S1 CORP /DE/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________

FORM 10-Q


[x]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003

or

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Transition Period From to

Commission File Number: 000-24931

S1 CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		58-2395199 (I.R.S. Employer Identification No.)

3500 Lenox Road, Suite 200 Atlanta, Georgia (Address of principal executive offices)		30326 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (404) 923-3500

NOT APPLICABLE
(Former name if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]

Shares of common stock outstanding as of November 10, 2003: 73,021,589

TABLE OF CONTENTS


PART 1 — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
SECTION 302 CERTIFICATION OF CEO
SECTION 302 CERTIFICATION OF CFO
SECTION 906 CERTIFICATION OF CEO
SECTION 906 CERTIFICATION OF CFO

S1 CORPORATION AND SUBSIDIARIES

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS


	PART I - FINANCIAL INFORMATION
Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements as of September 30, 2003	6
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4	Controls and Procedures	24
	PART II - OTHER INFORMATION
Item 1	Legal Proceedings	25
Item 6	Exhibits and Reports on Form 8-K	25
Signature		26

PART 1 — FINANCIAL INFORMATION


Item 1.		*Financial Statements*

S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)


					September 30,			December 31,
					2003			2002

ASSETS
Current assets:
	Cash and cash equivalents				$	128,119		$	127,842
	Short-term investments					20,406			14,843
	Accounts receivable, net					40,148			54,815
	Prepaid expenses					7,431			7,601
	Other current assets					3,488			7,232

			Total current assets			199,592			212,333
	Property and equipment, net					17,453			30,626
	Intangible assets, net					14,013			17,585
	Goodwill, net					94,665			106,971
	Other assets					6,159			9,459

		Total assets			$	331,882		$	376,974

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	2,951		$	13,354
	Accrued compensation and benefits					12,896			11,710
	Accrued restructuring					8,015			2,665
	Accrued other expenses					18,607			21,742
	Deferred revenues					39,130			40,305
	Current portion of capital lease obligation					721			1,693

			Total current liabilities			82,320			91,469
	Capital lease obligation, excluding current portion					694			185
	Accrued restructuring, excluding current portion					6,579			4,445
	Other liabilities					1,648			1,114

			Total liabilities			91,241			97,213

Stockholders’ equity:
	Preferred stock					10,000			18,328
	Common stock					729			713
	Additional paid-in capital					1,905,782			1,896,111
	Common stock held in treasury – at cost					(10,000	)		(9,250	)
	Accumulated deficit					(1,663,597	)		(1,623,545	)
	Accumulated other comprehensive loss					(2,273	)		(2,596	)

				Total stockholders’ equity		240,641			279,761

				Total liabilities and stockholders’ equity	$	331,882		$	376,974

Preferred shares issued and outstanding						749,064			1,398,214

Common shares issued and outstanding						72,877,540			71,259,901

Common stock held in treasury						2,051,862			1,906,300

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


					Three Months Ended						Nine Months Ended
					September 30,						September 30,

					2003			2002			2003			2002

Revenues:
	Software licenses				$	16,161		$	22,926		$	45,312		$	69,156
	Support and maintenance					14,193			14,806			44,210			44,351
	Professional services					16,815			24,755			63,137			74,434
	Data center					8,840			9,279			35,571			30,956
	Other					1,452			245			2,618			994

			Total revenues			57,461			72,011			190,848			219,891

Operating expenses:
	Cost of software licenses					1,156			2,492			3,014			5,250
	Cost of professional services, support and maintenance					18,503			22,096			66,091			68,329
	Cost of data center					5,177			5,824			18,567			17,126
	Cost of other revenue					1,424			381			2,438			963
	Selling and marketing					9,334			15,186			30,988			44,643
	Product development					10,415			12,751			33,789			40,528
	General and administrative, including stock compensation expense of $0 and $212 for the three months ended September 30, 2003 and 2002, respectively and $281 and $1,111 for the nine months ended September 30, 2003 and 2002, respectively					7,607			8,822			24,637			29,151
	Depreciation					3,545			5,408			13,983			17,395
	Merger related costs and restructuring charges					4,052			734			20,564			2,756
	Acquired in-process research and development					—			—			—			350
	Amortization of other intangible assets and goodwill impairment					768			4,275			16,625			13,971

			Total operating expenses			61,981			77,969			230,696			240,462

				Operating loss		(4,520	)		(5,958	)		(39,848	)		(20,571	)
Interest and other income (expense), net						171			(129	)		(74	)		1,149

		Loss before income tax (expense) benefit				(4,349	)		(6,087	)		(39,922	)		(19,422	)
Income tax (expense) benefit						(11	)		887			(130	)		1,869

Net loss					$	(4,360	)	$	(5,200	)	$	(40,052	)	$	(17,553	)

Basic and diluted net loss per common share					$	(0.06	)	$	(0.07	)	$	(0.58	)	$	(0.26	)

Weighted average common shares outstanding						69,876,641			70,410,161			69,493,376			67,121,167

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)


				Nine Months Ended
				September 30,

				2003			2002

Cash flows from operating activities:
	Net loss			$	(40,052	)	$	(17,553	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation, amortization and goodwill impairment charge			30,608			31,366
		Loss on disposal of property and equipment			3,931			—
		Acquired in-process research and development			—			350
		Compensation expense for stock options			281			1,111
		Provision for doubtful accounts receivable and billing adjustments			4,674			6,123
		Gain on the sale of investment securities available for sale			(24	)		—
		Loss on impaired cost-basis equity investments			615			—
		Benefit for deferred income taxes			—			(2,261	)
		Proceeds from income tax refunds			710			—
	Changes in assets and liabilities, excluding effects of acquisitions:
		Decrease (increase) in accounts receivable			9,678			(4,398	)
		Decrease (increase) in prepaid expenses and other assets			4,317			(2,728	)
		(Decrease) increase in accounts payable			(10,703	)		5,009
		Increase (decrease) in accrued expenses and other liabilities			5,495			(8,437	)
		(Decrease) increase in deferred revenues			(735	)		4,128

			Net cash provided by operating activities		8,795			12,710

Cash flows from investing activities:
	Net cash paid in connection with acquisitions				—			(3,943	)
	Maturities of short-term investment securities				14,853			42,882
	Purchases of short-term investment securities				(20,416	)		(46,992	)
	Proceeds from sale of investment securities available for sale				92			—
	Proceeds from sale of other assets				1,415			—
	Proceeds from sale of cost basis equity investment				494			—
	Purchase of long-term certificate of deposit				—			(2,500	)
	Purchases of property, equipment and technology				(4,528	)		(9,426	)

			Net cash used in investing activities		(8,090	)		(19,979	)

Cash flows from financing activities:
	Proceeds from sale of common stock under employee stock purchase and option plans				1,078			5,076
	Payments on capital lease obligations				(1,756	)		(4,484	)
	Repurchase of common stock held in treasury				(750	)		(7,042	)

		Net cash used in financing activities			(1,428	)		(6,450	)

Effect of exchange rate changes on cash and cash equivalents					1,000			178

Net increase (decrease) in cash and cash equivalents					277			(13,541	)
Cash and cash equivalents at beginning of period					127,842			119,632

Cash and cash equivalents at end of period				$	128,119		$	106,091

Noncash investing and financing activities:
	Property and equipment acquired through leases			$	1,293		$	250
	Conversion of preferred stock to common stock				8,328			225,778
	Effects of acquisitions:
			Issuance of common stock to acquire businesses		—			22,778
			Liabilities assumed		—			9,990

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1.		BACKGROUND AND BASIS OF PRESENTATION

S1 Corporation is a global provider of enterprise software solutions for more than 4,000 financial organizations including banks, credit unions, investment firms and insurance companies. Our solutions automate transactions and integrate the channels by which financial institutions interact with their customers. Our objective is to be the leading global provider of integrated enterprise solutions that enable financial institutions to improve the way they service their customers by integrating all delivery channels, expanding the total financial relationship and increasing profits. We sell our solutions to small, mid-sized and large financial organizations in two geographic regions: (i) the Americas region, and (ii) the International region, consisting of Europe, Middle East and Africa (EMEA) and Asia-Pacific and Japan (APJ). We refer to our core business segment as the “Financial Institutions” business.

Through Edify Corporation and its subsidiaries, we offer voice and speech recognition applications and consultation services to improve customer service and reduce costs through automation and increased operational effectiveness. These products streamline customer inquiries and transactions and deliver a consistent experience to the customer across all channels of communication including voice, email, fax, Web, and wireless. Edify’s products are sold across multiple vertical markets including financial services, travel, retail and telecommunications on a direct basis and through the use of resellers. Our financial institutions segment is the exclusive reseller of Edify Solutions to the financial services marketplace.

S1 is headquartered in Atlanta, Georgia, USA, with additional domestic offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New York, New York; West Hills, California and Santa Clara, California; and international offices in Brussels, Dublin, Hong Kong, Lisbon, London, Luxembourg, Madrid, Munich, Paris, Rotterdam and Singapore. S1 is incorporated in Delaware.

We accounted for the Edify business assets and liabilities as “held for sale” for the period from July 1, 2002 until March 31, 2003. In April 2003, we determined that we would not be able to sell the Edify business by June 30, 2003 on terms that were agreeable to us. The accompanying financial statements reflect the Edify business as a part of our continuing operations for all periods presented. As a result, during the quarter ended March 31, 2003, we have:

• reclassified the assets and liabilities of the Edify business from “assets held for sale” and “liabilities of business held for sale” as of December 31, 2002 in our condensed consolidated balance sheet;

• presented the results of operations for the Edify business as a segment of continuing operations in our consolidated statements of operations for all periods presented, which required a retroactive reclassification of revenues and expenses for prior periods previously reported; and

• recorded depreciation expense of $0.3 million on the fixed assets of the Edify business and amortization expense of $1.7 million for other intangible assets associated with the Edify business for the nine-month period from July 1, 2002 through March 31, 2003.

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of our financial condition as of September 30, 2003, our results of operations for the three and nine months ended September 30, 2003 and our cash flows for the nine months ended September 30, 2003. The data in the condensed consolidated balance sheet as of December 31, 2002 was derived from our audited consolidated balance sheet as of December 31, 2002, as presented in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain items in the prior financial statements have been reclassified to conform to the current presentation. The condensed consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. Our operating results for the three and nine months ended

September 30, 2003 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2003.


2.		SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Significant Accounting Policies

Our significant accounting policies are included in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2002. Below are significant changes to our accounting policies.

During December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. At this time, we do not anticipate making a voluntary change to the fair value based method of accounting for stock-based employee compensation.

We account for our stock option plans in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148. As such, we record compensation expense on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Additionally, if a modification is made to an existing grant, any related compensation expense is calculated on the date both parties accept the modification and recorded on the date the modification becomes effective. Otherwise, we do not record stock compensation expense when we grant stock options to S1 employees.

In the three and nine months ended September 30, 2003 and 2002, we recognized compensation expense relating to stock options granted with exercise prices less than the market price on the date of grant and for modifications made to the terms of existing grants. Had we determined compensation expense based on the fair value at the grant date for our stock options and stock purchase rights under SFAS No. 123, our net loss would have increased to the unaudited pro forma amounts indicated below:

Three Months Ended

Nine Months Ended

September 30,

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

	•		reclassified the assets and liabilities of the Edify business from “assets held for sale” and “liabilities of business held for sale” as of December 31, 2002 in our condensed consolidated balance sheet;

	•		presented the results of operations for the Edify business as a segment of continuing operations in our consolidated statements of operations for all periods presented, which required a retroactive reclassification of revenues and expenses for prior periods previously reported; and

	•		recorded depreciation expense of $0.3 million on the fixed assets of the Edify business and amortization expense of $1.7 million for other intangible assets associated with the Edify business for the nine-month period from July 1, 2002 through March 31, 2003.