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

FORM 10-Q

Commission File Number: 000-24931

S1 CORPORATION
(Exact name of registrant as specified in its charter)

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 o

     Shares of common stock outstanding as of August 9, 2002: 70,243,229

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S1 CORPORATION AND SUBSIDIARIES

QUARTERLY PERIOD ENDED JUNE 30, 2002

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PART I — FINANCIAL INFORMATION

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PART 1 — FINANCIAL INFORMATION

Item 1 — Financial Statements

S1 CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES

1. BACKGROUND AND BASIS OF PRESENTATION

     S1 Corporation is a global provider of enterprise software solutions for financial organizations including banks, credit unions, insurance companies and investment firms. Our solutions automate the channels by which financial institutions interact with their customers. These channels target full-service channels that support a person-to-person interaction, such as talking to a teller in a bank branch or working with an insurance agent or a customer support representative over the phone, and self-service channels that support person-to-machine interactions conducted via the Internet, interactive voice response units (IVR) or automated teller machines (ATMs). Our solutions also support automated, or machine-to-machine, interactions. Our applications are designed to support all of the financial institution’s market segments from retail end-users to small businesses to large corporations, as well as financial institution employees including bank tellers, insurance agents, contact center representatives and financial advisors. In addition, we provide customer relationship management (CRM), wealth management and statutory financial reporting solutions for global, national, regional and local financial organizations. We offer account aggregation services through our reseller relationship with our affiliate Yodlee, Inc.

     Through our Edify Corporation subsidiary, we provide self-service and assisted service applications to companies in a variety of industries, including principally retail, transportation, telecommunications and financial services. Because Edify’s solutions are not designed specifically for financial institutions, which is our primary strategic market, we report its operations as a separate segment, referred to as the “contact center automation” segment. In July 2002, we announced our plan to sell this business together with the non-financial business of our recently acquired Point Holdings operations. Following the planned divestiture of these combined businesses, all of our remaining businesses will be focused on our strategic financial services market.

     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, 2001. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of our financial condition as of June 30, 2002 and our results of operations for the three and six months ended June 30, 2002 and cash flows for the six months ended June 30, 2002. The data in the condensed consolidated balance sheet as of December 31, 2001 was derived from our audited consolidated balance sheet as of December 31, 2001, as presented in our Annual Report on Form 10-K for the year ended December 31, 2001. 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 six months ended June 30, 2002 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2002.

2. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. We are required to adopt this statement no later than January 1, 2003 and do not expect it to have a material impact on our consolidated financial statements.

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” However, it retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be

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held and used and the measurement of long-lived assets to be disposed of by sale. Impairment of goodwill is not included in the scope of SFAS No. 144 and will be treated in accordance with SFAS No. 142. According to SFAS No. 144, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing or discontinued operations. We adopted this statement on January 1, 2002 with no material impact on our consolidated financial statements.

     We will apply SFAS No. 144 in accounting for our planned divestiture of our contact center automation segment. As a result, beginning with our financial statements for the quarter ending September 30, 2002, we will:

	•		present the total assets of the contact center automation segment on one line in our consolidated balance sheets for all periods presented, which will require a retroactive reclassification of those assets for prior periods previously reported;
	•		present the total liabilities of the contact center automation segment on one line in our consolidated balance sheets for all periods presented, which will require a retroactive reclassification of those liabilities for prior periods previously reported;
	•		present the results of operations for the contact center automation segment as “discontinued operations” on one line in our consolidated statements of operations for all periods presented, which will require a retroactive reclassification of that segment’s revenues and expenses for prior periods previously reported; and
	•		discontinue depreciation of fixed assets and amortization of intangible assets associated with the contact center automation segment;

     The classification of the contact center automation segment’s assets and liabilities as “held for sale” will continue until such time that we sell the business, which we anticipate will happen in the next 12 months.

     In November 2001, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” which is a codification of EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from a vendor to a customer or reseller of the vendor’s products to be a reduction in the selling prices of the vendor’s product and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement and could lead to negative revenue under certain circumstances. Revenue reduction is required unless consideration related to a separate identifiable benefit and the benefit’s fair value can be established. We adopted EITF 01-09 effective January 1, 2002 with no material impact on our consolidated financial statements.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In this statement, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. This statement also establishes that fair value is the objective for the initial measurement of the liability. The provisions of this statement will be effective for exit or disposal activities that are initiated after December 31, 2002. We will adopt this statement as required and do not expect it to have a material impact on our financial statements.

3. ACQUISITIONS

     On February 14, 2002, we completed the acquisition of Regency Systems, Inc., a Dallas, Texas based provider of telephone and Internet banking applications and web design services for community and mid-market banks. The Regency acquisition enhanced our product offering with a telephone banking solution for community and mid-market banks and added over 1,000 customers. We accounted for the acquisition of Regency using the purchase method of accounting prescribed by SFAS No. 141. For accounting purposes, we treated the acquisition as if it had occurred on February 1, 2002. Accordingly, our consolidated results of operations for the six months ended June 30, 2002 include five months of operating results for Regency.

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     On March 27, 2002, we acquired the assets and subsidiaries of Point Holdings, Ltd., a Dublin, Ireland based multi-channel CRM provider. The acquisition of Point strengthened our product offering, extended our insurance customer base and expanded our presence in Europe. We accounted for the acquisition of Point using the purchase method of accounting prescribed by SFAS No. 141. For accounting purposes, we treated the acquisition as if it had occurred on March 31, 2002. Accordingly, our consolidated results of operations for the six months ended June 30, 2002 include three months of operating results for Point.

     Under the terms of the acquisition agreements, we issued common stock and paid cash to the sellers and paid direct acquisition costs, including principally advisory, legal and accounting fees. The values of the common shares were determined based on the average market price of our common shares over the 2 day trading period before and the 2 day trading period after the respective acquisition agreements were signed, less the estimated costs to register the securities. We calculated the purchase price for Regency and Point as follows (in thousands, except share data):

     Under the terms of the Regency acquisition agreement, if the aggregate market value of the common stock issued to the selling shareholder, based on the average stock price for the 10 trading days immediately preceding the effective date of the registration statement for those shares, declined below $5.1 million, we agreed to pay the selling shareholder the difference. Accordingly, in May 2002, due to the decrease in our stock price, we were required to pay the selling shareholder additional cash of $478,000 under the terms of this arrangement. The additional payment to the selling shareholder is reflected in the financial statements as of June 30, 2002 and the table presented above.

     The Regency business and the operations of the Point business that are focused on financial institutions are included in the financial institutions segment. The remaining Point operations (those that are not focused on financial institutions) are included in the contact center automation segment. We assigned the entire amount of goodwill stemming from the Regency acquisition to the financial institutions segment. We allocated the goodwill associated with the Point acquisition between the financial institutions segment and contact center automation segment. The amounts allocated to in-process research and development were expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. We expect the projects under development at the time of the acquisitions to be completed within 12 months of the acquisition dates. Costs incurred to complete these projects are expected to be less than $2.1 million in the aggregate.

     We assigned the total purchase price to the net assets and identifiable intangible assets of the acquired entities with the remaining amount assigned to goodwill. The value assigned to the identifiable intangible assets was based on an analysis performed by an independent third party as of the date of the acquisitions. We are in the process of finalizing these valuations; thus, the purchase price allocations are preliminary and subject to change. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

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     We did not present unaudited pro forma results of the operations of S1 and the acquired companies for the six months ended June 30, 2002 or the three and six months ended June 30, 2001 because our pro forma results for those periods would not be materially different from our actual results for those periods.

     In May 2002, we amended the purchase agreement for Software Dynamics, Inc., a business we acquired in September 2001. The amendment eliminated a contingency associated with the total consideration paid for SDI. Previously, we did not assign the full value of the series E preferred stock issued to the sellers because of a contingency that may have required the sellers to return up to $2.1 million of the series E preferred stock. As a result of the amendment, the condition was removed and we reflected the full value of the series E preferred stock issued to the sellers by increasing the reported value of the series E preferred stock. The additional purchase price was assigned to goodwill.

4. SHORT TERM INVESTMENTS

     Short term investments consist of investments in certificates of deposit, commercial paper and other highly liquid securities with original maturities exceeding 90 days but less than one year. All of these investments are held to maturity and are reported at amortized cost. We have the ability and the intent to hold these investments to maturity. The fair value of these investments is not significantly different from their carrying value at June 30, 2002.

     Certain of our investments are made with financial institutions who are also our customers. These investments are made at market rates in arms-length transactions.

5. GOODWILL AND OTHER INTANGIBLE ASSETS – ADOPTION OF SFAS No. 142

     In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Under these new standards, the FASB eliminated accounting for certain mergers and acquisitions as poolings of interests, eliminated amortization of goodwill and indefinite life intangible assets and established new impairment measurement procedures for goodwill. For S1, the standards became effective for all acquisitions completed on or after June 30, 2001. Changes in financial statement treatment for goodwill and intangible assets arising from mergers and acquisitions completed prior to June 30, 2001 became effective January 1, 2002. We implemented SFAS 142 on January 1, 2002 with the following effects:

•		We reclassified $7.0 million of unamortized assembled workforce intangible assets into goodwill.
•		We discontinued amortization on goodwill and assembled workforce of $64.5 million, excluding goodwill recorded for the Software Dynamics Inc. transaction that was never subject to amortization. We estimate that the resulting reduction of amortization expense will be approximately $55.5 million for 2002, $6.8 million for 2003 and $2.2 million for 2004.
•		We performed a transitional goodwill impairment test as of January 1, 2002. The impairment test required us to: (1) identify our reporting units, (2) determine the carrying value of each reporting unit by assigning assets and liabilities, including existing goodwill and intangible assets, to those reporting units, and (3) determine the fair value of each reporting unit. Based on the results of the transitional impairment test, we believe that the fair value of our reporting units exceed their carrying value. Accordingly, we concluded that our goodwill was not impaired at January 1, 2002.

     Following the transitional impairment test, our goodwill balances will be subject to impairment tests using the same process described above, at least once annually. If the carrying value of any reporting unit exceeds its fair value in future periods, we will determine the amount of any goodwill impairment, if any, through a detailed fair value analysis of each of the assigned assets (excluding goodwill). If any impairment were indicated as a result of the annual test, we would record an impairment charge as part of income (loss) from operations.

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     At June 30, 2002, our other intangible assets consisted of the following:

     We recorded amortization expense of $5.0 million and $9.7 million during the three and six months ended June 30, 2002, respectively. We estimate aggregate amortization expense by operating segment for 2002 and the next four calendar years to be as follows (in thousands):

     The changes in the carrying value of our goodwill for the six months ended June 30, 2002 are as follows:

     The goodwill allocated to the contact center automation segment reflects the estimated amount of goodwill associated with the operations of Point that are not focused on financial institutions. The allocation of goodwill from the Point acquisition to the operating segments is preliminary as of the date of this report.

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     The following table shows our net loss and net loss per share as adjusted for amortization of goodwill and assembled workforce for all periods reported in our statements of operations.

6. STOCKHOLDERS’ EQUITY

     On April 30, 2002, our series D convertible preferred stock automatically converted into S1 common stock at a rate of 29.283 common shares for each preferred share. Accordingly, we issued 6,954,712 shares of S1 common stock in exchange for 237,500 shares of series D convertible preferred stock.

7. COMPREHENSIVE LOSS

     The components of comprehensive loss are as follows (in thousands):

8. MERGER RELATED AND RESTRUCTURING CHARGES

     In connection with the acquisition of Point, we incurred merger related costs of $3.7 million related to exit costs for certain of our European operations during the first quarter of 2002. Under this exit plan, we will reduce headcount, consolidate offices and dispose of redundant equipment. Additionally, during the first quarter of 2002, we reduced merger related accruals of $1.7 million related to the settlement of pending litigation for less than the amount originally accrued.

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     In 2000 and 2001, we approved restructuring plans to streamline our global operations and to consolidate product development in our financial institutions segment. As a result of the plans, we reduced our workforce and closed several of our facilities worldwide. At various times during 2001, we determined that, as a result of weakening conditions in the domestic real estate markets, our original estimate of the costs to dispose of unused real estate was below the currently anticipated costs. The restructuring reserves as of December 31, 2001 and June 30, 2002 and their utilization for the six months ended June 30, 2002 are summarized as follows:

     We expect to make future cash expenditures, net of anticipated sublease income, related to these restructuring activities of approximately $9.3 million, of which we anticipate to pay approximately $3.8 million within the next twelve months.

9. SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS

     We operate and manage S1 in two business segments: financial institutions and contact center automation. The financial institutions segment develops, markets and implements integrated, transactional and brandable enterprise applications for financial institutions worldwide, available as in-house solutions or solutions that can be hosted by us in one of our data centers. Through the contact center automation segment we offer customer interaction solutions, including: interactive voice response, voice recognition, e-mail management, web chat navigation and collaboration and computer telephony integration. In July 2002, we announced our plan to sell the contact center automation business together with the non-financial business of our recently acquired Point Holdings operations. Following the planned divestiture of these combined businesses, all of our remaining businesses will be focused on our strategic financial services market.

     We evaluate the performance of our operating segments based on their contribution before interest, other income (expense) and taxes, as reflected in the tables presented below for the three and six months ended June 30, 2002 and 2001. We do not use any asset-based metrics to measure the operating performance of our segments.