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EX-23.1 - EXHIBIT 23.1 - S1 CORP /DE/ | c14026exv23w1.htm |
EX-31.2 - EXHIBIT 31.2 - S1 CORP /DE/ | c14026exv31w2.htm |
EX-21.1 - EXHIBIT 21.1 - S1 CORP /DE/ | c14026exv21w1.htm |
EX-31.1 - EXHIBIT 31.1 - S1 CORP /DE/ | c14026exv31w1.htm |
EX-10.17 - EXHIBIT 10.17 - S1 CORP /DE/ | c14026exv10w17.htm |
EX-10.16 - EXHIBIT 10.16 - S1 CORP /DE/ | c14026exv10w16.htm |
EX-32.1 - EXHIBIT 32.1 - S1 CORP /DE/ | c14026exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - S1 CORP /DE/ | c14026exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
o | 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 | 58-2395199 | (404) 923-3500 | ||
(State or other jurisdiction of | (I.R.S. Employer | (Registrants telephone number | ||
incorporation or organization) | Identification No.) | including area code) |
705 Westech Drive | ||
Norcross, Georgia | 30092 | |
(Address of principal executive offices) | (Zip Code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | The Nasdaq Stock Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definition of large accelerated
filer accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the Companys voting common stock held by non-affiliates of the
registrant on June 30, 2010 (the last business day of the registrants most recently completed
second fiscal quarter), based upon the last sale price of the common stock on that date of $6.01,
and was $309.2 million. For purposes of this calculation, executive officers, directors and holders
of 10% or more of the outstanding shares of the registrants common stock are deemed to be
affiliates of the registrant.
Shares of common stock outstanding as of February 17, 2011: 53,391,860
Documents Incorporated by Reference
Portions of S1 Corporations definitive proxy statement for the annual meeting of
shareholders to be held on or about May 24, 2011 is expected to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A which the registrant intends to file no later than
120 days after December 31, 2010 are incorporated herein by reference into Part III of this Annual
Report on Form 10-K.
S1 CORPORATION
FOR THE YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
FOR THE YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
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Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I
This annual report on Form 10-K and the documents incorporated into this annual report on Form
10-K by reference contain forward-looking statements and information relating to our subsidiaries
and us within the safe harbor provisions of the Private Securities Litigation Reform Act. These
statements include statements with respect to our financial position, results of operations and
business. The words believes, expects, may, will, should, projects, contemplates,
anticipates, forecasts, estimates, intends or similar terminology identify forward-looking
statements. Forward-looking statements may include projections of our revenue, revenue backlog,
expenses, capital expenditures, earnings per share, product development projects, future economic
performance or management objectives. 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 under
the caption Risk Factors in Item 1A of Part I of this report. 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. When we use the terms S1 Corporation, S1, Company, we,
us and our, we mean S1 Corporation, a Delaware corporation, and its subsidiaries.
Item 1. | Business. |
General Information
S1 Corporation is a leading global provider of payments and financial services software
solutions. We offer payments solutions for ATM and retail point-of-sale (POS) driving, card
management, and merchant acquiring, as well as financial services solutions for consumer, small
business and corporate online banking, trade finance, mobile banking, voice banking, branch and
call center banking. We sell our solutions primarily to banks, credit unions, retailers and
transaction processors. We also provide software, custom software development, hosting and other
services to State Farm Mutual Automobile Insurance Company (State Farm), a relationship that we
expect will conclude by the end of 2011.
Founded in 1996, we started the worlds first Internet bank Security First Network Bank. In
1998, we sold the banking operations and focused on software development, implementation and
support services. For several years, our core business was primarily providing Internet banking and
insurance applications. Then, through a series of strategic acquisitions and product development
initiatives, we expanded our solution set to include applications that deliver financial services
across multiple channels and provide payments and card management functionality.
Our vision is to be the leading global provider of payments and financial services software
solutions. The key initiatives supporting this vision are to:
| Maintain the highest possible level of customer satisfaction to create opportunities to sell additional solutions and services; |
| Cross-sell applications from our payments and financial services solution sets; |
| Become the most efficient software company possible through continuous operational improvements; |
| Deliver innovative, quality products and services to meet current market demands and future customer needs; and |
| Broaden our product offerings and increase our market penetration through selective acquisitions and the development of new markets. |
Descriptions of our Software Solutions
S1 Payments Processing and Card Management
| ATM Driving drives a wide array of ATM terminals, whether dial-up, leased line, or advanced-functionality devices. Our solution for ATM owners manages online connections to networks, card schemes, and host systems, and provides sophisticated performance monitoring, back office functionality and management information. The solution supports magnetic stripe and EMV cards as well as a comprehensive set of value-added transactions and services. |
| Retail Payments drives fast, cost-effective, and secure payment card processing for retailers, gift card management, merchants and e-commerce operators, enabling all aspects of a payment transaction, from the POS through to the authorizer. |
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| Card Management supports secure issuance and life cycle management for credit, debit and prepaid cards and provides extensive authorization and validation services, personal identification number management and management information. Our solution supports magnetic stripe, EMV, contactless and instant issuance options. |
| Merchant Acquiring provides a comprehensive processing platform for handling card payment transactions generated at multiple sales channels including the POS, Internet, call center and mobile phone. A wide variety of card and transaction types are supported including EMV, prepaid and contactless. |
S1 Online Banking
| S1 Consumer Online Banking allows our customers to offer online banking capabilities, including personal finance management, electronic bill payment and presentment, account transfers, alerts and reminders, and online self-service tools. We provide bill-pay services from either our in-house bill pay solutions or through third-party partnerships. |
| S1 Business Online Banking provides online financial solutions suited for small to mid-market business banking customers. Our software allows our financial institution customers to offer product packages that can satisfy an array of business customer segments with such features as account management and enhanced reporting, payments, foreign exchange and self-service features, including the ability to open new accounts online, report lost cards, reset passwords, stop payments, reorder checks, request check copies, and create electronic alerts. |
| S1 Corporate Banking provides online cash management solutions to some of the worlds largest banks. S1 Corporate Banking is built in a multilingual and multi-currency framework and delivers diverse payment methods, multi-factor authentication capabilities, electronic file delivery, check services, robust information reporting, real-time data on account balances and transactions as well as straight-thru processing on payments from the Automated Clearing House (ACH) to Fedwire to the Society for Worldwide Interbank Finance Telecommunication (SWIFT). |
| S1 Trade Finance provides online trade finance solutions to some of the worlds largest banks. S1 Trade Finance allows a banks customers to quickly and easily manage their international buying and selling activities with one integrated system to create, process and report on trade instruments such as letters of credit, collections, and open account transactions. |
| S1 Mobile Banking and Payments provides the ability for consumers and businesses to access and manage bank account information and perform financial transactions via the convenience of a mobile device. S1 Out-of-Band Authentication provides security against phishing and keystroke-logging attacks to mobile phones. |
| S1 Voice Banking delivers a full range of voice banking functionality, including online and offline transaction processing, call-flow management, and voice driver management. |
S1 Branch Banking
| S1 Teller enables front-line teller employees to perform tasks from a single screen using workflow processes that simplify and enforce adherence to a financial institutions business rules. Efficient workflows also create opportunities for tellers to promote new products and make referrals. |
| S1 Sales and Service Platform provides transaction functionality and embedded relationship management tools along with a universal desktop for instant, real-time access to complete customer and account data. S1 Sales and Service provides tools such as case and lead management, portfolio management and pipeline management and can fill the need for a branch automation, sales force automation and customer relationship management system at the same time in one seamless desktop. |
| S1 Call Center is a fully integrated call center solution that offers workflows, transactions and core services that meet the specialized needs of the call center environment. In addition to the core services found in the teller and sales and service platform, S1 Call Center provides the customer information, sales and service capabilities, process flows, reporting, and fulfillment management functionality that is typically found in call center operations. |
| S1 Lending provides a highly configurable and robust consumer, business and credit origination software solution that delivers straight-through processing control from application through loan booking, with support for multiple data entry channels. The software is differentiated in part through its ability to deliver broad application-level strength in each area of lending through a universal platform, which provides operational and administrative consistency and control. |
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Reporting Segments
Since the first quarter of 2010, when we changed our reporting segments, we have operated and
managed S1 in three business segments: Payments, Banking: Large Financial Institution (Banking:
Large FI), and Banking: Community Financial Institution (Banking: Community FI). We separate
our banking businesses based on the size of the financial institution we sell to as the solutions
and related services required by each can differ in complexity and the length of the implementation
cycle. Segment information for periods prior to the first quarter of 2010 has been restated to
reflect the change in composition of our reportable segments.
| The Payments segment provides our ATM and POS driving, card management, and merchant acquiring solutions to financial institutions, retailers and transaction processors of all sizes globally. |
| The Banking: Large FI segment provides consumer, small business and corporate online banking, trade finance, and mobile banking solutions to large banks globally, branch and call center banking solutions to large banks outside of the United States, and also supports our business with State Farm (which we expect will conclude by the end of 2011). |
| The Banking: Community FI segment provides consumer and small business online banking, mobile banking, voice banking, branch and call center banking solutions to community and regional banks and credit unions in the United States. |
Acquisitions
On March 4, 2010, we acquired 100% of the outstanding shares of PM Systems Corporation
(PMSC), a provider of Internet banking, bill payment and security services to credit unions in
the United States. PMSC provides us with additional financial services solutions and expands our
presence in the credit union marketplace. We paid approximately $29.2 million, net of cash
acquired, for PMSC and funded the acquisition from our available cash on the acquisition date.
PMSCs results of operations are included in our Banking: Community FI segments results of
operations from March 4, 2010.
In support of establishing an office in Latin America, on August 26, 2010, we acquired certain
assets of, and hired certain employees from, a company that resold our products in Latin America
(the Reseller). We paid approximately $1.9 million, net of cash acquired, for the Reseller and
funded the acquisition from our available cash on the acquisition date. The Resellers results of
operations are included in our Payments segments results of operations from August 26, 2010.
Industry Background
There are many global factors influencing the competitive environment for financial
institutions and retailers including:
| economic conditions and particularly the impact of the lack of liquidity in credit markets; |
| pressure to grow their businesses; |
| pressure to reduce costs; |
| impact of mergers and acquisitions; |
| pressure on customer retention and better use of customer data; |
| increasing electronic payment transaction volumes; |
| increased security concerns and regulatory requirements; and |
| the need to minimize information technology and infrastructure costs while meeting the ever-rising consumer expectations for customer service and convenience. |
We believe that the above factors are influencing financial institutions and retailers to look
for new ways to effectively service and sell to their customers through all of their interaction
channels, including their physical locations, the Internet, telephone, ATM, POS, mobile phone and
call center.
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Financial institutions can more cost-effectively grow their businesses by cross-selling
additional products and services to existing customers. This is difficult to do if they are not
able to understand the needs of their customers and customer segment behavior and intelligently
market services and products to these customers. Our financial services solutions are designed to
not only provide financial institutions with greater insight into customer data, but also into
customer transaction behavior.
As new channels for delivering financial services were introduced, many financial institutions
took a tactical approach in expanding their offerings, incrementally adding these new channels as
they fit in with their evolving business plans. Each channel functioned independently, with
limited, if any, interactions and knowledge of the customer interactions occurring in the other
channels. This infrastructure, which features disparate vendors and technologies, has become too
expensive for many institutions to support and too inefficient for consumers and businesses to
utilize as a basis for interacting with their financial institution.
By implementing multiple applications on a single technology platform the long-term value
proposition for many of our solutions financial institutions are able to reduce the number of
technology platforms, interfaces and administrative resources associated with supporting their
operations. We believe that financial institutions which provide a unified experience for their
customers across multiple points of interaction, delivered at the lowest possible cost, will gain a
key competitive advantage.
In addition to these broad industry drivers, there are other catalysts that are driving new
technology purchase decisions by financial institutions including increased regulatory requirements
such as those in the areas of identity theft prevention, Check 21 legislation, anti-money
laundering, and in the European Union, the conversion to the Single Euro Payments Area. Many
internally developed systems or older systems either do not support these requirements or require a
costly investment to bring those systems into compliance. Additional security requirements are
expected for high risk transactions.
Retailers face constant pressure to become more efficient in order to protect and improve
their margins in an increasingly competitive environment. Current economic conditions are
amplifying this pressure and creating additional focus by retailers on how to process payments at
the POS in their stores, via the Internet and with mobile devices in a more cost-effective manner.
Retailers can realize significant savings by using our software to acquire and route payments
initiated in their stores, on the Internet and through other delivery channels. In addition, our
software also provides additional back office functionality that can improve operational
efficiencies. Lastly, for retailers who prefer outsourcing their payments processing, we offer a
hosting solution which allows them to utilize the functional strength of our solution without
requiring additional staff to manage an on-premise implementation.
There are also a variety of factors, both global and territory/country-specific, that
influences the competitive marketplace for our payments processing and card management solutions.
One of the primary drivers is security concerns which have given rise to an increase in regulatory
requirements and security enhancements, such as the Payment Card Industry Data Security Standard
(PCI-DSS) and Visas Payment Application Best Practices. We believe this increase in security
concerns and the associated regulatory requirements can cause organizations in the payments space
to consider replacing their existing legacy payments platforms, including in-house systems, which
are generally more expensive to maintain from a compliance perspective.
Another factor influencing the competitive marketplace is that a large proportion of payments
systems are still based on legacy and/or proprietary technology and organizations are increasingly
under pressure to adopt modern, open-system payments platforms to reduce the costs associated with
operations, management and maintenance. In line with the pressure to reduce costs, organizations
with payments platforms are also continually looking for opportunities to increase revenue by
adding new payment channels and accepting new payment methods. Additionally, a significant number
of developing countries are rapidly adopting electronic payments instruments in lieu of cash which
not only provides opportunities for new payments systems, but also for additional infrastructure to
keep pace with the growth in transaction volumes and the demand for new payments channels and
instruments.
We believe these factors are examples of initiatives that are influencing the decision on the
part of organizations of all sizes to consider new solutions to help them increase revenue
opportunities, improve customer loyalty, reduce costs and comply with regulatory requirements. We
believe our solutions can help address these needs.
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Customers and Revenue
We derive a significant portion of our revenue from licensing our solutions and providing
professional services. We generate recurring revenue from support and maintenance, hosting
applications in our data center, and from electronic bill payment services. We also generate
recurring revenue by charging our customers a periodic fee for term licenses including the
right-to-use the software and receive maintenance and support for a specified period of time. For
certain customers, this fee includes the right to receive hosting services. We reported revenue of
$209.1 million, $238.9 million and $228.4 million in 2010, 2009 and 2008, respectively. Our
revenue attributed to sales in the United States as compared to total reported revenue was 72% for
the years ended December 31, 2010, 2009 and 2008.
We have one customer that accounts for over 10% of our total revenue. Revenue from State Farm
was 12%, 16% and 18% of our consolidated revenue and 26%, 30% and 33% of our Banking: Large FI
segment revenue during the years ended December 31, 2010, 2009 and 2008, respectively. In 2008, we
announced that we expected our relationship with State Farm to conclude by the end of 2011. We
generated $25.2 million of revenue in 2010 from State Farm and expect to generate approximately $16
- $17 million in revenue in 2011 from this customer.
Refer to the notes of our consolidated financial statements for a further discussion of the
various types of revenue, revenue recognition policies, and financial information regarding segment
reporting and geographic areas.
Revenue Backlog
Our estimated revenue backlog includes revenue for software licenses including term licenses,
professional services, and hosting services, as specified in executed contracts that we believe
will be recognized in revenue over the next twelve months. The portion of the estimated revenue
backlog from our Banking: Large FI segment does not include revenue associated with the State Farm
business which is expected to conclude by the end of 2011, or with the custom development project
for an international branch customer, which is expected to decrease as the project winds down. As
our Banking: Community FI segment primarily generates recurring revenue for support and maintenance
and hosting, we do not believe that disclosing revenue backlog for this part of our business
provides additional useful information. As of December 31, 2010 and 2009, our estimate of revenue
backlog was $62.8 million and $39.2 million, respectively.
We believe that presenting this estimate provides supplemental information and an alternative
presentation useful to investors understanding trends in our business including the shift we have
been experiencing toward recognizing more software license revenue using the percentage of
completion method. However, our estimated backlog is based on a number of assumptions and is
subject to a number of factors, many of which are completely outside of our control. Please see
Part I, Item 1A. Risk Factors for further discussion of the risks and uncertainties associated
with the disclosed amount of revenue backlog; for further discussion of our accounting policies,
see Note 1 to our consolidated financial statements in Item 8. Financial Statements and
Supplementary Data.
Sales and Marketing
Each business segment maintains dedicated sales forces that are focused on product sales for
their specific solutions to their target markets. Within each segment are trained sales support
personnel and solutions architects who provide functional and technical expertise to maximize the
customers understanding of our solutions. The sales cycle for our payments solutions, which
target financial institutions and retailers of all sizes, generally lasts from six to 18 months and
is typically facilitated by direct sales teams. The sales cycle for large financial institutions
generally lasts from six to 18 months and is typically facilitated by direct sales teams. Sales to
community and regional banks and credit unions are typically facilitated by both direct and
telephone-based sales teams and the sales cycle generally lasts from six to nine months. We also
have relationships with resellers that act as an indirect channel to expand our market penetration,
primarily for our payments and branch banking solutions.
In North America, we primarily utilize direct sales teams that call on financial institutions,
processors and retailers to identify sales opportunities, while in Latin America we mostly utilize
both direct sales teams and resellers. Our Banking: Community FI segment also utilizes resellers
for its branch banking solutions. Our sales teams are organized by product lines and call on
existing customers and new prospects for first time sales and for cross-selling new and add-on
applications and services. Our sales teams are responsible for the relationship with their assigned
customers, including customer satisfaction, product and service delivery, and cross-selling new and
add-on applications and services. Additionally, we have dedicated client service personnel in place
for our larger customers to further support the relationship.
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In the Europe and Middle East region, we utilize a combination of direct sales teams and
resellers depending on the specific country in the region. In Africa, we sell our products through
resellers except in South Africa where we sell on a direct basis. In the Asia-Pacific region, our
sales efforts are focused primarily with direct sales into Thailand, Singapore, Australia and New
Zealand, while the rest of Asia-Pacific is generally covered by resellers.
In addition to internal sales efforts and joint efforts with distribution partners, we market
our products and services in other ways to build awareness of our brands. Our marketing efforts
include the use of online marketing, direct marketing, telemarketing, special events, public
relations, memberships in key industry organizations, participation in industry conferences, and
establishing relationships with industry analysts to help drive demand for our solutions as well as
guide product development and marketing efforts.
We have built a global network of alliances, allowing us to more fully extend our expertise,
capabilities, and reach within the markets we address. We have established strategic, technology,
and channel relationships with a number of organizations. We have relationships with companies such
as IBM, Microsoft and core processing vendors such as Fiserv, Inc., Fidelity National Information
Services, Inc. and Jack Henry & Associates, Inc. We also have relationships with key technology
providers, including bill payment providers, credit card processing vendors, retail POS vendors,
and printed product vendors.
Services
In addition to licensing software, we provide a broad array of services to meet the needs of
our customers. The services include planning, project management, implementation, integration and
customization of customer software applications, ongoing maintenance and support and application
hosting.
Professional Services. Our professional services teams facilitate the implementation and
customization of our software solutions. Our professional services organizations are engaged in the
following activities:
| Project Management our project managers are responsible for the oversight of services projects throughout the implementation cycle; |
| Implementation our professional services teams install and configure our software; |
| Custom Software Development our software developers customize our software solutions to meet the specific business requirements of our customers; |
| Integration we assist our customers in integrating and testing our software with core banking systems and other applications within their environment; |
| Educational Services our training professionals help our customers train their employees to use our solutions to better serve their customers; and |
| Web Design Services our web design group assists with the delivery of a complete web presence for financial institutions. |
Customer Support. Our customer support teams offer various levels of service to meet an
organizations support needs including technical support for our products, software release
management and online support from our support website.
Hosting Services. Our hosting services provide systems outsourcing, data center hosting,
operational management and control across the full range of personal, small business and corporate
Internet banking, mobile, voice, and payments processing applications. We host S1 applications for
our global and international customers in our data center facility in Norcross, Georgia. Our
operating environment was designed to address mission-critical operations, such as security,
recovery and availability of data. Our data center is a hardened facility that can scale to
support large volumes of customers.
Competition
The market for payments and financial services software solutions is competitive, rapidly
evolving and subject to technological change. We currently perceive our near-term competition as
coming from three primary areas: (1) financial institutions proprietary in-house development
organizations, (2) single-point solution vendors, and (3) core processing vendors.
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In-house Development Organizations. Some financial institutions conduct a significant portion
of their software development in-house while others have chosen to outsource to third-party
vendors. Generally, only very large organizations
have the ability to develop solutions internally. We believe financial organizations may
encounter the following challenges when developing financial software in-house:
| building, maintaining and upgrading an in-house solution can be very costly and may lack an industry-wide best practices approach; |
| attracting and retaining the necessary technical personnel can be difficult and costly; |
| the cost of and skills required to maintain regulatory compliance can prove onerous; |
| the development of third party partnerships necessary to support the primary software product can be time consuming, costly, and require a partner management infrastructure; and |
| technological development may be too far outside the financial organizations core competencies to be effective or successful. |
Single-Point Solution Vendors. These vendors offer solutions for a specific line of business
and/or channel. In the online consumer and business banking space, we compete primarily with
Digital Insight (a division of Intuit Inc.), Financial Fusion (a division of Sybase Inc.),
Corillian Corporation (a division of Fiserv, Inc.), and Q2 Software. In the corporate banking
space, we compete primarily with Fundtech Ltd., ACI Worldwide, Inc., Clear2Pay and Bottomline
Technologies. In branch banking, we compete primarily with Argo Data Resource Corporation and
Fidelity National Information Services, Inc. In the payments processing and card management space,
we compete primarily with ACI Worldwide, Inc. We believe the disadvantages associated with
single-point solution providers include:
| integrating applications and channels from multiple vendors may greatly lengthen a financial organizations time-to-market and implementation costs; |
| managing relationships with multiple vendors may be more time consuming and require greater management infrastructure; |
| operating, supporting and upgrading solutions from multiple vendors can be more costly; and |
| combining solutions across different channels generally does not provide a single view of the customer. |
Core Processing Vendors. These vendors offer data processing services and outsourcing for
financial institutions systems of record. In this space, we compete with companies such as
Fidelity National Information Services, Inc., Fiserv, Inc. and Jack Henry and Associates, Inc. A
number of these companies offer front office products within a packaged pricing scheme integrated
with their core back office capabilities. We believe the primary disadvantage of this approach is
that these front office applications will generally lag behind the market to some degree in terms
of functions and features and are of a secondary focus to the vendor behind their data processing
and other back office products and services. Although we are in competition with core processing
vendors, we do partner with certain core processing vendors for bill-pay services.
Product Development
As software and related services are influenced by rapid technological changes, customer needs
and regulatory requirements, we continue to invest in the development of enhancements to existing
solutions and new product solutions. We employ best practices from well-known enterprise software
companies to help ensure that the entire organization products, services, delivery and support
is ready to successfully and repeatedly deliver products to the market and focus on customer
success. We utilize resources from locations in the United States, Europe, South Africa and India
for product development, support and implementation services. We develop most of our solutions
internally and spent $35.5 million, $34.6 million and $29.3 million on product development efforts
in 2010, 2009 and 2008, respectively.
We continue to expand our payments solutions to meet the growing demand around the world. We
continue to expand our product functionality across all channels to support demand for new
enhancements and customizations to better support our customers and address sales opportunities. We
also expect to continue to focus significant product development efforts updating the technology
platforms for several of our solutions.
Government and Industry Regulation
As a service provider to financial institutions, we are subject to examination and are
indirectly regulated by the Office of the Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, National Credit Union Association and the various state financial regulatory agencies
that supervise and regulate the banks, credit unions and thrift institutions for which we provide
data processing services. Matters subject to review and examination by federal and state financial
institution regulatory agencies include our internal controls in connection with our performance of
data processing services, the agreements giving rise to those processing activities, as well as
certain design specifications of our software licensed to financial institutions.
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Laws and industry regulations that apply to communications, commerce and payments over the
Internet are becoming more prevalent. Currently, there are Internet laws regarding copyrights,
taxation and the transmission of specified types of material. Congress also adopted legislation
imposing obligations on financial institutions to notify their customers of the institutions
privacy practices, restrict the sharing of non-public customer data with non-affiliated parties at
the customers request, establish procedures and practices to protect and secure customer data,
establish fraud detection capabilities for customer transactions and notify customers of data
breach incidents. These privacy provisions are implemented by regulations with which compliance is
required. Additionally, many legislative and regulatory actions have been enacted or are pending at
the state and federal level with respect to privacy. Further, we and our customers may be faced
with state and federal requirements that differ drastically, and in some cases conflict. In
addition, the European Union enacted its own privacy regulations and may in the future consider
other Internet-related legislation. Laws applicable to Internet based transactions remain
unsettled, even in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet. In addition, the growth and development of the market for
online financial services, including online banking, may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose additional burdens on
companies conducting business online. We also may be subject to encryption and technology export
laws, as well as industry regulations regarding credit card payments which, depending on future
developments, could adversely affect our business.
Employees
As of December 31, 2010, we had approximately 1,670 full-time employees, including 1,040 in
customer support, hosting services and professional services, 120 in sales and marketing, 360 in
product development, and 150 in general and administrative. Additionally, we use the services of
independent contractors, primarily for professional service projects and product development. We
believe that relations between the Company and its employees are satisfactory. Our success is
highly dependent on our ability to attract and retain qualified employees.
Patents, Trademarks, Copyrights, Licenses and Proprietary Rights
We rely on a combination of patent, copyright, trademark and trade secret laws and
confidentiality procedures to protect our proprietary technology and information. For a discussion
of certain risks associated with intellectual property, please refer to Risk Factors in Item 1A
of Part I.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) and 15(d) of the
Securities Exchange Act of 1934 are available free of charge at our website at www.s1.com on our
investors page as soon as reasonably practicable after we electronically file such materials with,
or furnish such materials to, the Securities and Exchange Commission (SEC). You may also obtain a
copy of any of these reports directly from the SEC. You may read and copy any material we file or
furnish with the SEC at their Public Reference Room, located at 100 F Street N.E., Washington, D.C.
20549. The phone number for information about the operation of the SEC Public Reference Room is
1-800-732-0330. Because we electronically file our reports, you may also obtain this information
from the SEC internet website at www.sec.gov. You can obtain additional contact information for the
SEC on their website. Additionally, you can request copies of our Annual Report on Form 10-K
without charge by contacting Investor Relations, S1 Corporation, 705 Westech Drive, Norcross,
Georgia 30092 or by calling 404-923-3500.
We also make available, on our website, the charters of our Audit, Compensation, Corporate
Governance and Nominating and Strategic Planning Committees, and our Code of Ethics.
Item 1A. | Risk Factors. |
You should consider carefully the following risks. If any of the following risks actually
occur, our business, financial position or results of operations would likely suffer. In that case,
the trading price of our common stock could decline, and you may lose all or a part of the money
you paid to buy our common stock.
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Our business, which depends heavily on revenue from customers in the banking and insurance
industries and other financial services firms, may be materially adversely impacted by volatile
U.S. and global market and economic conditions
For the foreseeable future, we expect to continue to derive most of our revenue from products
and services we provide to the banking and insurance industries and other financial services firms
and retailers. Given the concentration of our business activities in financial industries, we may
be particularly exposed to economic downturns in those industries. U.S. and global market and
economic conditions have been disrupted and volatile over the past several years. General business
and economic conditions that could affect us and our customers include fluctuations in debt and
equity capital markets, liquidity of the global financial markets, the availability and cost of
credit, investor and consumer confidence, and the strength of the economies in which our customers
operate. A poor economic environment could result in significant decreases in demand for our
products and services, including the delay or cancellation of current or anticipated projects, and
adversely affect our operating results. In addition to mergers and acquisitions in the banking
industry, we have seen an increased level of bank closures and government supervised consolidation
transactions. Our existing customers may be acquired by or merged into other financial
institutions that have their own financial software solutions, be closed by regulators, or decide
to terminate their relationships with us for other reasons. As a result, our sales could decline
if an existing customer is merged with or acquired by another company or closed. Additionally, our
investment portfolio is generally subject to credit, market, liquidity and interest rate risks and
the value and liquidity of our investments may be adversely impacted by U.S. and global market and
economic conditions including bank closures.
We expect that the revenue we generate from our largest customer, State Farm, will decrease as our
work efforts for them conclude by the end of 2011 which may cause our financial performance and our
stock price to suffer
State Farm accounted for 12%, 16% and 18% of our consolidated revenue and 26%, 30% and 33% of
our Banking: Large FI segment revenue during the years ended December 31, 2010, 2009 and 2008,
respectively. In 2008, we announced that we expected our relationship with State Farm to conclude
by the end of 2011. We generated $25.2 million of revenue in 2010 from State Farm and expect to
generate approximately $16 $17 million in revenue in 2011 from this customer. We can give no
assurance that we will be able to generate the foregoing revenue amounts from State Farm or that we
will be able to replace the revenue or associated gross margin from State Farm.
The delay or cancellation of a customer project, changes in project completion estimates, or
inaccurate project completion estimates, may adversely affect our operating results and cause our
financial performance to suffer
Any unanticipated delays in a customer project, changes in customer requirements or priorities
during the project implementation period, changes in project completion estimates, inaccurate
project completion estimates, or a customers decision to cancel a project, may adversely impact
our operating results and financial performance. When professional services are considered
essential to the functionality of our software, we record license and professional services revenue
over the project implementation period using the percentage of completion method, which is
generally measured by the percentage of labor hours incurred to date to estimated total labor hours
for each contract. The percentage of completion accounting method requires ongoing estimates of
the progress being made on complex and difficult projects and measuring this progress is subject to
potential inaccuracies and changes. Any inaccuracies or changes in estimates may lead to
significant changes to our financial results and adversely impact our operating results and
financial performance.
Security breaches or computer viruses could harm our business by disrupting our delivery of
services, damaging our reputation and business, or resulting in material liability to us
Our products and business may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. In the course of providing services to our customers, we may collect, store,
process or transmit sensitive and confidential financial information. Accordingly, it is critical
that our facilities and infrastructure remain secure. A security breach affecting us could damage
our reputation, deter organizations from purchasing our products, deter their end-user customers
from using our products, or result in material liability to us.
Privacy, security, and compliance concerns continue to increase. Security compromises,
including identity theft and fraud, could deter people from using electronic commerce services such
as ours. We may need to spend significant capital or other resources for compliance requirements
and protection against the threat of security breaches or to alleviate problems caused by security
breaches. Additionally, computer viruses could infiltrate our systems and disrupt our business. Any
inability to prevent security breaches, fraud or computer viruses could cause our customers to lose
confidence in our services and terminate their agreements with us, and could reduce our ability to
attract new customers or result in material liability to us.
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Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price
of our common stock
If we fail to meet the expectations of securities analysts or investors as a result of any
future fluctuations in our quarterly operating results, the market price of our common stock would
likely decline. We may experience fluctuations in future quarters because:
| implementation projects in our Payments and Banking: Large FI segments have been increasing in size, complexity and length and, in accordance with applicable accounting guidance, the software license revenue from these types of engagements is generally recognized over the implementation period (referred to as the percentage of completion method). We currently expect that the overall percentage of these types of engagements will increase over time and, as we shift to recognizing more software license revenue using the percentage of completion method, our current and near-term financial results may be negatively impacted; |
| software licenses and professional services revenue recognized under the percentage of completion method can vary from quarter to quarter due to the number and size of professional services projects, project scope changes, changes in estimates to completion, and project delays and cancellations; |
| we cannot accurately predict the value, number and timing of license or services agreements we will sign in a period, in part because the budget constraints and internal review processes of existing and potential customers are not within our control; |
| as we sell our products on both a perpetual license and a term or subscription license, we cannot accurately predict the mix of perpetual licenses to term licenses sold in any one quarter. Term licenses significantly reduce the amount of revenue recognized in the first year of the contract, but is intended to increase the overall revenue earned from the customer during the typical customer life cycle; perpetual license revenue can vary significantly on a quarterly basis; |
| the length of our sales cycle to large financial organizations generally lasts from six to 18 months, which adds an element of uncertainty to our ability to forecast revenue; |
| during our sales and implementation cycles, we expend substantial time, effort and resources preparing contract proposals, negotiating the contract and implementing the software and, if our efforts do not result in a sale (whether during the period in which such expenditures were incurred or at all), we will not realize any revenues to offset these expenditures during the period in which they were incurred or at all; |
| even if a sale is completed, revenue recognition can be delayed or fall below expectations if accounting guidance requires us to recognize revenue over the implementation period, potentially resulting in significant fluctuations in our revenue on a quarterly basis; as such, it is difficult to accurately predict the amount of revenue that will be recognized in any given quarter; |
| if we fail to or are delayed in the introduction of new or enhanced products, or if our competitors introduce new or enhanced products, sales of our products and services may not achieve expected levels and/or may decline; |
| our ability to expand the mix of distribution channels through which our products are sold may be limited; |
| our products may not achieve widespread market acceptance, which could cause our revenue to be lower than expected; |
| we have had significant contracts with legacy customers that have decreased or terminated their services and we may not be able to replace this revenue and/or the gross margins associated with this revenue; |
| our sales may be constrained by the timing of releases of third-party software that works with our products; |
| a significant percentage of our expenses is relatively fixed and we may be unable to reduce expenses in the short term if revenue decreases; and |
| the migration of our license sales model to be more focused on recurring revenue contracts may result in less predictable revenue due to an inability to predict the rate at which it is adopted by our customers, or the rate at which it may be deferred. |
The amount of our revenue backlog is based on a number of assumptions and is subject to a number of
factors, many of which are completely outside of our control, and such revenue may not be
recognized over the next 12 months, or at all
As discussed in further detail in Item 1. Business Revenue Backlog, implementation
projects in our Payments and Banking: Large FI segments have been increasing in size, complexity
and length. In accordance with applicable accounting guidance, the software licenses revenue from
these types of engagements is generally recognized over the implementation period (which is
referred to as the percentage of completion method). We currently expect that the overall
percentage of these types of engagements will increase over time.
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In light of the shift to recognizing more software license revenue using the percentage of
completion method, we have disclosed the estimated amount of revenue backlog for the Payments and
Banking: Large FI segments. These amounts
include revenue for software licenses including term licenses, professional services, and
hosting services, in each case as specified in executed contracts that management believes will be
recognized over the next 12 months. The portion of the estimate from our Banking: Large FI segment
does not include revenue associated with the State Farm business, which is expected to conclude by
the end of 2011, or with the custom development project for an international branch customer, which
is expected to decrease as the project winds down. As our Banking: Community FI segment primarily
generates recurring revenue for support and maintenance and hosting, we do not believe that
disclosing revenue backlog for the Banking: Community FI provides additional useful information.
Our estimate of revenue backlog requires substantial judgment of our management. It is based
on a number of assumptions, which may turn out to be inaccurate or wrong, and is subject a number
of factors and uncertainties, many of which are outside of our control. Such assumptions, factors
and uncertainties include, but are not limited to, the following:
| Revenue for term licenses and hosting services are the annualized amount expected over the next 12 months as of the date presented; |
| Foreign currency exchange rates are assumed to remain constant over the 12-month period for contracts stated in currencies other than the U.S. Dollar; |
| Perpetual licenses and professional services are based on current estimates of project completion over the next 12 months; |
| Our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including mergers, changes in their financial condition or general changes in economic conditions or geographic locations; |
| We may experience delays in the development or delivery of products or services specified in customer contracts; and |
| Our estimate is based on constant hosting transaction volumes, and changes in hosting transaction volumes may impact the amount of revenue actually recognized in future periods. |
Estimates of future financial results are inherently unreliable. Accordingly, there can be no
assurance that the amounts included in our estimate of revenue backlog will be recognized over the
next 12 months, or at all. Additionally, because our estimate of revenue backlog is an operating
metric, it is not subject to the same level of internal review or control as a U.S. GAAP financial
measure.
System failures, errors, defects or other performance problems with our products or data center
operations could cause demand for our products to decrease, impair customer relations, or result in
material liability to us
Our products are used by our customers to provide services that are integral to their
businesses and operations. Accordingly, any system failures, errors, defects or other performance
problems could result in financial or other damages to our customers and could damage our
reputation, deter organizations from purchasing our products, deter their end-user customers from
using our products, or result in material liability to us. Additionally, our data center is an
integral part of our business and any interruption in our data center operations, whether as a
result of human error, power failure, telecommunications failure, fire, terrorism or otherwise,
could damage our reputation, deter organizations from purchasing our products, deter their end-user
customers from using our products, or result in material liability to us.
We have engaged third-parties to assist us with certain implementation activities which may not be
successful and which may result in harm to our business, reputation and financial results
In order to optimize available professional services resources and meet delivery timeframes,
we have established relationships with several third parties to assist us with implementing and
customizing our products. As a result, we have less quality control over the implementation and
customization of our software with respect to these deployments and are more reliant on the ability
of these third parties to correctly implement and customize our software in a timely manner. If
these third parties fail to properly implement our software, meet delivery deadlines, or meet
quality requirements, our business, reputation and financial results may be harmed.
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We are engaged in offshore software development activities which may not be successful and which
may put our intellectual property at risk
In order to optimize available research and development resources and meet development
timeframes, in 2004 we acquired an Indian based development center. This center had been owned and
operated for us by a third party since 2002. In 2004, associated with our acquisition of Mosaic
Software Holdings Limited, we acquired a development center in Cape Town, South Africa. While our
experience to date with these offshore development centers has been positive, there is no
assurance this will continue. Specifically, there are a number of risks associated with this
activity, including but not limited to the following:
| communications and information flow may be less efficient and accurate as a consequence of time zone differences, distance and language differences between our primary development organization and the foreign based activities, resulting in delays in development or errors in the software developed; |
| potential disruption from the involvement of the United States in political and military conflicts around the world; |
| the quality of the development efforts undertaken offshore may not meet our requirements because of language, cultural and experience differences, resulting in potential product errors and/or delays; |
| we have experienced a greater level of voluntary turnover of personnel in India than in other development centers which could have an adverse impact on efficiency and timeliness of development as well as the opportunity for misappropriation of our intellectual property; |
| in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general risk that the misappropriation of our intellectual property might not be readily discoverable; and |
| currency exchange rates could fluctuate and adversely impact the cost advantages intended from maintaining these facilities. |
We are from time to time involved in litigation over intellectual property or other proprietary
rights which may be costly and time consuming to defend and our operating results would suffer if
we were subject to a protracted infringement claim or a significant damage award
Substantial intellectual property litigation and threats of litigation exist in our industry.
Third parties may have, or may eventually be issued, patents or assert copyrights and/or trade
secrets that could be infringed by our products or technology. Any of these third parties could
make a claim of infringement against us with respect to our products or technology and from time to
time, we have received claims that certain of our products or other proprietary rights require a
license of intellectual property rights of a party and infringe, or may infringe, the intellectual
property rights of others. In some instances, our customers may be accused of infringing the
intellectual property rights of third parties. As a result, we provide certain indemnity for our
customers against infringement claims. Even if such accusations ultimately prove lacking in merit,
the disposition of such disputes may be costly, distracting, and result in damages, royalties, or
injunctive relief preventing the use of the intellectual property in question and may require
entering into licensing agreements, redesigning our products or ceasing production entirely. Any
claims, with or without merit, could have the following negative consequences:
| be time-consuming to investigate and defend; |
| result in costly litigation and damage awards; |
| divert management attention and resources; |
| cause product shipment delays or suspensions; |
| cause us to spend significant resources to develop non-infringing technology, which we may not be able to do; |
| result in an injunction being issued against the use and sale of our products; and |
| require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all. |
Infringement of our proprietary technology could hurt our competitive position and income potential
Our success depends upon our proprietary technology and information. We rely on a combination
of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our
proprietary technology and information. Because it is difficult to police unauthorized use of
software, the steps we have taken to protect our services and products may not prevent
misappropriation of our technology. Any misappropriation of our proprietary technology or
information could reduce any competitive advantages we may have or result in costly litigation. We
also have a significant international presence and the laws of some foreign countries may not
protect our proprietary technology as well as the laws of the United States. Additionally, it may
be more difficult to identify the misappropriation of our intellectual property in foreign
countries. Our ability to protect our proprietary technology may not be adequate.
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Our business and financial results may be negatively impacted by fluctuations in foreign currency
exchange rates
In 2010, approximately 21% of our revenue and 24% of our operating expenses were transacted in
currencies other than U.S. Dollars. We believe most of our international operations are naturally
hedged for foreign currency risk as our foreign subsidiaries generally invoice their customers and
satisfy their obligations in their local currencies. Therefore, our
revenue may be impacted by foreign currency fluctuations from these international operations
but the impact to our net income is generally minimized. However, our development center in India
is not naturally hedged as their costs are in the local currency but they are funded in U.S.
Dollars or British Pounds. Additionally, our South Africa operations are approximately 60%
naturally hedged as some of the development and professional services performed are funded in U.S.
Dollars and British Pounds. Accordingly, currency fluctuations in the Indian Rupee or South
African Rand may negatively impact our financial results.
Acquisitions may be costly and difficult to integrate, divert management resources or dilute
stockholder value
We have made acquisitions in the past and we may make additional acquisitions in the future.
The integration of these companies and any future acquisitions into our existing operations is a
complex, time-consuming and expensive process and may disrupt our business. Among the potential
issues related to integration are:
| incompatibility of business cultures; |
| delays in integrating diverse technology platforms; |
| difficulties in coordinating geographically separated organizations; |
| difficulties in re-training sales forces to market additional products across our intended markets; |
| difficulties implementing common internal business systems and processes; |
| conflicts in third-party relationships; and |
| loss of customers and key employees and the diversion of the attention of management from other ongoing business concerns. |
Additionally, the use of equity to finance an acquisition could dilute the interests of our
stockholders.
Our market is highly competitive and if we are unable to keep pace with evolving technology,
successfully introduce new or enhanced products, or successfully migrate customers to new versions
of our software, our financial performance maybe adversely impacted and our future prospects may
decline
The market for our products and services is characterized by rapidly changing technology,
intense competition and evolving industry standards. We have many competitors who offer various
components of our suite of applications or who use a different technology platform to accomplish
similar tasks. In some cases, our existing customers also use some of our competitors products.
Our future success will depend on our ability to develop, sell, implement and support enhancements
of current products and new software products in response to changing customer needs. If the
completion of the next version of any of our products is delayed or is otherwise unsuccessful, or
if we are unable to successfully migrate customers to new versions of our software, including
without limitation the Banking: Community FI segments new online banking solution, our financial
performance and future prospects could be harmed. In addition, competitors may develop products or
technologies that the industry considers more attractive than those we offer or that render our
technology obsolete.
Changes in credit card association or other network rules or standards could adversely affect the
Companys business
In order to provide the Companys payment gateway and application services, several of the
Companys products and services are registered with Visa and MasterCard and other networks as a
payments application or service provider. As such, the Company is subject to card association and
network rules that could subject the Company to a variety of fines or penalties that may be levied
by the card associations or networks for certain acts or omissions by the Company. Visa, MasterCard
and other networks set standards with respect to which the Company must comply. The termination of
the Companys status as a certified service provider or payment application, or any changes in card
association or other network rules or standards, including interpretation and implementation of the
rules or standards, that increase the cost of doing business or limit the Companys ability to
provide compliant payment applications and services could have an adverse effect on the Companys
business, operating results and financial condition.
We are subject to government regulation which may interfere with our ability to conduct our
business, including our ability to attract and maintain customers, and could negatively impact our
business and financial results
We are subject to external audits, examination, and are indirectly regulated by the Office of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, National Credit Union Association
and the various state financial regulatory agencies that supervise and regulate the banks, credit
unions and thrift institutions for which we provide data processing services. Matters subject to
review and examination by federal and state financial institution regulatory agencies and external
auditors include our internal information technology controls in connection with our performance of
data processing services, the agreements
giving rise to those processing activities, and the design of our products that perform
banking functions. Our ability to satisfy these audits and examinations and maintain compliance
with applicable regulations could negatively affect our ability to conduct our business, including
our ability to attract and maintain customers.
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Market volatility may affect the price of our common stock
The trading prices of technology stocks in general and ours in particular, have experienced
extreme price fluctuations. Our stock price has fluctuated after declining from its high in 2000.
More recently, the financial services sector has also experienced price fluctuations. Any further
negative change in the publics perception of the prospects of technology based companies,
particularly those which provide services to the financial services sector such as ours, could
further depress our stock price regardless of our results of operations. Other broad market and
industry factors may decrease the trading price of our common stock, regardless of our operating
performance. Market fluctuations, as well as general political and economic conditions such as a
recession or interest rate or currency rate fluctuations, also may affect the trading price of our
common stock. In addition, our stock price could be subject to wide fluctuations in response to the
following factors:
| actual or anticipated variations in our quarterly operating results; |
| approximately 36% of our common stock is owned by five institutions as of December 31, 2010, and a change in position of any one of these holders could cause a significant drop in our stock price if market demand is insufficient to meet sales demand; |
| announcements of new products, product enhancements, technological innovations or new services by us or our competitors; |
| delays or failures in introducing new or enhanced products or in migrating customers to new versions of our software: |
| changes in financial estimates by securities analysts; |
| conditions or trends in the computer software, electronic commerce and Internet industries; |
| changes in the market valuations of other technology companies; |
| developments in Internet regulations; |
| announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| unscheduled system downtime of our products in either a hosted or in-house environment; |
| security breaches in our software or facilities may cause harm to our business and reputation, result in a loss of customers or result in material liability to us; |
| additions or departures of key personnel; and |
| sales of our common stock or other securities in the open market. |
Future sales of our common stock in the public market could negatively affect our stock price
If our stockholders sell substantial amounts of our common stock, including shares issued when
options are exercised, the market price of our common stock could fall. As of December 31, 2010, we
had approximately 53.3 million shares of common stock outstanding, assuming no exercise of
outstanding options. As of December 31, 2010, stock options to purchase approximately 5.9 million
shares of our common stock and 1.2 million shares of unvested restricted stock were outstanding.
The common stock issuable upon exercise of these options and vesting of restricted stock will be
eligible for sale in the public market from time to time. The possible sale of a significant number
of these shares may cause the market price of our common stock to fall.
We face added business, political, regulatory, operational, financial and economic risks as a
result of our international operations, any of which could increase our costs and hinder our growth
We conduct our business worldwide and may be adversely affected by changes in demand resulting
from:
| fluctuations in currency exchange rates; |
| governmental currency controls; |
| changes in various regulatory requirements; |
| political, economic and military changes and disruptions; |
| difficulties in enforcing our contracts in foreign jurisdictions; |
| export/import controls; |
| tariff regulations; |
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| difficulties in staffing and managing foreign sales, professional services, product development and support operations; |
| greater difficulties in trade accounts receivable collection; and |
| possible adverse tax consequences. |
Some of our solutions may use encrypted technology, the export of which is regulated by the
United States government. If the United States government were to adopt new legislation restricting
the export of software or encryption technology, we could experience delays or reductions in our
shipments of products internationally. In addition, existing or future export regulations could
limit our ability to distribute our solutions outside of the United States.
We maintain international offices and portions of our maintenance, consulting, and research
and development operations in Europe, Middle East, Africa, Asia and Latin America. Therefore, our
operations may also be affected by economic conditions in international regions. Additionally, from
time to time, we lend funds to our foreign subsidiaries to meet their operating and capital
requirements and several of our foreign subsidiaries are subject to laws that authorize regulatory
bodies to block or limit the flow of funds from those subsidiaries. Regulatory action of that kind
could impede access to funds that we need to make payments on obligations. The risks associated
with international operations may harm our business.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of
a significant portion of these assets would negatively affect our financial results
Our balance sheet includes goodwill and intangible assets that represent approximately 51% of
our total assets at December 31, 2010. These assets consist of goodwill and identified intangible
assets associated with our acquisitions. On at least an annual basis, we assess whether there have
been impairments in the carrying value of goodwill and intangible assets. If the carrying value of
an asset is determined to be impaired, then it is written down to fair value by a charge to
operating earnings. An impairment of a significant portion of goodwill or intangible assets could
materially negatively affect our results of operations.
We depend upon key employees and may be unable to hire or retain a sufficient number of qualified
personnel
Our future performance depends to a significant degree upon the continued contributions of our
senior management team and other key employees and on our ability to hire and retain highly skilled
management, technical, sales, and customer support personnel. There is substantial competition for
employees with the skills we require and we compete for qualified employees with companies that may
have greater financial resources than we have. Our failure to hire and retain talented personnel
could have a material adverse effect on our business, operating results and financial position.
The adoption or modification of laws or regulations relating to the Internet, or interpretations of
existing law, could adversely affect our business
Laws and regulations which apply to communications and commerce over the Internet are becoming
more prevalent. Currently, there are Internet laws regarding copyrights, taxation and the
transmission of specified types of material. Congress also adopted legislation imposing obligations
on financial institutions to notify their customers of the institutions privacy practices,
restrict the sharing of non-public customer data with non-affiliated parties at the customers
request, and establish procedures and practices to protect and secure customer data. These privacy
provisions are implemented by regulations with which compliance is required. Additionally, many
legislative and regulatory actions have been enacted or are pending at the state and federal level
with respect to privacy. Further, our customers and we may be faced with state and federal
requirements that differ drastically, and in some cases conflict. In addition, the European Union
enacted its own privacy regulations and it may in the future consider other Internet-related
legislation. The law of the Internet, however, remains largely unsettled, even in areas where there
has been some legislative action. It may take years to determine whether and how existing laws such
as those governing intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the growth and development of the market for online financial services, including online
and mobile banking, may prompt calls for more stringent consumer protection laws, both in the
United States and abroad, that may impose additional burdens on companies.
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Some anti-takeover provisions contained in our charter and under Delaware law could hinder a
takeover attempt
We are subject to the provisions of Section 203 of the General Corporation Law of the State of
Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from engaging
in business combinations with some stockholders for a specified period of time without the approval
of the holders of substantially all of our outstanding
voting stock. Such provisions could delay or impede the removal of incumbent directors and
could make more difficult a merger, tender offer or proxy contest involving us, even if such events
could be beneficial, in the short-term, to the interests of our stockholders. In addition, such
provisions could limit the price that some investors might be willing to pay in the future for
shares of our common stock. Our certificate of incorporation and bylaws contain provisions relating
to the limitations of liability and indemnification of our directors and officers, dividing our
board of directors into three classes of directors serving three-year terms and providing that our
stockholders can take action only at a duly called annual or special meeting of stockholders.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Item 2. | Properties. |
Our executive offices and corporate headquarters are located in Norcross, Georgia, USA and our
other primary domestic offices are in Austin, Texas; Chapin, South Carolina; Charlotte, North
Carolina and West Hills, California. Our primary international offices are located in Chertsey,
England; Cape Town, South Africa; Johannesburg, South Africa; Bogotá, Colombia; and Pune, India.
We maintain additional domestic offices in Littleton, Massachusetts; Colorado Springs, Colorado and
Fairport, New York. We maintain additional international offices in Brussels, Dublin, Dubai,
Melbourne, Munich and Singapore. We lease all of our office locations except for our corporate
headquarters located in Norcross, Georgia, USA, which also houses our data center operations. We
believe that our principal properties are suitable and adequate for their use, which are general
office buildings. We believe our facilities have sufficient capacity for our existing needs and
expected near-term growth.
Our principal locations are as follows:
Approximate Size | Lease | |||||||||
Principal Locations | Principal Business Segment | (square feet) | Expiration | |||||||
Austin, TX, USA |
Banking: Community FI | 26,400 | 2015 | |||||||
Bogotá, Colombia |
Payments | 7,500 | 2012 | |||||||
Cape Town, South Africa |
Payments | 35,700 | 2013 | |||||||
Chapin, SC, USA |
Banking: Community FI | 24,500 | 2015 | |||||||
Charlotte, NC, USA |
Banking: Large FI | 26,300 | 2015 | |||||||
Chertsey, England |
Payments and Banking: Large FI | 9,800 | 2014 | |||||||
Johannesburg, South Africa |
Payments | 8,100 | 2013 | |||||||
Norcross, GA, USA |
Payments, Banking: Large FI and Banking: Community FI | 71,000 | Owned | |||||||
Pune, India |
Banking: Large FI and Banking: Community FI | 56,400 | 2013 | |||||||
West Hills, CA, USA |
Banking: Community FI | 24,900 | 2018 |
Item 3. | Legal Proceedings. |
As originally disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30,
2010, on May 28, 2010, Leon Stambler filed a complaint in the Eastern District of Texas against 29
named defendants including S1 Corporation and S1, Inc. (collectively, S1) and other financial
software services providers. The complaint alleges infringement of two patents generally relating
to encryption technology. In his complaint, Stambler is seeking unspecified monetary damages. The
case is at a very preliminary stage. S1 intends to vigorously defend itself in the litigation.
Item 4. | [Removed and Reserved.] |
16
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PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
As of the close of business on February 17, 2011 there were 427 shareholders of record of our
common stock, although there are a much larger number of beneficial owners. We have never paid or
declared cash dividends on our common stock or preferred stock and do not anticipate paying cash
dividends on our capital stock in the foreseeable future, although there are no restrictions on our
ability to do so. Our common stock is quoted on the Nasdaq Stock Market under the symbol SONE.
The following table shows, for the periods indicated, the high and low sales prices per share of
our common stock as reported on the Nasdaq Stock Market.
2010 | 2009 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 6.84 | $ | 5.80 | $ | 8.00 | $ | 4.75 | ||||||||
Second Quarter |
$ | 6.80 | $ | 5.45 | $ | 7.42 | $ | 5.04 | ||||||||
Third Quarter |
$ | 6.18 | $ | 4.73 | $ | 7.43 | $ | 5.87 | ||||||||
Fourth Quarter |
$ | 7.24 | $ | 5.16 | $ | 6.60 | $ | 5.65 |
Comparison of Cumulative Total Return from December 31, 2005 to December 31, 2010
The following table sets forth comparative information regarding the cumulative stockholder
return on our common stock since December 31, 2005. Total stockholder return is measured by
dividing the sum of the cumulative amount of dividends for the measurement period (assuming
dividend reinvestment) and the difference between our share price at the end and the beginning of
the measurement period by the share price at the beginning of the measurement period. Neither S1
nor its predecessor, Security First Network Bank, has paid dividends on its common stock from the
date of the initial public offering of Security First Network Bank, May 26, 1996, to December 31,
2010. Our cumulative stockholder return over this period was based on an investment of $100 on
December 31, 2005 and compares to the cumulative total return of the Interactive Week Internet
Index and the Nasdaq Composite Index.
12/31/2005 | 12/31/2006 | 12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 | |||||||||||||||||||
S1 Corporation |
$ | 100 | $ | 127 | $ | 168 | $ | 181 | $ | 150 | $ | 159 | ||||||||||||
Interactive Week Internet Index |
$ | 100 | $ | 114 | $ | 131 | $ | 76 | $ | 133 | $ | 175 | ||||||||||||
NASDAQ Composite |
$ | 100 | $ | 110 | $ | 120 | $ | 72 | $ | 103 | $ | 120 |
17
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Item 6. | Selected Financial Data. |
The following table presents selected statement of operations data, selected balance sheet
data and other selected data for S1 on a consolidated basis. We derived the selected historical
consolidated financial data presented below from our audited consolidated financial statements and
related notes. You should read this data together with our audited consolidated financial
statements and related notes.
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(3) | (4) | |||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Total revenue |
$ | 209,086 | $ | 238,927 | $ | 228,435 | $ | 204,925 | $ | 192,310 | ||||||||||
(Loss) income from continuing operations |
(6,283 | ) | 30,423 | 21,850 | 19,495 | (12,239 | ) | |||||||||||||
Income from discontinued operations |
| | | | 30,141 | |||||||||||||||
Net (loss) income |
(6,283 | ) | 30,423 | 21,850 | 19,495 | 17,902 | ||||||||||||||
Revenue from significant customer (1) |
25,168 | 38,402 | 42,084 | 43,425 | 47,898 | |||||||||||||||
Stock-based compensation expense |
3,700 | 1,602 | 8,092 | 8,522 | 5,663 | |||||||||||||||
Basic (loss) income per share: |
||||||||||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.56 | $ | 0.38 | $ | 0.32 | $ | (0.17 | ) | ||||||||
Discontinued operations |
| | | | 0.42 | |||||||||||||||
Net (loss) income |
$ | (0.12 | ) | $ | 0.56 | $ | 0.38 | $ | 0.32 | $ | 0.25 | |||||||||
Diluted (loss) income per share: |
||||||||||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.55 | $ | 0.38 | $ | 0.32 | $ | (0.17 | ) | ||||||||
Discontinued operations |
| | | | 0.42 | |||||||||||||||
Net (loss) income |
$ | (0.12 | ) | $ | 0.55 | $ | 0.38 | $ | 0.32 | $ | 0.25 | |||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 61,917 | $ | 61,784 | $ | 63,840 | $ | 45,011 | $ | 69,612 | ||||||||||
Working capital |
48,843 | 82,942 | 55,804 | 64,318 | 83,227 | |||||||||||||||
Goodwill |
147,544 | 126,605 | 124,362 | 125,281 | 125,300 | |||||||||||||||
Total assets |
309,653 | 300,066 | 278,686 | 281,844 | 307,805 | |||||||||||||||
Debt obligation, excluding current portion |
35 | 5,026 | 6,126 | 8,805 | 4,119 | |||||||||||||||
Total liabilities |
72,040 | 61,425 | 69,946 | 71,939 | 83,576 | |||||||||||||||
Stockholders equity |
237,613 | 238,641 | 208,740 | 209,905 | 224,229 | |||||||||||||||
Other Selected Data: |
||||||||||||||||||||
Cash provided by operating activities |
$ | 37,249 | $ | 16,035 | $ | 34,147 | $ | 31,332 | $ | 3,460 | ||||||||||
Cash (used in) provided by investing activities |
(37,704 | ) | (7,688 | ) | 15,765 | (13,893 | ) | 31,626 | ||||||||||||
Cash used in financing activities (2) |
(364 | ) | (12,172 | ) | (27,488 | ) | (42,490 | ) | (50,671 | ) | ||||||||||
Weighted average common shares outstanding
basic |
52,495 | 52,584 | 55,734 | 59,746 | 70,780 | |||||||||||||||
Weighted average common shares outstanding
diluted |
52,495 | 53,291 | 56,449 | 60,596 | 70,780 |
(1) | Revenue from State Farm. | |
(2) | Cash used in financing activities included the repurchase of common stock of $9.6 million in 2009, $25.1 million in 2008, $51.0 million in 2007 and $55.8 million in 2006 pursuant to authorized stock repurchase programs. | |
(3) | Our 2010 selected financial data reflects, as of their respective dates of acquisition, our purchase of PM Systems Corporation for approximately $29.2 million, net of cash acquired, in March 2010 and certain assets from a reseller in Latin America for approximately $1.9 million, net of cash acquired, in August 2010. | |
(4) | In 2004, we acquired Mosaic Software Holdings Limited and we paid an additional acquisition cost of $14.0 million as earn-out consideration in 2006. Discontinued operations included our Risk and Compliance business sold in 2006 for approximately $32.6 million. |
18
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
This annual report on Form 10-K and the documents incorporated into this annual report on Form
10-K by reference contains forward-looking statements and information relating to our subsidiaries
and us within the safe harbor provisions of the Private Securities Litigation Reform Act. These
statements include statements with respect to our financial position, results of operations and
business. The words believes, expects, may, will, should, projects, contemplates,
anticipates, forecasts, estimates, intends or similar terminology identify forward-looking
statements. Forward-looking statements may include projections of our revenue, revenue backlog,
expenses, capital expenditures, earnings per share, product development projects, future economic
performance or management objectives. 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
under the caption Risk Factors in Item 1A of Part I of this report. 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. When we use the terms S1 Corporation, S1, Company, we,
us and our, we mean S1 Corporation, a Delaware corporation, and its subsidiaries. The
following discussion should be read in conjunction with the audited consolidated financial
statements and notes appearing elsewhere in this report.
Executive Overview
Background. S1 Corporation is a leading global provider of payments and financial services
software solutions. We offer payments solutions for ATM and retail POS driving, card management,
and merchant acquiring, as well as financial services solutions for consumer, small business and
corporate online banking, trade finance, mobile banking, voice banking, branch and call center
banking. We sell our solutions primarily to banks, credit unions, retailers and transaction
processors. We also provide software, custom software development, hosting and other services to
State Farm, a relationship that we expect will conclude by the end of 2011.
In the first quarter of 2010, we changed our reporting segments to present our Payments,
Banking: Large Financial Institution (Banking: Large FI), and Banking: Community Financial
Institution (Banking: Community FI) businesses separately. The Payments segment provides our ATM
and POS driving, card management, and merchant acquiring solutions to financial institutions,
retailers and transaction processors of all sizes globally. The Banking: Large FI segment provides
consumer, small business and corporate online banking, trade finance, and mobile banking solutions
to large banks globally, branch and call center banking solutions to large banks outside of the
United States, and also supports our business with State Farm. The Banking: Community FI segment
provides consumer and small business online banking, mobile banking, voice banking, branch and call
center banking solutions to community and regional banks and credit unions in the United States.
Segment information for periods prior to the first quarter of 2010 has been restated to reflect the
change in composition of our reportable segments.
On March 4, 2010, we acquired 100% of the outstanding shares of PM Systems Corporation
(PMSC), a provider of Internet banking, bill payment and security services to credit unions in
the United States. PMSC provides us with additional financial services solutions and expands our
presence in the credit union marketplace. We paid approximately $29.2 million, net of cash
acquired, for PMSC and funded the acquisition from our available cash on the acquisition date.
PMSCs results of operations are included in our Banking: Community FI segments results of
operations from March 4, 2010.
In support of establishing an office in Latin America, on August 26, 2010, we acquired certain
assets of, and hired certain employees from, a company that resold our products in Latin America
(the Reseller). We paid approximately $1.9 million net of cash acquired for the Reseller and
funded the acquisition from our available cash on the acquisition date. The Resellers results of
operations are included in our Payments segments results of operations from August 26, 2010.
Historically, Software licenses for a majority of our Payments solutions and for some of our
Banking: Large FI solutions were generally recognized upon delivery of the software provided all
other revenue recognition criteria were met. However, as our Payments business expands to serve
larger customers and our Banking: Large FI business provides greater levels of customization and
integration, specifically for our corporate online banking solutions, implementation projects have
been increasing in size, complexity and length. Accordingly, we expect a greater percentage of
Software licenses to be recognized over the implementation period as Software licenses revenue is
recognized over the implementation period when professional services are considered essential to
the functionality of the software. While this shift does have an impact on our current and
near-term financial results, we believe it will provide greater long-term revenue visibility.
Software licenses and professional services revenue recognized under the percentage of completion
method can vary from quarter to quarter due to
the number and size of professional services projects, project scope changes, changes in
estimates to completion, and project delays and cancellations.
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During the fourth quarter of 2010, due to an increase in project scope, the estimated hours to
complete the project with an international branch customer increased significantly. Since we
recognize revenue for this project using the percentage of completion method, our revenue in the
fourth quarter was reduced by approximately $5.0 million as a result of this change. In February
2011, we amended certain agreements (collectively, the Amendments) with this customer to (i)
reduce the scope of the project, and (ii) revise billing milestones. In exchange for these
contract modifications, we granted the customer licenses to certain of our software products (the
Licensed Products).
Although the scope of the project was reduced, the total amount of revenue we expect to
recognize from this customer in connection with this project remains the same. Accordingly, the approximately
$5.0 million referenced above will be recognized over the remainder of the project under the
percentage of completion method, expected primarily in 2011 and 2012. Pursuant to the Amendments,
this customer is entitled to normal and customary upgrades and enhancements related to the Licensed
Products for up to seven years at no additional cost. Consequently, we will allocate a portion of
the revenue from this project to the fair value of this obligation which, when netted against the
favorable impact of the reduction in project scope, is expected to reduce our revenue in the first
quarter of 2011 by approximately $1.3 million.
Summary financial results. Our revenue was $209.1 million for the year ended December 31,
2010, a decrease of $29.8 million, or 12%, as compared to the same period in 2009 due primarily to
lower Professional services revenue in our Banking: Large FI segment, which included a reduction in
revenue from State Farm of $13.2 million and from an international branch customer of $11.6
million. Our Payments and Banking: Large FI segments Software licenses revenue was impacted as a
greater percentage of their new sales was recognized over the implementation period instead of upon
delivery. For the year ended December 31, 2010, our net loss of $6.3 million was primarily
attributable to the revenue decline in our Banking: Large FI segment and the increase in
development and professional services costs incurred in connection with migrating online banking
customers in the Banking: Community FI segment to a new banking platform.
During the year ended December 31, 2010, we generated $37.2 million in cash provided by
operating activities primarily from earnings adjusted for the effect of non-cash expenses,
collections of accounts receivable, and the growth of deferred revenue for annual support services,
professional services and software licenses billed in advance. Our cash provided from operating
activities funded most of our capital expenditures, debt payments and acquisitions in 2010.
Revenue from Significant Customers
State Farm accounted for 12%, 16% and 18% of our consolidated revenue and 26%, 30% and 33% of
our Banking: Large FI segment revenue during the years ended December 31, 2010, 2009 and 2008,
respectively. In 2008, we announced that we expected our relationship with State Farm to conclude
by the end of 2011. We generated $25.2 million of revenue in 2010 from State Farm and expect to
generate approximately $16 $17 million in revenue in 2011 from this customer. We can give no
assurance that we will be able to generate the foregoing revenue amounts from State Farm or that we
will be able to replace the revenue or associated gross margin from State Farm.
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Table of Contents
Consolidated Results of Operations
The following table sets forth our statement of operations data for the three years ended
December 31, 2010, 2009 and 2008 and the percentage of revenue of each line item for the periods
presented (dollars in thousands, except per share data):
Change | ||||||||||||||||||||
2010 vs. | 2009 vs. | |||||||||||||||||||
2010 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Revenue: |
||||||||||||||||||||
Software licenses |
$ | 26,237 | $ | 35,196 | $ | 30,230 | -25 | % | 16 | % | ||||||||||
Support and maintenance |
63,034 | 59,602 | 53,779 | 6 | % | 11 | % | |||||||||||||
Professional services |
65,180 | 94,965 | 92,470 | -31 | % | 3 | % | |||||||||||||
Hosting |
54,635 | 49,164 | 51,956 | 11 | % | -5 | % | |||||||||||||
Total revenue |
209,086 | 238,927 | 228,435 | -12 | % | 5 | % | |||||||||||||
Operating Expenses: |
||||||||||||||||||||
Cost of software licenses (1) |
2,242 | 3,188 | 3,986 | -30 | % | -20 | % | |||||||||||||
Cost of professional services, support and maintenance (1) |
82,778 | 74,186 | 74,095 | 12 | % | 0 | % | |||||||||||||
Cost of hosting (1) |
27,595 | 28,147 | 26,408 | -2 | % | 7 | % | |||||||||||||
Selling and marketing |
28,172 | 30,725 | 36,432 | -8 | % | -16 | % | |||||||||||||
Product development |
35,508 | 34,619 | 29,271 | 3 | % | 18 | % | |||||||||||||
General and administrative |
27,134 | 24,864 | 25,826 | 9 | % | -4 | % | |||||||||||||
Depreciation and amortization |
10,161 | 9,593 | 9,066 | 6 | % | 6 | % | |||||||||||||
Total operating expenses |
213,590 | 205,322 | 205,084 | 4 | % | 0 | % | |||||||||||||
Operating (loss) income |
(4,504 | ) | 33,605 | 23,351 | -113 | % | 44 | % | ||||||||||||
Interest and other (expense) income, net |
(1,608 | ) | (1,218 | ) | 753 | 32 | % | -262 | % | |||||||||||
(Loss) income before income tax benefit (expense) |
(6,112 | ) | 32,387 | 24,104 | -119 | % | 34 | % | ||||||||||||
Income tax expense |
(171 | ) | (1,964 | ) | (2,254 | ) | -91 | % | -13 | % | ||||||||||
Net (loss) income |
$ | (6,283 | ) | $ | 30,423 | $ | 21,850 | -121 | % | 39 | % | |||||||||
(Loss) income per share |
||||||||||||||||||||
Basic |
$ | (0.12 | ) | $ | 0.56 | $ | 0.38 | |||||||||||||
Diluted |
$ | (0.12 | ) | $ | 0.55 | $ | 0.38 | |||||||||||||
Effective tax rate |
-3 | % | 6 | % | 9 | % | ||||||||||||||
Operating expenses as a percent of revenue |
||||||||||||||||||||
Cost of software licenses (2) |
9 | % | 9 | % | 13 | % | ||||||||||||||
Cost of professional services, support and maintenance
(2) |
65 | % | 48 | % | 51 | % | ||||||||||||||
Cost of hosting (2) |
51 | % | 57 | % | 51 | % | ||||||||||||||
Selling and marketing |
13 | % | 13 | % | 16 | % | ||||||||||||||
Product development |
17 | % | 14 | % | 13 | % | ||||||||||||||
General and administrative |
13 | % | 10 | % | 11 | % | ||||||||||||||
Depreciation and amortization of other intagible assets |
5 | % | 4 | % | 4 | % | ||||||||||||||
Operating (loss) income |
-2 | % | 14 | % | 10 | % | ||||||||||||||
Net (loss) income |
-3 | % | 13 | % | 10 | % |
(1) | The Cost of software licenses, professional services, support and maintenance, and hosting excludes charges for depreciation. The Cost of software licenses includes amortization of acquired technology. | |
(2) | Each direct cost is a percentage of the applicable revenue type for the periods presented. |
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RESULTS OF OPERATIONS COMPARISON OF 2010 TO 2009
Banking: | Banking: | |||||||||||||||
(Dollars in thousands) | Payments | Large FI | Community FI | Total | ||||||||||||
Total revenue |
||||||||||||||||
2010 |
$ | 54,657 | $ | 95,933 | $ | 58,496 | $ | 209,086 | ||||||||
2009 |
56,543 | 129,232 | 53,152 | 238,927 | ||||||||||||
Revenue (decline) growth |
(1,886 | ) | (33,299 | ) | 5,344 | (29,841 | ) | |||||||||
Percentage change |
-3 | % | -26 | % | 10 | % | -12 | % | ||||||||
Total operating income (loss) |
||||||||||||||||
2010 |
$ | 5,287 | $ | (3,595 | ) | $ | (6,196 | ) | $ | (4,504 | ) | |||||
2009 |
14,491 | 19,781 | (667 | ) | 33,605 | |||||||||||
Change in operating
income (loss) |
(9,204 | ) | (23,376 | ) | (5,529 | ) | (38,109 | ) | ||||||||
Percentage change |
-64 | % | -118 | % | -829 | % | -113 | % |
Revenue. Total revenue decreased in 2010 as compared to 2009 primarily due to lower
Professional services revenue for the Banking: Large FI segment due to a decline in revenue from
State Farm of $13.2 million and from an international branch customer of $11.6 million. A portion
of the overall decrease in 2010 revenue from the international branch customer related to a
significant increase in project scope in the fourth quarter of 2010 which, in accordance with the
percentage of completion method, resulted in a revenue reduction of approximately $5.0 million. Additionally,
Software licenses revenue in the Payments and Banking: Large FI segments declined as 2009 included
a greater percentage of perpetual license fees that were fully recognized upon delivery of the
software rather than recognized over the implementation period as was generally the case in 2010.
Support and maintenance revenue grew in 2010 as compared to 2009 primarily due to the continued
growth of software licensing activity in the Payments segment. Our Hosting revenue increased in
2010 as compared to 2009 primarily due to our acquisition of PMSC in March 2010 as reflected in our
Banking: Community FI segment partially offset by the impact of customer attrition in late 2009 in
the Banking: Large FI segment. Revenue was favorably impacted in 2010 as a result of changes in
foreign exchange rates by approximately $2.1 million primarily for operations in Europe and South
Africa in the Payments segment.
Payments segment revenue decreased primarily due to a decline in Software licenses revenue as
2009 included a greater percentage of perpetual license fees that were fully recognized upon
delivery of the software rather than recognized over the implementation period as was generally the
case in 2010. Professional services revenue in 2010 was negatively impacted as a result of
increases in the size and complexity of certain projects. Support and maintenance revenue
increased reflecting the continued growth in software licensing activity. Revenue in the Payments
segment was favorably impacted in 2010 as a result of changes in foreign exchange rates by
approximately $2.2 million for operations in Europe and South Africa primarily in Software licenses
and Support and maintenance revenue. The acquisition of the Reseller did not materially impact
Payments segment revenue in 2010.
Banking: Large FI segment revenue decreased primarily due to lower Professional services
revenue as a result of a decline in business with State Farm of $13.2 million, a decline in
business with an international branch customer of $11.6 million, and lower revenue from
professional services as a result of an increase in the complexity of certain projects. The custom
development project with an international branch customer increased in scope during 2010 which
negatively impacted our professional services revenue and margin. Banking: Large FI segments
Software licenses revenue declined as 2009 included a greater percentage of perpetual license fees
that were fully recognized upon delivery of the software rather than over the implementation period
as was generally the case in 2010. Banking: Large FI segments Hosting revenue declined primarily
due to the impact of customer attrition in late 2009. Revenue in the Banking: Large FI segment was
not materially impacted in 2010 as a result of changes in foreign exchange rates.
Banking: Community FI segment revenue increased as compared to the same period in 2009
primarily due to $9.9 million in revenue from PMSC which was reflected mainly in Hosting revenue.
The Banking: Community FI segment had lower Software licenses revenue due to reduced license sales
in this segments branch business. The impact of customer attrition in the community online
banking business during 2009 tempered the revenue impact of the PMSC acquisition. The migration of
Banking: Community FIs customers to this segments new platform impacted revenue growth in 2010 as
this migration effort impacted our ability to add new customers. We expect this impact to revenue
to continue in 2011 until the migration of existing customers is completed. Revenue in the
Banking: Community FI segment was not materially impacted in 2010 as a result of changes in foreign
exchange rates.
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Table of Contents
Operating (loss) income. Our operating loss in 2010 of $4.5 million as compared to operating
income of $33.6 million in 2009 was mainly attributable to lower Professional services revenue in
our Banking: Large FI segment, the impact of a larger percentage of our Software licenses revenue
being recognized over the implementation period instead of upon delivery, higher professional
services costs incurred in connection with migrating customers in the Banking: Community FI segment
to a new platform, higher stock-based compensation expense, and non-recurring professional fees of
$2.3 million in 2010 relating to legal fees and transaction costs, partially offset by lower
variable cash incentives resulting from missed earnings targets. The operating loss in 2010 was
unfavorably impacted as a result of changes in foreign exchange rates by approximately $1.3 million
primarily for our operations in India.
Payments segment operating income decreased $9.2 million primarily as a result of the decline
in revenue as a larger percentage of Software licenses revenue was recognized over the
implementation period than upon delivery in 2010. Additionally, we incurred growth in professional
services and support personnel to accommodate supporting a larger customer base and future
projected revenue growth for increased sales bookings in 2010. Also, the Payments segment had
higher stock-based compensation expense and non-recurring professional fees of $0.6 million. Since
most of our foreign operations are naturally hedged, the impact on revenue from changes in foreign
exchange rates for operations in Europe and South Africa was generally offset by the impact in
operating expenses in 2010. The acquisition of certain assets of the Reseller did not materially
impact Payments segment operating results during 2010.
Banking: Large FI segment operating loss of $3.6 million in 2010 as compared to operating
income of $19.8 million in 2009 was primarily a result of lower Professional services revenue due
to the decline in business with State Farm and with an international branch customer.
Additionally, we incurred higher stock-based compensation expense and non-recurring professional
fees of $1.0 million during 2010. Professional services, support and maintenance margins declined
as the decrease in professional services revenue did not directly impact our costs, which are
mainly internal personnel costs. However, the Banking: Large FI segments operating loss was
reduced by lower variable cash incentives due to missed earnings targets and lower product
development costs. Operating expenses were unfavorably impacted in 2010 as a result of changes in
foreign exchange rates by approximately $1.0 million, primarily for operations in India.
Banking: Community FI segment operating loss increased $5.5 million in 2010 as compared to
2009 due mainly to product development and professional services costs incurred in connection with
migrating customers to a new platform. We expect the costs of migrating customers to Banking:
Community FIs new platform to decline towards the end of 2011. Additionally, costs declined as a
result of lower sales incentives reflecting the impact of migration efforts on customer growth.
The Banking: Community FI segments operating loss included non-recurring professional fees of $0.7
million. Operating expenses were unfavorably impacted in 2010 as a result of changes in foreign
exchange rates of approximately $0.3 million, primarily for our development center in South Africa.
The acquisition of PMSC contributed approximately $1.0 million of operating income to the Banking:
Community FI segment in 2010.
Interest and other (expense) income, net. Interest and other (expense) income, net was
primarily impacted by net foreign exchange losses and withholding taxes related to international
trade receivables and payments of intercompany services. The decline in net foreign exchange
losses was offset by higher foreign withholding taxes during 2010 as compared to 2009.
Income tax benefit (expense). During 2010, our income tax expense was $0.2 million primarily
from income tax expense in certain foreign jurisdictions offset by tax benefits for U.S.
alternative minimum tax loss carryback pursuant to the American Recovery and Reinvestment Act and
deductions for research and development expenditures in one of our foreign development centers. The
income tax expense in 2009 of $2.0 million was primarily for our international operations in
certain jurisdictions where we do not have net operating loss carryforwards (NOLs) to offset
income.
We did not record a tax benefit for our losses in the United States as we have fully reserved
our deferred tax assets. Until such time as we release the deferred tax asset valuation allowance,
we will not record tax benefits in the United States. Given the economic environment over the past
several years and the decline in revenue from our largest customer, management believes it is
necessary to see further evidence of the achievement of our domestic growth targets before any
valuation allowance can be released with respect to these operations.
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RESULTS OF OPERATIONS COMPARISON OF 2009 TO 2008
Banking: | Banking: | |||||||||||||||
(Dollars in thousands) | Payments | Large FI | Community FI | Total | ||||||||||||
Total revenue |
||||||||||||||||
2009 |
$ | 56,543 | $ | 129,232 | $ | 53,152 | $ | 238,927 | ||||||||
2008 |
48,024 | 125,705 | 54,706 | 228,435 | ||||||||||||
Revenue (decline) growth |
8,519 | 3,527 | (1,554 | ) | 10,492 | |||||||||||
Percentage change |
18 | % | 3 | % | -3 | % | 5 | % | ||||||||
Total operating income (loss) |
||||||||||||||||
2009 |
$ | 14,491 | $ | 19,781 | $ | (667 | ) | $ | 33,605 | |||||||
2008 |
9,031 | 11,507 | 2,813 | 23,351 | ||||||||||||
Change in operating
income (loss) |
5,460 | 8,274 | (3,480 | ) | 10,254 | |||||||||||
Percentage change |
60 | % | 72 | % | -124 | % | 44 | % |
Revenue. Total revenue increased primarily due to high demand for Payments and Banking:
Large FIs solutions from new customers and cross sales to existing customers resulting in growth
of our Software licenses, Support and maintenance, and Professional services revenue partially
offset by the negative impact of changes in foreign exchange rates due primarily to operations in
Europe and South Africa. Banking: Large FIs Professional services revenue included a decline in
business with State Farm of $3.9 million.
Payments segment revenue increased primarily due to high demand which drove growth in Software
licenses for perpetual license fees that were fully recognized upon delivery of the software in
2009. Professional services and Support and maintenance revenue increased reflecting the continued
growth in software licensing activity and related implementation projects from the prior years
period. Revenue was negatively affected in 2009 as a result of changes in foreign exchange rates by
approximately $2.5 million due primarily to operations in Europe and South Africa.
Banking: Large FI segment revenue increased primarily due to high demand for U.S. online
banking solutions from new customers and cross sales from existing customers which drove growth in
Software licenses and Support and maintenance revenue. Professional services revenue declined
slightly as a result of a decline in business with State Farm of $3.9 million offset by growth in
business with an international branch customer. Hosting revenue declined primarily due to the
impact of changes in foreign exchange rates for operations in Europe.
Banking: Community FI segment revenue decreased primarily due to customer attrition in this
segments online banking business and the migration of existing customers to this segments new
platform, which impacted Support and maintenance and Hosting revenue. However, Software licenses
revenue increased due to license sales in this segments branch business.
Operating income (loss). Operating income increased $10.3 million in 2009 compared to the
same period in 2008 as a result of higher revenue in our Payments and Banking: Large FI segments,
increased margins for professional services, support and maintenance, and lower stock-based
compensation expense partially offset by higher professional services costs incurred in connection
with migrating customers in the Banking: Community FI segment to a new platform.
Payments segment operating income increased $5.5 million primarily as a result of high demand
for the Payment segments solutions which drove revenue growth. Additionally, the Payments segment
held costs relatively flat for professional services, and operating income benefitted from lower
stock-based compensation expense.
Banking: Large FI segment operating income increased $8.3 million primarily as a result of
increased revenue for its online banking solutions, increased professional services margins, lower
stock-based compensation expense and a favorable impact on operating income from changes in foreign
exchange rates by approximately $0.9 million for operations in Europe and India.
Banking: Community FI segment operating loss of $0.7 million for 2009 as compared to operating
income of $2.8 million for the comparable period in 2008 was due mainly to lower revenue in the
community online banking business as a result of customer attrition and increased costs for product
development and professional services incurred in connection with migrating customers to a new
platform.
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Interest and other (expense) income, net. Our interest income declined by $1.6 million in
2009 as compared to 2008 primarily due to lower interest rates on our cash and investments. Other
non-operating expenses had an increase in net foreign exchange losses on international trade
receivables of $1.3 million partially offset by impairment charges of $700 thousand incurred in
2008 related to a mutual fund trust investment.
Income tax expense. We had income tax expense of $2.0 million and $2.3 million for 2009 and
2008, respectively. We recorded alternative minimum tax expense for components of our domestic
operations as a result of limitations on the use of our federal NOLs. Some components of our
domestic operations incurred income tax expense at regular statutory rates because they are not
included in our consolidated federal income tax return and therefore, do not benefit from our
federal NOLs. Some of our international operations incur income tax expense in jurisdictions where
we do not have NOLs to offset income. We determined that approximately $3.1 million and $2.0
million of the deferred tax valuation allowance should be released with respect to certain
international jurisdictions through income tax expense during 2009 and 2008, respectively.
Liquidity and Capital Resources
Our primary source of cash is cash collections from our customers following the purchase of
software licenses, product support, professional services and hosting services. Payments from
customers for product support and maintenance and software subscription agreements are generally
billed annually in advance. Our primary uses of cash are for personnel, facilities and capital
expenditures. The following tables show information about our cash flows during the years ended
December 31, 2010, 2009 and 2008 and selected balance sheet data as of December 31, 2010 and 2009
(in thousands):
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net cash provided by operating activities before
changes in operating assets and liabilities |
$ | 10,078 | $ | 41,378 | $ | 40,460 | ||||||
Change in operating assets and liabilities |
27,171 | (25,343 | ) | (6,313 | ) | |||||||
Net cash provided by operating activities |
37,249 | 16,035 | 34,147 | |||||||||
Net cash (used in) provided by investing activities |
(37,704 | ) | (7,688 | ) | 15,765 | |||||||
Net cash used in financing activities |
(364 | ) | (12,172 | ) | (27,488 | ) | ||||||
Effect of exchange rates on cash and cash equivalents |
952 | 1,769 | (3,595 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
$ | 133 | $ | (2,056 | ) | $ | 18,829 | |||||
As of December 31, | ||||||||
2010 | 2009 | |||||||
Cash and cash equivalents |
$ | 61,917 | $ | 61,784 | ||||
Working capital (1) |
48,843 | 82,942 | ||||||
Total assets |
309,653 | 300,066 | ||||||
Total stockholders equity |
237,613 | 238,641 |
(1) | Working capital included deferred revenue of $38.0 million and $26.8 million as of December 31, 2010 and 2009, respectively. |
Operating activities. During the year ended December 31, 2010, cash provided by
operating activities of $37.2 million was primarily due to cash generated from our earnings
adjusted for the effect of non-cash expenses and the increase of cash generated from collections of
billed receivables and deferred revenue for software licenses and professional services. Our
unbilled receivables of $12.4 million as of December 31, 2010 related to revenue recognized on
professional services projects in advance of milestone billings that we expect to bill and collect
in future quarters. As of December 31, 2010 and 2009, 60% and 42% of the unbilled receivables,
respectively, related to the custom development project for an international branch customer.
Deferred revenue increased for billings in advance of professional services and deferred software
licenses recognized over the implementation period. During 2010, we made restructuring payments of
$2.2 million for facilities vacated in prior years and expect to have cash expenditures, net of
anticipated sublease income, of approximately $1.5 million within the next twelve months for the
vacated facilities. We believe that our expected cash flows from operations, together with our
existing cash, will be sufficient to meet our anticipated cash needs for working capital, debt
obligations, and capital expenditures for at least the next 12 months.
During the year ended December 31, 2009, cash provided by operating activities of $16.0
million consisted of net income adjusted for the effect of non-cash expenses partially offset by
changes in our operating assets and liabilities, which was primarily in accounts receivables.
Accounts receivable increased as the billed receivables balance increased $12.1 million and the
unbilled receivables balance increased $10.7 million during 2009. The growth of billed receivables
was attributable to our sales growth and increased days sales outstanding for billed receivables
from 45 days to 61 days during
2009. During 2009, we paid approximately $3.5 million in income taxes relating to 2008 and
restructuring payments of $3.0 million for facilities vacated in prior years.
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During the year ended December 31, 2008, cash provided by operating activities of $34.1
million consisted primarily of net income adjusted for the effect of non-cash expenses, partially
offset by changes in our operating assets and liabilities. The increase in accounts receivable of
$3.1 million was primarily due to sales growth. We made restructuring payments of $3.5 million in
2008 primarily for facilities vacated in prior years.
Investing activities. For the year ended December 31, 2010, cash used in investing activities
was $37.7 million primarily due to the acquisition of PMSC for approximately $29.2 million net of
cash acquired, the acquisition of certain assets of the Reseller for approximately $1.9 million net
of cash acquired, and capital expenditures of $6.8 million primarily related to computer equipment
and our data center operations. We expect to spend approximately 3-4% of revenue on capital
expenditures in 2011 which is consistent with our historical spend rate.
During the year ended December 31, 2009, cash used in investing activities was $7.7 million
mainly for capital expenditures for our data center and facility improvements. We also purchased a
restricted investment for $2.0 million in 2009 that is a compensating balance to a letter of credit
for a leased facility. We had an investment in a specific mutual fund trust which was previously
classified as cash and cash equivalents until December 2007 when we were informed that this fund
(i) was closed with respect to additional investments, (ii) had suspended redemptions except in the
case of requests for redemptions in kind, and (iii) would begin an orderly liquidation and
dissolution of portfolio assets. During 2009, we received $2.5 million of redemptions from this
mutual fund trust and had a net realized gain of $100 thousand from settlements. We did not have
any remaining shares of the mutual fund trust as of December 31, 2009.
During the year ended December 31, 2008, cash provided by investing activities was $15.8
million resulting from $8.7 million of capital expenditures and the net maturity of $20.8 million
of investments. Our capital expenditures during 2008 were primarily for hardware, software and
building improvements. We also received $3.7 million from the release of an escrow held since
August 2006 related to the sale of our Risk and Compliance business. Additionally, we acquired
$1.3 million of computer equipment financed through capital leases which typically have three year
terms. Our net cash from investments included $7.8 million of redemptions from a mutual fund
trust and had other than temporary impairment charges of approximately $700 thousand related to
this mutual fund trust.
Financing activities. For the year ended December 31, 2010, cash used in financing activities
was $0.4 million mainly due to the payment of capital lease and debt obligations offset by cash
received from the exercise of employee stock awards. A balloon payment of approximately $5.0
million less $1.6 million held as collateral for our notes payable relating to our corporate
headquarters is due in February 2011 which we expect will be funded by cash provided by operating
activities and available funds in the United States.
During the year ended December 31, 2009, cash used in financing activities was $12.2 million
primarily due to the purchase of $9.6 million, or 1.5 million shares, of our common stock pursuant
to an authorized stock repurchase program completed in the fourth quarter of 2009 and $3.9 million
for the payment of capital lease and debt obligations. We received cash from the exercise of
employee stock awards of $1.3 million during 2009.
During the year ended December 31, 2008, cash used in financing activities was $27.5 million
primarily due to the purchase of $25.1 million, or 4.4 million shares, of common stock pursuant to
an authorized stock repurchase program and $3.7 million for the payment of capital lease and debt
obligations. We received cash from the exercise of employee stock awards of $1.3 million during
2008.
Contractual Obligations and Off-Balance Sheet Arrangements
We generally do not engage in off balance sheet arrangements in the normal course of business,
but we enter into operating lease arrangements and purchase commitments in the normal course of
business. We lease office space and computer equipment under non-cancelable operating leases that
expire at various dates through 2023. As a result of the consolidation of our offices over the
past few years, we have entered into various sublease agreements for our vacated properties. We
also lease computer equipment under capital lease arrangements. Please refer to the notes of our
consolidated financial statements for further information on our debt, leases and purchase
commitments.
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In connection with the lease on one of our vacated offices, we issued to our landlord a
standby letter of credit in the amount of $2.0 million to guarantee certain obligations under the
lease agreement through August 2011. As of December 31, 2010, there were no amounts outstanding
under the letter of credit. We have a fixed term deposit of $2.0 million with the
issuer as a compensating balance for the letter of credit that we purchased in 2009 as an
investment which was included in long-term other assets at December 31, 2010.
As of December 31, 2010, future minimum payments including interest under long-term debt,
operating leases, capital leases, purchase obligations to vendors, uncertain tax positions and
operating sublease income are as follows (in thousands):
Less than | 1 - 3 | 3 - 5 | Greater than | |||||||||||||||||
1 year | years | years | 5 years | Total | ||||||||||||||||
Notes payable including interest payments |
$ | 5,094 | $ | | $ | | $ | | $ | 5,094 | ||||||||||
Capital leases including interest payments |
20 | 36 | | | 56 | |||||||||||||||
Operating leases |
10,333 | 11,195 | 9,362 | 7,384 | 38,274 | |||||||||||||||
Purchase obligations (1) |
2,657 | 1,622 | | | 4,279 | |||||||||||||||
Uncertain tax postitions (2) |
| | | | 459 | |||||||||||||||
Deferred compensation (3) |
| | | | 298 | |||||||||||||||
Subtotal |
$ | 18,104 | $ | 12,853 | $ | 9,362 | $ | 7,384 | $ | 48,460 | ||||||||||
Operating sublease income |
(2,692 | ) | (32 | ) | | | (2,724 | ) | ||||||||||||
Total obligations, net of sublease income |
$ | 15,412 | $ | 12,821 | $ | 9,362 | $ | 7,384 | $ | 45,736 | ||||||||||
(1) | Our purchase obligations mainly consist of software support, hardware support and telecommunication agreements. | |
(2) | For unrecognized tax benefits or liabilities related to uncertain tax positions, we are not able to reasonably estimate the timing of the payments. Therefore, the table does not reflect the expected payment in any specific date column but the amount is included in the Total column. | |
(3) | As the specific payment dates for the deferred compensation are unknown, the related balances have not been reflected in the future minimum payments section of the table for any specific date column, but the amount is included in the Total column. |
Stock appreciation rights awards. As of December 31, 2010, we have a cash liability of
approximately $2.1 million related to our SARs granted in November 2006 that are vested and
exercisable at the discretion of the employees holding such awards. These estimates are based on
our valuation, which uses our closing stock price, among other factors, as of December 31, 2010.
There were cash settlements paid by us included in cash flows from operating activities of $0.3
million, $0.9 million and $0.2 million in 2010, 2009 and 2008, respectively.
Subsidiary funding policies. We lend funds to our foreign subsidiaries to meet their operating
and capital requirements. Our intercompany funding policies are predicated on an assumption that,
unless legally provided for, funds or securities are not freely available from a foreign subsidiary
for use by our U.S. subsidiaries. In particular, some of our foreign subsidiaries are subject to
laws that authorize regulatory bodies to block or limit the flow of funds from those subsidiaries.
Regulatory action of that kind could impede access to funds that we need to make payments on
obligations, including debt obligations. As such, we assume that capital or other financing
provided to certain foreign subsidiaries is not available to our parent company or other
subsidiaries in the U.S. until repayment of funding occurs. As of December 31, 2010, we had cash
and cash equivalents of $61.9 million of which $24.1 million was held outside of the United States
by our foreign operations. We expect foreign subsidiaries will repay their debt for funding or
services performed but we do not currently intend to repatriate undistributed earnings from foreign
subsidiaries. If these assets were distributed to the United States, we may be subject to
additional taxes in certain circumstances.
Capital requirements. We believe that our expected cash flows from operations together with
our existing cash will be sufficient to meet our anticipated cash needs for working capital, debt
obligations, and capital expenditures for at least the next 12 months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional
equity, issue debt securities or establish a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our stockholders. The addition
of indebtedness would result in increased fixed obligations and could result in operating covenants
that would restrict our operations. We cannot assure that financing will be available in amounts or
on terms acceptable to us, if at all.
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Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) amended FASB ASC 605-25
Revenue Recognition: Multiple-Element Arrangements on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective evidence or third party evidence of fair value for
deliverables in an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using the relative selling
price method and additional disclosures on the selling price method. The change is effective
January 1, 2011. As most arrangements accounted for under software revenue recognition guidance
are excluded from the update, the adoption of this change should not have a material effect on our
results of operations.
In October 2009, the FASB amended FASB ASC 985-605 Software: Revenue Recognition to exclude
from its scope all tangible products containing both software and non-software components that
operate together to deliver the products functions. The change is effective January 1, 2011. As
this change does not affect revenue arrangements that have no tangible products or contracts that
bundle services and software, the adoption of this change should not have a material effect on our
results of operations since most of our arrangements have little to no tangible products.
In January 2010, the FASB issued ASU 2010-6 Improving Disclosures About Fair Value
Measurements that amends existing disclosure requirements under ASC 820 by adding required
disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy;
adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. The new disclosures and clarifications of existing disclosure are
effective for fiscal years beginning after December 15, 2009, except for the disclosure
requirements related to the purchases, sales, issuances and settlements in the rollforward activity
of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years
ending after December 31, 2010. Since this standard impacts disclosure requirements only, the
adoption of this guidance did not have a material impact to our consolidated results of operations
or financial condition.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reported period. Generally, we base our estimates on historical experience and on various other
assumptions in accordance with U.S. GAAP that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates under other assumptions or conditions. Critical
accounting policies and estimates are those that we consider the most important to the portrayal of
our financial position and results of operations because they require our most difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain. To see further discussion of all the accounting policies
and related disclosures, review the notes to the consolidated financial statements. Our critical
accounting policies and estimates include those related to:
| revenue recognition; |
| estimation of our allowance for doubtful accounts and billing adjustments; |
| valuation and recoverability of long-lived assets, including goodwill; |
| determination of the fair value of stock-based compensation; and |
| income taxes. |
Revenue recognition. Revenue is a key component of our results of operations and is a key
metric used by management, securities analysts and investors to evaluate our performance. Our
revenue generally includes multiple element arrangements such as software license fees for software
products, implementation and customization services, training, post-contract customer support,
hosting and data center services and, in some cases, hardware or other third party products and
services. From time to time, we enter into software arrangements that include software license,
maintenance, and professional services which are considered essential to the functionality of the
software. In these instances, we recognize revenue for the three revenue streams (software
license, maintenance and professional services) under three units of accounting, which are the (i)
software license, (ii) professional services, and (iii) support and maintenance. For purposes of
displaying revenues and costs, the Company presents applicable license fees, maintenance and
professional services revenues in the Consolidated Statement of Operations using vendor-specific
objective evidence of fair value (VSOE), or if unavailable, other objective evidence of fair
value for the undelivered elements and assigning the remainder of the arrangement fee to the
license.
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Software licenses revenue. For software license sales for which professional services
rendered are not considered essential to the functionality of the software, we recognize revenue
upon delivery of the software provided (1) there is
evidence of an arrangement, (2) collection of our fee is probable, and (3) the fee is fixed or
determinable. In our arrangements that include software licenses, for which VSOE does not exist for
the delivered element and exists for all undelivered elements, we use the residual method.
When professional services are considered essential to the functionality of the software, we
record revenue for the license and professional services over the implementation period using the
percentage of completion method, which is generally measured by the percentage of labor hours
incurred to date to estimated total labor hours for each contract. We typically use labor hours to
estimate contract costs. Contract costs generally include direct labor, contractor costs and
indirect costs identifiable with or allocable to the contracts. If other judgments or assumptions
were used in the evaluation of our revenue arrangements, the timing and amounts of revenue
recognized may have been significantly different. For instance, many of our software license
revenue arrangements in our Payments and Banking: Large FI segments are accounted for using the
percentage of completion method since the services are considered essential to the functionality of
the software. If it was determined that those services were not essential to the functionality of
the software, we may have recognized the license revenue upon delivery of the license, provided
other required criteria were satisfied. Further, if we determined that we cannot make reasonably
dependable estimates in the application of the percentage of completion method, we would defer all
revenue and recognize the revenue upon completion of the contract.
For subscription license arrangements where we sell customers the rights to unspecified
products as well as unspecified upgrades and enhancements during a specified term and sometimes
include hosted services, the license revenue is recognized ratably over the term of the
arrangement. Subscription revenue is allocated to all elements of the arrangement (Software
license, Support and maintenance, and Hosting revenue) using a consistent approach which considers
the VSOE of support and maintenance and pricing methodologies. In addition, subscription agreements
typically contain renewal terms that automatically extend the term of the arrangement for one year
or more unless a timely notice of termination is provided.
Support and maintenance revenue. Revenue for post-contract customer support and
maintenance is recognized ratably over the contract period.
Professional services revenue. Revenue derived from arrangements to provide
professional services on a time and materials basis is recognized as the related services are
performed. For other revenue from professional services that are provided on a fixed fee basis,
revenue is recognized on a percentage of completion or proportional performance basis which is
generally a method based upon labor hours incurred as a percentage of total estimated labor hours
to complete the project. Provisions for estimated losses on incomplete contracts are made in the
period in which such losses are determined. Our contractual arrangements are evaluated on a
contract-by-contract basis and often require our judgment and estimates that affects the
classification and timing of revenue recognized in our statements of operations. The complexity of
our process for estimates and factors relating to the assumptions, risks and uncertainties inherent
with the application of the percentage of completion or proportional performance method of
accounting affects the amount of revenue and related expenses reported in our consolidated
financial statements. Specifically, we may be required to make judgments about:
| whether the fees associated with our products and services are fixed or determinable; |
| whether the collection of our fees is probable; |
| whether professional services are essential to the functionality of the related software product; |
| whether we have the ability to make reasonably dependable estimates in the application of the percentage of completion and proportional performance methods; and |
| whether we have VSOE of fair value for our products and services. |
Additionally, we may be required to make estimates which may impact the timing and amounts of
revenue recognized during the periods if our presented estimates change. Our revenue and unbilled
accounts receivable may be impacted by changes to these estimates including:
| percentage of labor hours incurred to date to the estimated total labor hours for each contract; |
| changes to labor rates; |
| milestone billing dates that become greater than 12 months from the reporting date; |
| utilization and efficiency variances; |
| specification and testing requirements; |
| provisions for estimated losses on uncompleted contracts; and |
| length or complexity of custom implementations. |
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Hosting revenue. Hosting arrangements typically include two elements: implementation
and transaction processing services. For those hosting arrangements which contain elements that
qualify as separate units of accounting, the
implementation and transaction processing services are recognized as the services are
performed. For those hosting arrangements that contain elements that do not qualify as separate
units of accounting, professional services revenue earned under these arrangements is initially
deferred and then recognized over the term of the hosting arrangement or the expected period of
performance, whichever is longer. Over-usage fees, bill pay fees and fees billed based on the
actual number of transactions from which we capture data, are billed in accordance with contract
terms as these fees are incurred.
Estimation of allowance for doubtful accounts and billing adjustments. We are required to
report accounts receivable at the amount we expect to collect from our customers. As a result, we
are required to use our judgment to estimate the likelihood that certain receivables may not be
collected or that we might offer future discounts or concessions for previously billed amounts.
Accordingly, we have established a discount allowance for estimated billing adjustments and a bad
debt allowance for estimated amounts that we will not collect. We report provisions for billing
adjustments as a reduction of revenue and provisions for bad debts as a component of selling and
marketing expense. We review specific accounts for collectability based on circumstances known to
us at the date of our financial statements. In addition, we maintain reserves based on historical
billing adjustments and write-offs, and historical discounts, concessions and bad debts, customer
concentrations, customer credit-worthiness and current economic trends. Accordingly, our judgments
and estimates about the collectability of our accounts receivable affect revenue, selling expense
and the carrying value of our accounts receivable.
Billed accounts receivable that were more than 90 days past due accounted for 16% and 7% of
the billed accounts receivable balance, excluding allowance for doubtful accounts and billing
adjustments as of December 31, 2010 and 2009, respectively. Our discount allowance reflects the
increase in billed accounts receivable that were more than 90 days past due impacted by longer
collection periods for large implementations in the Banking: Large FI segment.
Valuation and recoverability of long-lived assets, including goodwill. We evaluate the
recoverability of long-lived assets, including goodwill, whenever events or changes in
circumstances indicate that the carrying amount should be assessed by comparing their carrying
value to the undiscounted estimated future net operating cash flows expected to be derived from
such assets. If such evaluation indicates a potential impairment, we use discounted cash flows and
market approach to measure fair value in determining the amount of the long-lived assets that
should be written off. Factors we consider important which could trigger an impairment review
include, but are not limited to, the following:
| significant under-performance relative to expected historical or projected future operating results; |
| significant changes in the manner of our use of the acquired assets or the strategy of our overall business; |
| significant negative industry or economic trends; |
| significant decline in our stock price for a sustained period; and |
| our market capitalization relative to net book value. |
As of December 31, 2010, our balance sheet included goodwill and other intangibles that
represent approximately 51% of our total assets. We are required to perform an annual test of our
goodwill value to determine whether it has been impaired. We use long term forecasts to determine
the discounted cash flows and the market approach of revenue multiples to estimate the fair value
of our reporting units. Our fair value estimates are impacted by many factors including, but not
limited to changing economic conditions of our customer base, expected growth rates, discount rate,
and long term business plans. Future events and changes in circumstances may require us to record
an impairment charge if our financial condition or results of operations significantly decline. As
a measure of sensitivity, a 10% decrease in the fair value of any of our reporting units would not
trigger an impairment of the carrying value of our goodwill based on our October 1, 2010 goodwill
test.
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Determination of the fair value of stock-based compensation. We account for stock-based
compensation using the modified prospective method. In determining the fair value, management
makes certain estimates such as but not limited to the expected life of an equity award, the
volatility of our stock and risk free rates. Additionally, we are required to estimate forfeitures
at the time of grant and adjust them over the requisite service period based on the extent to which
actual forfeitures differ, or are expected to differ, from their estimates. These assumptions
affect the estimated fair value of the equity grant. As such, these estimates will affect the
compensation expense we record in future periods. These estimates affect the timing of the
compensation expense we record. Also, we have outstanding stock appreciation rights (SARs) that
are cash settled. Therefore, we revalue our liability to settle the SARs awards each period based
on an updated valuation which includes, among other factors, our closing stock price for the
period. Future volatility in our stock price will impact the liability to settle the SARs awards
which will be reflected in operating expenses. Our stock-based compensation expense relates to our
stock options, restricted stock and cash-settled SARs. Our expense for stock options and restricted
stock is recognized ratably over the vesting period. While the mix of stock option and restricted
stock expense has varied, the total combined expense for stock options and restricted stock has not
changed significantly. Our stock-based compensation expenses included in operating expenses and by
grant type were as follows (in thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating expenses: |
||||||||||||
Cost of professional services, support and maintenance |
$ | 310 | $ | 161 | $ | 344 | ||||||
Cost of data center |
133 | 115 | 100 | |||||||||
Selling and marketing |
504 | (246 | ) | 2,949 | ||||||||
Product development |
270 | 254 | 1,034 | |||||||||
General and administrative |
2,483 | 1,318 | 3,665 | |||||||||
Total stock-based compensation expense |
$ | 3,700 | $ | 1,602 | $ | 8,092 | ||||||
Grant type: |
||||||||||||
Stock options |
$ | 1,656 | $ | 2,342 | $ | 3,955 | ||||||
Restricted stock |
2,573 | 1,750 | 917 | |||||||||
Stock appreciation rights |
(529 | ) | (2,490 | ) | 3,220 | |||||||
Total stock-based compensation expense |
$ | 3,700 | $ | 1,602 | $ | 8,092 | ||||||
Income taxes. We use the asset and liability method of accounting for income taxes. Under
this method, income tax expense is recognized for the amount of taxes payable or refundable for the
current year. In addition, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit carryforwards. Management must
make assumptions, judgments and estimates to determine our current provision for income taxes and
also our deferred tax assets and liabilities and any valuation allowance to be recorded against a
deferred tax asset.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take
into account predictions of the amount and category of future taxable income, such as income from
operations or capital gains income. Actual operating results and the underlying amount and category
of income in future years could render our current assumptions, judgments and estimates of
recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates
mentioned above could cause our actual income tax obligations to differ from our estimates, thus
materially impacting our financial position and results of operations. We released a portion of our
valuation allowance for deferred tax assets in 2009 and in 2008 for multiple foreign jurisdictions.
However, we still have a valuation allowance on our deferred tax assets in the United States. In
order to release additional amounts of the valuation allowance, we must show a history of sustained
profitability or other positive evidence. As economic conditions in the United States improve, we
will evaluate the possibility of releasing a portion of the valuation allowance based on estimates
regarding our future earnings and the recoverability of the deferred tax assets. A portion of any
such reversal could have a positive impact on our earnings in the period in which it is reversed.
In the event the valuation allowance is released, the portion of the allowance associated with loss
carryforwards generated by stock options will be credited to additional paid-in-capital and will
not be reported as a benefit on the statement of operations.
Effects of Foreign Currencies
Our revenue and net income were impacted by foreign exchange rate fluctuations mainly for
transactions in the British Pound, South African Rand, Indian Rupee and the European Euro.
Generally, expenses are denominated in the same currency as our revenue and the exposure to rate
changes is naturally hedged for transactions in the British Pound and European Euro which minimizes
the impact to net income. However, our development center in India is not naturally hedged as their
costs are in the local currency but are funded in U.S. Dollars and British Pounds. Additionally,
our South African operations are approximately 60% naturally hedged as some of the development and
professional services performed are funded in U.S. Dollars and British Pounds. We did not enter
into material financial derivatives to hedge our currency risks in 2010, 2009 or 2008. Please
refer to Item 7A of Part II, Quantitative and Qualitative Disclosures about our Market Risk for
further discussions on potential foreign currency risks.
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The estimated effect on our consolidated statements of operations from changes in exchange
rates versus the U.S. Dollar is as follows (in thousands, except per share data):
Year Ended December 31, 2010 | Year Ended December 31, 2009 | |||||||||||||||||||||||
At Prior Year | At Prior Year | |||||||||||||||||||||||
Exchange | Exchange Rate | Exchange | Exchange Rate | |||||||||||||||||||||
Rates (1) | Effect | As reported | Rates (1) | Effect | As reported | |||||||||||||||||||
Revenue |
$ | 206,936 | $ | 2,150 | $ | 209,086 | $ | 243,127 | $ | (4,200 | ) | $ | 238,927 | |||||||||||
Operating Expenses |
210,130 | 3,460 | 213,590 | 210,042 | (4,720 | ) | 205,322 | |||||||||||||||||
Operating Income |
(3,194 | ) | (1,310 | ) | (4,504 | ) | 33,085 | 520 | 33,605 | |||||||||||||||
Net Income |
(5,113 | ) | (1,170 | ) | (6,283 | ) | 29,523 | 900 | 30,423 | |||||||||||||||
Basic (loss) income per share |
$ | (0.10 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | 0.54 | $ | 0.02 | $ | 0.56 | |||||||||
Diluted (loss) income per share |
$ | (0.10 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | 0.54 | $ | 0.01 | $ | 0.55 |
(1) | Current year results translated into U.S. Dollars using prior years average rate. |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Our market risk exposure primarily is the effect of foreign currency fluctuations. We also
are at risk for changes in interest rates and changes in the market values of our cash, cash
equivalents and investments. Information relating to quantitative and qualitative disclosure about
market risk is set forth below, in Item 7 of Part II, Managements Discussion and Analysis of
Financial Condition and Results of Operations, in our Risk Factors contained in Item 1A of this
report and the notes of our consolidated financial statements. As of December 31, 2010, we were
not a party to any material derivative financial instruments, other financial instruments for which
the fair value disclosure would be required for derivative commodity instruments.
Foreign currency risk. The foreign currency financial statements of our international
operations are translated into U.S. dollars at current exchange rates, except revenue and expenses,
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 accumulated other comprehensive income (loss). Therefore,
our exposure to foreign currency exchange rate risk occurs when translating the financial results
of our international operations to U.S. dollars in consolidation. Our foreign currency risk is
primarily for transactions in the British Pound Sterling, South African Rand, Indian Rupee and
European Euro.
Our expenses are generally denominated in the same currency as our revenue and the exposure to
our net income from foreign currency rate changes is minimal. We believe most of our international
operations are naturally hedged for foreign currency risk as our foreign subsidiaries generally
invoice their customers and satisfy their obligations in their local currencies with the exception
of our development centers in India and South Africa. Our development center in India is not
naturally hedged for foreign currency risk as their costs are in the local currency, but are funded
in U.S. dollars or British Pounds. Additionally, our South African operations are approximately
60% naturally hedged as some of the development and professional services performed are funded in
U.S. Dollars and British Pounds. There can be no guarantee that foreign currency fluctuations in
the future will not be significant or fully hedged. We have not historically used financial
instruments for speculative trading purposes, or hedged our foreign currency exposure to entirely
offset the changes in foreign currency rates.
Based on our 2010 financial results, approximately 21% of our revenue and approximately 24% of
our operating expenses were transacted in currencies other than U.S. Dollars. From a sensitivity
analysis viewpoint, based on our 2010 financial results, a hypothetical overall 10% change in the
U.S. Dollar from the average foreign exchange rates during 2010 would have impacted our revenue and
net loss by approximately $4.4 million and $0.6 million, respectively.
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Interest rate risk. Our exposure to market risk for changes in interest rates relates
primarily to our cash, cash equivalents and investments which impacts earnings by changes in our
interest income. We generally invest our excess cash in money market funds, government debt funds
and fixed term deposits. We believe they are recorded at fair value due to their short term nature.
Based on our cash and cash equivalent balances as of December 31, 2010, the annual impact on
results of operations of a one-percentage point change in interest rates would be approximately
$0.6 million.
For fixed rate debt, interest rate changes affect the fair value of financial instruments but
do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes
generally do not affect the fair market value but do impact future earnings and cash flows,
assuming other factors are held constant. We have historically only had fixed rate capital leases,
but we did not have any significant balances as of December 31, 2010.
Investment risk. As of December 31, 2010, we had an investment of $2.0 million in fixed term
deposits to collateralize our letter of credit. We believe our risk is low due to the fixed
principal balance of the investments. However, the potential impact of a hypothetical decrease of
10% in the fair value of the underlying investments would negatively affect earnings by $0.2
million if the decrease in fair value were deemed other than temporary.
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Table of Contents
Item 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
Page | ||||
FINANCIAL STATEMENTS: |
||||
35 | ||||
36 | ||||
37 | ||||
38 | ||||
39 | ||||
40 | ||||
FINANCIAL STATEMENT SCHEDULE: |
||||
For each of the three years ended December 31, 2010, 2009 and 2008 |
||||
64 |
All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
34
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of S1 Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of S1 Corporation and its subsidiaries at
December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2010 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on these financial statements,
on the financial statement schedule, and on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control Over Financial Reporting, management
has excluded PM Systems Corporation from its assessment of internal control over financial
reporting as of December 31, 2010 because it was acquired by the Company in a purchase business
combination during 2010. We have also excluded PM Systems Corporation from our audit of internal
control over financial reporting. PM Systems Corporation is a wholly-owned subsidiary whose total
assets and total revenues represent 10% and 5%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2010.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 11, 2011
Atlanta, Georgia
March 11, 2011
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S1 CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands, except share | ||||||||
and per share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 61,917 | $ | 61,784 | ||||
Accounts receivable, net of allowance for doubtful accounts and billing adjustments
of $3,309 and $2,299 at December 31, 2010 and 2009, respectively |
44,370 | 64,470 | ||||||
Prepaid expenses |
4,827 | 4,729 | ||||||
Other current assets |
6,612 | 4,931 | ||||||
Total current assets |
117,726 | 135,914 | ||||||
Property and equipment, net |
22,330 | 23,018 | ||||||
Intangible assets, net |
11,846 | 4,895 | ||||||
Goodwill |
147,544 | 126,605 | ||||||
Other assets |
10,207 | 9,634 | ||||||
Total assets |
$ | 309,653 | $ | 300,066 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 9,779 | $ | 7,707 | ||||
Accrued compensation and benefits |
9,705 | 11,569 | ||||||
Current portion of debt obligation |
5,046 | 1,170 | ||||||
Accrued restructuring |
1,528 | 2,096 | ||||||
Income taxes payable |
1,950 | 1,586 | ||||||
Deferred revenue |
38,022 | 26,837 | ||||||
Other current liabilities |
2,853 | 2,007 | ||||||
Total current liabilities |
68,883 | 52,972 | ||||||
Debt obligation, excluding current portion |
35 | 5,026 | ||||||
Accrued restructuring, excluding current portion |
| 1,381 | ||||||
Other liabilities |
3,122 | 2,046 | ||||||
Total liabilities |
$ | 72,040 | $ | 61,425 | ||||
Commitments and contingencies (Note 10) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value. Authorized 25,000,000 shares. Issued and outstanding
0 shares and 749,064 shares at December 31, 2010 and 2009, respectively |
$ | | $ | 10,000 | ||||
Common stock, $0.01 par value. Authorized 350,000,000 shares. Issued and outstanding
53,317,063 and 51,712,710 shares at December 31, 2010 and 2009, respectively |
533 | 517 | ||||||
Additional paid in capital |
1,802,795 | 1,787,772 | ||||||
Accumulated deficit |
(1,563,817 | ) | (1,557,534 | ) | ||||
Accumulated other comprehensive loss |
(1,898 | ) | (2,114 | ) | ||||
Total stockholders equity |
237,613 | 238,641 | ||||||
Total liabilities and stockholders equity |
$ | 309,653 | $ | 300,066 | ||||
See accompanying notes to consolidated financial statements.
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S1 CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands, except share and per share data) | ||||||||||||
Revenue: |
||||||||||||
Software licenses |
$ | 26,237 | $ | 35,196 | $ | 30,230 | ||||||
Support and maintenance |
63,034 | 59,602 | 53,779 | |||||||||
Professional services |
65,180 | 94,965 | 92,470 | |||||||||
Hosting |
54,635 | 49,164 | 51,956 | |||||||||
Total revenue |
209,086 | 238,927 | 228,435 | |||||||||
Operating expenses: |
||||||||||||
Cost of software licenses (1) |
2,242 | 3,188 | 3,986 | |||||||||
Cost of professional services, support and maintenance (1) |
82,778 | 74,186 | 74,095 | |||||||||
Cost of hosting (1) |
27,595 | 28,147 | 26,408 | |||||||||
Selling and marketing |
28,172 | 30,725 | 36,432 | |||||||||
Product development |
35,508 | 34,619 | 29,271 | |||||||||
General and administrative |
27,134 | 24,864 | 25,826 | |||||||||
Depreciation and amortization |
10,161 | 9,593 | 9,066 | |||||||||
Total operating expenses |
213,590 | 205,322 | 205,084 | |||||||||
Operating (loss) income |
(4,504 | ) | 33,605 | 23,351 | ||||||||
Interest income |
214 | 433 | 2,052 | |||||||||
Interest expense |
(455 | ) | (721 | ) | (855 | ) | ||||||
Other non-operating expenses |
(1,367 | ) | (930 | ) | (444 | ) | ||||||
Interest and other (expense) income, net |
(1,608 | ) | (1,218 | ) | 753 | |||||||
(Loss) income before income tax expense |
(6,112 | ) | 32,387 | 24,104 | ||||||||
Income tax expense |
(171 | ) | (1,964 | ) | (2,254 | ) | ||||||
Net (loss) income |
$ | (6,283 | ) | $ | 30,423 | $ | 21,850 | |||||
(Loss) income per share |
||||||||||||
Basic |
$ | (0.12 | ) | $ | 0.56 | $ | 0.38 | |||||
Diluted |
$ | (0.12 | ) | $ | 0.55 | $ | 0.38 | |||||
Weighted average common shares outstanding basic |
52,495,265 | 52,583,832 | 55,734,103 | |||||||||
Weighted average common shares outstanding fully diluted |
52,495,265 | 53,290,836 | 56,449,371 |
(1) | The Cost of software licenses, professional services, support and maintenance and hosting excludes charges for depreciation but the Cost of software licenses includes amortization of acquired technology. |
See accompanying notes to consolidated financial statements.
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S1 CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net (loss) income |
$ | (6,283 | ) | $ | 30,423 | $ | 21,850 | |||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
11,216 | 11,170 | 11,591 | |||||||||
Provision for doubtful accounts receivable and billing adjustments |
1,388 | 995 | 159 | |||||||||
Deferred income taxes |
57 | (2,812 | ) | (1,895 | ) | |||||||
Other than temporary impairments of investments |
| | 663 | |||||||||
Stock-based compensation expense |
3,700 | 1,602 | 8,092 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in accounts receivable |
19,880 | (22,396 | ) | (3,095 | ) | |||||||
(Increase) decrease in prepaid expenses and other assets |
(1,760 | ) | 792 | (231 | ) | |||||||
Decrease in accounts payable and other liabilities |
(292 | ) | (920 | ) | (6,250 | ) | ||||||
(Decrease) increase in accrued compensation and benefits |
(1,985 | ) | (2,711 | ) | 2,106 | |||||||
Increase (decrease) in income taxes payable |
310 | (1,437 | ) | 2,434 | ||||||||
Increase (decrease) in deferred revenues |
11,018 | 1,329 | (1,277 | ) | ||||||||
Net cash provided by operating activities |
37,249 | 16,035 | 34,147 | |||||||||
Cash flows from investing activities: |
||||||||||||
Maturities of investment securities |
1,384 | 5,728 | 24,244 | |||||||||
Purchases of investment securities |
(1,117 | ) | (3,224 | ) | (3,447 | ) | ||||||
Purchases of restricted investment securities |
| (2,000 | ) | | ||||||||
Amounts released from escrow related to sale of business |
| | 3,712 | |||||||||
Acquisitions, net of acquired cash |
(31,198 | ) | | | ||||||||
Purchases of property, equipment and technology |
(6,773 | ) | (8,192 | ) | (8,744 | ) | ||||||
Net cash (used in) provided by investing activities |
(37,704 | ) | (7,688 | ) | 15,765 | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from exercise of employee stock awards |
810 | 1,341 | 1,305 | |||||||||
Payments on capital leases and debt obligations |
(1,174 | ) | (3,917 | ) | (3,718 | ) | ||||||
Repurchase and retirement of common stock |
| (9,596 | ) | (25,075 | ) | |||||||
Net cash used in financing activities |
(364 | ) | (12,172 | ) | (27,488 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
952 | 1,769 | (3,595 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
133 | (2,056 | ) | 18,829 | ||||||||
Cash and cash equivalents at beginning of period |
61,784 | 63,840 | 45,011 | |||||||||
Cash and cash equivalents at end of period |
$ | 61,917 | $ | 61,784 | $ | 63,840 | ||||||
Noncash investing and financing activities: |
||||||||||||
Equipment financed through capital leases |
$ | 60 | $ | | $ | 1,301 | ||||||
Supplemental schedule of cash flow data: |
||||||||||||
Cash paid for income taxes |
$ | 1,716 | $ | 7,057 | $ | 2,279 | ||||||
Cash paid for interest |
455 | 730 | 875 |
See accompanying notes to consolidated financial statements.
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S1 CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands except for share data)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders | Comprehensive | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | Income (Loss) | ||||||||||||||||||||||||||||
Balance at December 31, 2007 |
749,064 | $ | 10,000 | 56,748,906 | $ | 567 | $ | 1,810,783 | $ | (1,609,807 | ) | $ | (1,638 | ) | $ | 209,905 | ||||||||||||||||||||
Net income |
| | | | | 21,850 | | 21,850 | 21,850 | |||||||||||||||||||||||||||
Net unrealized loss on cash flow hedges |
| | | | | | 49 | 49 | 49 | |||||||||||||||||||||||||||
Change in cumulative foreign currency translation
adjustment, net of taxes |
| | | | | | (4,283 | ) | (4,283 | ) | (4,283 | ) | ||||||||||||||||||||||||
Realized loss on cash flow hedges |
| | | | | | 117 | 117 | 117 | |||||||||||||||||||||||||||
Common stock issued upon the exercise of stock
Awards |
| | 442,141 | 4 | 1,301 | | | 1,305 | | |||||||||||||||||||||||||||
Stock-based compensation expense |
| | 4,872 | | | 4,872 | | |||||||||||||||||||||||||||||
Repurchase and retirement of common stock |
| | (4,391,737 | ) | (43 | ) | (25,032 | ) | | | (25,075 | ) | | |||||||||||||||||||||||
Comprehensive income |
| | | | | | | | $ | 17,733 | ||||||||||||||||||||||||||
Balance at December 31, 2008 |
749,064 | $ | 10,000 | 52,799,310 | $ | 528 | $ | 1,791,924 | $ | (1,587,957 | ) | $ | (5,755 | ) | $ | 208,740 | ||||||||||||||||||||
Net income |
| | | | | 30,423 | | 30,423 | 30,423 | |||||||||||||||||||||||||||
Net unrealized loss on cash flow hedges |
| | | | | | (69 | ) | (69 | ) | (69 | ) | ||||||||||||||||||||||||
Change in cumulative foreign currency translation
adjustment, net of taxes |
| | | | | | 3,710 | 3,710 | 3,710 | |||||||||||||||||||||||||||
Common stock issued upon the exercise of stock
Awards |
| | 420,751 | 4 | 1,337 | | | 1,341 | | |||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | 4,092 | | | 4,092 | | |||||||||||||||||||||||||||
Repurchase and retirement of common stock |
| | (1,507,351 | ) | (15 | ) | (9,581 | ) | | | (9,596 | ) | | |||||||||||||||||||||||
Comprehensive income |
| | | | | | | | $ | 34,064 | ||||||||||||||||||||||||||
Balance at December 31, 2009 |
749,064 | $ | 10,000 | 51,712,710 | $ | 517 | $ | 1,787,772 | $ | (1,557,534 | ) | $ | (2,114 | ) | $ | 238,641 | ||||||||||||||||||||
Net loss |
| | | | | (6,283 | ) | | (6,283 | ) | (6,283 | ) | ||||||||||||||||||||||||
Change in cumulative foreign currency translation
adjustment, net of taxes |
| | | | | | 216 | 216 | 216 | |||||||||||||||||||||||||||
Conversion of preferred stock to common stock |
(749,064 | ) | (10,000 | ) | 1,070,090 | 11 | 9,989 | | | | | |||||||||||||||||||||||||
Common stock issued upon the exercise of stock |
| |||||||||||||||||||||||||||||||||||
awards |
| | 534,263 | 5 | 805 | | | 810 | | |||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | 4,229 | | | 4,229 | | |||||||||||||||||||||||||||
Comprehensive loss |
| | | | | | | | $ | (6,067 | ) | |||||||||||||||||||||||||
Balance at December 31, 2010 |
| $ | | 53,317,063 | $ | 533 | $ | 1,802,795 | $ | (1,563,817 | ) | $ | (1,898 | ) | $ | 237,613 | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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S1 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business Overview
S1 Corporation is a leading global provider of payments and financial services software
solutions. We offer payments solutions for ATM and retail point-of-sale (POS) driving, card
management, and merchant acquiring, as well as financial services solutions for consumer, small
business and corporate online banking, trade finance, mobile banking, voice banking, branch and
call center banking. We sell our solutions primarily to banks, credit unions, retailers and
transaction processors. We also provide software, custom software development, hosting and other
services to State Farm Mutual Automobile Insurance Company (State Farm), a relationship that we
expect will conclude by the end of 2011.
Basis of presentation
The consolidated financial statements include the accounts of S1 Corporation and its wholly
owned subsidiaries. All significant intercompany transactions are eliminated in the consolidation
process. When we use the terms S1 Corporation, S1, Company, we, us and our, we mean S1
Corporation, a Delaware corporation, and its subsidiaries.
In the first quarter of 2010, we changed our reporting segments to present our Payments,
Banking: Large Financial Institution (Banking: Large FI), and Banking: Community Financial
Institution (Banking: Community FI) businesses separately. The Payments segment provides our ATM
and POS driving, card management, and merchant acquiring solutions to financial institutions,
retailers and transaction processors of all sizes globally. The Banking: Large FI segment provides
consumer, small business and corporate online banking, trade finance, and mobile banking solutions
to large banks globally, branch and call center banking solutions to large banks outside of the
United States, and also supports our business with State Farm (which we expect will conclude by the
end of 2011). The Banking: Community FI segment provides consumer and small business online
banking, mobile banking, voice banking, branch and call center banking solutions to community and
regional banks and credit unions in the United States. Certain reclassifications have been made to
the prior years financial statements to conform to current year presentation related to our
segment reporting.
Subsequent events
We have evaluated all subsequent events and determined that there were no subsequent events
required to be disclosed or recorded as of December 31, 2010 in our financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America (U.S. GAAP) requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes,
including estimates of revenue, probable losses, restructuring costs and operating expenses. Actual
results could differ from those estimates.
Fair value of financial instruments
Cash and cash equivalents include deposits with commercial banks and highly liquid investments
with original maturities of 90 days or less. Cash and cash equivalents also includes certain short
term investments that are readily convertible to known amounts of cash and are so near their
maturity that they present insignificant risk of changes in value because of changes in interest
rates. Generally, these investments have net asset values (NAV) of $1.00 per unit.
The classification of the investment is made when we purchase the investment. However, if the
investment changes and no longer meets the definition of cash and cash equivalents, the investment
will be reclassified to short term investments during the quarter of the change. 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. Investments
with a remaining maturity that exceed one year are reported in non-current other assets.
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Investments in debt and equity securities are analyzed to determine whether they represent an
investment that has a fair value per share or unit that is determined and published for current
transactions. The analysis is limited to those
professionally managed investments that (1) pool the capital of investors to invest in bonds
(debt securities), options, currencies, or money market securities for current income, capital
appreciation, or both consistent with the investment objectives of the fund; (2) have a NAV
provided to the investor periodically, but no less frequently than at each month end; and (3) the
month-end NAV is the price paid or received by investors purchasing or selling investments at month
end. Any unrealized holding gains and losses resulting from these securities are reported as a net
amount in a separate component of shareholders equity until realized. Realized gains and losses
and declines in value judged to be other than temporary, if any, are included in earnings.
Derivative financial instruments
We may use derivative financial instruments to manage certain exposures to fluctuations in
foreign currency to mitigate the risk that changes in exchange rates will adversely affect the
eventual dollar cash flows resulting from the hedged transactions with a series of foreign currency
options. Designation is performed on a specific exposure basis to support hedge accounting. The
changes in fair value of these hedging instruments will be offset in part or in whole by
corresponding changes in the cash flows of the underlying exposures being hedged. We generally do
not hold or issue derivative financial instruments for trading purposes.
Accounts receivable and allowance for doubtful accounts and billing adjustments
Accounts receivable include amounts billed to customers and unbilled amounts of revenue earned
in advance of billings. Unbilled receivable balances arise primarily from our performance of
services in advance of billing terms on contracted professional services where percentage of
completion or proportional performance accounting is applied. Generally, billing occurs at the
achievement of milestones that correlate with progress towards completion of implementation
services. Accounts receivable are recorded at the invoiced amount or the earned amount and do not
bear interest. We have established a discount allowance for estimated billing adjustments and an
allowance for estimated amounts that we will not collect. We report provisions for billing
adjustments as a reduction of revenue and provisions for uncollectible amounts as a component of
selling expense. We review specific accounts, including substantially all accounts with past due
balances over 90 days, for collectability based on circumstances known to us at the date of our
financial statements. In addition, we maintain reserves based on historical billing adjustments and
write-offs, historical discounts and write-offs, customer concentrations, customer
credit-worthiness, and current economic trends. Accounts receivable are charged off against the
allowance when we estimate it is probable the receivable will not be recovered. Accounts receivable
are presented net of allowance for doubtful accounts and billing adjustments.
Property and equipment
We report property and equipment at cost less accumulated depreciation. Expenditures for major
additions and improvements are capitalized and minor replacements, maintenance and repairs are
charged to expense as incurred. Assets held under capital leases are recorded at the lower of the
net present value of the minimum lease payments or the fair value of the leased asset at the
inception of the lease and are generally only for computer equipment. We calculate depreciation
using the straight-line method over the estimated useful lives of the related assets. We amortize
leasehold improvements using the straight-line method over the estimated useful life of the
improvement or the lease term, whichever is shorter. Depreciation for assets held under capital
leases is computed using the straight-line method over the estimated useful life of the assets
which is usually equal to the lease term. However, we may use the lease term if the lease has a
lease term shorter than our estimated useful life and the lease is not a bargain purchase or
automatic transfer of title. Gains or losses recognized on disposal or retirement of property and
equipment are recognized in Interest and other (expense) income in the statement of operations. We
accrue asset retirement liabilities for leased facilities if required to restore the facility due
to our leasehold improvements. However, to date these liabilities have been immaterial to our
financial position as most of our larger leases do not require restorations.
The estimated useful lives of property and equipment are as follows:
Building
|
27 years | |
Building improvements
|
5 to 15 years | |
Leasehold improvements
|
shorter of lease term or 5 years | |
Furniture and fixtures
|
5 years | |
Computer equipment
|
2 to 3 years including leases | |
Software
|
3 years |
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Leases
We review all leases for capital or operating classification at their inception. We generally
enter into lease arrangements as an operating lease for our facilities and capital lease for
computer equipment. For leases that contain rent escalations, we record the total rent expense
during the lease term on a straight-line basis over the term of the lease. We record the difference
between the rents paid and the straight-line rent in a deferred rent account in other current
liabilities or other long-term obligations, as appropriate, on our balance sheet. We record rent
incentives, such as free rent or leasehold allowances, as deferred rent liabilities in other
current liabilities or other long-term obligations, as appropriate, on our balance sheet. We
classify the amortization of lease incentives as a reduction of occupancy expense in our statements
of operations.
Goodwill
We have recorded goodwill in connection with the acquisition of businesses under U.S. GAAP for
business combinations. We are required to perform an impairment test of goodwill at least once
annually and upon the occurrence of a triggering event. We have elected to test our goodwill for
impairment as of October 1st each year. The impairment test requires 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. Our measurement of fair value considers both the
income approach, utilizing the present value of estimated future discounted cash flows, and market
approach, utilizing a revenue multiple to estimate fair value. We use historical growth rates and
margins in our discounted cash flow model and compare our revenue multiple with an average of our
industry group. If the carrying value of any reporting unit exceeds its fair value, we will
determine the amount of 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. Based upon the results of our annual impairment
test in 2010, 2009 and 2008, no impairments were identified.
Other long-lived assets
We evaluate the recoverability of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount should be assessed by comparing their carrying
value to the undiscounted estimated future net operating cash flows expected to be derived from
such assets. If such evaluation indicates a potential impairment, we use discounted cash flows to
measure fair value in determining the amount of these assets that should be written off.
We amortize identifiable intangible assets over their estimated useful lives (ranging from
five to ten years) using the straight-line method which approximates the projected utility of such
assets based upon the information available. Acquired technology represents technology acquired
from third parties, which we have incorporated in our products and the related amortization is
recorded in the Cost of software licenses in our statements of operations. Customer relationships
and trade names are amortized in Depreciation and amortization in our statement of operations.
Intangible assets are evaluated for impairment annually. If such evaluation indicates a potential
impairment, we use discounted cash flows to measure fair value in determining the amount of these
assets that should be written off.
Other assets
Our long-term other assets consist primarily of deferred tax assets, investments and security
deposits.
Cost-basis investments
Other assets include investments in entities that we account for on the cost basis and equity
method. We account for investments in affiliated entities, which we do not manage and over which we
exert significant influence, using the equity method. The equity method of accounting requires us
to record our share of the net operating results of the investee in our consolidated statements of
operations. Under the cost basis, we recognize the net operating results of the investee only to
the extent distributed by the investee as dividends. We adjust the carrying value of our equity
method investments for our share of their net operating results, unless or until our share of their
underlying net assets has been reduced to $0. At the end of each reporting period, we assess the
recoverability of these cost basis and equity method investments by comparing their carrying value,
including goodwill, to the estimated fair value using the undiscounted estimated future net cash
flows expected to be derived from such assets. If we determine that the carrying value is not
recoverable, then the impairment is other than temporary and we reduce the asset to its estimated
fair value.
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As of December 31, 2010, we owned approximately 13% of Yodlee, accounted for as a cost method
investment. Our investment in Yodlee was accounted for using the equity method until 2007. In
2007, we converted to the cost basis as
our ownership decreased below 20% and we did not have significant influence. We have not
received any dividend payments nor did we make any capital contributions to Yodlee in 2010, 2009 or
2008. Our carrying value in Yodlee was included in long-term other assets as of December 31, 2010
at $1.0 million. The Company is entitled, under certain circumstances, to appoint one member to
Yodlees board of directors.
Concentration of credit risk and uncertainties
For the foreseeable future, we expect to continue to derive most of our revenue from products
and services we provide to the banking and insurance industries and other financial services firms
and retailers. Given the concentration of our business activities in these industries, we may be
particularly exposed to economic downturns in those industries. U.S. and global market and
economic conditions have been, and continue to be, disrupted and volatile. General business and
economic conditions that could affect us and our customers include fluctuations in debt and equity
capital markets, liquidity of the global financial markets, the availability and cost of credit,
investor and consumer confidence, and the strength of the economies in which our customers operate.
A poor economic environment could result in significant decreases in demand for our products and
services, including the delay or cancellation of current or anticipated projects, and adversely
affect our operating results. In addition to mergers and acquisitions in the banking industry, we
have seen an increased level of bank closures and government supervised consolidation transactions
in the last few years. Our existing customers may be acquired by or merged into other financial
institutions that have their own financial software solutions, be closed by regulators, or decide
to terminate their relationships with us for other reasons. As a result, our sales could decline.
Our business success depends in part on our relationships with a limited number of large
customers. For the years ended December 31, 2010, 2009 and 2008, we had one customer, State Farm,
that generated over 10% of our revenue as discussed in our Segment Reporting, Geographic
Disclosures and Major Customers note to our consolidated financial statements.
Revenue recognition, deferred revenue and cost of revenue
We derive a significant portion of our revenue from licensing our solutions and providing
professional services. We generate recurring revenue from support and maintenance, hosting
applications in our data center, and from electronic bill payment services. We also generate
recurring revenue by charging our customers a periodic fee for term licenses including the
right-to-use the software and receive maintenance and support for a specified period of time. For
certain customers, this fee includes the right to receive hosting services. From time to time, we
enter into software arrangements that include software license, maintenance, and professional
services which are considered essential to the functionality of the software. In these instances,
we recognize revenue for the three revenue streams (software license, maintenance and professional
services) under three units of accounting, which are the (i) software license, (ii) professional
services, and (iii) support and maintenance. For purposes of displaying revenues and costs, the
Company presents applicable license fees, maintenance and professional services revenues in the
Consolidated Statement of Operations using vendor-specific objective evidence of fair value
(VSOE), or if unavailable, other objective evidence of fair value for the undelivered elements
and assigning the remainder of the arrangement fee to the license.
Software license revenue. For software license sales for which professional services rendered
are not considered essential to the functionality of the software, we recognize revenue upon
delivery of the software provided (1) there is evidence of an arrangement, (2) collection of our
fee is probable, and (3) the fee is fixed or determinable. In our arrangements that include
software licenses, for which VSOE does not exist for the delivered element and exists for all
undelivered elements, we use the residual method. When professional services are considered
essential to the functionality of the software, we record revenue for the license and professional
services over the implementation period using the percentage of completion method, which is
generally measured by the percentage of labor hours incurred to date to estimated total labor hours
for each contract. For software license sales where the license term does not begin until
installation is complete, we recognize license and professional services revenue when we complete
the installation of the software. For license arrangements in which the fee is not considered fixed
or determinable, the license revenue is recognized as payments become due.
For term license arrangements, sometimes referred to as subscription licenses, we allow
customers the right to use software and receive unspecified products as well as unspecified
upgrades and enhancements during a specified term. For certain agreements, the subscription license
also entitles the customer to receive hosting services. The subscription revenue is generally
recognized ratably over the term of the arrangement, typically three to five years. Generally, the
amount of subscription fees is based on the number of end-users accessing the licensed system,
subject in certain circumstances to minimum user levels. Subscription revenue is allocated to all
elements of the arrangement (Software license, Support and maintenance, and Hosting revenue) using
a consistent approach which considers the VSOE of support and maintenance and
pricing methodologies. In addition, subscription agreements typically contain renewal terms
that automatically extend the term of the arrangement for one year or more unless a timely notice
of termination is provided.
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Support and maintenance revenue. Revenue for post-contract customer support and maintenance is
recognized ratably over the contract period. Services provided to customers under customer support
and maintenance agreements generally include technical support and unspecified product upgrades.
VSOE of the fair value of support and maintenance revenue is based on substantive renewal rates
which are to be charged once the initial term expires. We have evaluated our historical renewal
rates and determined that our renewal rates are substantive.
Professional services revenue. Revenue derived from arrangements to provide professional
services on a time and materials basis is recognized as the related services are performed. Revenue
from professional services where services are deemed to be essential to the functionality of the
software is recognized using the percentage of completion method. For other revenue from
professional services that are provided on a fixed fee basis, revenue is recognized on a
proportional performance basis which is generally a method based upon labor hours incurred as a
percentage of total estimated labor hours to complete the project. We may encounter budget and
schedule overruns on fixed-price contracts caused by increased estimated labor hours to complete
the contract. Adjustments to estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded in the period in which current
estimates of total contract revenue and contract costs indicate a loss. VSOE of fair value of
professional services revenue is based upon consistent stand-alone pricing.
Hosting revenue. Hosting arrangements typically include two elements: implementation and
transaction processing services. For those hosting arrangements which contain elements that qualify
as separate units of accounting, the implementation and transaction processing services are
recognized as the services are performed. For those hosting arrangements that contain elements
that do not qualify as separate units of accounting, professional services revenue earned under
these arrangements is initially deferred and then recognized over the term of the hosting
arrangement or the expected period of performance, whichever is longer. VSOE of fair value of
hosting revenue is based on substantive renewal rates.
Deferred revenue. Deferred revenue represents payments received and billings to customers for
software licenses, professional services, and support and maintenance in advance of performing
services. Maintenance is normally billed quarterly or annually in advance of performing the
service.
Cost of revenue. Cost of software licenses consists primarily of the cost of third-party
software used in our products and the amortization of acquired technology. Costs of support,
maintenance and professional services are primarily personnel and related infrastructure costs,
stock-based compensation and related third party services or products. Hosting costs are primarily
personnel costs, stock-based compensation expense, infrastructure to support customer installations
that we host in our data centers and related third party services or products including bill pay.
Costs of revenue exclude charges for depreciation of property and equipment.
Product development costs
Product development costs include all research and development expenses and software
development costs. Generally, product development costs include personnel and related
infrastructure costs, including stock-based compensation expense. Historically, we have expensed
all research and development expenses as incurred. We expense all software development costs
associated with establishing technological feasibility, which we define as the completion of beta
testing. Because of the insignificant amount of costs incurred between completion of beta testing
and general customer release, we have not capitalized any software development costs in the
accompanying consolidated financial statements.
Other non-operating expenses
Other non-operating expenses are comprised of the following (in thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Foreign exchange transaction (loss) gain |
$ | (378 | ) | $ | (734 | ) | $ | 604 | ||||
Foreign withholding tax |
(708 | ) | (308 | ) | (350 | ) | ||||||
Other expenses and gain (loss) on investments |
(281 | ) | 112 | (698 | ) | |||||||
Other non-operating expenses |
$ | (1,367 | ) | $ | (930 | ) | $ | (444 | ) | |||
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Income taxes
We use the asset and liability method of accounting for income taxes, under which 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 carry forwards. When we prepare
our financial statements, we estimate our income taxes based on the various jurisdictions where we
conduct business. Significant judgment is required in determining our worldwide income tax
provision. We estimate our current tax liability and assess temporary differences that result from
differing treatments of certain items for tax and accounting purposes. We must then assess the
likelihood that our deferred tax assets will be realized. To the extent we believe that realization
is not likely, we establish a valuation allowance. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the statement of operations in the period
that includes the enactment date. We establish a valuation allowance to reduce the deferred income
tax assets to the level at which we believe it is more likely than not that the tax benefits will
be realized.
We recognize and measure benefits for uncertain tax positions. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the weight of
available evidence indicates that it is more likely than not that the tax position will be
sustained upon audit, including resolution of any related appeals or litigation processes. For tax
positions that are more likely than not of being sustained upon audit, the second step is to
measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate our
uncertain tax positions on a quarterly basis. Our evaluations are based upon a number of factors,
including changes in facts or circumstances, changes in tax law, correspondence with tax
authorities during the course of audits and effective settlement of audit issues. Changes in the
recognition or measurement of uncertain tax positions could result in material increases or
decreases in our income tax expense in the period in which we make the change, which could have a
material impact on our effective tax rate and operating results.
Other liabilities
Our long-term other liabilities consist primarily of deferred tax obligations, deferred
revenue and deferred rent.
Stock-based compensation
Our stock-based compensation program is a long-term retention program that is intended to
attract, retain and provide incentives for talented employees, officers and directors, and to align
stockholder and employee interests. We maintain certain stock compensation plans providing for the
grant of stock options, restricted stock, stock appreciation rights (SARs) and other forms of
awards to officers, directors and employees. Substantially all stock options granted under our
plans have ten-year contractual lives and generally vest and become exercisable ratably over four
years from the date of grant. However, grants of stock options and restricted stock awards to
directors generally vest over one year. Certain awards granted in 2006 vested and became
exercisable ratably over two years, including our outstanding SARs awards.
We account for share-based payments based on the fair value of the award that is expected to
vest using the modified prospective method. For stock options, the fair value is estimated at
the date of grant using a Black-Scholes option pricing model. Cash-settled SARs are recorded as
liabilities with changes in fair value recognized in earnings using the Black-Scholes option
pricing model. For cash-settled SARs that have not been exercised after the vesting period, the
fair value is recalculated at the end of each reporting period and changes in fair value are
recognized in earnings. For restricted stock awards, the fair value is determined by the market
price of our stock on the date of grant.
In determining fair value using the Black-Scholes option pricing model, management makes
certain estimates related to the expected term of the award, the volatility of our stock price, and
the risk-free interest rate. These assumptions generally require significant analysis and
judgments. Some of the assumptions are based on external data, while some assumptions are derived
from our historical experience with share-based payments. We currently estimate the expected term
using our historical exercise and post-vesting cancellation activity and stock price volatility by
considering our historical stock volatility. The risk-free interest rate is the implied yield
currently available on U.S. Treasury zero-coupons with the remaining term equal to the expected
term used as the input to the Black-Scholes model. The stock-based compensation expense is
amortized on a straight-line basis over the requisite service period (vesting period) reduced for
estimated forfeitures. Forfeitures are estimated at the time of grant and adjusted over the
requisite service period based on the extent to which actual forfeitures differ, or are expected to
differ, from their estimates. We estimate forfeitures using a weighted-average historical
forfeiture rate.
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Generally, proceeds from the exercise of stock awards include the net of cash received for the
exercise of stock options net of the fair value cash equivalent of shares withheld for payroll
taxes upon vesting of restricted stock.
Net (loss) income per share
We calculate earnings per share by allocating income between the weighted average common
shares outstanding and weighted average outstanding participating securities during periods in
which we record net income. For periods in which we record a net loss, we calculate net loss per
share as the net loss during the period divided by the weighted average number of common shares
outstanding during the period as the effect of applying the two-class method would be anti-dilutive
for participating securities. Net income is allocated to our common stock and our participating
securities of restricted stock and convertible preferred stock based on their respective rights to
share in dividends. Diluted earnings per share is calculated to reflect the potential dilution that
would occur if stock options or other rights to issue common stock were exercised and resulted in
additional shares of common stock outstanding that would share in our earnings.
Foreign currency translation
We translate the financial statements of our international subsidiaries into U.S. dollars at
current period end exchange rates, except for revenue and expenses, which are translated at average
exchange rates during each reporting period. Currency transaction gains or losses are included in
our results of operations. We include net exchange gains or losses resulting from the translation
of assets and liabilities as a component of accumulated other comprehensive income (loss) in
stockholders equity. The fluctuations in foreign currency rates for U.S. Dollars against
primarily the British Pound Sterling, South African Rand, Indian Rupee and European Euro resulted
in changes to other comprehensive income mainly due to our foreign cash balances, accounts
receivable and goodwill balances.
Comprehensive income (loss)
We report total changes in equity resulting from revenue, expenses, and gains and losses,
including those that do not affect the accumulated deficit. Accordingly, we include in other
comprehensive income (loss) those amounts relating to foreign currency translation adjustments in
the consolidated statement of stockholders equity and comprehensive income (loss). Our balances
for accumulated other comprehensive loss at December 31, 2010 and December 31, 2009 reflect
accumulative currency translation adjustments.
Recent accounting pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) amended FASB ASC 605-25
Revenue Recognition: Multiple-Element Arrangements on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective evidence or third party evidence of fair value for
deliverables in an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using the relative selling
price method and additional disclosures on the selling price method. The change is effective
January 1, 2011. As most arrangements accounted for under software revenue recognition guidance
are excluded from the update, the adoption of this change should not have a material effect on our
results of operations.
In October 2009, the FASB amended FASB ASC 985-605 Software: Revenue Recognition to exclude
from its scope all tangible products containing both software and non-software components that
operate together to deliver the products functions. The change is effective January 1, 2011. As
this change does not affect revenue arrangements that have no tangible products or contracts that
bundle services and software, the adoption of this change should not have a material effect on our
results of operations since most of our arrangements have little to no tangible products.
In January 2010, the FASB issued ASU 2010-6 Improving Disclosures About Fair Value
Measurements that amends existing disclosure requirements under ASC 820 by adding required
disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy;
adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. The new disclosures and clarifications of existing disclosure are
effective for fiscal years beginning after December 15, 2009, except for the disclosure
requirements related to the purchases, sales, issuances and settlements in the rollforward activity
of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years
ending after December 31, 2010. Since this standard impacts disclosure requirements only, the
adoption of this guidance did not have a material impact to our consolidated results of operations
or financial condition.
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2. Business Combinations
On March 4, 2010, we acquired 100% of the outstanding shares of PM Systems Corporation
(PMSC), a provider of internet banking, bill payment and security services to credit unions in
the United States. We believe PMSC provides us with additional financial services solutions and
expands our presence in the credit union marketplace. We paid approximately $29.2 million in cash,
net of cash acquired, for PMSC and funded the acquisition from our available cash on the
acquisition date. In connection with the acquisition, we incurred approximately $300 thousand of
legal, valuation, and investment banking fees that were included in General and administrative
expenses in our first quarter 2010 operating results. PMSCs results of operations are included in
our Banking: Community FI segments results of operations from March 4, 2010.
In support of establishing an office in Latin America, on August 26, 2010, we acquired certain
assets of, and hired certain employees from, a company that resold our products in Latin America
(the Reseller). We paid approximately $1.9 million in cash, net of cash acquired, for the
Reseller and funded the acquisition from our available cash on the acquisition date. The Company
will also pay an additional $500 thousand, which will be expensed over the service period, if (i)
on August 26, 2012, one of the employees that we hired is still employed by us, or (ii) such
employee is terminated without cause by us prior to August 26, 2012. The Resellers results of
operations are included in our Payments segment results of operations from August 26, 2010.
We accounted for the purchase of PMSC and the purchase of the Resellers assets in accordance
with U.S. GAAP guidance on business combinations. The excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired was recorded as goodwill
which will be fully deductible for income tax purposes. We believe the goodwill and other
identifiable intangibles from this transaction are attributable to the additional revenue, earnings
and customers associated with their respective businesses. We recorded tangible assets acquired
and liabilities assumed at fair value as of the acquisition dates. The identifiable intangible
assets acquired included existing software technology and trade names for PMSC as well as customer
relationships for both PMSC and the Reseller. We used variations of the income approach method
such as the royalty savings method and excess earnings method to value the intangible assets based
upon discounted cash flow projections and the royalty savings method. Pro forma information
related to the acquisitions was not included because the impact on the Company was not considered
material. The allocations of the purchase price were as follows (in thousands):
PMSC | Reseller Assets | |||||||
Cash |
$ | 751 | $ | 51 | ||||
Accounts receivables |
908 | 452 | ||||||
Indentifiable intangible assets: |
||||||||
Trade names |
121 | | ||||||
Acquired technology |
3,390 | | ||||||
Customer relationships |
5,986 | 230 | ||||||
Goodwill |
19,497 | 1,653 | ||||||
Property and equipment |
502 | 281 | ||||||
Other assets |
506 | 6 | ||||||
Deferred revenue |
(622 | ) | | |||||
Liabilities |
(1,107 | ) | (673 | ) | ||||
Total |
$ | 29,932 | $ | 2,000 | ||||
3. Fair Value Measurements
U.S. GAAP defines fair value, establishes a framework for measuring fair value, expands
disclosures about fair value measurements, and establishes a three-tier fair value hierarchy which
prioritizes the inputs used in measuring fair value. These tiers include: Level 1 which is defined
as observable inputs such as quoted prices in active markets; Level 2 which is defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 which is defined as unobservable inputs in which little or no market data exists therefore
requiring an entity to develop its own assumptions.
The carrying value approximates fair value of cash and cash equivalents due to the short-term
nature of these financial instruments. The fair value of fixed term deposits approximate their
carrying value as the principal is fixed. Our long-term debt has fixed interest rates. The fair
values of long-term borrowings having fixed rates are determined by discounting cash flows of
future interest accruals at market rates currently offered for borrowings with similar remaining
maturities or repricing terms. The participants of our non-funded deferred compensation plan for
non-employee members of
the board of directors are issued phantom shares equivalent to the cash fees due to the
director based on the stock price on the day of issuance each quarter. Since the cash settlement
of these phantom shares will be at the current market value on the date of payment, the fair value
of the liability is revalued each period based off the ending stock price.
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Generally, we hold our cash reserves in different types of cash funds. In December 2007, we
were informed that one of these funds (i) was closed with respect to additional investments, (ii)
had suspended redemptions except in the case of requests for redemptions in kind, and (iii) would
begin an orderly liquidation and dissolution of portfolio assets. As such, we began to account for
this mutual fund trust under FASB ASC 320 Investments-Debt and Equity Securities. The funds value
was then determined based on the valuation of the individual investment securities it holds, many
of which are separately valued based on a combination of Level 1, Level 2 and Level 3 inputs as
prepared by the fund manager. The Level 2 inputs include, for example, values for comparable
issued securities. The Level 3 inputs include valuations from third parties, similar type funds,
and assumptions about future market conditions. The net asset value (NAV) of the fund fluctuated
depending on the value of these underlying securities. The NAV of our investment in the fund was
reported to us by the fund manager. Based on the funds holding underlying securities subject to a
Level 3 valuation, we categorized our investment in the fund as a Level 3 investment. The fund
was fully liquidated during 2009 and we received approximately $2.5 million to settle our remaining
investment in the fund. We realized a gain of approximately $0.1 million during 2009 on cash
settlements of the fund.
We also have assets that under certain conditions are subject to measurement at fair value on
a non-recurring basis. These assets include long term assets such as property and equipment,
goodwill and other intangible assets. For these assets, measurement at fair value in periods
subsequent to their initial recognition is applicable if one or more is determined to be impaired.
During the years ended December 31, 2010, 2009, and 2008, we had no impairments related to these
assets.
Estimated fair values of our financial instruments were as follows (in thousands):
December 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
Cash and cash equivalents |
$ | 61,917 | $ | 61,917 | $ | 61,784 | $ | 61,784 | ||||||||
Included in other current assets: |
||||||||||||||||
Fixed term deposits |
| | 318 | 318 | ||||||||||||
Restricted fixed term deposit |
2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
Debt obligation, excluding current portion |
35 | 36 | 5,026 | 4,911 | ||||||||||||
Deferred compensation |
298 | 298 | | |
We did not have any assets or liabilities that are measured on a recurring basis as of
December 31, 2009. The following table summarizes the assets carried at fair value measured on a
recurring basis as of December 31, 2010 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Carrying | Identical Assets | Observable Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Deferred compensation |
$ | 298 | $ | 298 | $ | | $ | | ||||||||
Total |
$ | 298 | $ | 298 | $ | | $ | | ||||||||
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Any realized gains or impairments of our Level 3 investment, the mutual fund trust, were
recorded to Interest and other (expense) income, net in our consolidated statements of operations.
The following table summarizes the change in balance for our Level 3 investment, the mutual fund
trust, for the year ended December 31, 2009 (in thousands):
Fair Value Measurements at Reporting Date
Using Signifcant Unobservable Inputs (Level 3)
Using Signifcant Unobservable Inputs (Level 3)
Balance at December 31, 2008 |
$ | 2,395 | ||
Realized gain in earnings |
109 | |||
Cash settlements |
(2,504 | ) | ||
Ending balance at December 31, 2009 |
$ | | ||
4. Accounts Receivable
Accounts receivable consisted of the following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Billed receivables |
$ | 35,264 | $ | 42,862 | ||||
Unbilled receivables |
12,415 | 23,907 | ||||||
Allowance for doubtful accounts and billing adjustments |
(3,309 | ) | (2,299 | ) | ||||
Total |
$ | 44,370 | $ | 64,470 | ||||
Billed accounts receivables that were more than 90 days past due accounted for 16% and
7% of the billed accounts receivable balance, excluding allowance for doubtful accounts and billing
adjustments as of December 31, 2010 and 2009, respectively, which was reflected by the increase to
our discount allowance. As of December 31, 2010 and 2009, 60% and 42% of the unbilled receivables,
respectively related to an implementation for an international branch customer. During the fourth
quarter of 2010, our estimated hours to complete this project increased, resulting in a reduction
of revenue under the percentage of completion method of approximately $5.0 million, thereby
reducing the unbilled accounts receivable for this customer.
Unbilled receivables generally relate to professional services projects with milestone
billings where revenue is recognized as services are rendered and billings are sent to customers in
accordance with the terms of the contract, primarily at project milestone dates. We expect to bill
and collect these amounts within one year of the balance sheet date.
5. Other Current Assets
Other current assets consisted of the following (in thousands):
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Restricted cash and escrow deposits |
$ | 2,063 | $ | 2,059 | ||||
Short-term investments |
| 318 | ||||||
Taxes receivable |
1,582 | 557 | ||||||
Deferred tax assets, net |
1,859 | 1,079 | ||||||
Other |
1,108 | 918 | ||||||
Total |
$ | 6,612 | $ | 4,931 | ||||
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6. Property and Equipment
Property and equipment as of December 31, 2010 included computer equipment under a capital
lease which was less than $0.1 million. Property and equipment as of December 31, 2009 included
computer equipment under capital leases with original cost and accumulated amortization of
approximately $4.7 million and $2.9 million, respectively. Property and equipment consisted of the
following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Property and building improvements |
$ | 12,319 | $ | 12,115 | ||||
Leasehold improvements |
2,658 | 1,977 | ||||||
Furniture and fixtures |
2,332 | 2,327 | ||||||
Computer equipment |
36,875 | 31,891 | ||||||
Software |
10,934 | 10,811 | ||||||
Property and equipment, before depreciation |
65,118 | 59,121 | ||||||
Accumulated depreciation and amortization |
(42,788 | ) | (36,103 | ) | ||||
Property and equipment, net |
$ | 22,330 | $ | 23,018 | ||||
7. Goodwill and Other Intangible Assets
In connection with the acquisition of PMSC in the first quarter of 2010, we recorded goodwill
of $19.5 million and identifiable intangible assets of $9.5 million, of which $0.1 million was
identified as trade names (1 year estimated weighted average useful life), $3.4 million was
identified as acquired technology (5 year estimated weighted average useful life), and $6.0 million
was identified as customer relationships (10 year estimated weighted average useful life). As a
result of our acquisition of certain assets of the Reseller in the third quarter of 2010, we
recorded goodwill of $1.7 million and identifiable intangible assets for customer relationships of
$0.2 million with a 6 year estimated weighted average useful life.
Our goodwill balances below include accumulated impairment losses that were recorded in
December 2000 of $212.8 million for our Banking: Large FI segment and $258.1 million for our
Banking: Community FI segment. The changes in the carrying value of our goodwill for the years
ended December 31, 2010 and 2009 were as follows (in thousands):
Banking: | Banking: | |||||||||||||||
Payments | Large FI | Community FI | Total | |||||||||||||
Goodwill, net as of December 31, 2008 |
$ | 33,943 | $ | 48,697 | $ | 41,722 | $ | 124,362 | ||||||||
Effect of foreign currency translations |
(1,107 | ) | 3,350 | | 2,243 | |||||||||||
Goodwill, net as of December 31, 2009 |
32,836 | 52,047 | 41,722 | 126,605 | ||||||||||||
Acquisitions |
1,653 | | 19,497 | 21,150 | ||||||||||||
Effect of foreign currency translations |
80 | (291 | ) | | (211 | ) | ||||||||||
Goodwill, net as of December 31, 2010 |
$ | 34,569 | $ | 51,756 | $ | 61,219 | $ | 147,544 | ||||||||
The change in the net carrying amount of intangible assets at December 31, 2010 was due
to assets acquired during the year, amortization expense and the foreign exchange effect. Our
intangible assets consisted of the following (in thousands):
As of December 31, 2010 | ||||||||||||
Gross | Accumulated | Net | ||||||||||
Carrying Value | Amortization | Carrying Value | ||||||||||
Trade names |
$ | 121 | $ | (101 | ) | $ | 20 | |||||
Acquired technology |
25,328 | (21,646 | ) | 3,682 | ||||||||
Customer lists |
18,196 | (10,052 | ) | 8,144 | ||||||||
Total |
$ | 43,645 | $ | (31,799 | ) | $ | 11,846 | |||||
As of December 31, 2009 | ||||||||||||
Gross | Accumulated | Net | ||||||||||
Carrying Value | Amortization | Carrying Value | ||||||||||
Acquired technology |
$ | 21,938 | $ | (20,592 | ) | $ | 1,346 | |||||
Customer relationships |
12,000 | (8,451 | ) | 3,549 | ||||||||
Total |
$ | 33,938 | $ | (29,043 | ) | $ | 4,895 | |||||
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Amortization expense of acquired technology, included in Cost of software licenses, and
amortization expense of customer relationships, included in Depreciation and amortization of other
intangible assets, were as follows (in thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Trade names |
$ | 101 | $ | | $ | | ||||||
Acquired technology |
1,055 | 1,577 | 2,525 | |||||||||
Customer lists |
1,601 | 1,113 | 1,130 | |||||||||
Total |
$ | 2,757 | $ | 2,690 | $ | 3,655 | ||||||
Based upon our current intangible assets, we estimate aggregate amortization expense for the
next five calendar years to be as follows (in thousands):
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
Payments |
$ | 525 | $ | 525 | $ | 525 | $ | 443 | $ | 35 | ||||||||||
Banking: Large FI |
245 | 183 | | | | |||||||||||||||
Banking: Community FI |
2,089 | 1,493 | 1,277 | 1,277 | 712 | |||||||||||||||
Total |
$ | 2,859 | $ | 2,201 | $ | 1,802 | $ | 1,720 | $ | 747 | ||||||||||
8. Restructuring Costs
We implemented cost reduction plans in prior years to change our organizational structure,
reduce operating costs and more effectively align us with the needs of our customers. We incur
adjustments to the reserve for accretion expense for long term facility leases as the liabilities
become short term and we adjust our estimates based on sublease assumptions for certain subleased
office space and early surrender of certain subleased office space. The total adjustments in 2010,
2009 and 2008 were deemed immaterial and reflected in operating expenses. The restructuring
reserves at December 31, 2010 included future rent expense for vacated facilities, net of sublease
income. We expect to make future cash expenditures, net of anticipated sublease income, related to
these restructuring activities of approximately $1.5 million all within the next twelve months.
Due to the short term nature, as leases expire in 2011, we believe the carrying value approximates
the fair value. The table below rolls forward the restructuring reserves for the years ended
December 31, 2010, 2009, and 2008 per plan as follows (in thousands):
2003 and | ||||||||||||||||||||||||
2006 Plan | 2005 Plan | Prior Plans | ||||||||||||||||||||||
Personnel | Personnel | |||||||||||||||||||||||
Costs | Lease Costs | Costs | Lease Costs | Lease Costs | Total | |||||||||||||||||||
Balance, December 31, 2007 |
$ | 833 | $ | 3,712 | $ | 33 | $ | 2,356 | $ | 2,290 | $ | 9,224 | ||||||||||||
Amounts utilized |
(323 | ) | (1,210 | ) | | (1,207 | ) | (796 | ) | (3,536 | ) | |||||||||||||
Adjustments |
(510 | ) | 208 | (33 | ) | 544 | (131 | ) | 78 | |||||||||||||||
Balance, December 31, 2008 |
| 2,710 | | 1,693 | 1,363 | 5,766 | ||||||||||||||||||
Amounts utilized |
| (1,163 | ) | | (968 | ) | (835 | ) | (2,966 | ) | ||||||||||||||
Adjustments |
| 324 | | 167 | 186 | 677 | ||||||||||||||||||
Balance, December 31, 2009 |
| 1,871 | | 892 | 714 | 3,477 | ||||||||||||||||||
Amounts utilized |
| (1,061 | ) | | (667 | ) | (521 | ) | (2,249 | ) | ||||||||||||||
Adjustments |
| (38 | ) | | 198 | 140 | 300 | |||||||||||||||||
Balance, December 31, 2010 |
$ | | $ | 772 | $ | | $ | 423 | $ | 333 | $ | 1,528 | ||||||||||||
Restructuring in 2006. In 2006, management approved a plan of reorganization to reduce
operating costs as we aligned more closely with our customers. The reorganization resulted in a
reduction of personnel of approximately 9% in both the United States and Europe as well as the
consolidation of some facilities. We adjusted our estimates for personnel costs by $500 thousand in
2008 as we negotiated a signed release from any potential repayments of development grants for
an international location which reduced our reserve. We adjusted our estimates for lease
costs due to changes in operating expenses, related sublease income and for accretion expense in
2010, 2009 and 2008.
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Restructuring in 2005. In 2005, management implemented a reorganization that resulted in a
reduction of personnel of approximately 8% as well as the consolidation of some facilities. The
reorganization comprised of charges for severance costs associated with headcount reductions, lease
payments associated with excess office space and the write-off of fixed assets. The remaining
severance reserve was released in 2008 after all obligations were fulfilled. We adjusted our
estimates for lease costs due to changes in operating expenses, related sublease income and for
accretion expense in 2010, 2009 and 2008.
Restructuring in 2003 and prior. In 2003 and certain prior years, management approved
restructuring plans to reorganize our worldwide operations by reducing work force and consolidating
certain office facilities. We adjusted our estimates for lease costs due to changes in operating
expenses and related sublease income in 2010, 2009 and 2008.
9. Retirement Savings Plan
401(k) retirement savings plan. We provide a 401(k) retirement savings plan for substantially
all of our full-time employees in the United States. Each participant in the 401(k) plan may elect
to contribute from 1% to 50% of his or her annual compensation to the plan up to limits placed by
the U.S. Internal Revenue Service. We, at managements discretion, may make matching contributions
to the plan. Our matching contributions to the plan charged to expense for 2010, 2009 and 2008 were
approximately $0.8 million, $1.0 million, and $0.9 million, respectively.
Deferred compensation plan. Our Directors Deferred Compensation Plan (the Deferred
Compensation Plan) is a non-qualified deferred compensation plan for non-employee directors of the
Company effective as of January 1, 2010. The Deferred Compensation Plan is an unfunded plan
maintained for the purpose of providing non-employee directors of the Company an opportunity to
defer some or all of their cash (both retainer and meeting fees) and equity awards (other than
option grants) until after their service on the board has ended. As of December 31, 2010, the
liability for cash compensation deferred under the Deferred Compensation Plan was $0.3 million and
was included in long-term other liabilities.
10. Commitments, Contingencies and Debt Obligations
Operating lease commitments. We lease office facilities and computer equipment under
non-cancelable operating lease agreements which expire at various dates through 2023. Total rental
expense under these leases was $5.9 million, $5.9 million and $5.6 million in 2010, 2009 and 2008,
respectively. As of December 31, 2010, our operating leases were collateralized by deposits of
$1.3 million included in long-term other assets. In connection with the lease on a vacated office,
we issued to our landlord a standby letter of credit in the amount of $2.0 million to guarantee
certain obligations under the lease agreement through August 2011. As of December 31, 2010, there
were no amounts outstanding under the letter of credit. We have a fixed term deposit of $2.0
million with the issuer as a compensating balance for the letter of credit that we purchased in
2009. The fixed term deposit was included in long-term other assets at December 31, 2010.
Future minimum annual payments under non-cancelable operating lease agreements and expected
sublease income from non-cancelable sublease agreements are as follows (in thousands):
Operating Lease | Sublease | Net Operating Lease | ||||||||||
Commitments (1) | Income (1) | Commitments | ||||||||||
2011 |
$ | 10,333 | $ | (2,692 | ) | $ | 7,641 | |||||
2012 |
5,932 | (32 | ) | 5,900 | ||||||||
2013 |
5,263 | | 5,263 | |||||||||
2014 |
3,158 | | 3,158 | |||||||||
2015 |
6,204 | | 6,204 | |||||||||
Thereafter |
7,384 | | 7,384 | |||||||||
$ | 38,274 | $ | (2,724 | ) | $ | 35,550 | ||||||
(1) | Includes amounts for vacated facilities recorded in our restructuring reserves of $4.1 million for operating lease commitments and $2.6 million of related sublease income. |
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Debt obligations. Our notes payable are mainly for our Norcross facility that we
purchased in 2007 and our capital leases are for computer equipment. The note payable on our
Norcross facility is collateralized by the building and a deposit of $1.6 million in other current
assets. Debt obligations consisted of the following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Note payable due Feb. 2011 in monthly installments of $40 thousand
which include interest at 7.6% |
$ | 4,972 | $ | 5,060 | ||||
Note payable due Aug. 2011 in monthly installments of $7 thousand
which include interest at 12.0% |
54 | 128 | ||||||
Capital lease obligation with maturity dates through Sep. 2013 |
55 | 1,008 | ||||||
$ | 5,081 | $ | 6,196 | |||||
Less: Current maturities included in current liabilities |
(5,046 | ) | (1,170 | ) | ||||
Debt obligation, excluding current portion |
$ | 35 | $ | 5,026 | ||||
Future minimum annual notes payable payments and capital lease payments as of December
31, 2010 are as follows (in thousands):
Notes Payable | Capital Leases | Total | ||||||||||
2011 |
$ | 5,094 | $ | 20 | $ | 5,114 | ||||||
2012 |
| 20 | 20 | |||||||||
2013 |
| 16 | 16 | |||||||||
$ | 5,094 | $ | 56 | $ | 5,150 | |||||||
Less amount representing interest |
(68 | ) | (1 | ) | (69 | ) | ||||||
$ | 5,026 | $ | 55 | $ | 5,081 | |||||||
Contractual commitments. In the normal course of business, we enter into contracts with
vendors which mainly consist of software support, hardware support and telecommunication
agreements. At December 31, 2010, our payment obligations under these contracts were $2.7 million
for 2011 and $1.6 million for 2012.
Guarantees and indemnifications. We typically grant our customers a warranty, usually 90 days
from delivery date, which guarantees that our products will substantially conform to our current
specifications. We also indemnify our customers for certain matters including third party claims of
intellectual property infringement relating to the use of our products. Historically, costs
related to these guarantee and indemnification provisions have not been significant and we did not
have any material liabilities recorded as of December 31, 2010.
Litigation. As originally disclosed in our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010, on May 28, 2010, Leon Stambler filed a complaint in the Eastern District of
Texas against 29 named defendants including S1 Corporation and S1, Inc. (collectively, S1) and
other financial software services providers. The complaint alleges infringement of two patents
generally relating to encryption technology. In his complaint, Stambler is seeking unspecified
monetary damages. The case is at a very preliminary stage. S1 intends to vigorously defend itself
in the litigation.
There are no other material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which we or any of our subsidiaries is a party or of which our or
any of our subsidiaries property is subject.
11. Stock-based Compensation
We maintain certain stock-based compensation plans providing for stock options, restricted
stock awards and units, stock appreciation rights (SARs) and other forms of awards to officers,
directors and non-officer employees. In May 2008, our stockholders approved the 2003 Stock
Incentive Plan, Amended and Restated effective February, 26, 2008 (the Stock Incentive Plan)
which, among other things, increased the number of shares available for grant under the Stock
Incentive Plan by 4,069,591 shares. Awards that are settled in cash do not count against the
maximum limit of shares in these plans.
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If all outstanding options were exercised, all restricted stock vested, and all available
grants were issued and exercised as of December 31, 2010, our stock-based compensation plans would
provide for the issuance of common stock as follows (in thousands):
Shares | ||||
Grants available under 2003 Stock Incentive Plan |
1,214 | |||
Stock options outstanding |
5,907 | |||
Restricted stock |
1,236 | |||
Total |
8,357 | |||
There was no capitalized stock-based compensation cost as of December 31, 2010. The following
table shows the stock-based compensation expense included in our statements of operations (in
thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating expenses: |
||||||||||||
Cost of professional services, support and maintenance |
$ | 310 | $ | 161 | $ | 344 | ||||||
Cost of data center |
133 | 115 | 100 | |||||||||
Selling and marketing |
504 | (246 | ) | 2,949 | ||||||||
Product development |
270 | 254 | 1,034 | |||||||||
General and administrative |
2,483 | 1,318 | 3,665 | |||||||||
Total stock-based compensation expense |
$ | 3,700 | $ | 1,602 | $ | 8,092 | ||||||
Grant type: |
||||||||||||
Stock options |
$ | 1,656 | $ | 2,342 | $ | 3,955 | ||||||
Restricted stock |
2,573 | 1,750 | 917 | |||||||||
Stock appreciation rights |
(529 | ) | (2,490 | ) | 3,220 | |||||||
Total stock-based compensation expense |
$ | 3,700 | $ | 1,602 | $ | 8,092 | ||||||
Stock Options. The fair value for stock option grants was determined using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected volatility |
46.6 | % | 49.1 | % | 44.4 | % | ||||||
Risk-free interest rate |
1.8 | % | 2.5 | % | 3.1 | % | ||||||
Expected life |
4.4 years | 4.4 years | 4.4 years | |||||||||
Weighted average fair value per share grant during year |
$ | 2.42 | $ | 3.01 | $ | 2.58 |
The aggregate intrinsic value for the stock options outstanding and exercisable in the table
represents the total pretax value, based on our closing stock price of $6.90 as of December 31,
2010. The aggregate intrinsic value of the stock options exercised was $0.3 million, $0.6 million
and $1.1 million for 2010, 2009 and 2008, respectively. A summary of our stock options awards and
changes during the twelve months ended December 31, 2010 is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Shares | Exercise | Contractual | Value | |||||||||||||
(000s) | Price | Life (Yrs) | ($000s) | |||||||||||||
Outstanding at December 31, 2009 |
6,287 | $ | 6.96 | |||||||||||||
Granted |
520 | 6.05 | ||||||||||||||
Exercised |
(290 | ) | 4.81 | $ | 310 | |||||||||||
Forfeited |
(610 | ) | 12.74 | |||||||||||||
Outstanding at December 31, 2010 |
5,907 | 6.38 | 5.6 | 6,707 | ||||||||||||
Exercisable at December 31, 2010 |
4,648 | 6.39 | 4.9 | 5,912 |
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A summary rollforward of our non-vested options and changes during the year ended December 31,
2010, is presented below:
Non-Vested | Weighted- | |||||||
Number of | Average | |||||||
Shares | Grant-Date | |||||||
(000s) | Fair Value | |||||||
Non-vested balance at December 31, 2009 |
1,510 | $ | 2.65 | |||||
Granted |
520 | 2.42 | ||||||
Vested |
(682 | ) | 2.63 | |||||
Forfeited |
(89 | ) | 2.56 | |||||
Non-vested balance at December 31, 2010 |
1,259 | 2.58 | ||||||
The following table summarizes information about stock options outstanding by price range at
December 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
Average | Weighted- | Weighted- | ||||||||||||||||||
Number | Remaining | Average | Number | Average | ||||||||||||||||
Outstanding | Contractual | Exercise | Exercisable | Exercise | ||||||||||||||||
Range of Exercise Price | (000s) | Life (Yrs) | Price | (000s) | Price | |||||||||||||||
$3.51 4.00 | 158 | 2.7 | $ | 3.60 | 158 | $ | 3.60 | |||||||||||||
4.01 5.00 | 1,735 | 5.0 | 4.54 | 1,735 | 4.54 | |||||||||||||||
5.01 6.00 | 655 | 5.7 | 5.30 | 536 | 5.28 | |||||||||||||||
6.01 7.00 | 1,816 | 7.6 | 6.33 | 922 | 6.44 | |||||||||||||||
7.01 8.00 | 532 | 7.0 | 7.19 | 322 | 7.20 | |||||||||||||||
8.01 9.00 | 708 | 3.6 | 8.34 | 672 | 8.35 | |||||||||||||||
9.01 19.30 | 303 | 1.2 | 15.10 | 303 | 15.10 | |||||||||||||||
3.51 19.30 | 5,907 | 5.6 | 6.38 | 4,648 | 6.39 |
As of December 31, 2010, we had $2.4 million of total unrecognized compensation expense
related to non-vested stock options expected to be recognized over a weighted average period of 1.2
years. The stock-based compensation expense for stock options was based on grant date fair value
of the awards for the remaining unvested periods. The total fair value of shares vested during the
twelve months ended December 31, 2010, 2009 and 2008 was $1.8 million, $2.5 million and $4.0
million, respectively.
Restricted Stock Activity. The aggregate intrinsic value for the restricted stock outstanding
in the table represents the total pretax value, based on our closing stock price of $6.90 as of
December 31, 2010. The weighted average grant date fair value of the restricted stock granted was
$5.97, $7.10 and $6.43 during the twelve months ended December 31, 2010, 2009 and 2008,
respectively. A summary of our restricted stock and changes during the twelve months ended
December 31, 2010 is presented below:
Weighted-Average | ||||||||||||
Remaining | Aggregate | |||||||||||
Shares | Contractual | Intrinsic | ||||||||||
(000s) | Life (Yrs) | Value ($000s) | ||||||||||
Unvested at December 31, 2009 |
1,007 | |||||||||||
Granted |
606 | |||||||||||
Vested |
(338 | ) | $ | 2,083 | ||||||||
Forfeited |
(39 | ) | ||||||||||
Unvested at December 31, 2010 |
1,236 | 2.7 | 8,526 | |||||||||
Expected to Vest |
1,236 | 2.7 | 8,526 |
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As of December 31, 2010, we had $6.6 million in unrecognized compensation costs related to
non-vested restricted stock awards expected to be recognized over a weighted average period of 1.4
years. The stock-based compensation expense for restricted stock was based on grant date fair
value of the awards for the remaining unvested periods. The total fair value of shares vested
during the twelve months ended December 31, 2010, 2009 and 2008 was $2.1 million, $0.8 million and
$0.8 million.
Stock Appreciation Rights Activity. The fair value for SARs was determined using the
Black-Scholes option-pricing model with the following assumptions:
As of December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected volatility |
27.8 | % | 54.9 | % | 51.5 | % | ||||||
Risk-free interest rate |
0.5 | % | 0.8 | % | 0.9 | % | ||||||
Expected life |
1.5 years | 1.5 years | 2.6 years | |||||||||
Closing stock price |
$ | 6.90 | $ | 6.52 | $ | 7.89 |
The aggregate intrinsic value for the SARs outstanding and exercisable in the table represents
the total pretax value, based on our closing stock price of $6.90 as of December 31, 2010. A
summary of our SARs awards and changes during the twelve months ended December 31, 2010 is
presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Shares | Exercise | Contractual | Value | |||||||||||||
(000s) | Price | Life (Yrs) | ($000s) | |||||||||||||
Outstanding at December 31, 2009 |
1,165 | $ | 4.87 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(213 | ) | 4.86 | $ | 267 | |||||||||||
Forfeited |
| | ||||||||||||||
Outstanding at December 31, 2010 |
952 | 4.88 | 5.0 | 1,926 | ||||||||||||
Exercisable at December 31, 2010 |
952 | 4.88 | 5.0 | 1,926 |
As of December 31, 2010, all SARs have vested with an outstanding liability of $2.1 million
based on the Black-Scholes valuation, which uses our closing stock price, among other factors, as
of December 31, 2010. There is no unrecognized expense related to the vesting of the awards. The
outstanding SARs are cash-settled awards and thus, we will record changes in fair value until they
are settled. The total fair value of shares vested during the twelve months ended December 31, 2008
was $2.4 million. There were no SARs that vested during 2010 and 2009. There were cash
settlements for SARs included in cash flows from operating activities of $0.3 million, $0.9 million
and $0.2 million in 2010, 2009 and 2008, respectively.
12. Income Taxes
(Loss) income before income tax expense consisted of the following (in thousands):
2010 | 2009 | 2008 | ||||||||||
U.S. operations |
$ | (9,584 | ) | $ | 11,537 | $ | 7,223 | |||||
Foreign operations |
3,472 | 20,850 | 16,881 | |||||||||
$ | (6,112 | ) | $ | 32,387 | $ | 24,104 | ||||||
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Income tax expense is summarized as follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (1,408 | ) | $ | (79 | ) | $ | 27 | ||||
Foreign |
1,516 | 4,551 | 3,412 | |||||||||
State |
6 | 304 | 710 | |||||||||
Total current |
$ | 114 | $ | 4,776 | $ | 4,149 | ||||||
Deferred: |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
Foreign |
57 | (2,812 | ) | (1,895 | ) | |||||||
State |
| | | |||||||||
Total deferred |
$ | 57 | $ | (2,812 | ) | $ | (1,895 | ) | ||||
Total income tax expense |
$ | 171 | $ | 1,964 | $ | 2,254 | ||||||
A reconciliation of the income tax expense to the amount computed by applying the
statutory federal income tax rate to the (loss) income before income tax expense is as follows (in
thousands):
2010 | 2009 | 2008 | ||||||||||
Income tax (benefit) expense at federal statutory rate of 35% |
$ | (2,139 | ) | $ | 11,336 | $ | 8,436 | |||||
State income tax expense, net of federal benefit |
56 | 198 | 457 | |||||||||
Changes related to tax assessments/prior period taxes |
347 | 286 | 317 | |||||||||
Deferred tax valuation allowance increase (release) |
1,820 | (3,114 | ) | (2,048 | ) | |||||||
Increase (decrease) in valuation allowance related to
current year operations |
2,081 | (4,913 | ) | (3,150 | ) | |||||||
Foreign operations tax rate differences |
(873 | ) | (2,426 | ) | (2,447 | ) | ||||||
International research credits |
(1,276 | ) | | | ||||||||
Constructive dividend |
1,055 | 86 | 215 | |||||||||
Net operating loss carryback |
(1,408 | ) | | | ||||||||
Other foreign taxes |
47 | 309 | | |||||||||
Other permanent items |
461 | 202 | 474 | |||||||||
Income tax expense |
$ | 171 | $ | 1,964 | $ | 2,254 | ||||||
The income tax effects of the temporary differences that give rise to our deferred income
tax assets and liabilities as of December 31, 2010 and 2009 are as follows (in thousands):
2010 | 2009 | |||||||
Deferred income tax assets: |
||||||||
Net operating loss carryforwards |
$ | 97,626 | $ | 98,633 | ||||
Equity in net loss of affiliate |
18,438 | 18,438 | ||||||
Accrued expenses |
2,938 | 2,532 | ||||||
Deferred revenue |
1,099 | 353 | ||||||
Tax credit carryforwards |
3,058 | 2,948 | ||||||
Restructuring |
596 | 1,356 | ||||||
Property and equipment depreciation |
2,290 | 3,317 | ||||||
Unrealized translation adjustments |
917 | 1,066 | ||||||
Identifiable intangibles |
753 | 613 | ||||||
Stock-based compensation |
5,300 | 5,189 | ||||||
Other |
277 | 276 | ||||||
Total gross deferred income tax assets |
133,292 | 134,721 | ||||||
Valuation allowance for deferred income tax assets |
(124,551 | ) | (127,260 | ) | ||||
Total deferred income tax assets |
$ | 8,741 | $ | 7,461 | ||||
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2010 | 2009 | |||||||
Deferred income tax liabilities: |
||||||||
Future reversals of branch deferred tax assets |
$ | 1,510 | $ | 631 | ||||
Other |
| 180 | ||||||
Total deferred income tax liabilities |
$ | 1,510 | $ | 811 | ||||
Net deferred income taxes |
$ | 7,231 | $ | 6,650 | ||||
2010 | 2009 | |||||||
Included in: |
||||||||
Other current assets |
$ | 1,859 | $ | 1,079 | ||||
Other noncurrent assets |
5,390 | 5,620 | ||||||
Other noncurrent liabilities |
(18 | ) | (49 | ) | ||||
Net deferred income taxes |
$ | 7,231 | $ | 6,650 | ||||
We recognize deferred income tax assets and liabilities 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.
We then establish a valuation allowance to reduce the deferred income tax assets to the level at
which we believe it is more likely than not that the tax benefits will be realized. Realization of
the tax benefits associated with 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)
future taxable income that will result from the reversal of existing taxable temporary differences
and (2) future taxable income generated by future operations.
Periodically, management reviews the deferred tax assets and evaluates the need for a
valuation allowance, generally in the fourth quarter each year in conjunction with our annual
budget cycle. Based upon our results of operations in recent years and expected profitability in
future years in certain foreign jurisdictions, we concluded that it is more likely than not certain
foreign deferred tax assets will be realized. A reversal of the valuation allowance resulted in
non-cash income tax benefit in the fourth quarters of 2009 and 2008 totaling $3.1 million and $2.0
million, respectively. In 2010, we recorded a valuation allowance of $1.8 million against the
deferred tax assets of certain international jurisdictions. As of December 31, 2010, the remaining
valuation allowance primarily relates to deferred tax assets in the United States. Given the
recent economic environment in the financial services industry, management believes it is more
likely than not a valuation allowance is required on these deferred tax assets. Management will
continue to assess the realization of our deferred tax assets and related valuation allowance.
At December 31, 2010, we had domestic net operating loss carryforwards of approximately $234.5
million, foreign net operating loss carryforwards of approximately $44.1 million, domestic tax
credit carryforwards of approximately $5.3 million and foreign jurisdiction tax credit
carryforwards of approximately $2.3 million. The domestic net operating loss carryforwards expire
at various dates through 2029 unless utilized. The foreign net operating loss carryforwards
generally do not expire and the tax credit carryforwards expire at various dates through 2021. Our
domestic net operating loss carryforwards at December 31, 2010 include $200.5 million in income tax
deductions related to stock options which will be tax effected and the benefit will be reflected as
a credit to additional paid-in capital as realized.
Using the with-and-without approach for tax benefits, actual income taxes payable for the
period are compared to the amount of tax payable that would have been incurred absent the deduction
for employee share-based payments in excess of the amount of compensation cost recognized for
financial reporting. As a result of this approach, tax net operating loss carryforwards not
generated from share-based payments in excess of cost recognized for financial reporting are
considered utilized before the current periods share-based deduction. We did not recognize any
tax benefits during 2010, 2009 and 2008 for stock-based compensation.
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We are subject to income taxes in both the U.S. and numerous foreign jurisdictions.
Significant judgment is required in evaluating our tax positions and determining our provision for
income taxes. During the ordinary course of business, there are many transactions and calculations
for which the ultimate tax determination is uncertain. We establish reserves for tax-related
uncertainties based on estimates of whether, and the extent to which, additional taxes will be due.
These reserves are established when we believe that certain positions might be challenged despite
our belief that our tax return positions are fully supportable. We adjust these reserves in light
of changing facts and circumstances, such as the outcome of tax audits. The provision for income
taxes includes the impact of reserve provisions and changes to reserves that we considered
appropriate. The reconciliation of our tax contingencies is as follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | 8,053 | $ | 8,095 | $ | 11,385 | ||||||
Additions for tax positions in current year |
1,564 | | | |||||||||
Reductions for tax positions of prior years |
| (42 | ) | (3,290 | ) | |||||||
Ending balance |
$ | 9,617 | $ | 8,053 | $ | 8,095 | ||||||
We recognize interest and penalties related to uncertain tax positions in income tax
expense. As of December 31, 2010, accrued interest and penalties related to uncertain tax positions
were immaterial.
During 2010, we increased unrecognized tax benefits by approximately $1.6 million. This
increase was primarily due to the proposed reduction in tax loss carryforwards as a result of
insufficient levels of profit in an international jurisdiction. Tax expense for the year ended
December 31, 2010, increased by $0.1 million as a result of the additions to unrecognized tax
benefits. In 2009, our unrecognized tax benefits decreased by an immaterial amount due to the
expiration of the statue of limitations. During 2008, our unrecognized tax benefits decreased by
$3.3 million, of which $2.1 million is related to the expiration of the statue of limitations for
2004, primarily related to fixed assets and intercompany debts. We also reduced unrecognized tax
benefits by $1.2 million due to a change of judgment concerning intercompany debts where it has
been determined these balances are more likely than not equity under the applicable tax authority.
Within twelve months of the reporting date, we expect to settle the unrecognized benefits added in
2010.
The tax years 2007, 2008, 2009 and 2010 remain open to examination by the major taxing
jurisdictions to which we are subject. In addition, net operating loss carryforwards from the years
1999, 2000 and 2001 are subject to examination because these loss years intervene with the open
years.
We have not provided for U.S. federal income and withholding taxes on $14.3 million of our
foreign subsidiaries undistributed earnings as of December 31, 2010, because such earnings are
intended to be indefinitely reinvested in our foreign operations. Upon distribution of those
earnings in the form of dividends or otherwise, we would be subject to U.S. income taxes (subject
to an adjustment for foreign tax credits). It is not practicable to determine the income tax
liability that might be incurred if these earnings were to be distributed.
13. Related Party Transactions
In connection with acquiring an ownership interest in Yodlee in January 2001, we became a
non-exclusive reseller of Yodlees aggregation services pursuant to an agreement that expired in
2009. In 2008, we entered into an agreement with Yodlee to become a non-exclusive reseller of
their hosted direct pay and personal finance management services with a three year term. In
December 2010, we entered into an agreement to extend the terms as a non-exclusive reseller of
their hosted direct pay and personal finance management services through March 2014. We paid
approximately $0.1 million, $0.2 million and $0.2 million in fees to Yodlee during 2010, 2009 and
2008, respectively.
14. Convertible Preferred Stock
We have authorized 25,000,000 shares of $0.01 par value preferred stock, of which 1,637,832
shares have been designated as series A convertible preferred stock, 749,064 shares have been
designated as series B convertible preferred stock, 215,000 shares have been designated as series C
convertible preferred stock, 244,000 have been designated as series D convertible preferred stock
and 649,150 have been designated as series E convertible preferred stock. The series A, series B,
series C, series D and series E shares have been converted to common stock or cancelled as of
December 31, 2010. On July 2, 2010, State Farm converted the 749,064 shares of our Series B
Convertible Preferred Stock it held into 1,070,090 shares of our common stock. At December 31,
2010, the Company did not have any shares of convertible preferred stock outstanding.
15. Equity Transactions
During 2007, our Board of Directors authorized a stock repurchase program under which we could
repurchase shares of our common stock. In September 2008, our Board of Directors authorized an
increase to our previously approved stock repurchase program that provided total authorization to
purchase up to 4,000,000 shares of our common stock. In November 2008, the total authorization
under our stock repurchase program was increased by an additional $10.0 million. During 2009, we
repurchased and retired 1,507,351 shares for a total cost of $9.6 million which includes
transaction fees. Shares acquired pursuant to the stock repurchase program were canceled, thereby
reducing the total number of shares of common stock outstanding. The stock repurchase program was
completed in December 2009.
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16. Segment Reporting, Geographic Disclosures and Major Customers
S1 Corporation is a leading global provider of payments and financial services software
solutions. We manage our business in three operating segments: Payments, Banking: Large FI, and
Banking: Community FI. The Payments segment provides our ATM and POS driving, card management, and
merchant acquiring solutions to financial institutions, retailers and transaction processors of all
sizes globally. The Banking: Large FI segment provides consumer, small business and corporate
online banking, trade finance, and mobile banking solutions to large banks globally, branch and
call center banking solutions to large banks outside of the United States, and also supports our business with
State Farm (which we expect will conclude by the end of 2011). The Banking: Community FI segment
provides consumer and small business online banking, mobile banking, voice banking, branch and call
center banking solutions to community and regional banks and credit unions in the United States.
We evaluate the performance of our operating segments based on their contribution before
interest, other income and income taxes, as reflected in the tables presented below for the years
ended December 31, 2010, 2009 and 2008. We do not use any asset-based metrics to measure the
operating performance of our segments. The following tables show revenue and operating income for
our reportable segments (in thousands):
Year Ended December 31, 2010 | ||||||||||||||||
Banking: | Banking: | |||||||||||||||
Payments | Large FI | Community FI | Total | |||||||||||||
Revenue: |
||||||||||||||||
Software licenses |
$ | 14,402 | $ | 5,879 | $ | 5,956 | $ | 26,237 | ||||||||
Support and maintenance |
22,291 | 20,696 | 20,047 | 63,034 | ||||||||||||
Professional services |
16,796 | 44,037 | 4,347 | 65,180 | ||||||||||||
Hosting |
1,168 | 25,321 | 28,146 | 54,635 | ||||||||||||
Total revenue |
$ | 54,657 | $ | 95,933 | $ | 58,496 | $ | 209,086 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of software licenses |
121 | 1,073 | 1,048 | 2,242 | ||||||||||||
Cost of professional services,
support and maintenance |
19,735 | 41,233 | 21,810 | 82,778 | ||||||||||||
Cost of hosting |
868 | 14,648 | 12,079 | 27,595 | ||||||||||||
Selling and marketing |
12,338 | 9,994 | 5,840 | 28,172 | ||||||||||||
Product development |
5,856 | 16,412 | 13,240 | 35,508 | ||||||||||||
General and administrative |
8,453 | 11,787 | 6,894 | 27,134 | ||||||||||||
Depreciation and amortization |
1,999 | 4,381 | 3,781 | 10,161 | ||||||||||||
Total operating expenses |
49,370 | 99,528 | 64,692 | 213,590 | ||||||||||||
Operating income (loss) |
$ | 5,287 | $ | (3,595 | ) | $ | (6,196 | ) | $ | (4,504 | ) | |||||
Year Ended December 31, 2009 | ||||||||||||||||
Banking: | Banking: | |||||||||||||||
Payments | Large FI | Community FI | Total | |||||||||||||
Revenue: |
||||||||||||||||
Software licenses |
$ | 18,063 | $ | 9,003 | $ | 8,130 | $ | 35,196 | ||||||||
Support and maintenance |
18,905 | 21,265 | 19,432 | 59,602 | ||||||||||||
Professional services |
18,814 | 70,710 | 5,441 | 94,965 | ||||||||||||
Hosting |
761 | 28,254 | 20,149 | 49,164 | ||||||||||||
Total revenue |
$ | 56,543 | $ | 129,232 | $ | 53,152 | $ | 238,927 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of software licenses |
1,359 | 798 | 1,031 | 3,188 | ||||||||||||
Cost of professional services,
support and maintenance |
15,914 | 42,240 | 16,032 | 74,186 | ||||||||||||
Cost of hosting |
674 | 15,794 | 11,679 | 28,147 | ||||||||||||
Selling and marketing |
11,344 | 12,136 | 7,245 | 30,725 | ||||||||||||
Product development |
5,380 | 21,071 | 8,168 | 34,619 | ||||||||||||
General and administrative |
5,766 | 12,578 | 6,520 | 24,864 | ||||||||||||
Depreciation and amortization |
1,615 | 4,834 | 3,144 | 9,593 | ||||||||||||
Total operating expenses |
42,052 | 109,451 | 53,819 | 205,322 | ||||||||||||
Operating income (loss) |
$ | 14,491 | $ | 19,781 | $ | (667 | ) | $ | 33,605 | |||||||
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Year Ended December 31, 2008 | ||||||||||||||||
Banking: | Banking: | |||||||||||||||
Payments | Large FI | Community FI | Total | |||||||||||||
Revenue: |
||||||||||||||||
Software licenses |
$ | 16,991 | $ | 7,755 | $ | 5,484 | $ | 30,230 | ||||||||
Support and maintenance |
15,624 | 18,159 | 19,996 | 53,779 | ||||||||||||
Professional services |
14,801 | 71,011 | 6,658 | 92,470 | ||||||||||||
Hosting |
608 | 28,780 | 22,568 | 51,956 | ||||||||||||
Total revenue |
$ | 48,024 | $ | 125,705 | $ | 54,706 | $ | 228,435 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of software licenses |
1,103 | 1,338 | 1,545 | 3,986 | ||||||||||||
Cost of professional services,
support and maintenance |
14,335 | 44,761 | 14,999 | 74,095 | ||||||||||||
Cost of hosting |
319 | 15,607 | 10,482 | 26,408 | ||||||||||||
Selling and marketing |
12,209 | 15,660 | 8,563 | 36,432 | ||||||||||||
Product development |
4,003 | 18,229 | 7,039 | 29,271 | ||||||||||||
General and administrative |
5,551 | 13,990 | 6,285 | 25,826 | ||||||||||||
Depreciation and amortization |
1,473 | 4,613 | 2,980 | 9,066 | ||||||||||||
Total operating expenses |
38,993 | 114,198 | 51,893 | 205,084 | ||||||||||||
Operating income |
$ | 9,031 | $ | 11,507 | $ | 2,813 | $ | 23,351 | ||||||||
Geography. Geographic external revenue and long-lived assets are attributed to the
geographic regions based on their location which includes intercompany cross charges for work
performed across regions. Our geographic regions are the Americas and our international locations
in Europe, Middle East and India (EMEI), Africa, and Asia and Pacific (APAC). Our long-lived
assets in the international regions primarily are property and equipment. The following table
shows revenue and long-lived assets by geographic region (in thousands):
Revenue | Property and Equipment | |||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||
Americas |
$ | 151,582 | $ | 170,874 | $ | 164,642 | $ | 19,685 | $ | 20,451 | ||||||||||
International |
||||||||||||||||||||
EMEI |
30,049 | 36,639 | 40,503 | 1,013 | 985 | |||||||||||||||
Africa |
13,974 | 10,925 | 9,215 | 1,461 | 1,494 | |||||||||||||||
APAC |
13,481 | 20,489 | 14,075 | 171 | 88 | |||||||||||||||
Total |
$ | 209,086 | $ | 238,927 | $ | 228,435 | $ | 22,330 | $ | 23,018 | ||||||||||
Major customer. Currently, we have one major customer (defined as any customer who
individually contributes more than 10% of total revenue) in the Banking: Large FI segment. We
derived 12%, 16% and 18% of our consolidated revenue from State Farm for the years ended December
31, 2010, 2009 and 2008, respectively. Our Banking: Large FI segment derived 26%, 30% and 33% of
the segments revenue from State Farm for the years ended December 31, 2010, 2009 and 2008,
respectively. In 2008, we announced that we expected our relationship with State Farm to conclude
by the end of 2011.
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17. Net (Loss) Income Per Share
The following table presents the calculation of basic and diluted net (loss) income per share
for the periods presented:
2010 | 2009 | 2008 | ||||||||||
(in thousands, except per share data) | ||||||||||||
Basic (loss) income per share: |
||||||||||||
Net (loss) income |
$ | (6,283 | ) | $ | 30,423 | $ | 21,850 | |||||
Amount allocated to participating preferred stockholders |
| (598 | ) | (410 | ) | |||||||
Amount allocated to participating restricted stockholders |
| (406 | ) | (83 | ) | |||||||
Net (loss) income available to common stockholders |
$ | (6,283 | ) | $ | 29,419 | $ | 21,357 | |||||
Basic weighted average common shares outstanding |
52,495 | 52,584 | 55,734 | |||||||||
Basic (loss) income per share |
$ | (0.12 | ) | $ | 0.56 | $ | 0.38 | |||||
Diluted (loss) income per share: |
||||||||||||
Net (loss) income |
$ | (6,283 | ) | $ | 30,423 | $ | 21,850 | |||||
Amount allocated to participating preferred stockholders |
| (591 | ) | (405 | ) | |||||||
Amount allocated to participating restricted stockholders |
| (401 | ) | (82 | ) | |||||||
Net (loss) income available to common stockholders |
$ | (6,283 | ) | $ | 29,431 | $ | 21,363 | |||||
Basic weighted average common shares outstanding |
52,495 | 52,584 | 55,734 | |||||||||
Dilutive effect of employee stock options |
| 707 | 715 | |||||||||
Diluted weighted average common shares outstanding |
52,495 | 53,291 | 56,449 | |||||||||
Diluted (loss) income per share |
$ | (0.12 | ) | $ | 0.55 | $ | 0.38 |
We did not include the additional shares of common stock through the exercise of 0.6
million stock options as they would have an anti-dilutive effect on our loss per share for that
period because of our net loss for the year ended December 31, 2010. Additionally, we excluded 3.5
million stock options outstanding in the computation of diluted earnings per share for the years
ended December 31, 2010, 2009 and 2008, as their exercise price was higher than our average stock
price during those periods. However, these shares may be dilutive in the future.
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18. Quarterly Financial Information
(Unaudited)
The following table illustrates selected unaudited consolidated quarterly statement of
operations data for the years ended December 31, 2010 and 2009. In our opinion, this unaudited
information has been prepared on substantially the same basis as the consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments
(consisting of normal recurring adjustments) necessary to state fairly the unaudited consolidated
quarterly data. The unaudited consolidated quarterly data should be read together with the audited
consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on
Form 10-K. The results for any quarter are not necessarily indicative of results for any future
period.
Income or loss per share in each quarter is computed using the weighted-average number of
shares outstanding during that quarter while income or loss per share for the full year is computed
using the weighted-average number of shares outstanding during the year. Thus, the sum of the four
quarters income or loss per share will not necessarily equal the full-year income or loss per
share.
Three Months Ended | ||||||||||||||||||||||||||||||||
Dec. 31, | Sept. 30, | June 30, | Mar. 31, | Dec. 31, | Sept. 30, | June 30, | Mar. 31, | |||||||||||||||||||||||||
2010 | 2010 | 2010 | 2010 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Software licenses |
$ | 8,902 | $ | 6,764 | $ | 4,832 | $ | 5,739 | $ | 8,978 | $ | 7,444 | $ | 9,718 | $ | 9,056 | ||||||||||||||||
Support and maintenance |
16,598 | 15,648 | 15,145 | 15,643 | 15,905 | 14,919 | 14,951 | 13,827 | ||||||||||||||||||||||||
Professional services |
12,498 | 17,382 | 17,870 | 17,430 | 22,013 | 25,787 | 24,090 | 23,075 | ||||||||||||||||||||||||
Hosting |
14,475 | 13,886 | 13,927 | 12,347 | 12,564 | 12,187 | 12,083 | 12,330 | ||||||||||||||||||||||||
Total revenue |
52,473 | 53,680 | 51,774 | 51,159 | 59,460 | 60,337 | 60,842 | 58,288 | ||||||||||||||||||||||||
Operating expenses (1) |
56,798 | 53,181 | 52,310 | 51,301 | 50,650 | 51,274 | 55,243 | 48,155 | ||||||||||||||||||||||||
Operating (loss) income |
(4,325 | ) | 499 | (536 | ) | (142 | ) | 8,810 | 9,063 | 5,599 | 10,133 | |||||||||||||||||||||
Net (loss) income |
$ | (4,345 | ) | $ | 892 | $ | (1,774 | ) | $ | (1,056 | ) | $ | 9,938 | $ | 6,910 | $ | 4,631 | $ | 8,944 | |||||||||||||
(Loss) income per share: |
||||||||||||||||||||||||||||||||
Basic |
$ | (0.08 | ) | $ | 0.02 | $ | (0.03 | ) | $ | (0.02 | ) | $ | 0.18 | $ | 0.13 | $ | 0.09 | $ | 0.16 | |||||||||||||
Diluted |
$ | (0.08 | ) | $ | 0.02 | $ | (0.03 | ) | $ | (0.02 | ) | $ | 0.18 | $ | 0.12 | $ | 0.08 | $ | 0.16 | |||||||||||||
(1) Includes stock
based compensation
expense (benefit |
$ | 2,269 | $ | 249 | $ | 809 | $ | 373 | $ | 1,181 | $ | (139 | ) | $ | 3,091 | $ | (2,531 | ) |
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Schedule II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Balance | Additions | |||||||||||||||||||
at | Charged to | Charged to | Balance at | |||||||||||||||||
beginning | costs and | other | end of | |||||||||||||||||
Description | of period | expenses | accounts | Deductions | period | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Year ended December 31, 2010: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 2,299 | 1,388 | | (378 | ) | $ | 3,309 | ||||||||||||
Valuation allowance for deferred taxes |
$ | 127,260 | 1,820 | (4,529 | ) | | $ | 124,551 | ||||||||||||
Year ended December 31, 2009: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 1,388 | 995 | | (84 | ) | $ | 2,299 | ||||||||||||
Valuation allowance for deferred taxes |
$ | 140,110 | (3,114 | ) | (9,736 | ) | | $ | 127,260 | |||||||||||
Year ended December 31, 2008: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 3,858 | 159 | | (2,629 | ) | $ | 1,388 | ||||||||||||
Valuation allowance for deferred taxes |
$ | 145,346 | (2,048 | ) | (3,188 | ) | | $ | 140,110 |
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Table of Contents
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Not Applicable.
Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures. As of December 31, 2010, we carried out an
evaluation, under the supervision and with the participation of management, including the chief
executive officer and the chief financial officer (or persons performing similar functions), of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15(d)-15(e) under the Securities Exchange act of 1934 (the Exchange Act))
pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the chief executive officer
and the chief financial officer (or persons performing similar functions) concluded that our
disclosure controls and procedures were effective as of December 31, 2010.
Managements Report on Internal Control Over Financial Reporting. Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Exchange Act Rules 13a-15(f) or 15d-15(f). The Companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of this Report, Management conducted an evaluation of the
effectiveness of the companys internal control over financial reporting as of December 31, 2010
based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management has excluded from the
scope of its assessment of internal control over financial reporting the operations and related
assets of PM Systems Corporation (PMSC), which S1 acquired on March 4, 2010. At December 31,
2010, and for the period from March 4, 2010, through December 31, 2010, the total assets and total
net revenue subject to PMSCs internal control over financial reporting represented 10% and 5%,
respectively, of S1s consolidated total assets and consolidated net revenue, respectively.
Management has concluded that our internal control over financial reporting was effective at the
reasonable assurance level as of December 31, 2010.
The effectiveness of the Companys internal control over financial reporting as of December
31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is presented in Part II Item 8 Financial
Statements and Supplementary Data.
Changes in Internal Control Over Financial Reporting. There have not been any changes in the
Companys internal control over financial reporting during the quarter ended December 31, 2010,
which have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
Item 9B. | Other Information. |
None
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
Information required by this item is omitted from this report because we will file our
definitive proxy statement within 120 days after the end of the fiscal year covered by this report,
and the information included in our definitive proxy statement in sections Information as to Our
Directors and Executive Officers, Board of Directors and Corporate Governance and Section 16(a)
Beneficial Ownership Reporting Compliance is incorporated in this report by reference.
Item 11. | Executive Compensation. |
Information required by this item is omitted from this report because we will file our
definitive proxy statement within 120 days after the end of the fiscal year covered by this report,
and the information included in our definitive proxy statement in sections Board of Directors and
Corporate Governance, Compensation Committee Report, Compensation Discussion and Analysis and
Executive Compensation Tables is incorporated in this report by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information required by this item is omitted from this report because we will file our
definitive proxy statement within 120 days after the end of the fiscal year covered by this report,
and the information included in our definitive proxy statement in sections Security Ownership of
Certain Beneficial Owners and Management and Equity Compensation Plan Information is
incorporated in this report by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information required by this item is omitted from this report because we will file our
definitive proxy statement within 120 days after the end of the fiscal year covered by this report,
and the information included in our definitive proxy statement in sections Board of Directors and
Corporate Governance and Transactions with Management and Related Parties is incorporated in
this report by reference.
Item 14. | Principal Accounting Fees and Services. |
Information required by this item is omitted from this report because we will file our
definitive proxy statement within 120 days after the end of the fiscal year covered by this report,
and the information included in our definitive proxy statement in section Report of Audit
Committee and Public Accounting Fees is incorporated in this report by reference.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1) The consolidated financial statements filed as a part of this report and incorporated
in this report by reference are listed and indexed under Item 8 Financial Statements and
Supplementary Data.
(2) The financial statement schedules filed as part of this report and incorporated in this
report by reference are listed and indexed under Item 8 Financial Statements and Supplementary
Data.
(3) The exhibits listed below are filed as part of this report and incorporated in this report
by reference:
Exhibit | ||||
No | Exhibit Description | |||
3.1 | Amended and Restated Certificate of Incorporation of S1 Corporation (S1) (filed as Exhibit
1 to S1s Registration Statement on Form 8-A (File No. 000-24931) filed with the Securities
and Exchange Commission (the SEC) on September 30, 1998 and incorporated herein by
reference). |
|||
3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File No.
333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference). |
|||
3.3 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K filed with the SEC
on March 30, 2000 and incorporated herein by reference). |
|||
3.4 | Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 2 to S1s Registration Statement on Form 8-A (File No. 000-24931) filed with the SEC
on September 30, 1998 and incorporated herein by reference). |
|||
3.5 | Amended and Restated Bylaws of S1, as amended (filed as Exhibit 3.6 to S1s Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2006 and incorporated herein by
reference). |
|||
4.1 | Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference). |
|||
10.1 | Stock Purchase Agreement, dated as of June 29, 1998, by and among SFNB, S1 and State Farm
Mutual Automobile Insurance Company (filed as Exhibit 10.4 to Pre-Effective Amendment No. 2 to
the S1s Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on August
21, 1998 and incorporated herein by reference). |
|||
10.2 | Security First Technologies Corporation Amended and Restated 1995 Stock Option Plan (filed as
Appendix B to S1s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 7,
1999 and incorporated herein by reference).* |
|||
10.3 | Amendment to Security First Technologies Corporation Amended and Restated 1995 Stock Option
Plan (filed as Exhibit 10.3 to S1s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000 and incorporated herein by reference).* |
|||
10.4 | Security First Network Bank Amended and Restated Directors Stock Option Plan (filed as
Exhibit 10.2 to Pre-Effective Amendment No. 2 to S1s Registration Statement on Form S-4 (File
No. 333-56181) filed with the SEC on August 21, 1998 and incorporated herein by reference).* |
|||
10.5 | Amendment to Security First Network Bank Amended and Restated Directors Stock Option Plan
(filed as Exhibit 10.1 to S1s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 and incorporated herein by reference).* |
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Table of Contents
Exhibit | ||||
No | Exhibit Description | |||
10.6 | Security First Technologies Corporation 1998 Directors Stock Option Plan (filed as Exhibit
10.3 to Pre-Effective Amendment No. 1 to S1s Registration Statement on Form S-4 (File No.
333-56181) filed with the SEC on July 30, 1998 and incorporated herein by reference).* |
|||
10.7 | Amendment to Security First Technologies Corporation 1998 Directors Stock Option Plan (filed
as Exhibit 10.2 to S1s Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000 and incorporated herein by reference).* |
|||
10.8 | S1 Corporation 2003 Stock Option Plan, As Amended and Restated Effective February 26, 2008
(filed as Attachment B to S1s Definitive Proxy Statement on Schedule 14A filed with the SEC
on April 13, 2008 and incorporated herein by reference).* |
|||
10.9 | Form of Indemnification Agreement by and between S1 and each of its directors and certain
executive officers (filed as Exhibit 10 to S1s Current Report on Form 8-K filed with the SEC
on November 14, 2006 and incorporated herein by reference). |
|||
10.10 | Master Software Development and Consulting Services Agreement between S1 Corporation and
State Farm, dated as of March 31, 2000 (filed as Exhibit 10.18 to S1s Amended Annual Report
on Form 10-K/A filed with the SEC on July 26, 2006 and incorporated herein by reference). |
|||
10.11 | Description of Arrangement for Directors Fees, effective as of June 5, 2010 (filed as
Exhibit 10.11 to S1s Current Report on Form 8-K filed with the SEC on June 9, 2010 and
incorporated herein by reference). |
|||
10.12 | Agreement with Paul Parrish (filed as Exhibit 10.1 to S1s Current Report on Form 8-K filed
with the SEC on December 17, 2008 and incorporated herein by reference).* |
|||
10.13 | Agreement with Johann Dreyer dated December 24, 2008 (filed as Exhibit 10.1 to S1s Current
Report on Form 8-K filed with the SEC on December 24, 2008 and incorporated herein by
reference).* |
|||
10.14 | Agreement with Jan Kruger dated December 24, 2008 (filed as Exhibit 10.2 to S1s Current
Report on Form 8-K filed with the SEC on December 24, 2008 and incorporated herein by
reference).* |
|||
10.15 | Amendment to Agreement between S1 and Paul Parrish dated August 18, 2009 (filed as Exhibit
10.1 to S1s Current Report on Form 8-K filed with the SEC on August 18, 2009 and incorporated
herein by reference).* |
|||
10.16 | Agreement with Pierre Naude dated December 24, 2008.* |
|||
10.17 | Agreement with Francois van Schoor dated December 24, 2008.* |
|||
10.18 | Directors Deferred Compensation Plan, effective as of January 1, 2010 (filed as Exhibit
10.1 to S1s Current Report on Form 8-K filed with the SEC on December 19, 2009 and
incorporated herein by reference). |
|||
10.19 | S1 Corporation 2010 Management Incentive Plan (filed as Exhibit 10.1 to S1s Current Report
on Form 8-K filed with the SEC on February 4, 2010 and incorporated herein by reference).* |
|||
21.1 | Subsidiaries of S1. |
|||
23.1 | Consent of Independent Registered Public Accounting Firm |
|||
31.1 | Certificate of Chief Executive Officer |
|||
31.2 | Certificate of Chief Financial Officer |
|||
32.1 | Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002 |
* | Management contract or compensatory plan, contract or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, as of March 11, 2011.
S1 CORPORATION |
||||
By: | /s/ PAUL M. PARRISH | |||
Paul M. Parrish | ||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
date indicated.
Name | Title | Date | ||
/s/ JOHN W. SPIEGEL
|
Chairman of the Board | March 11, 2011 | ||
/s/ JOHANN DREYER
|
Chief Executive Officer and Director | March 11, 2011 | ||
(Principal Executive Officer) | ||||
/s/ PAUL M. PARRISH
|
Chief Financial Officer | March 11, 2011 | ||
(Principal Financial Officer and | ||||
Principal Accounting Officer) | ||||
/s/ RAM GUPTA
|
Director | March 11, 2011 | ||
/s/ M. DOUGLAS IVESTER
|
Director | March 11, 2011 | ||
/s/ THOMAS P. JOHNSON, JR.
|
Director | March 11, 2011 | ||
/s/ GREGORY J. OWENS
|
Director | March 11, 2011 | ||
/s/ EDWARD TERINO
|
Director | March 11, 2011 | ||
69