
<CAPTION>
Actual Percent Required Percent Excess
------ ------- -------- ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Core....................... $ 18,861 22.6% $ 2,507 3.0% $ 16,354
Tangible................... 18,861 22.6 1,253 1.5 17,608
Risk-based................. 19,024 53.2 2,861 8.0 16,163
</TABLE>
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
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.
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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. 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
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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
party data processors*............. -- -- -- -- 700 4,400
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 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.
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<PAGE>
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. These costs were completely expensed at the end of
1997, therefore, the direct costs related to software licensing decreased in the
first quarter 1998.
Professional Services. Professional services increased to $2.4 million in
first quarter 1998 from $1.0 million in 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 increase in professional services revenues is due to an
increased number of implementations occurring in first quarter 1998 compared to
first quarter 1997.
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 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 a 1997 acquisition. During
the first quarter 1997, amortization of goodwill related to acquisitions
amounted 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. In
addition, personnel expenses increased between first quarter 1998 and first
quarter 1997 as a result of the acquisition of SBD which occurred in the fourth
quarter of 1998.
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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." As members of the STAR program, these
organizations have rights to participate in the development and direction of S1
products through representation on both the S1 Board of Directors and the S1
Product Advisory Committee.
Professional Services. Professional services, which accounted for 58% of
1997 revenues, increased to $6.3 million from $0.7 million in 1996. During 1997,
SFNB completed the installation of six financial institutions in the S1 data
center, one third party data processing center and four financial institutions
operating their own data centers. This compares to a total of two
implementations completed during 1996, both using the S1 data center. The direct
costs associated with professional services, which are primarily personnel
costs, were $5.3 million in 1997, resulting in a gross margin of $0.9 million or
15%, versus a gross margin in 1996 of $0.2 million or 23%.
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. Most of
these expenses relate to continued efforts in developing the VFM products during
1997. 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
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<PAGE>
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 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.
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<PAGE>
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. 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 to expand the VFM development effort as well as the
acquisition of SecureWare. 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.
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
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
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.
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<PAGE>
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 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
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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.
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
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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. 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.
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.
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Also, the acceleration in implementations completed is attributable to the
expertise acquired from the addition of the professionals from the acquisition
of SBD. Management anticipates that the professional services' margin will
increase in the future as pricing for professional services stabilizes and as a
result of the efficiencies gained from previous implementations
Data Center. Data center fees, which represented 5% of fourth quarter
revenues, will likely remain the most rapidly growing segment of revenues. As a
comparison, data center fees represented slightly more than 1% of total revenues
in the first quarter of 1997. Revenues associated with the data center are
directly influenced by the numbers of financial institutions that are using VFM
products through the S1 data center and the product marketing efforts of these
financial institutions. Data center processing revenue increased by 43% between
the third and fourth quarter. This increase is attributable to the increased
number of institutions implemented in 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.
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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
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 consummated, the
OTS will require $10.0 million in capitalization for New Bank. If the Sale is
not consummated, the OTS 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 of SFNB for $3.0 million in excess of the $10.0 million of
regulatory total capital.
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. The transactions with Royal Bank, upon consummation, will release the
$10 million capital requirement related to the Banking Business and provide an
additional $7.5 million in cash available to the Holding Company. 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 during 1999. In
addition, as part of the Royal Bank transaction, SFNB has
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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.
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. The OTS requires
$10.0 million in capitalization for SFNB. 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 of
which $10 million is available to fund ongoing software operations. The
transactions with Royal Bank, upon consummation, will release the $10.0 million
capital requirement related to the Banking Business and provide an additional
$10.0 million in cash available to the Holding Company. 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 and
determining whether they are Year 2000 compliant. In addition, SFNB is
developing plans of action for the
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systems and products which are not Year 2000 compliant. SFNB believes that based
on the assessments completed to date, that critical Year 2000 issues can be
corrected. The failure of SFNB 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 fully certified as
Year 2000 compliant through complete "end to end" testing. Due to the near term
release of this version, prior releases will not be certified as 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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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.
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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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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 $100,000 (the
"named executive officers") for the fiscal year ended December 31, 1997. SFNB
has not granted any stock appreciation rights ("SARs").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------
Awards
------
Securities All other
Annual Compensation underlying options compensation
Name and --------------------
Principal Position Year Salary ($) Bonus ($) (#) ($) (c)
- ------------------ ---- ---------- --------- ---------------------- ------------
<S> <C> <C> <C>
James S. Mahan, III 1997 $ 200,000 -- -- $ 19,617
Chief Executive Officer 1996 87,535 -- -- 71,211
and Director of SFNB 1995 -- -- 929,200 --
and Chairman of the Board
and Chief Executive Officer
of S1 (a)
Michael C. McChesney 1997 $ 150,000 -- -- $ 11,183
Chairman of the Board 1996 87,570 (b) -- -- 3,453(b)
of SFNB and Director 1995 -- -- 464,400 --
of S1
Robert F. Stockwell 1997 $ 119,141 -- 20,000 $ 6,392
Treasurer, Acting 1996 104,962 -- -- 72,281
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
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<PAGE>
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.
(c) All other compensation includes contributions to the SFNB 401(k) plan,
insurance premiums, and car allowance and club membership for Mr. Mahan.
For 1996, all other compensation includes reimbursement of moving expenses
of $56,880 and $70,009, including applicable taxes associated with such
reimbursement, for Messrs. Mahan and Stockwell, respectively.
Directors of SFNB do not receive any fees or other compensation for their
service as directors. Directors, however, are reimbursed for travel and other
expenses incurred in connection with attending meetings of the SFNB Board of
Directors.
EMPLOYMENT CONTRACTS
SFNB currently does not have any employment contracts or other compensatory
plans or arrangements pertaining to resignation, retirement or any other
termination of its executive officers' employment with SFNB or S1 or from a
change in control of SFNB or a change of responsibilities following a change in
control of SFNB.
OPTION GRANTS
The following table contains information concerning the grant of stock
options to the named executive officers during fiscal year 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------
Number Percent of total
of securities options granted
underlying options to employees Exercise or base
Name granted (#) in fiscal year price ($/Sh) Expiration date
- ---- ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert F. Stockwell 20,000 1.7% $6.06 Dec. 12, 2007
</TABLE>
89
<PAGE>
OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
The following table sets forth on an aggregated basis certain information
concerning each exercise of stock options during fiscal year 1997 by the named
executive officers and the value of unexercised options.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1997 AND FISCAL YEAR-END OPTION VALUES
Number of securities
underlying unexercised Value of unexercised in-the
Shares options at FY-end (#) money options at FY-end ($)(b)
acquired on Value ------------------------- -------------------------
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. 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. 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.
90
<PAGE>
STOCK OWNED BY MANAGEMENT
The following table sets forth certain information as of May 28, 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 May 28, 1998, there were 10,814,215 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) 2,185,723 18.3%
</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 May 28, 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 May 28, 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 May 28, 1998, 75,124 shares held by his wife Marguerite, and
4,218 shares held in SFNB's 401(k) plan.
91
<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 May 28, 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 551,100 (d) 5.1%
One International Place, Suite 2401
Boston, MA 02110
</TABLE>
(a) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of SFNB
Common Stock if such person has or shares voting power or investment power
with respect to such security, or has the right to acquire beneficial
ownership at any time within 60 days. As used herein, "voting power"
includes the power to vote or direct the voting of shares and "investment
power" includes the power to dispose or direct the disposition of shares.
(b) Mr. McChesney filed a Schedule 13D with the OTS dated April 29, 1998
reporting beneficial ownership of 1,075,657 shares of SFNB Common Stock,
representing approximately 9.7% of the 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.
92
<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 May 28, 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") filed a Schedule 13G with the OTS
dated April 30, 1998 reporting beneficial ownership of 551,100 shares of
SFNB Common Stock, representing approximately 5.2% of the outstanding SFNB
Common Stock. According to the Schedule 13G, Hollybank has sole voting and
sole dispositive power over all such shares. The Schedule 13G also
reports that Dorsey R. Gardner, the general partner of Hollybank, may be
deemed to beneficially own 50,000 of these shares and that he disclaims
beneficial ownership of such shares except to the extent of his interest as
a limited partner in Hollybank.
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.
93
<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 F 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 F, 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.
94
<PAGE>
APPENDIX A
[LOGO] FRIEDMAN, BILLINGS, RAMSEY & CO. INC. Institutional Brokerage
Research
Investment Banking
FBR
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Telephone (703) 312-9500
March 9, 1998
Board of Directors
Security First Network Bank
3390 Peachtree Road
Atlanta, GA 30326
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR"), provide
you with its opinion as to the fairness, from a financial point of view, to
holders of common stock ("Stockholders") of Security First Network Bank ("SFNB")
of the Sale Price (as defined) to be received by such holders pursuant to the
Stock Purchase Agreement between Royal Bank of Canada ("RBC"), RBC Holdings
(Delaware) Inc., a U.S. subsidiary of RBC and SFNB dated as of March 9, 1998
(the "Stock Purchase Agreement"), pursuant to which the banking business of SFNB
will be acquired by RBC (the "Sale"). The Sale Price for the banking business of
SFNB is $13 million in cash (subject to adjustment as described in the Stock
Purchase Agreement).
In delivering this opinion, FBR has completed the following tasks:
1. reviewed RBC Annual Report to Stockholders for the fiscal year ended
October 30, 1997 and RBC Annual Reports on Form 10-K filed with the
Securities and Exchange Commission (the "SEC") for the fiscal years
ended December 31, 1994 through 1996; reviewed RBC Quarterly Reports on
Form 10-Q for the fiscal quarters ended January 30, 1997, April 30,
1997 and July 31, 1997 filed with the SEC;
2. reviewed SFNB Annual Report to stockholders for the fiscal year ended
December 31, 1996 and SFNB Annual Report on Form 10-KSB filed with the
Office of Thrift Supervision ("OTS") for the fiscal year ended December
31, 1996; reviewed SFNB Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997
filed with the OTS;
3. reviewed SFNB's unaudited financial statements for the twelve months
ended December 31, 1997;
4. reviewed the reported market prices and trading activity for the RBC
common stock for the period January 1994 through March 9, 1998;
5. discussed the financial condition, results of operations, business and
prospects of SFNB and RBC with the managements of SFNB and RBC;
A-1
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Page 2
6. compared the results of operations and financial condition of SFNB and
RBC with those of certain publicly-traded financial institutions (or
their holding companies) that FBR deemed to be reasonably comparable to
SFNB or RBC, as the case may be;
7. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably
comparable to the Sale;
8. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions entered into by RBC;
9. reviewed a copy of the Stock Purchase Agreement; and
10. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning SFNB and RBC furnished to it by SFNB or RBC, or the
publicly-available financial and other information regarding SFNB, RBC and other
financial institutions (or their holding companies). FBR has assumed that all
such information is accurate and complete. FBR has further relied on the
assurances of management of SFNB and RBC that they are not aware of any facts
that would make such financial or other information relating to such entities
inaccurate or misleading. With respect to financial forecasts for SFNB provided
to FBR by its management, FBR has assumed, for purposes of this opinion, that
the forecasts have been reasonably prepared on bases reflecting the best
available estimates and judgements of such managements at the time of
preparation as to the future financial performance of SFNB. FBR has assumed that
there has been no material change in SFNB's assets, financial condition, results
of operations, business or prospects since December 31, 1997. FBR did not
undertake an independent appraisal of the assets or liabilities of SFNB nor was
FBR furnished with any such appraisal. FBR is not an expert in the evaluation of
allowances for loan losses, was not requested to and did not review such
allowances, and was not requested to and did not review any individual credit
files of SFNB. FBR's conclusions and opinion are necessarily based upon
economic, market and other conditions and the information made available to FBR
as of the date of this opinion. FBR expresses no opinion on matters of a legal,
regulatory, tax or accounting nature related to the Sale.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
savings institutions and financial institution holding companies, initial and
secondary offerings, mutual-to-stock conversions of savings institutions, as
well as business valuations for other corporate purposes for financial
institutions and real estate related companies. FBR has experience in, and
knowledge of, the valuation of bank and thrift securities in Georgia and the
rest of the United States.
FBR has acted as a financial advisor to SFNB in connection with the Sale and
will receive a fee for services rendered which is contingent upon the
consummation of the Sale. In the ordinary course of FBR's business, it may
effect transactions in the securities of SFNB or RBC for its own account and/or
for the accounts of its customers and, accordingly, may at any time hold long or
short positions in such securities. From time to time, principals and/or
employees of FBR may also have positions in the securities.
Based upon and subject to the foregoing, as well as any such other matters as we
consider relevant, it is FBR's opinion, as of the date hereof, that the Sale
Price is fair, from a financial point of view, to the Stockholders of SFNB.
A-2
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Page 3
This letter is solely for the information of the Board of Directors and
Stockholders of SFNB and may not be relied upon by any other person or used for
any other purpose, reproduced, disseminated, quoted from or referred to without
FBR's prior written consent; provided, however, this letter may be referred to
and reproduced in its entirety in proxy materials sent to the stockholders in
connection with the solicitation of approval for the Sale.
Very truly yours,
/s/ Suzanne N. Richardson
Suzanne N. Richardson
Managing Director
A-3
<PAGE>
APPENDIX B
SECOND AMENDED AND RESTATED
PLAN OF REORGANIZATION*
This Second Amended and Restated Plan of Reorganization (the
"Plan of Reorganization") is dated as of March 9, 1998, and is entered into and
agreed upon by and among Security First Network Bank ("SFNB"), and, upon
organization, Security First Technologies Corporation, a Delaware corporation
(the "Holding Company") and New Security First Network Bank, a federal savings
bank in organization (the "New Bank") (jointly referred to as the "Parties"),
and replaces in its entirety the Plan of Reorganization and Merger, dated
January 28, 1997, and the Amended and Restated Plan of Reorganization, dated
January 28, 1998, by and among the Parties. This Plan of Reorganization also
constitutes a plan of voluntary dissolution of SFNB pursuant to Section 546.4 of
the rules and regulations of the Office of Thrift Supervision ("OTS").
RECITALS
1. SFNB is a federal savings bank, duly organized and validly
existing under the laws of the United States, with its principal office at 3390
Peachtree Road, NE, Atlanta, Georgia. The authorized capital stock of SFNB
consists of (i) 25,000,000 shares of common stock, no par value per share ("SFNB
Common Stock"), of which 10,487,244 shares were issued and outstanding as of
December 31, 1997, and (ii) 2,500,000 shares of preferred stock, no par value,
of which 1,251,084 shares were issued and outstanding as of December 31, 1997
("SFNB Preferred Stock") (SFNB Common Stock and SFNB Preferred Stock are jointly
referred to as "SFNB Stock").
2. SFNB will cause the organization of the Holding Company and
then will cause the Holding Company to enter into this Plan of Reorganization.
3. Upon its organization, the Holding Company will be a
corporation, duly organized and validly existing under the laws of the State of
Delaware, with its principal office to be located at 3390 Peachtree Road, NE,
Atlanta, Georgia. At the time the transactions contemplated by the Plan of
Reorganization are consummated, the authorized capital stock of the Holding
Company will consist of 40,000,000 shares of common stock, par value $0.01 per
share (the "Holding Company Common Stock"), and 5,000,000 shares of serial
preferred stock, par value $0.01 per share (the "Holding Company Preferred
Stock") (Holding Company Common Stock and Holding Company Preferred Stock are
jointly referred to as the "Holding Company Stock"). No shares of the Holding
Company Stock are issued and outstanding as of the date hereof.
4. SFNB will cause the organization of the New Bank as a
wholly owned operating subsidiary of SFNB and then will cause the New Bank to
enter into this Plan of Reorganization.
5. Upon its organization, New Bank will be chartered as a
federal savings bank, duly organized and existing under the laws of the United
States, with its principal office at a location within the United States to be
determined by the Parties prior to the Contribution (as defined below). At the
time the transactions contemplated by the Plan of Reorganization are
consummated, the authorized capital stock of New Bank will consist of 1,000
shares of common stock, $.01 par value per share.
- ------------
*As amended on June 4, 1998
B-1
<PAGE>
NOW, THEREFORE, each of the Parties agrees as follows:
SECTION 1. SHAREHOLDER APPROVAL OF THE PLAN OF REORGANIZATION
1.1. This Plan of Reorganization shall be submitted for
approval by the holders of SFNB Common Stock at a meeting to be called and held
in accordance with the applicable provisions of law (the "Shareholder Meeting").
This Plan of Reorganization also will be submitted for approval by the holders
of SFNB's Preferred Stock by written consent. SFNB, as the organizer of the
Holding Company will approve the Plan of Reorganization on behalf of the Holding
Company by unanimous written consent. SFNB as the organizer of the New Bank will
approve the Plan of Reorganization on behalf of the New Bank by unanimous
written consent.
1.2. If the requisite approval of the Plan of Reorganization
is obtained at the Shareholder Meeting, then after the Shareholder Meeting and
until the Effective Time, as hereafter defined, SFNB shall issue certificates
for SFNB Stock, whether upon transfer or otherwise, only if such certificates
bear a legend, the form of which shall be approved by the board of directors of
the Holding Company, indicating that the Plan of Reorganization has been
approved and that shares of SFNB Stock evidenced by such certificates are
subject to consummation of the Plan of Reorganization.
SECTION 2. DEFINITIONS
2.1. EFFECTIVE TIME. The Plan of Reorganization shall become
effective upon the agreement of each of the Parties and as soon as possible upon
satisfaction of all conditions hereto, including obtaining the shareholder
approval of the Plan of Reorganization, and the expiration of any applicable
waiting periods. Such time, when all the transactions contemplated hereby are
effected, is hereinafter called the "Effective Time." Notwithstanding the
foregoing, the Effective Time shall not occur until the moment immediately prior
to the Closing, as defined in the Agreement identified in Section 2.2.
2.2. BANKING BUSINESS. The term "Banking Business" shall have
the meaning set forth in Section 2.3 of the Stock Purchase Agreement (the
"Agreement"), dated as of March 9, 1998, by and among Royal Bank of Canada, RBC
Holdings (Delaware) Inc., SFNB and upon organization, the Holding Company, and
shall include the Acquired Assets and Assumed Liabilities, as provided for and
defined in the Agreement. "Banking Business" does not include, among other
things, the stock of Security First Technologies, Inc. and cash or cash
equivalent assets that when taken from SFNB will not cause its total capital to
decrease below $10 million.
2.3. NON-BANKING BUSINESS. The term "Non-Banking Business"
shall mean those assets and liabilities of SFNB that are not included in the
Banking Business. The term Non-Banking Business also includes the stock of the
New Bank.
SECTION 3. ACTIONS AT THE EFFECTIVE TIME
SECTION 3.1. CONTRIBUTION OF THE BANKING BUSINESS OF SFNB TO
THE NEW BANK
3.1.1. At the Effective Date, SFNB shall contribute the
Banking Business to the New Bank (the "Contribution").
3.1.2. As a result of the Contribution, the New Bank shall
possess all of the rights, privileges, immunities, powers and franchises of a
public as well as of a private nature, and shall be subject to all of the
restrictions, disabilities and duties of SFNB with respect to the Banking
Business; and all singular rights, privileges, immunities, powers and franchises
of SFNB, and all property, real, personal and mixed, and all debts due to SFNB
with respect to the Banking Business, on whatever account, including
subscriptions to shares, and all other things in action or belonging to
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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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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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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
SECURITY FIRST NETWORK BANK,
Old 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 Related Parties....................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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<PAGE>
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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<PAGE>
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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<PAGE>
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 Shares including, without limitation,
the transactions contemplated by the Plan and this Agreement;
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(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, 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,
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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
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 forty-five million
(45,000,000), of which forty million (40,000,000) 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").
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:
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(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 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
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party or its affiliate acquires shares that are convertible into more
than 2% of the outstanding Common Stock of the Corporation; or (D) to a
single party (e.g., a broker or investment banker) for the purpose of
conducting a widely dispersed public distribution on behalf of the
Original Holder pursuant to an effective registration statement under
the Securities Act of 1933, as amended (the "Securities Act"). (For the
purposes hereof, "affiliate" shall have the meaning specified in Rule
405 promulgated by the Securities and Exchange Commission under the
Securities Act.)
(b) The option to convert shares of the Series A
Preferred Stock into shares of Common Stock of the Corporation shall be
exercisable by delivering the certificate or certificates for the shares to be
converted, properly endorsed to the Corporation or in blank, together with a
written notice specifying the number of shares to be converted, to the Secretary
of the Corporation at the home office of the Corporation. The conversion of the
shares of Series A Preferred Stock shall be effective as of the date on which
the Corporation receives such certificate or certificates and such notice of
conversion.
(c) All shares of Common Stock issued upon the
conversion of any shares of Series A Preferred Stock shall be fully paid and
non-assessable.
(d) The number of shares of Common Stock of the
Corporation into which the shares of Series A Preferred Stock can be converted
shall be subject to adjustment from time to time as follows:
(i) If, at any time after the issuance of
any shares of Series A Preferred Stock, the Corporation pays or makes a
dividend or other distribution on any class of capital stock of the
Corporation in Common Stock of the Corporation, then the number of
shares of Common Stock into which each share of Series A Preferred
Stock may be converted shall be increased by multiplying such number by
a fraction, the denominator of which is the number of shares of such
Common Stock outstanding at the close of business on the day
immediately preceding the date of such distribution and the numerator
of which is the sum of such number of shares and the total number of
shares constituting such dividend or other distribution, such increase
to become effective immediately after the opening of business on the
day following such distribution.
(ii) If, at any time after the issuance of
any shares of Series A Preferred Stock, the outstanding shares of
Common Stock of the Corporation are subdivided into a greater number of
such shares, then the number of shares of Common Stock into which each
share of Series A Preferred Stock may be converted shall be
proportionately increased, and, conversely, if, at any time after the
issuance of any shares of Series A Preferred Stock, the outstanding
shares of Common Stock of the Corporation are combined into a smaller
number of such shares, then the number of shares of Common Stock into
which each share of Series A Preferred Stock may be converted shall be
proportionately decreased, such increase or decrease, as the case may
be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination
becomes effective.
(iii) The reclassification (including any
reclassification upon a merger in which the Corporation is the
continuing corporation) of the Common Stock of the Corporation into
securities, including other than shares of such Common Stock, shall be
deemed to involve a subdivision or combination, as the case may be, of
the number of shares of the Common Stock of the Corporation outstanding
immediately prior to such reclassification into the number of shares of
such Common Stock outstanding immediately thereafter and the effective
date of such reclassification shall be deemed to be the day upon which
such subdivision or combination becomes effective, within the meaning
of subparagraph (ii) above.
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4.3.1.4. LIQUIDATION
In the event of the liquidation, dissolution, or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the shares of Series A Preferred Stock shall be entitled to share ratably,
without distinction as to class, in all of the assets of the Corporation
available for distribution to shareholders.
4.3.1.5. RESERVATION OF COMMON STOCK
So long as any shares of Series A Preferred Stock are
outstanding, the Corporation shall maintain a sufficient number of authorized
but unissued shares of Common Stock to provide for the conversion of all
outstanding shares of Series A Preferred Stock into shares of Common Stock.
4.4. PREEMPTIVE RIGHTS
Holders of the capital stock of the Corporation shall not be
entitled to preemptive rights with respect to any shares or other securities of
the Corporation which may be issued.
5. INCORPORATOR; DIRECTORS
5.1. INCORPORATOR
The name and mailing address of the incorporator (the
"Incorporator") is Security First Network Bank, 3390 Peachtree Road, NE, Suite
1700, Atlanta, Georgia 30326. The powers of the Incorporator shall terminate
upon the filing of this Certificate of Incorporation.
5.2. DIRECTORS
The number of directors of the Corporation shall be such
number as from time to time shall be fixed by, or in the manner provided in, the
bylaws of the Corporation.
The classification shall be such that the term of one class
shall expire each succeeding year. The Corporation's board of directors shall
initially be divided into three classes named Class I, Class II and Class III,
with Class I and II each initially consisting of one director and Class III
initially consisting of two directors. The terms, classifications,
qualifications and election of the board of directors and the filling of
vacancies thereon shall be as provided herein and in the bylaws of the
Corporation. The names and business addresses of those persons of each class to
serve on the initial board of directors shall be as follows:
Class I: Term of office expires at the first annual meeting of shareholders:
Name Address
Robert W. Copelan 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Class II: Term of office expires at the second annual meeting of shareholders:
Name Address
Howard J. Runnion, Jr. 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
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Class III: Terms of office expire at the third annual meeting of shareholders:
Name Address
Michael C. McChesney 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
James S. Mahan, III 3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Subject to the foregoing, at each annual meeting of
shareholders the successors to the class of directors whose term shall then
expire shall be elected to hold office for a term expiring at the third
succeeding annual meeting and until their successors shall be elected and
qualified.
Any vacancy occurring in the board of directors, including any
vacancy created by reason of an increase in the number of directors, shall be
filled for the unexpired term in the manner provided in the Corporation's
bylaws, and any director so chosen shall hold office for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor shall have been elected
and qualified, or until the director's earlier resignation or removal.
No director may be removed except for cause and then only by
an affirmative vote of at least two-thirds of the total votes eligible to be
voted by shareholders at a duly constituted meeting of shareholders called for
such purpose. At least 30 days prior to such meeting of shareholders, written
notice shall be sent to the director or directors whose removal will be
considered at such meeting.
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.
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
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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.
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 least 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 consideration 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
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
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(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 the 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.
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:
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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
Shareholder has previously acquired any shares of a particular class of
Voting Stock):
(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
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(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.
(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; (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),
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; 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.
(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 to such Act or subsequent provisions).
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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; or
(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.
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.
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, director or partner 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 substantial beneficial interest or as to
which such person serves as a trustee or in a similar fiduciary capacity; and
(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.
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.
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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
(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.
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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 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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IN WITNESS WHEREOF, the undersigned, being the Incorporator
hereinabove named, for the purpose of forming a corporation pursuant to the
Delaware General Corporation Law, hereby certifies that the facts hereinabove
stated are truly set forth, and accordingly executes this Certificate of
Incorporation this 22nd day of May, 1998.
SECURITY FIRST NETWORK BANK
Incorporator
By: /s/ Robert F. Stockwell
------------------------
Robert F. Stockwell
Chief Financial Officer
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APPENDIX E
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
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Incorporation, the holders of one-third of the shares issued and outstanding and
entitled to vote at the meeting, and who are present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business. Once a share is represented for any purpose at a
meeting (other than solely to object (1) to holding the meeting or transacting
business at the meeting, or (2) (if it is a special meeting) to consideration of
a particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice), it is deemed present for quorum purposes for
the remainder of the meeting and for any adjournment of that meeting unless a
new record date is or must be set for the adjourned meeting. The holders of a
majority of the voting shares represented at a meeting, whether or not a quorum
is present, may adjourn such meeting from time to time.
2.9. VOTING AND PROXIES
Unless otherwise provided in the Delaware General Corporation
Law or in the Corporation's Certificate of Incorporation, and subject to the
other provisions of these Bylaws, each shareholder shall be entitled to one vote
on each matter, in person or by proxy, for each share of the Corporation's
capital stock that has voting power and that is held by such shareholder. No
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A duly executed appointment of proxy shall
be irrevocable if the appointment form states that it is irrevocable and if, and
only as long as, it is coupled with an interest sufficient in law to support an
irrevocable power.
2.10. REQUIRED VOTE
If a quorum exists, action on a matter (other than the
election of directors) is approved if the votes cast favoring the action exceed
the votes cast opposing the action, unless the Certificate of Incorporation or
the Delaware General Corporation Law requires a greater number of affirmative
votes (in which case such different requirement shall apply). Directors shall be
elected by a plurality of the votes cast by the shares entitled to vote in the
election (provided a quorum exists), and the election of directors need not be
by written ballot.
2.11. ACTION WITHOUT A MEETING
Any action required or permitted to be taken at a
shareholders' meeting may be taken without a meeting if the action is taken by
persons who would be entitled to vote at a meeting and who hold shares having
voting power to cast not less than the minimum number of votes that would be
necessary to authorize or take the action at a meeting at which all shareholders
entitled to vote were present and voted. The action must be evidenced by one or
more written consents describing the action taken, signed by the shareholders
entitled to take action without a meeting, and delivered to the Corporation for
inclusion in the minute book. No consent shall be effective to take the
corporate action specified unless the number of consents required to take such
action are delivered to the Corporation within sixty days of the delivery of the
earliest-dated consent. All shareholders entitled to vote on the record date of
such written consent who do not participate in taking the action shall be given
written notice thereof in accordance with the Delaware General Corporation Law.
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.
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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,
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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.
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3.7. COMMITTEES OF DIRECTORS
The Board of Directors may by resolution create one or more
committees and appoint members of the Board of Directors to serve on the
committees at the pleasure of the Board of Directors. To the extent specified in
a resolution adopted by the Board of Directors, each committee may exercise the
full authority of the Board of Directors, except as limited by Section 141 (or
any successor section) of the Delaware General Corporation Law. All provisions
of the Delaware General Corporation Law and these Bylaws relating to meetings,
action without meetings, notice (and waiver thereof), and quorum and voting
requirements of the Board of Directors apply, as well, to such committees and
their members.
3.8. COMPENSATION OF DIRECTORS
The Board of Directors shall have the authority to fix the
compensation of directors. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
4. OFFICERS
4.1. POSITIONS
The officers of the Corporation shall be a Chairman, a Chief
Executive Officer, a President, a Secretary and a Treasurer, and such other
officers as the Board of Directors (or an officer authorized by the Board of
Directors) from time to time may appoint, including one or more Vice Chairmen,
Executive Vice Presidents, Vice Presidents, Assistant Secretaries and Assistant
Treasurers. Each such officer shall exercise such powers and perform such duties
as shall be set forth below and such other powers and duties as from time to
time may be specified by the Board of Directors or by any officer(s) authorized
by the Board of Directors to prescribe the duties of such other officers. Any
number of offices may be held by the same person, except that in no event shall
the President and the Secretary be the same person. Each of the Chairman, the
Chief Executive Officer, the President, the Chief Financial Officer and/or any
Vice President may execute bonds, mortgages and other documents under the seal
of the Corporation, except where required or permitted by law to be otherwise
executed and except where the execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the Corporation.
4.2. CHAIRMAN
The Chairman shall (when present) preside at all meetings of
the Board of Directors and shareholders, and shall ensure that all orders and
resolutions of the Board of Directors and shareholders are carried into effect.
The Chairman may be the Chief Executive Officer of the Corporation.
4.3. CHIEF EXECUTIVE OFFICER
The Chief Executive Officer shall have overall responsibility
and authority for management of the operations of the Corporation (subject to
the authority of the Board of Directors), shall (in the absence of the Chairman)
preside at all meetings of the Board of Directors and 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.
E-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.
E-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
E-8
<PAGE>
Board of Directors) the record date for determining shareholders entitled to
consent to corporate action without a meeting is the first date on which a
shareholder delivers a signed written consent to the Corporation for inclusion
in the minute book.
5.3.2. PAYMENTS
In order that the Corporation may determine the shareholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the shareholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining shareholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
5.4. SHAREHOLDERS OF RECORD
The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, to receive notifications, to vote as such owner, and to exercise all
the rights and powers of an owner. The Corporation shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise may be provided by the Delaware General
Corporation Law.
6. INSURANCE
The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation (or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
against liability asserted against or incurred by such person in such capacity
or arising from such person's status as such (whether or not the Corporation
would have the power to indemnify such person against the same liability).
7. GENERAL PROVISIONS
7.1. INSPECTION OF BOOKS AND RECORDS
Any shareholder, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its shareholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a shareholder. In every
instance where an attorney or other agent shall be the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing which authorizes the attorney or other 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.
E-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.
E-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
E-11
<PAGE>
APPENDIX F
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 (Unaudited)......................................... F-2
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 (Unaudited)................................... F-3
Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1998 (Unaudited)..................................... F-4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (Unaudited)................................... F-5
Notes to Consolidated Financial Statements for the three months ended
March 31, 1998 (Unaudited)............................................ F-6
Independent Auditors' Report............................................... F-9
Consolidated Balance Sheets as of December 31, 1997 and 1996............... F-10
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995...................................... F-11
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................... F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................... F-13
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995...................................... F-14
F-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.
F-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
discounted 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.
F-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
---------------------
CLASS A AMOUNT RETAINED ACCUMULATED
CONVERTIBLE -------------------- EARNINGS OTHER TOTAL
PREFERRED COMMON PREFERRED COMMON (ACCUMULATED COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
STOCK STOCK STOCK STOCK DEFICIT) INCOME EQUITY INCOME
--------- ------ --------- ------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,251,084 10,487,245 $ 2,679 $ 72,990 $(52,035) $ (96) $ 23,538
Net loss.................. -- -- -- -- (8,578) -- (8,578) (8,578)
Change in net unrealized
gains on investment
securities available for sale -- -- -- -- -- 7 7 7
Change in cumulative foreign
currency translation
adjustment.............. -- -- -- -- -- (3) (3) (3)
Proceeds from sale of common
stock, net of expenses.. -- 92,593 -- 970 -- -- 970
Common stock issued upon
exercise of stock options -- 36,680 -- 44 -- -- 44
--------- ---------- --------- --------- -------- -------- ---------
Balance at March 31, 1998 1,251,084 10,616,518 $ 2,679 $ 74,004 $(60,613) $ (92) $ 15,978
--------- ---------- --------- --------- -------- -------- ---------
Comprehensive income...... $ (8,574)
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-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.
F-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.
F-6
<PAGE>
The following represents condensed balance sheets and statements of
operations for the banking operations for the periods indicated.
<TABLE>
<CAPTION>
Balance Sheets
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
======== ========
<CAPTION>
Statements of Operations
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. 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
F-7
<PAGE>
that are included in comprehensive income but excluded from earnings under
current accounting standards. Currently, "other comprehensive income" for the
Company consists solely of items previously recorded as a component of
stockholders' equity under SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities" and SFAS 52, "Foreign Currency Translation". The Company
has adopted the interim-period disclosure requirements of SFAS 130 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.
F-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
F-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)
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.
F-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.
F-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
UNREALIZED
NUMBER OF SHARES GAINS ON CUMULATIVE
CLASS A RETAINED INVESTMENT FOREIGN
CONVERTIBLE AMOUNT EARNINGS SECURITIES CURRENCY TOTAL
PREFERRED COMMON PREFERRED COMMON (ACCUMULATED AVAILABLE FOR TRANSLATION STOCKHOLDERS'
STOCK STOCK STOCK STOCK DEFICIT) SALE ADJUSTMENT EQUITY
--------- ---------- --------- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 .......................... -- 2,400,000 $ -- $ 2,352 $ 2,795 $ (72) $ -- $ 5,075
Net loss ........................ -- -- -- -- (1,480) -- -- (1,480)
Cash dividend declared .......... -- -- -- -- (300) -- -- (300)
Change in net unrealized
gains on investment
securities available for sale.. -- -- -- -- -- 102 -- 102
--------- ---------- -------- ------- -------- -------- -------- --------
Balance at December 31,
1995 .......................... -- 2,400,000 $ -- $ 2,352 $ 1,015 $ 30 $ -- $ 3,397
Net loss ........................ -- -- -- -- (22,059) -- -- (22,059)
Cash dividend declared
(note 6(a)) ................... -- -- -- -- (3,000) -- -- (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) 1,637,832 3,772,792 2,047 56,821 -- -- -- 58,868
Issuance of common stock in
acquisition (note 3) .......... -- 1,920,000 -- 2,400 -- -- -- 2,400
Common stock issued upon
exercise of stock options ..... -- 167,231 -- 208 -- -- -- 208
--------- ---------- -------- ------- -------- -------- -------- --------
Balance at December 31,
1996 .......................... 1,637,832 8,260,023 $ 2,047 $61,781 $(24,044) $ 129 $ -- $ 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 ......... (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 -- -- -- 5,991
Issuance of common stock
in acquisition (note 3) ...... -- 1,000,000 -- 5,701 -- -- -- 5,701
Common stock issued upon
exercise of stock options ..... -- 110,544 -- 149 -- -- -- 149
Cumulative foreign currency
translation adjustment ........ -- -- -- -- -- -- (151) (151)
--------- ---------- -------- ------- -------- -------- -------- --------
Balance at December 31,
1997 .......................... 1,251,084 10,487,245 $ 2,679 $72,990 $(52,035) $ 55 $ (151) $ 23,538
========= ========== ======== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-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.
F-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
either on a subscription basis using the straight-line method over a
period of three years, the estimated useful life of the Company's
software products, or using the percentage of completion method of
accounting if the software license fees are bundled with other
services.
Revenues from professional services, provided on a fixed fee basis, are
recognized using the percentage of completion method, measured by the
percentage of contract costs incurred to date to estimated total
contract costs for each contract. Provisions for estimated losses on
F-14
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
uncompleted contracts are made in the period in which such losses are
determined. Revenues derived from contracts to provide services on a
time and materials basis are recognized as the related services are
performed.
Data center revenues are recognized as the services are performed and
are determined based on the number of billable customer accounts
processed during the period.
Deferred revenues represent either billings rendered to or payments
received from customers for software licenses or services in advance of
revenue recognition.
(c) Investment Securities
The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Under SFAS No. 115, investments in equity and debt securities are
classified as held to maturity, trading or available for sale. Trading
securities are reported at fair value, with changes in fair value
included in the statement of operations, while available-for-sale
securities are reported at fair value, with net unrealized gains or
losses included as a component of stockholders' equity. Held to
maturity securities are reported at amortized cost. Unrealized losses
on all securities that are other than temporary are reported in the
statement of operations upon determination that the loss is other than
temporary. Amortization of premiums and accretion of discounts are
computed using the effective interest method and assumed prepayment
speeds. The specific identification method is used in determining gains
and losses on the sale of securities.
Investment securities include U.S. Treasury bills and debt securities
of certain other U.S. government agencies with original maturities of
greater than 90 days and ranging up to five years.
(d) Premises and Equipment
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line and accelerated methods over the estimated
useful lives of the related assets ranging from 3 to 5 years. Leasehold
improvements are amortized using the straight-line method over the
estimated useful life of the improvement or the lease term, whichever
is shorter.
(e) Product Development
Product development includes all research and development expenses and
software development costs. All research and development expenses are
expensed as incurred. The Company's policy is to expense all software
development costs associated with establishing technological
feasibility, which the Company defines as completion of beta testing.
Because of the insignificant amount of costs incurred by the Company
between completion of beta testing and customer release, the Company
has not capitalized any such software development costs in the
accompanying consolidated financial statements.
F-15
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(f) Purchased Technology and Goodwill
Purchased technology and goodwill are amortized over their estimated
useful lives using the straight-line method. Estimated useful lives
range from eight months to three years. 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.
(i) Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss and
tax credit carryforwards. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-16
<PAGE>
SECURITY FIRST NETWORK BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(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 of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company's financial
statements 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.
F-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:
<TABLE>
<CAPTION>
Balance Sheets
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>
F-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 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
F-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.
F-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
-------------------------------------------------------
Unrealized
Amortized -------------------- 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
=========== ======= ======= ===========
<CAPTION>
December 31, 1996
-----------------------------------------------------
Unrealized
Amortized -------------------- 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>
F-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.
F-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 the Company to maintain a minimum
capital level of $10 million to support its banking operations. As
a result, $10 million of the Company's cash and investment
securities available for sale are restricted from use to fund
operations. This restriction will be eliminated 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.
F-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.
F-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
F-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. 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>
F-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> <C> <C>
$0.625 - 1.89 2,574 7.60 $ 0.86 1,224 $ 0.81
4.46 - 7.00 613 9.35 5.93 83 6.11
7.50 - 12.92 496 6.66 9.47 137 12.04
--------------- ------- ---- ------ ------- ------
$0.625 - 12.92 3,683 7.77 $ 2.88 1,444 $ 2.18
=============== ======= ==== ====== ======= ======
</TABLE>
(10) Employee Benefit Plan
The Company provides a 401(k) Retirement Savings Plan (the "Plan") for
substantially all of its full-time employees. Each participant in the
Plan may elect to contribute from 1% to 15% of his or her annual
compensation to the Plan. The Company, at its discretion, may make
matching contributions to the Plan. The Company is currently matching up
to 4% of the employees compensation first to the Company's stock fund $1
for each dollar contributed by the employee and second to the remaining
investment funds $.25 for each dollar contributed by the 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
F-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.
F-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, attached
as Appendix D to the Proxy Statement/Prospectus.
3.2 Bylaws of the Holding Company, attached as Appendix E to the
Proxy Statement/Prospectus.
4.1 Specimen certificate for the Holding Company common stock.*
4.2 Specimen certificate for the Holding Company Series A
Convertible Preferred Stock.*
5 Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities registered hereunder, including the consent of that
firm.
8 Opinion of KPMG Peat Marwick LLP as to certain tax matters.*
10.1 Security First Network Bank, FSB Employee Stock Option Plan.*
10.2 Security First Network Bank Amended and Restated Directors'
Stock Option Plan.*
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.
99 Form of SFNB proxy card.
----------
* To be filed by amendment.
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
II-3
<PAGE>
registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information
called for by the other Items of the applicable form.
(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 5th day of June, 1998.
SECURITY FIRST TECHNOLOGIES CORPORATION
By: /s/ James S. Mahan, III
------------------------------------
James S. Mahan, III
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below appoints James S. Mahan, III or Robert F. Stockwell, jointly and
severally, each in his own capacity, his true and lawful attorneys-in-fact, with
full power of substitution for him and in his name, place and stead, in any and
all capacities to sign any amendments to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
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 5th day of June, 1998.
Signature Title
- --------- -----
/s/ James S. Mahan, III
- --------------------------- Chief Executive Officer and Director
James S. Mahan, III (Principal Executive Officer)
/s/ Robert F. Stockwell
- --------------------------- Chief Financial Officer, Treasurer and Secretary
Robert F. Stockwell (Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert W. Copelan
- --------------------------- Director
Robert W. Copelan
/s/ Michael C. McChesney
- --------------------------- Chairman of the Board and Director
Michael C. McChesney
/s/ Howard J. Runnion, Jr.
- --------------------------- Director
Howard J. Runnion, Jr.
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, attached
as Appendix D to the Proxy Statement/Prospectus.
3.2 Bylaws of the Holding Company, attached as Appendix E to the
Proxy Statement/Prospectus.
4.1 Specimen certificate for the Holding Company common stock.*
4.2 Specimen certificate for the Holding Company Series A
Convertible Preferred Stock.*
5 Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities registered hereunder, including the consent of that
firm.
8 Opinion of KPMG Peat Marwick LLP as to certain tax matters.*
10.1 Security First Network Bank, FSB Employee Stock Option Plan.*
10.2 Security First Network Bank Amended and Restated Directors'
Stock Option Plan.*
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.
99 Form of SFNB proxy card.
----------
* To be filed by amendment.
II-6
Exhibit 2.3
COMMON STOCK PURCHASE AND OPTION AGREEMENT*
BY AND BETWEEN
SECURITY FIRST NETWORK BANK
AND
RBC HOLDINGS (DELAWARE) INC.
DATED AS OF MARCH 9, 1998
----------
* As amended on June 5, 1998
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TABLE OF CONTENTS
Page
SECTION 1. PURCHASE AND SALE OF THE SHARES.....................................4
1.1 Purchase and Sale of the Shares.....................................4
1.2 Closing.............................................................4
SECTION 2. REGISTRATION RIGHTS.................................................4
2.1 Piggyback Registration Rights.......................................4
2.2 Demand Registration Rights..........................................5
2.3 Registration Procedures.............................................5
2.4 Registration Expenses...............................................6
2.5 Indemnity and Contribution..........................................7
2.6 Successor to SFNB...................................................8
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SFNB..............................8
3.1 Organization and Standing...........................................8
3.2 Authorization; Binding Obligation...................................9
3.3 Subsidiaries........................................................9
3.4 Capitalization......................................................9
3.5 Validity of Shares; Issuance........................................9
3.6 Non-Contravention...................................................9
3.7 Financial Statements...............................................10
3.8 Assets.............................................................10
3.9 Governmental Consent...............................................10
3.10 Litigation; Disputes...............................................11
3.11 Absence of Certain Changes or Events...............................11
3.12 Compliance with Applicable Laws....................................11
3.13 No Misrepresentation...............................................11
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER........................11
4.1 Organization and Standing..........................................11
4.2 Authorization......................................................12
4.3 Non-Contravention..................................................12
4.4 Governmental Consent...............................................12
4.5 Adequate Resources.................................................12
4.6 Investment Representations.........................................12
4.7 Litigation; Disputes...............................................13
4.8 No Misrepresentation...............................................13
SECTION 5. COVENANTS..........................................................13
5.1 Regulatory Applications; Third Party Consents......................13
5.2 Matters as to SFNB.................................................13
5.3 Other Approvals....................................................13
5.4 New Party to Agreement.............................................13
SECTION 6. CONDITIONS TO CLOSING..............................................13
6.1 Conditions to Obligations of All Parties...........................13
6.2 Conditions to the Obligations of Purchaser.........................14
6.3 Conditions to Obligations of SFNB..................................14
SECTION 7. CLOSING............................................................15
7.1 Deliveries by SFNB.................................................15
7.2 Deliveries by Purchaser............................................15
SECTION 8. LEGEND.............................................................16
8.1 Endorsement........................................................16
8.2 Removal of Legend..................................................16
SECTION 9. STOCK OPTION.......................................................16
9.1 Grant of Option....................................................16
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9.2 The Options........................................................16
9.3 Term of the Options................................................17
9.4 The Per Share Option Exercise Price................................17
9.5 Exercise of The Options............................................17
9.6 Transferability....................................................17
9.7 Requirements of Law................................................17
9.8 Changes in Capitalization..........................................18
9.9 Ownership Limitation...............................................18
SECTION 10. TERMINATION.......................................................18
10.1 Mutual Consent....................................................18
10.2 Other Termination.................................................18
10.3 Effect of Termination.............................................19
SECTION 11. MISCELLANEOUS.....................................................19
11.1 Additional Actions and Documents..................................19
11.2 Expenses..........................................................19
11.3 Notices...........................................................19
11.4. Waiver............................................................20
11.5 Binding Effect....................................................21
11.6 Entire Agreement; Amendment.......................................21
11.7 Severability......................................................21
11.8 Headings..........................................................21
11.9 Governing Law.....................................................21
11.10 Signature in Counterparts.........................................21
11.11 No Third Party Beneficiaries......................................21
11.12 Assignability.....................................................22
11.13 Parties Not Partners..............................................22
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<PAGE>
COMMON STOCK PURCHASE AND OPTION AGREEMENT
This Common Stock Purchase and Option Agreement ("Agreement"), dated
as of March 9, 1998, is entered into by and between Security First Network Bank,
a federal savings bank ("SFNB"), and RBC Holdings (Delaware) Inc., a Delaware
corporation ("Purchaser").
WHEREAS, Purchaser desires to subscribe for and acquire from SFNB
shares of SFNB's common stock, no par value per share ("Common Stock") on the
terms and under the conditions specified herein; and
WHEREAS, SFNB and Purchaser desire that Purchaser acquire the Common
Stock on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the sufficiency of which is hereby acknowledged, the parties mutually
agree as follows:
SECTION 1. PURCHASE AND SALE OF THE SHARES.
1.1 PURCHASE AND SALE OF THE SHARES.
At the Closing (as hereinafter defined) and subject to the terms and
conditions of this Agreement, Purchaser does hereby subscribe for and agree to
purchase for $10.80 per share (the "Purchase Price") 92,593 shares of Common
Stock (the "Shares"). SFNB agrees to sell the Shares to Purchaser at the Closing
under the terms and conditions of this Agreement.
1.2 CLOSING.
The closing (the "Closing") of the purchase and sale of the Shares
shall take place on the date hereof, or at such other time and date as the
parties shall mutually agree (the "Closing Date"), at the offices of Hogan &
Hartson L.L.P., 555 13th Street, N.W., Washington, D.C. 20004, or at such other
place as the parties shall mutually agree.
SECTION 2. REGISTRATION RIGHTS.
2.1 PIGGYBACK REGISTRATION RIGHTS.
2.1(a) Except as provided at Section 2.1(b) below, if at any time or
times beginning six months after the Closing Date through three years following
the Closing Date SFNB proposes to make a public offering of its common stock, no
par value per share ("Common Stock"), which requires registration under
applicable rules and regulations of the Office of Thrift Supervision ("OTS") (or
any successor regulator thereto as to federal securities laws), other than an
offering not suitable for inclusion of shares of selling stockholders for offer
to the public, such as shares being offered in connection with an employment
benefit plan or in connection with a merger, SFNB shall give written notice of
the proposed registration to Purchaser not less than 14 business days prior to
the proposed filing date of the registration form with the OTS, and at the
written request of Purchaser delivered to SFNB within 10 days after the receipt
of such notice, SFNB shall include in such registration and
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<PAGE>
offering, and in any underwriting of such offering, all shares of Common Stock
that have been designated for registration in Purchaser's request. SFNB may
withdraw any proposed registration statement or offering of securities under
this Section 2 at any time without any liability to Purchaser hereunder.
2.1(b) If a registration in which Purchaser has the right to
participate pursuant to this Section 2 is an underwritten public offering and
the managing underwriter advises SFNB in writing that in its opinion the number
of securities requested to be included in such registration exceeds the number
that can be sold in such offering consistent with the pricing expectations of
SFNB, then SFNB first shall include in such offering the Common Stock proposed
to be sold by SFNB if consistent with the aforementioned opinion of the managing
underwriter, and second shall include the Common Stock requested to be included
in such registration by Purchaser and other selling stockholders who hold
registration rights pursuant to pre-existing written agreements with SFNB, if
any, pro rata based upon the number of shares of Common Stock requested by each
such selling stockholder to be included in such registration, or in such other
amounts upon which SFNB, Purchaser and the other selling stockholders may agree.
The three year limitation on registration rights set forth in Section 2.1(a)
shall not apply to any shares of Purchaser's Common Stock excluded from
registration by virtue of this Section 2.1(b).
2.2 DEMAND REGISTRATION RIGHTS.
2.2(a) At any time after one year from the date of the Closing Date,
Purchaser may request registration for sale under the Securities Act of 1933, as
amended (the "Securities Act") of any shares of Common Stock owned by Purchaser
(a "Demand Registration"), provided, however, that (i) SFNB shall only be
obligated to effect one Demand Registration for Purchaser, (ii) SFNB shall not
be obligated to effect a Demand Registration unless Purchaser requests
registration for sale of shares that represent at least 50% of the aggregate
amount of Common Stock then owned by Purchaser, and (iii) SFNB shall not be
required to conduct an underwritten offering. A Demand Registration shall
specify the approximate number of shares of Common Stock requested to be
registered and the anticipated per share price range for such offering.
2.2(b) A Demand Registration shall be deemed to occur when such
registration becomes effective under the Securities Act, except that if, after
it becomes effective, such Demand Registration is interfered with by any stop
order, injunction or other order or requirement of the OTS (or any successor
regulator thereto as to federal securities laws) or any other governmental
authority, such registration shall not be deemed to have been effected unless
such stop order, injunction or other order shall have been subsequently vacated
or removed.
2.3 REGISTRATION PROCEDURES.
2.3(a) SFNB shall have no obligation to include shares of Common
Stock owned by Purchaser in a registration statement pursuant to Section 2.1 or
Section 2.2 hereof unless and until Purchaser has furnished SFNB with all
information and statements about or pertaining to Purchaser in such reasonable
detail and on such timely basis as is reasonably deemed by SFNB to be necessary
or appropriate for the preparation of the registration statement.
2.3(b) Whenever Purchaser has requested that its shares of Common
Stock be registered pursuant to Section 2.1 or Section 2.2 hereof, SFNB shall,
subject to its rights under Section 2.1(a) to withdraw the registration
statement and the other provisions of Section 2.1 and Section 2.2:
(1) prepare and file with the OTS a registration statement
with respect to such shares and use its reasonable efforts to cause such
registration statement to become effective
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<PAGE>
as soon as practicable after the filing thereof (provided that before filing a
registration statement or offering circular or any amendments or supplements
thereto, SFNB shall furnish counsel for Purchaser with copies of all such
documents proposed to be filed);
(2) prepare and file with the OTS as promptly as is
reasonably practicable such amendments and supplements to such registration
statement and offering circular contained therein as may be necessary to keep
such registration statement effective for a period of not less than three months
or until Purchaser has completed the distribution described in such registration
statement, whichever occurs first;
(3) furnish to Purchaser the number of copies of such
registration statement, each amendment and supplement thereto, the offering
circular contained in such registration statement (including each preliminary
offering circular), and such other documents as Purchaser may reasonably
request;
(4) use reasonable efforts to register or qualify such
shares under the state blue sky or securities or banking laws ("Blue Sky Laws")
of such jurisdictions as Purchaser reasonably requests (and to keep such
registrations and qualifications effective for a period of three months, or
until Purchaser has completed the distribution of such shares, whichever occurs
first), and to do any and all other acts and things that may be reasonably
necessary or advisable to enable Purchaser to consummate the disposition of such
shares in such jurisdictions; provided, however, that SFNB will not be required
to do any of the following: (i) qualify generally to do business in any
jurisdiction where it would not be required but for this Section 2.3(b), (ii)
subject itself to taxation in any such jurisdiction, or (iii) file any general
consent to service of process in any such jurisdiction;
(5) promptly notify Purchaser at any time when an offering
circular relating thereto is required to be delivered under applicable federal
securities laws during the period that SFNB is required to keep the registration
statement effective, of the occurrence of any event as a result of which the
offering circular included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the statements
therein in the light of the circumstances under which they were made, not
misleading, and prepare a supplement or amendment to the offering circular so
that, as thereafter delivered to the purchasers of such shares, the offering
circular will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(6) use reasonable efforts to cause all such shares to be
listed on a securities exchange or the Nasdaq Stock Market; and
(7) provide a transfer agent and registrar (if SFNB does not
already have such an agent) for all such shares not later than the effective
date of such registration statement.
2.4 REGISTRATION EXPENSES.
2.4(a) If, pursuant to Section 2.1 or Section 2.2 hereof, shares of
Common Stock owned by Purchaser are included in a registration statement, then
Purchaser shall pay all transfer taxes, if any, relating to the sale of its
shares of Common Stock, the fees and expenses of its own counsel, and its pro
rata portion of any underwriting discounts or commissions or the equivalent
thereof.
2.4(b) Except for the fees and expenses specified in Section 2.4(a)
hereof and except as provided below in this Section 2.4(b), SFNB shall pay all
expenses incident to the registration and to SFNB's performance of or compliance
with this Agreement, including, without limitation, all
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<PAGE>
registration and filing fees, fees and expenses of compliance, with Blue Sky
Laws, underwriting discounts, fees, and expenses (other than Purchaser's pro
rata portion of any underwriting discounts or commissions or the equivalent
thereof), printing expenses, messenger and delivery expenses, and fees and
expenses of counsel for SFNB and all independent certified public accountants
and other persons retained by SFNB. With respect to any registration pursuant to
Section 2.2 hereof, SFNB shall pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties) and the expenses and fees for listing the securities
to be registered on an exchange or on the Nasdaq Stock Market.
2.5 INDEMNITY AND CONTRIBUTION.
2.5(a) In the event that any shares of Common Stock owned by
Purchaser are sold by means of a registration statement pursuant to Section 2.1
or Section 2.2 hereof, Purchaser (for the purposes of this paragraph 2.5(a), the
"Indemnifying Person") agrees to indemnify and hold harmless SFNB, each of
SFNB's officers and directors, and each person, if any, who controls or may
control SFNB within the meaning of the Securities Act (for the purposes of this
paragraph 2.5(a), SFNB, its officers and directors, and any such other persons
being hereinafter referred to individually as an "Indemnified Person" and
collectively as "Indemnified Persons") from and against all demands, claims,
actions or causes of action, assessments, losses, damages, liabilities, costs,
and expenses, including, without limitation, interest, penalties, and reasonable
attorneys' fees and disbursements, asserted against, resulting to, imposed upon,
or incurred by such Indemnified Person, directly or indirectly (collectively,
hereinafter referred to in the singular as a "Claim" and in the plural as
"Claims"), based upon, arising out of, or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such Claim is based upon, arises out of or results from any
untrue statement or omission based upon information furnished to SFNB by
Purchaser in a written document provided by Purchaser for use in connection with
the registration statement.
2.5(b) SFNB (for the purposes of this paragraph 2.5(b), the
"Indemnifying Person") agrees to indemnify and hold harmless Purchaser, its
officers and directors, each person, if any, who controls or may control
Purchaser within the meaning of the Securities Act and any underwriters
participating in the distribution of Common Stock pursuant to a registration
statement (for the purposes of this paragraph 2.5(b), Purchaser, its officers
and directors, and any such other persons also being hereinafter referred to
individually as an "Indemnified Person" and collectively as "Indemnified
Persons") from and against all Claims based upon, arising out of, or resulting
from any untrue statement of a material fact contained in the registration
statement or any omission to state therein a material fact necessary in order to
make the statement made therein, in the light of the circumstances under which
they were made, not misleading, provided that SFNB will not be liable in any
such case to the extent that any such Claim arises out of or results from any
untrue statement or omission based upon information furnished to SFNB by
Purchaser in a written document provided by Purchaser for use in connection with
the registration statement.
2.5(c) The indemnification set forth herein shall be in addition to
any liability SFNB or Purchaser may otherwise have in connection with any
registration of Common Stock. Within a reasonable time after receiving
definitive notice of any Claim in respect of which an Indemnified Person may
seek indemnification under this Section 2.5, such Indemnified Person shall
submit written notice thereof to Indemnifying Person. The failure of the
Indemnified Person so to notify the Indemnifying Person of any such Claim shall
not relieve the Indemnifying Person from any liability it may have hereunder
except to the extent that (a) such liability was caused or increased by such
omission, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such omission. In addition, the omission of
the Indemnified Person so to notify the Indemnifying Person of any such Claim
shall not relieve the Indemnifying Person
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<PAGE>
from any liability it may have otherwise than hereunder. The Indemnifying Person
shall have the right to undertake, by counsel or representatives of its own
choosing, the defense, compromise, or settlement (without admitting liability of
the Indemnifying Person) of any such Claim asserted, such defense, compromise,
or settlement to be undertaken at the expense and risk of the Indemnifying
Person, and the Indemnified Person shall have the right to engage separate
counsel, at its own expense, which counsel for the Indemnifying Person shall
keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall fail to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person shall
undertake the defense, compromise, or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. In the event that any Claim shall arise out of a transaction
or cover any period or periods wherein SFNB and Purchaser shall each be liable
hereunder for part of the liability or obligation arising therefrom, then the
parties shall, each choosing its own counsel and bearing its own expenses,
defend such Claim, and no settlement or compromise of such Claim may be made
without the joint consent or approval of SFNB and Purchaser. Notwithstanding the
foregoing, no Indemnifying Person shall be obligated hereunder with respect to
amounts paid in settlement of any Claim if such settlement is effected without
the consent of such Indemnifying Person (which consent shall not be unreasonably
withheld).
2.5(d) If the indemnification provided for in this Section 2.5 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party (as defined in either Section 2.5(a) or 2.5(b)) with respect to any Claim,
then the Purchaser or SFNB, as applicable and as the case may be (each an
"Indemnifying Party"), in lieu of indemnifying an Indemnified Party hereunder,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such Claim in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party on the one hand and of the Indemnified
Party on the other in connection with the statements or omissions which resulted
in such claim.
2.6 SUCCESSOR TO SFNB.
SFNB has adopted a Second Amended and Restated Plan of Reorganization
(the "Plan") into a holding company structure (the "Reorganization"). Upon the
Reorganization, the provisions of this Section 2 shall be applicable to any
holding company which SFNB may form if the Shares are converted into the capital
stock of such holding company. Under such circumstances, references in this
Section 2 to Common Stock shall be deemed to refer to the capital stock of the
holding company, and references in this Section 2 to the OTS and the securities
rules and regulations thereof shall be deemed to refer to the Securities and
Exchange Commission ("SEC"), and the Securities Act and the regulations of the
SEC thereunder, respectively.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SFNB.
SFNB represents and warrants to Purchaser as follows:
3.1 ORGANIZATION AND STANDING.
SFNB is a Federal savings bank organized and existing under the Home
Owners' Loan Act of 1933, as amended ("HOLA"). SFNB has the full corporate power
and authority to own and operate its properties and assets, to carry on its
business as currently conducted, to execute and deliver this Agreement, to sell
and issue the Shares hereunder, and, subject to the conditions specified herein,
to carry out and perform its obligations under the terms of this Agreement. SFNB
has furnished to Purchaser a true and complete copy of SFNB's federal stock
charter, as currently in
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effect, and a true and complete copy of SFNB's bylaws, as currently in effect,
in both cases, certified by its corporate secretary or other officer.
3.2 AUTHORIZATION; BINDING OBLIGATION.
SFNB has all requisite corporate power and authority to enter into
and to deliver this Agreement. Except as contemplated herein, all corporate
action on the part of SFNB and its directors, officers and stockholders
necessary for the authorization, execution, delivery and performance of this
Agreement by SFNB, the authorization, sale, issuance and delivery of the Shares,
and the performance of SFNB's obligations hereunder have been taken or will be
taken prior to the Closing Date. This Agreement, when executed and delivered by
SFNB, shall constitute a valid and binding obligation of SFNB enforceable in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws effecting the
enforcement of creditor's rights.
3.3 SUBSIDIARIES.
SFNB's direct subsidiaries are Security First Technologies, Inc. and
Security First Investments, Inc., and SFNB does not otherwise directly own any
other corporation, association or business entity.
3.4 CAPITALIZATION.
The authorized capital stock of SFNB consists of 25,000,000 shares of
common stock, of which 10,514,194 are issued and outstanding as of the date
hereof, and 2,500,000 shares of preferred stock, no par value per share
("Preferred Stock"), of which a Series A has been designated and of which
1,251,084 are issued and outstanding as of the date hereof. As of the date
hereof, there are options (the "Options") outstanding to purchase 4,129,834
shares of Common Stock, and except for the Options and the Class A Preferred
Stock, there are no outstanding securities convertible into or exchangeable for
Common Stock and there are no outstanding options, rights (preemptive or
otherwise), or warrants to purchase or to subscribe for any shares of such stock
or other securities of SFNB. Since December 31, 1997, SFNB has not issued any
capital stock except pursuant to Options and conversion of Preferred Stock.
3.5 VALIDITY OF SHARES; ISSUANCE.
The Shares, when issued in compliance with the provisions of this
Agreement, will be validly issued, fully paid and nonassessable, and free of any
liens or encumbrances, and will be issued in compliance with all applicable
federal and state banking and securities laws.
3.6 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance with, this
Agreement, and the issuance of the Shares, will not (a) violate any provision of
the federal stock charter or bylaws of SFNB; (b) conflict with or result in a
breach of, or default under, or result in the creation of any lien, claim,
charge or other encumbrance upon any of the assets or properties of SFNB or any
of its subsidiaries pursuant to the provisions of any agreement, mortgage,
indenture or other document or instrument to which SFNB or any of its
subsidiaries is a party or by which SFNB or any of its subsidiaries or any of
its properties or assets is bound, or (c) violate any existing statutes, laws,
ordinances, regulations, orders and other rules of law applicable to SFNB or any
of its subsidiaries or
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any of its properties or assets, or applicable to SFNB's power or authority to
perform its obligations under this Agreement.
3.7 FINANCIAL STATEMENTS.
SFNB has previously delivered or made available to Purchaser accurate
and complete copies of its audited consolidated financial statements as of and
for the year ended December 31, 1996 and its unaudited consolidated financial
statements as of and for the year ended December 31, 1997 (together, all such
financial statements are referred to as the "Financial Statements"). The
consolidated financial statements of SFNB referred to herein (including the
related notes, where applicable) fairly present (subject, in the case of the
unaudited statements, to recurring audit adjustments normal in nature and
amount, and the failure to include notes thereto), the results of the
consolidated operations and consolidated financial condition and cash flows of
SFNB for the respective fiscal periods or as of the respective dates therein set
forth; each of such statements (including the related notes, where applicable)
comply with applicable accounting requirements and with the published rules and
regulations of the OTS with respect thereto and each of such statements
(including the related notes, where applicable) has been prepared in accordance
with generally accepted accounting principles consistently applied during the
periods involved ("GAAP"), except in each case as indicated in such statements
or in the notes thereto. SFNB's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 and all reports filed under the Securities Exchange Act
of 1934, as amended ("Exchange Act") since May 23, 1996 comply in all material
respects with the appropriate requirements for such reports under the Exchange
Act, and SFNB has previously delivered or made available to Purchaser true,
correct and complete copies of such reports. Since May 23, 1996, SFNB has filled
all reports required to be filed by it under the Exchange Act. The books and
records of SFNB have been, and are being, maintained in all material respects in
accordance with GAAP and any other applicable legal and accounting requirements.
3.8 ASSETS.
SFNB (for purposes of this section, including its subsidiaries) has
good, valid and marketable title to all properties and assets owned by it,
including, without limitation, all properties and assets included in the
Financial Statements and all properties and assets purchased by SFNB since
December 31, 1996 (except for leased or licensed assets and for properties or
assets reflected in such Financial Statements which have been sold or otherwise
disposed of in the ordinary course of business), free and clear of all
encumbrances. All personal property of SFNB is in good operating condition and
repair and is suitable and adequate for the uses for which it is intended or is
being used. Each of SFNB and its subsidiaries owns or possesses the right to use
all material trademarks, service marks, trade names, copyrights, patents, and
licenses currently used by it in the conduct of its business. No material
product or service offered and no material trademark, service mark, or similar
right used by SFNB or its subsidiaries infringes any rights or patents of any
other person, and, as of the date hereof, neither SFNB nor any of its
subsidiaries has received any written or oral notice of any claim of such
infringement.
3.9 GOVERNMENTAL CONSENT.
No consent, approval or authorization of, or designation, declaration
or filing with, any governmental authority on the part of SFNB is required in
connection with the valid execution and delivery of this Agreement.
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3.10 LITIGATION; DISPUTES.
There are no actions, suits, claims, arbitrations, proceedings or
investigations pending, or to the knowledge of SFNB, threatened against,
affecting or involving SFNB or any of its subsidiaries in connection with the
transactions contemplated by this Agreement, at law or in equity, or before or
by any court, arbitrator or governmental authority, domestic or foreign. There
are no material legal proceedings pending, or to SFNB's knowledge, threatened,
other than ordinary routine litigation incidental to the business, to which SFNB
or any of its subsidiaries is a party or of which any of their property is
subject.
3.11 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as disclosed in its reports filed under the Exchange Act,
there has been no material adverse change in the business, operations, results
of operations or financial condition of SFNB and its subsidiaries, and since
December 31, 1996 neither SFNB nor any of its subsidiaries has incurred any
material liability, except as contemplated hereby or in the ordinary course of
their business consistent with their past practices and which has not had a
material adverse effect on SFNB or its subsidiaries. Since December 31, 1996,
SFNB and its subsidiaries have carried on their respective businesses in the
ordinary and usual course consistent with their past practices.
3.12 COMPLIANCE WITH APPLICABLE LAWS.
Each of SFNB and its subsidiaries have complied in all material
respects with all laws applicable to it or to the operation of its business.
Neither SFNB nor any subsidiary thereof has received any notice of any material
alleged or threatened claim, violation, or liability under any such laws that
has not heretofore been cured and for which there is no remaining liability.
3.13 NO MISREPRESENTATION.
None of the representations and warranties of SFNB set forth in this
Section 3 nor any of SFNB's reports filed under the Exchange Act since May 23,
1996 (at the time they were filed) contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents and warrants to SFNB as follows:
4.1 ORGANIZATION AND STANDING.
Purchaser is a Delaware corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Purchaser has the
full corporate power and authority to own and operate its properties and assets,
to carry on its business as currently conducted, to execute and deliver this
Agreement and, subject to the conditions specified herein, to carry out and
perform its obligations under the terms of this Agreement.
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4.2 AUTHORIZATION.
Purchaser has all requisite corporate power and authority to enter
into and to deliver this Agreement. All corporate action on the part of
Purchaser and its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement by Purchaser and the
performance of Purchaser's obligations hereunder have been taken. This
Agreement, when executed and delivered by Purchaser, shall constitute a valid
and binding obligation of Purchaser enforceable in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws effecting the enforcement of creditor's rights.
4.3 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance with, this
Agreement will not (a) violate any provision of the articles of incorporation or
bylaws of Purchaser; (b) conflict with or result in a breach of, or default
under, or result in the creation of any lien, claim, charge or other encumbrance
upon any of the assets or properties of Purchaser pursuant to the provisions of
any agreement, mortgage, indenture or other document or instrument to which
Purchaser is a party or by which Purchaser or any of its properties or assets is
bound, or (c) violate any existing statutes, laws, ordinances, regulations,
orders and other rules of law applicable to Purchaser or any of its properties
or assets, or applicable to Purchaser's power or authority to perform its
obligations under this Agreement.
4.4 GOVERNMENTAL CONSENT.
No consent, approval or authorization of, or designation, declaration
or filing with, any governmental authority on the part of Purchaser is required
in connection with the valid execution and delivery of this Agreement or in
connection with the consummation of the purchase of the Shares contemplated by
Section 1.1 hereof.
4.5 ADEQUATE RESOURCES.
Purchaser has sufficient cash and other resources to perform its
obligations hereunder.
4.6 INVESTMENT REPRESENTATIONS.
4.6(a) Purchaser has had an opportunity to discuss SFNB's business,
management and financial affairs with SFNB's management. Purchaser is capable of
evaluating the merits and risks of its investment in SFNB and has the capacity
to protect its own interests.
4.6(b) Purchaser is acquiring the Shares for investment for its own
account and not with a view to, or for resale in connection with, any
distribution. Purchaser understands that the Shares have not been registered
under the Securities Act nor under applicable rules and regulations of the OTS
by reason of a specific exemption from the registration provisions thereof which
depends upon, among other things, the bona fide nature of the investment intent
as expressed herein.
4.6(c) Purchaser acknowledges that the Shares must be held
indefinitely unless they are subsequently registered under applicable rules and
regulations of the OTS or an exemption from registration is available.
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4.7 LITIGATION; DISPUTES.
There are no actions, suits, claims, arbitrations, proceedings or
investigations pending, or to the knowledge of Purchaser, threatened against,
affecting or involving Purchaser in connection with the transactions
contemplated by this Agreement, at law or in equity, or before or by any court,
arbitrator or governmental authority, domestic or foreign.
4.8 NO MISREPRESENTATION.
None of the representations and warranties of Purchaser set forth in
this Section 4 contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading.
SECTION 5. COVENANTS.
5.1 REGULATORY APPLICATIONS; THIRD PARTY CONSENTS.
If applicable, upon the execution and delivery of this Agreement,
Purchaser shall cause to be prepared and filed, as soon as is reasonably
practical, all required applications and notices and any other filings with
governmental authorities which are necessary or contemplated for consummation of
the purchase of Shares contemplated hereby. Such applications and filings shall
be in such forms as may be prescribed by the respective governmental authorities
and shall contain such information as they may require.
5.2 MATTERS AS TO SFNB.
SFNB agrees to take all such action required of SFNB to consummate
the transactions contemplated hereby.
5.3 OTHER APPROVALS.
The parties shall cooperate and use their best efforts to obtain all
written consents and approvals of other persons in connection with the purchase
of the Shares contemplated hereby.
5.4 NEW PARTY TO AGREEMENT.
Upon the organization of Security First Technologies Corporation
("Holdings") as the proposed holding company in the Reorganization, SFNB shall
cause Holdings to become a party hereto, bound by the terms, conditions and
obligations contained herein.
SECTION 6. CONDITIONS TO CLOSING.
6.1 CONDITIONS TO OBLIGATIONS OF ALL PARTIES.
The obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, on or before the
Closing Date, of each of the following conditions precedent:
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6.1(a) Termination. This Agreement shall not have been terminated in
accordance with its terms.
6.1(b) Regulatory Approvals. All regulatory approvals sought shall
have been obtained and all notice periods shall have expired; no regulatory
approval shall contain any condition that would require any material
modification or nonperformance of the terms of this Agreement; all regulatory
approvals shall remain in full force and effect and all conditions and
requirements set forth in any regulatory approvals that are required to be
satisfied on or before the Closing Date, including the expiration of any waiting
periods, shall have been satisfied or properly waived.
6.1(c) No Governmental Action. No action or proceeding by or before
any governmental authority shall have been instituted or threatened (and not
subsequently dismissed, settled or otherwise terminated) which is reasonably
expected to restrain, prohibit or invalidate the transactions contemplated by
this Agreement or to affect adversely the consolidated financial condition and
business prospects of SFNB.
6.1(d) Reorganization. The Reorganization shall not have occurred.
6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER.
The obligations of Purchaser to purchase the Shares contemplated by
this Agreement are subject to the satisfaction, on or before the Closing Date,
of each of the following conditions precedent, any one or more of which may be
waived by Purchaser, in its sole and absolute discretion:
6.2(a) Representations and Warranties. The representations and
warranties of SFNB contained in this Agreement shall be true, correct and
complete in all material respects when made and shall be true and correct on the
Closing Date with the same force and effect as if made on the Closing Date
(provided, however, that if any portion of any representation or warranty is
already qualified by materiality, for purposes of determining whether this
Section 6.2(a) has been satisfied with respect to such portion of such
representation or warranty, such portion of such representation or warranty as
so qualified must be true and correct in all respects).
6.2(b) Compliance. SFNB shall have in all material respects performed
all obligations and agreements and complied with all covenants contained in this
Agreement to be performed and complied with by SFNB on or prior to the Closing
Date.
6.3 CONDITIONS TO OBLIGATIONS OF SFNB.
The obligations of SFNB to consummate the transactions contemplated
by this Agreement are subject to the satisfaction, on or before the Closing
Date, of each of the following conditions precedent, any one or more of which
may be waived by SFNB, in its sole and absolute discretion:
6.3(a) Representations and Warranties. The representations and
warranties of Purchaser contained in this Agreement shall be true, correct and
complete in all material respects when made and shall be true and correct as of
the Closing Date with the same force and effect as if made on the Closing Date
(provided, however, that if any portion of any representation or warranty is
already qualified by materiality, for purposes of determining whether this
Section 6.3(a) has been satisfied with respect to such portion of such
representation or warranty, such portion of such representation or warranty as
so qualified must be true and correct in all respects).
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6.3(b) Compliance. Purchaser shall have in all material respects
performed all obligations and agreements and complied with all covenants
contained in this Agreement to be performed and complied with by it on or prior
to the Closing Date.
SECTION 7. CLOSING.
7.1 DELIVERIES BY SFNB.
At the Closing, SFNB shall deliver to Purchaser the following:
(1) A certificate or certificates registered in Purchaser's
name, representing all of the Shares.
(2) A copy of the resolutions of the Board of Directors of
SFNB certified by the Secretary of SFNB, as being true, correct and complete and
then in full force and effect, authorizing the execution, delivery and
performance of this Agreement by SFNB, the authorization, sale, issuance and
delivery of the Shares, and the performance of SFNB's obligations hereunder.
(3) A certificate of SFNB signed by the President of SFNB
certifying that the representations and warranties of SFNB made herein are true,
complete and correct in all material respects as of the date of this Agreement
and are true and correct as of the Closing Date, and SFNB has in all material
respects performed all obligations and agreements and complied with all
covenants required to be performed or complied with by SFNB on or prior to the
Closing.
(4) Such other certificates, instruments or documents as
Purchaser may reasonably request in order to effect and document the
transactions contemplated hereby.
(5) An opinion of SFNB's counsel as to the due
authorization, full payment and non-assessibility of the Shares.
7.2 DELIVERIES BY PURCHASER.
At the Closing, Purchaser shall deliver to SFNB the following:
(1) The aggregate Purchase Price for the Shares, in cash or
by wire transfer or certified or bank cashier's check, payable to the order of
SFNB.
(2) A certificate of Purchaser signed by an officer of
Purchaser reasonably satisfactory to SFNB, certifying that the representations
and warranties of Purchaser made herein are true, complete and correct in all
material respects as of the date of this Agreement and are true and correct as
of the Closing Date, and Purchaser has in all material respects performed all
obligations and agreements and complied with all covenants required to be
performed or complied with by Purchaser on or prior to the Closing.
(3) Such other certificates, instruments or documents as
SFNB may reasonably request in order to effect and document the transaction
contemplated hereby.
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SECTION 8. LEGEND.
8.1 ENDORSEMENT.
Each certificate representing the Shares shall be endorsed with the
following legend (in addition to any legend required by applicable state
securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY
OTHER FEDERAL OR STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER APPLICABLE FEDERAL SECURITIES LAWS COVERING SUCH
SECURITIES OR SFNB RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO SFNB
THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
8.2 REMOVAL OF LEGEND.
The legend endorsed on a stock certificate pursuant to Section 8.1 of
this Agreement shall be removed and SFNB shall issue a certificate without such
legend to the holder of such Shares if such Shares are registered under
applicable federal securities laws and an offering circular meeting the
requirements of the rules and regulations of the OTS is available or if such
holder provides to SFNB an opinion of counsel for such holder of the Shares
reasonably satisfactory to SFNB, to the effect that a public sale, transfer or
assignment of such Shares may be made without registration and without
compliance with any restrictions.
SECTION 9. STOCK OPTION
9.1 GRANT OF OPTION.
SFNB does hereby grant to Purchaser four separate options (each, an
"Option," or collectively, the Options") to subscribe for and purchase that
number of whole shares of Common Stock (the "Option Shares") as determined below
in this Article 9. Upon the Reorganization, the provisions of this Article 9
shall be applicable to any holding company which SFNB may form pursuant to the
Plan if the Shares are converted into the capital stock of such holding company.
Under such circumstances, references in this Article 2 to Option Shares shall be
deemed to refer to share of capital stock of the holding company, references to
Common Stock shall be deemed to refer to the Common Stock of the holding company
and references in this Article 9 to SFNB shall be deemed to refer to the holding
company resulting from the Reorganization.
9.2 THE OPTIONS.
The Options are hereby designated individually as Option I, Option
II, Option III and Option IV. Each Option shall be exercisable for that number
of Option Shares which is equal to 2,500,000, divided by the number which equals
the "Per Share Option Exercise Price" for such Option, as set forth below in
Section 9.4.
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9.3 TERM OF THE OPTIONS.
Option I shall be exercisable from the date of the "Closing" under
the terms of, and as defined in, that certain Stock Purchase Agreement (the
"SFNB Stock Purchase Agreement") among Royal Bank of Canada, Purchaser, SFNB and
upon organization, Holdings, dated as of even date herewith ("the SFNB Closing
Date") until the close of business on the first business day which is 90 days
after the SFNB Closing Date. Option II shall be exercisable from the SFNB
Closing Date until the close of business on the first business day which is 270
days after the SFNB Closing Date. Option III shall be exercisable from the SFNB
Closing Date until the close of business on the first business day which is 450
days after the SFNB Closing Date. Option IV shall be exercisable from the SFNB
Closing Date until the close of business on the first business day which is 630
days after the SFNB Closing Date. Notwithstanding anything to the contrary
provided herein, the Options shall terminate and be of no further effect upon
termination of the Stock Purchase Agreement, other than by reason of Closing
thereunder.
9.4 THE PER SHARE OPTION EXERCISE PRICE.
The Per Share Option Exercise Price of Option I shall be the dollar
amount equal to the product of the Purchase Price, times 1.10. The Per Share
Option Exercise Price of Option II shall be the dollar amount equal to the
product of the Purchase Price, times 1.21. The Per Share Option Exercise Price
of Option III shall be the dollar amount equal to the product of the Purchase
Price, times 1.331. The Per Share Option Exercise Price of Option IV shall be
the dollar amount equal to the product of the Purchase Price, times 1.464.
9.5 EXERCISE OF THE OPTIONS.
An Option that is exercisable hereunder may be exercised by delivery
to SFNB on any business day, at its principal office, addressed to the attention
of the Corporate Secretary of SFNB, 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 aggregate Per Share Option Exercise
Price for the shares of Common Stock purchased pursuant to the exercise of an
Option shall be made in cash (whether by check, wire transfer or other
reasonably acceptable means). Promptly after the exercise of an Option and the
payment in full of the aggregate Per Share Option Exercise Price of the shares
of Common Stock covered thereby, the Purchaser shall be entitled to the issuance
of a stock certificate or certificates evidencing ownership of the Option Shares
so exercised.
9.6 TRANSFERABILITY.
Notwithstanding any provision of this Agreement to the contrary, no
Option shall be assignable or transferable, other than by Purchaser to any
direct or indirect parent or subsidiary corporation of Purchaser.
9.7 REQUIREMENTS OF LAW.
SFNB shall not be required to sell or issue any shares of Common
Stock under any Option if the sale or issuance of such shares would constitute a
violation by the Purchaser or SFNB of any provisions of any law or regulation of
any governmental authority, including without limitation any federal or state
securities laws or regulations. SFNB shall not be obligated to take
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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.
9.8 CHANGES IN CAPITALIZATION.
If the outstanding shares of Common Stock are increased or decreased
or changed into or exchanged for a different number or kind of shares or other
securities of SFNB 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 SFNB, occurring after
the date hereof, the number and kinds of Option Shares shall be adjusted
proportionately and accordingly. 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 Options 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 Per Share 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 Per Share Option Price.
9.9 OWNERSHIP LIMITATION.
If, upon exercise of an Option, Purchaser, including any subsidiaries
and affiliates thereof, would then own more than 4.999% of the outstanding
Common Stock, the Option Shares then subject to issuance shall be shares of SFNB
Class A Preferred Stock, no par value per share (the "Preferred Shares"), or if
after the Reorganization, the shares of capital stock of the resulting holding
company into which shares of Preferred Stock are converted, which stock shall
have the same terms and conditions of the Preferred Shares to the extent
contemplated by the Plan.
SECTION 10. TERMINATION.
10.1 MUTUAL CONSENT.
The parties may terminate this Agreement at any time by mutual
written agreement.
10.2 OTHER TERMINATION.
Either of SFNB, on the one hand, or Purchaser, on the other, may
terminate this Agreement by giving notice (a "Termination Notice") to the other
at the time designated in this Section or, in the absence of such designation,
at any time up to and including the Closing Date, if any one or more of the
following shall have occurred and be continuing:
10.2(a) Termination By Any Party. Any party may terminate this
Agreement under any one or more of the following circumstances:
(1) at any time after June 30, 1998, if the Closing shall
not have occurred for any reason other than a default or non-performance of its
obligations hereunder by the party giving such notice;
(2) any application for regulatory approval or notice with
any regulatory agency or authority is denied or withdrawn and is not modified or
supplemented and resubmitted in a manner that the party giving the notice
believes is responsive to the comments of the applicable governmental authority
within 45 days after it is so denied or withdrawn;
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(3) a court or other governmental authority of competent
jurisdiction shall have issued an order, writ, injunction or decree or shall
have taken any other action permanently restraining or otherwise prohibiting the
purchase of Shares contemplated hereby and such order, writ, injunction, decree
or other action shall have become final and nonappealable.
10.2(b) Termination By Purchaser. Purchaser may terminate this
Agreement if any condition precedent set forth in Sections 6.1 or 6.2 shall be
incapable of being satisfied.
10.2(c) Termination By SFNB. SFNB may terminate this Agreement if any
condition precedent set forth in Sections 6.1 or 6.3 shall be incapable of being
satisfied.
10.3 EFFECT OF TERMINATION.
Termination of this Agreement pursuant to this Section shall not
relieve any party of any liability for a default or other breach, default or
nonperformance under this Agreement. Notwithstanding the foregoing, no party
hereto shall be liable for consequential or punitive damages in connection with
such termination.
SECTION 11. MISCELLANEOUS.
11.1 ADDITIONAL ACTIONS AND DOCUMENTS.
Each of the parties hereto agrees that it will, at any time, prior
to, at or after the Closing, take or cause to be taken such further actions, and
execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments as may be necessary or reasonably requested in
connection with the consummation of the purchase and sale contemplated by this
Agreement or in order to fully effectuate the purposes, terms and conditions of
this Agreement.
11.2 EXPENSES.
Each party hereto shall pay its own expenses incurred in connection
with this Agreement and in the preparation for and consummation of the
transactions contemplated hereby.
11.3 NOTICES.
All notices, demands, requests, or other communications which may be
or are required to be given or made by any party to any other party pursuant to
this Agreement shall be in writing and shall be hand delivered, mailed by
first-class registered or certified mail, return receipt requested, postage
prepaid, or delivered by overnight air courier, addressed as follows:
(i) if to SFNB or Holdings (before the Reorganization):
Security First Network Bank
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Attn.: President
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Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Attn.: President
(after the Reorganization):
Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, Georgia 30326
Attn.: President
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attn.: Stuart G. Stein, Esq.
(ii)if to Purchaser:
RBC Holdings (Delaware) Inc.
1 Place Ville Marie
Montreal, Canada H3C 5A7
Attn.: Vice President - Business Development
with a copy (which shall not constitute notice) to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10166
Attn.: Steve Shoemate
or such other address as the addressee may indicate by written notice to the
other parties. Each notice, demand, request, or communication which shall be
given or made in the manner described above shall be deemed sufficiently given
or made for all purposes at such time as it is delivered to the addressee (with
the return receipt, the delivery receipt, or the affidavit of messenger being
deemed conclusive but not exclusive evidence of such delivery) or at such time
as delivery is refused by the addressee upon presentation.
11.4. WAIVER.
No waiver by any party of any failure or refusal of any other party
to comply with its obligations under this Agreement shall be deemed a waiver of
any other or subsequent failure or
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refusal to so comply by such other party. No waiver shall be valid unless in
writing signed by the party to be charged and only to the extent therein set
forth.
11.5 BINDING EFFECT.
This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns including, but
not limited to, any holding company which SFNB may form if the Shares are
converted into capital stock of such holding company.
11.6 ENTIRE AGREEMENT; AMENDMENT.
This Agreement, including the other instruments and documents
referred to herein or delivered pursuant hereto, contains the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior oral or written agreements, commitments or understandings with respect to
such matters. No amendment, modification or discharge of this Agreement shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification or discharge is sought.
11.7 SEVERABILITY.
If any part of any provision of this Agreement shall be invalid or
unenforceable under applicable law, such part shall be ineffective to the extent
of such invalidity or unenforceability only, without in any way affecting the
remaining parts of such provisions or the remaining provisions of said
Agreement.
11.8 HEADINGS.
The headings of the sections and subsections contained in this
Agreement are inserted for convenience only and do not form a part or affect the
meaning, construction or scope thereof.
11.9 GOVERNING LAW.
This Agreement, the rights and obligations of the parties hereto, and
any claims or disputes relating thereto, shall be governed by and construed
under and in accordance with the laws of the State of New York, excluding the
choice of law rules thereof.
11.10 SIGNATURE IN COUNTERPARTS.
This Agreement may be executed in separate counterparts, none of
which need contain the signatures of all parties, each of which shall be deemed
to be an original, and all of which taken together constitute one and the same
instrument. It shall not be necessary in making proof of this Agreement to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
11.11 NO THIRD PARTY BENEFICIARIES.
Except as expressly provided herein, this Agreement is made and
entered into for the sole protection and benefit of the parties hereto, and no
other person or entity shall have any right of
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action hereon, right to claim any right or benefit from the terms contained
herein or be deemed a third party beneficiary hereunder.
11.12 ASSIGNABILITY.
All terms and provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto, and their respective transferees,
successors and assigns; provided, however, that neither this Agreement nor any
rights, privileges, duties and obligations of the parties hereto may be assigned
or delegated by any party hereto without the prior written consent of all the
parties to this Agreement and any such purported or attempted assignment shall
be null and void ab initio and of no force or effect provided, further that
Purchaser may assign this Agreement, including rights, privileges, duties and
obligations hereunder to any parent or subsidiary corporation affiliate of
Purchaser so long as such assignment does not in any way materially delay or
otherwise materially adversely impact the ability of the parties hereto to
effect the transactions contemplated hereby.
11.13 PARTIES NOT PARTNERS.
Nothing contained in this Agreement shall constitute any party as a
partner with, agent for or principal of any one or more of the other parties or
their successors and assigns.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
SECURITY FIRST NETWORK BANK
By: /s/ Robert F. Stockwell
-----------------------------------
Robert F. Stockwell
Treasurer, Acting President and
Chief Financial Officer
RBC HOLDINGS (DELAWARE) INC.
By: /s/ Charles F. Seitz
-----------------------------------
Name: Charles F. Seitz
Title: Treasurer + Secretary
SECURITY FIRST
TECHNOLOGIES CORPORATION
By: /s/ James S. Mahan, III
-----------------------------------
Name: James S. Mahan, III
Title: Chief Executive Officer
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Exhibit 5
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
June 5, 1998
Board of Directors
Security First Technologies Corporation
3390 Peachtree Road, NE
Suite 1700
Atlanta, Georgia 30326
Ladies and Gentlemen:
We are acting as special counsel to Security First Technologies
Corporation, a Delaware corporation (the "Company"), in connection with its
registration statement on Form S-4 (the "Registration Statement") filed with the
Securities and Exchange Commission relating to the proposed issuance of up to
10,814,215 shares of the Company's common stock, par value $0.01 per share, all
of which shares (the "Shares") are to be issued by the Company in accordance
with the terms of the Second Amended and Restated Plan of Reorganization, dated
as of March 9, 1998, by and among Security First Network Bank ("SFNB"), the
Company and upon organization, New Security First Network Bank, as amended by
Amendment No. 1 thereto dated June 4, 1998 (together the "Plan"). This opinion
letter is furnished to you at your request to enable you to fulfill the
requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. ss. 229.601(b)(5),
in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. An executed copy of the Plan.
3. The Certificate of Incorporation of the Company, as certified by
the Secretary of the Company on the date hereof as then being
complete, accurate and in effect.
4. The Bylaws of the Company, as certified by the Secretary of the
Company on the date hereof as then being complete, accurate and
in effect.
5. Resolutions of the Board of Directors of the Company, adopted at
a meeting held on June 3, 1998, as certified by the Secretary of
the Company on the date hereof as then being complete, accurate
and in effect, relating to the issuance of the Shares and
arrangements in connection therewith.
E-24
<PAGE>
Board of Directors
Security First Technologies Corporation
June 5, 1998
Page 2
6. Resolutions of the Board of Directors of SFNB, as organizer of
the Company, adopted at meetings held on January 28, 1997,
January 28, 1998, March 9, 1998 and June 3, 1998, as certified by
the Secretary of the Company on the date hereof as then being
complete, accurate and in effect, relating to the issuance of the
Shares and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter is
given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
General Corporation Law of the State of Delaware. We express no opinion herein
as to any other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) effectiveness of the Registration Statement and (ii)
issuance of the Shares pursuant to the terms of the Plan and the resolutions of
the Boards of Directors of the Company and SFNB, the Shares will be validly
issued, fully paid and nonassessable under the General Corporation Law of the
State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter and should not be quoted in whole
or in part or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 5
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the proxy statement/prospectus constituting a part of
the Registration Statement. In giving this consent, we do not thereby admit that
we are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
HOGAN & HARTSON L.L.P.
E-25
Exhibit 21
Security First Technologies Corporation does not have any subsidiaries.
E-26
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
June 5, 1998
E-27
Exhibit 23.3
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
Consent of Friedman, Billings, Ramsey & Co., Inc.
-------------------------------------------------
Board of Directors
Security First Technologies Corporation
Board of Directors
Security First Network Bank
We hereby consent to the inclusion of our opinion letter dated March 9, 1998 as
an appendix to the proxy statement/prospectus included in the registration
statement on Form S-4 of Security First Technologies Corporation and to the
references to our firm and our opinion in the proxy statement/prospectus.
Friedman, Billings, Ramsey & Co., Inc.
By: /s/ Suzanne N. Richardson
--------------------------------
Suzanne N. Richardson
Managing Director
Arlington, Virginia
June 5, 1998
E-28
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 _________________________, 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 _____ a.m. on _______ __, 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; AND (3) 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
----------------
E-29
<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
[ ] [ ] [ ]
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.
E-30
