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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended March 31, 2003

or

Commission File Number: 000-24931

S1 CORPORATION

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

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

     Shares of common stock outstanding as of May 14, 2003: 69,358,574

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S1 CORPORATION AND SUBSIDIARIES

QUARTERLY PERIOD ENDED MARCH 31, 2003

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PART 1 — FINANCIAL INFORMATION

Item 1 — Financial Statements

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

See accompanying notes to unaudited condensed consolidated financial statements.

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

See accompanying notes to unaudited condensed consolidated financial statements.

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

See accompanying notes to unaudited condensed consolidated financial statements.

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

     1.     BACKGROUND AND BASIS OF PRESENTATION

          S1 Corporation is a provider of global enterprise software solutions for more than 4,000 financial organizations including banks, credit unions, investment firms and insurance companies. Our solutions automate 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 three geographic regions: (i) the Americas region, (ii) the Europe, Middle East and Africa region (EMEA) and (iii) the Asia-Pacific and Japan (APJ) region. We refer to our core business segment as the “Financial Institutions” business.

          Through Edify Corporation and its subsidiaries, we provide a variety of customer relationship management (CRM) applications that allow organizations in various industries to automate, integrate, personalize and analyze interactions with customers across touch points such as phone, web, wireless, email, fax and kiosk. In July 2002, we combined this business together with the non-financial institutions business of Point Information Systems, a CRM application provider that we acquired in March 2002, collectively referred to as the “Edify” business segment.

          S1 is headquartered in Atlanta, Georgia, USA, with additional domestic offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; Dallas, Texas; New York, New York, West Hills, California and Santa Clara, California; and additional international offices in Brussels, Dublin, Hong Kong, Lisbon, London, Luxembourg, Madrid, Melbourne, Munich, Paris, Rotterdam and Sydney. 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 April 2003, at which time we determined that we would not be able to sell the Edify business on terms that were agreeable to us before June 30, 2003. The accompanying financial statements reflect the Edify business as a part of our continuing operations for all periods presented. As a result, 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 and March 31, 2003 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 during the first quarter of 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 (consisting of only normal recurring adjustments) considered necessary for a fair presentation of our financial condition as of March 31, 2003 and our results of operations for the three months ended March 31, 2003 and cash flows for the three months ended March 31, 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

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months ended March 31, 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 months ended March 31, 2003 and 2002, we recognized compensation expense of approximately $0.2 million and $0.7 million, respectively, relating to stock options granted with exercise prices less than the market price on the date of grant. 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:

          The effect of applying SFAS No. 123 for providing these pro forma disclosures is not necessarily representative of the effects on reported net income (loss) in future periods.

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          The fair value of our stock-based option awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

Recent Accounting Pronouncements

          In June 2001, the FASB issued SFAS 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 adopted this statement effective January 1, 2003 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 Emerging Issues Task Force 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 a fter December 31, 2002. We applied the provisions of this Statement in accounting for our restructuring activities during the three months ended March 31, 2003. See Note 6 for a discussion of our restructuring activities.

          In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on our results of operations and financial condition.

          In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” which clarifies disclosure, recognition and measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition and measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. We typically grant our customers a warranty that guarantees that our product will substantially conform to our current specifications for 90 days from the delivery date. We also indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to these guarantees have not been significant and we are unable to estimate the potential impact of these guarantees on our future results of operations.

     3.     GOODWILL AND OTHER INTANGIBLE ASSETS

          At March 31, 2003, our other intangible assets consisted of the following:

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          We recorded amortization expense of $4.7 million and $3.4 million during the three months ended March 31, 2002 and 2003, respectively. We estimate aggregate amortization expense for 2003 and the next four calendar years to be as follows (in thousands):

          The changes in the carrying value of our goodwill for the three months ended March 31, 2003 are as follows:

          In April 2003, we terminated our efforts to divest the Edify business. We considered our inability to sell the Edify business on terms that were acceptable to us a triggering event under SFAS No. 142 and 144 that required us to perform a current assessment of the carrying value of the Edify business. Based on our current analysis of fair value for the Edify business, including estimates we based on discounted future cash flows, market valuations of comparable businesses and offers from potential buyers, we concluded that the fair value of the Edify business was less than its carrying value. Accordingly, we allocated our estimate of fair value for the unit to the existing assets and liabilities of the Edify business as of March 31, 2003, resulting in a goodwill impairment charge of $11.7 million and accelerated amortization on other intangible assets (developed technology and customer base) and purchased software of $1.2 million and $0.5 million, respectively.

     4.     STOCKHOLDERS’ EQUITY

          In July 2002, our board of directors approved a $10.0 million stock repurchase program. We completed this program in January 2003. As of March 31, 2003, we hold 2,051,862 shares of our common stock in treasury at a cost of $10.0 million.

     5.     COMPREHENSIVE LOSS

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

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     6.     MERGER RELATED COSTS AND RESTRUCTURING CHARGES

	Components of merger related and restructuring costs are as follows (in thousands):

          During the three months ended March 31 2002, we incurred merger related costs of $3.7 million in connection with the acquisition of the assets and subsidiaries of Point Holdings, Ltd. These costs, incurred in connection with our plan to reorganize certain of our European operations, include headcount reduction, consolidation of S1 and acquired Point office facilities and disposal of redundant or obsolete computer equipment. This merger related charge was partially offset by a $1.7 million decrease in reserves for legal claims, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve this legal matter during the first quarter of 2002 for less than previously estimated.

          During the three months ended March 31, 2003, we began consolidating our U.K. data center operations into our global hosting center in Atlanta, resulting in restructuring charges of $2.3 million comprised of accelerated depreciation of assets, severance costs and other related costs. In addition, we provided $6.3 million for losses on unused office facilities vacated as a result of cost alignment activities and recorded other restructuring charges including severance associated with a work force reduction in our financial institutions and Edify business operations as well as other corporate charges. In total, we reduced our workforce by approximately 80 people. Additionally, we decreased our reserve for legal claims by $0.5 million, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve this legal matter during the first quarter of 2003 for less than previously estimated.

          The restructuring reserves as of December 31, 2002 and March 31, 2003 and their utilization for the three months ended March 31, 2003 are summarized as follows:

          We expect to make future cash expenditures, net of anticipated sublease income, related to these restructuring activities of approximately $10.5 million, of which we anticipate to pay approximately $5.3 million within the next twelve months.

     7.     CONTINGENCIES

          Except as noted below, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which S1, or any of its subsidiaries is a party or which their property is subject.

•

S1 Corporation and its subsidiary Davidge Data Systems, Inc. are involved in litigation with Scottrade, Inc. and an affiliate company, Computer Research, Inc., relating to a software development project. The action was initially filed in March 2002 in the U.S. District Court for the Eastern District of Missouri. The plaintiffs filed amended complaints in November of 2002 and January of 2003. The plaintiffs have made a claim for a refund of all amounts

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			paid to S1 and Davidge as well as all damages flowing from the dispute, including service bureau expenses incurred because of the allege failure to perform, the sum of which could exceed a million dollars. S1 and Davidge have filed a counterclaim for unpaid amounts under the contract. We believe the plaintiffs’ claims are not meritorious and intend to vigorously defend the suit.
	•		S1 Corporation is involved in litigation with Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the Southern District of New York. The action was filed in March 2003 against S1 Corporation, Bank of America Corporation and Bank of America National Association. We believe that the plaintiff’s claims are not meritorious and intend to vigorously defend the suit.

          While we do not believe that any of the above matters or any other pending litigation will be material to our financial position or results of operations, there can be no assurance on the ultimate outcome of these matters.

     8.     SEGMENT REPORTING AND MAJOR CUSTOMERS

          We operate and manage S1 in two business segments: financial institutions and the Edify business. The financial institutions segment develops, markets and implements integrated, transactional and brandable enterprise applications for financial institutions worldwide, available as an in-house or hosted solution. The Edify business segment provides a variety of CRM applications that allow organizations in various industries to automate, integrate, personalize and analyze interactions with customers across touch points such as phone, web, wireless, email, fax and kiosk.

          We evaluate the performance of our operating segments based on their contribution before interest, other income (expense) and income taxes, as reflected in the tables presented below for the three months ended March 31, 2003 and 2002. We do not use any asset-based metrics to measure the operating performance of our segments.

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          Currently, we have two major customers in the financial institutions segment (defined as those customers who individually contribute more than 10% of total revenues). We derived 24% and 27% of our financial institutions segment revenues from State Farm Mutual Automobile Insurance Company during the three months ended March 31, 2003 and 2002, respectively.

          The other major customer, Zurich Insurance Company and certain of its affiliates or subsidiaries, accounted for 18% and 20% of our revenues from the financial institutions segment during the three months ended March 31, 2003 and 2002, respectively.

          In March 2003, we amended the terms of our data center arrangement with Zurich to shorten the term over which revenue will be recognized and payments received. Revenue from the data center contract, which would have been recognized ratably throughout 2003 and 2004, will be recognized in the first six months of 2003. Associated direct costs will be accelerated over that same period as well.

          During the three months ended March 31, 2003, we reported data center revenue of $2.8 million for data center services provided to Zurich. We expect to report data center revenue of $5.9 million for data center services provided to Zurich during the quarter ending June 30, 2003. Under the terms of the amended agreement, we expect to receive all of the data center payments from Zurich by July 31, 2003. We do not expect to report any data center revenue for Zurich after the quarter ending June 30, 2003. Total costs associated with Zurich were approximately $1.4 million, including costs of good sold and depreciation and do not include any allocation of management or administration expenses, during the three months ended March 31, 2003. We expect total costs associated with Zurich to be approximately $1.2 million during the quarter ending June 30, 2003.

          Our subscription license and professional services components of our arrangement with Zurich were not affected by the data center contract amendment. We are recognizing $8.2 million of subscription licenses each quarter through December 31, 2003 at which time the subscription license will terminate with no further expected revenue. Costs associated with this subscription license are limited to costs to bill and administer the contract monthly.

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     9.     NET LOSS PER COMMON SHARE

          We calculate basic net loss per common share as the loss available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common stock that would share in the earnings of S1. Because of our net losses, the issuance of additional shares of common stock through the exercise of stock options or stock warrants or upon the conversion of preferred stock would have an anti-dilutive effect on our net loss per share. The total number of common shares that would have been included in our computation of diluted loss per share if they had been dilutive is as follows (in thousands):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          This quarterly report contains forward-looking statements and information relating to our subsidiaries and us. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on the beliefs of management as well as assumptions made using information currently available to management. Because these statements reflect the current views of management concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. You are urged to read the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

          The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere herein and in our Annual Report on Form 10-K for the year ended December 31, 2002.

Overview

          We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring data center revenues by charging our data center customers a monthly fixed fee or a fee based on the number of their end users who use the solutions we provide, subject to a minimum charge. We also generate recurring revenues by charging our customers a periodic fee for maintenance. We operate and manage S1 in two business segments: financial institutions and the Edify business.

          Within our financial institutions business, we generate revenues from two principal product groups: S1 Enterprise (or multi-channel) financial solutions and single channel solutions. We define S1 Enterprise revenue as those fees that we earn from sales of our S1 Enterprise applications, such as S1 Personal Banking or S1 Business Banking, as well as fees that we earn from customers who have signed an S1 Enterprise agreement. Revenues from non-S1 Enterprise single channel financial solutions represent fees that we earn from customers who only use one of our legacy channel solutions. Our strategy is to upgrade a significant number of our customers to the S1 Enterprise platform and cross sell and/or up sell additional channel applications to our installed base of customers to migrate them to an S1 Enterprise solution. During the three months ended March 31, 2003 and 2002, we recorded revenue of $15.4 million and $2.4 million, respectively, from our S1 Enterprise solutions. In future periods, we expect revenues from our S1 Enterprise solutions to increase as a percentage of our total revenues.

          We sell our solutions to small, mid-sized and large financial organizations in three geographic regions: (i) the Americas region, (ii) the Europe, Middle East and Africa region (EMEA) and (iii) the Asia-Pacific and Japan (APJ) region. Our S1 Enterprise solutions target banks, credit unions and insurance companies in the Americas region and banks and credit unions in the EMEA and APJ regions. We earned a significant portion of our revenues and profits in 2003 and 2002 from two large financial institution customers. In connection with our acquisitions of Software Dynamics, Inc. (September 2001), Regency Systems, Inc. (February 2002) and the assets and subsidiaries of Point Holdings, Ltd., (March 2002), we have significantly increased the number of our financial institution customers to over 4,000. Most of these financial institution customers are mid-sized and regional financial institutions. As a result, we expect that a greater percentage of our future revenues will be earned from mid-sized and regional financial institutions. While we expect to generate a considerably higher number of contracts each year from small to mid-sized financial institutions, the average contract value and, therefore, margin contribution from each such contract will be significantly lower than the contracts from the two large financial institution customers.

          Currently, we have two major customers (defined as those who individually contribute more than 10% of total revenues) in the financial institutions segment. Revenues from State Farm Mutual Automobile Insurance Company were 24% and 27% of our financial institution revenues during the three months ended March 31, 2003 and 2002, respectively. The revenue from State Farm for the three-month period ended March 31, 2003 decreased $2.5 million from the same period in 2002 due to a decrease in projects performed for them in 2003. We expect that professional services revenues from State Farm will continue to decrease throughout fiscal 2003. Revenues from State Farm accounted for 21% and 23% of our total revenues during the three months ended March 31, 2003 and 2002, respectively.

          Zurich Insurance Company and certain of its affiliates or subsidiaries, accounted for 18% and 20% of our revenues from our financial institutions segment during the three months ended March 31, 2003 and 2002, respectively. Revenues

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from Zurich accounted for 17% of our total revenues during both of the three-month periods ending March 31, 2003 and 2002.

          In March 2003, we amended the terms of our data center arrangement with Zurich to shorten the term over which services will be provided and payments received associated with the provision of data center services by S1. Revenue from the data center contract, which would have been recognized ratably throughout 2003 and 2004 under the previously amended terms of the agreement, will be recognized in the first six months of 2003. Associated direct costs will be accelerated over that same period as well.

          During the three months ended March 31, 2003, we reported data center revenue of $2.8 million for data center services provided to Zurich. We expect to report data center revenue of $5.9 million for data center services provided to Zurich during the quarter ending June 30, 2003. We do not expect to report any data center revenue for Zurich after the quarter ending June 30, 2003. Total costs associated with Zurich were approximately $1.4 million, including costs of goods sold and depreciation and do not include any allocation of management or administration expenses, during the three months ended March 31, 2003. These costs do not include costs associated with the close of our U.K. data center facility. The closure of our U.K. data center was directly affected by the early completion of the data center contract. The costs are recorded as restructuring costs in the first and second quarter of 2003.

          Through the Edify business unit, we provide a variety of CRM applications that allow organizations in various industries to automate, integrate, personalize and analyze interactions with customers across touch points such as phone, web, wireless, email, fax and kiosk.

          We continually review our cost structure on a worldwide basis and consider additional ways to streamline our operations. During the three months ended March 31, 2003, we began consolidating our U.K. data center operations into our global hosting center in Atlanta, resulting in restructuring charges of $2.3 million comprised of accelerated depreciation of assets, employee severance and other related costs. In addition, we provided $6.3 million for losses on unused office facilities, employee severance and other costs associated with a work force reduction in our financial institutions and Edify business operations. During the remainder of 2003, we expect to reduce our annual operating expenses by as much as $35 million in order to align our cost structure with our anticipated revenues.

Comparison of the Three Months Ended March 31, 2003 and 2002

          Revenues. The following table sets forth our revenue data for the three months ended March 31, 2003 and 2002.