##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 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
(State or other jurisdiction of
incorporation or organization)
    
    58-2395199
(I.R.S. Employer
Identification No.)
 3500 Lenox Road, NE, Suite 200Atlanta, Georgia
(Address of principal executive offices)
    
    30326
(Zip Code)
 Registrants telephone number, including area code: (404) 923-3500 Securities registered pursuant to Section 12(b) of the Act:
Not Applicable Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Title of Class Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark 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 registrants 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o Aggregate market value of the common stock held by non-affiliates of the
Registrant, computed using the closing price on the for the Registrants common
stock on June 30, 2003, was $263,512,388. Shares of common stock outstanding as of March 5, 2004: 70,893,561 Documents Incorporated by Reference List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K into which the document is incorporated: Portions of the definitive proxy statement for the annual meeting of
shareholders to be held May 14, 2004, which the registrant intends to file no
later than 120 days after December 31, 2003, are incorporated by reference in
Part III.




---



TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Qualitative and Quantitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataREPORT OF INDEPENDENT AUDITORSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSVALUATION AND QUALIFYING ACCOUNTSItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSIGNATURESEX-21 SUBSIDIARIES OF S1EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLPEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO    Table of Contents  S1 CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 2003 TABLE OF CONTENTS PagePART IItem 1. Business
    
    
    1Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    17Item 6. Selected Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A. Qualitative and Quantitative Disclosures about Market Risk
    
    
    38Item 8. Financial Statements and Supplementary Data
    
    
    39Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    70Item 9A. Controls and Procedures
    
    
    70PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    70Item 11. Executive Compensation
    
    
    70Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    70Item 13. Certain Relationships and Related Transactions
    
    
    71Item 14. Principal Accountant Fees and Services
    
    
    71PART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    71Signatures
    
    
    75




---



##### Table of Contents



PART I 
 Item 1.Business. 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
within the safe harbor provisions of the Private Securities Litigation Reform
Act. These statements include statements with respect to our financial
condition, results of operations and business. The words believes, expects,
may, will, should, projects, contemplates, anticipates,
forecasts, intends or similar terminology identify forward-looking
statements. These statements are based on our beliefs as well as assumptions
made using information currently available to us. Because these statements
reflect our current views concerning future events, they involve risks,
uncertainties and assumptions. Therefore, actual results may differ
significantly from the results discussed in the forward-looking statements. The
risk factors described below provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. Except as provided
by law, we undertake no obligation to update any forward-looking statement. Business Overview We operate and manage S1 in two business segments: financial institutions,
our core business segment, and the Edify business. We sell our solutions to
small, mid-sized and large financial organizations in two geographic areas: (i)
the Americas region, and (ii) the International region, consisting of Europe,
Middle East and Africa (EMEA) and Asia-Pacific and Japan (APJ).
Additional information about our operating segments, geographic
disclosures and major customers is presented in note 17 to our
consolidated financial statements contained elsewhere in this report. Financial Institutions Segment Through our financial institutions segment, we provide enterprise software
solutions for financial services organizations, including banks, credit unions
and insurance companies around the world. Our solutions help financial
institutions to automate and integrate their customer interaction channels and
market segments. These interaction channels include:  
    
    Branch and call center channels, which banks primarily use to provide
personalized service and relationship selling through the teller, agent
desktop and call center;
    
    Internet channel, which financial institutions use as a low-cost way
to enable customers to conduct transactions in a self-service manner
anytime, anywhere; and
    
    Voice channel, which enables financial institutions to efficiently
interact with their customers for simple transactions, like balance
inquiries and payment information. Our applications, which can be sold as standalone applications or as an
integrated suite across the enterprise, help financial institutions better
service and sell financial products to all of their market segments, ranging
from retail consumers and small businesses to global corporations. Our
applications also help financial institutions lower the costs associated with
supporting their infrastructure and servicing their customers and employees by
providing a single platform on which all of their front-office applications and
customer information can reside. Our customer relationship management (CRM)
software enables institutions to better understand their customers, segment
their needs, and more effectively cross-sell services and improve customer
satisfaction. Our products are designed to run on-premise at a financial institution
location, or hosted in a data center. The products can be branded and extended
to meet the individual specifications of the financial institution. We provide
professional services for the installation and integration of our products,
product training, consulting and product enhancement services, all of which are
focused on enabling our customers to maximize the value of our applications and
meet their particular business needs and strategies. We also provide hosting
applications for customers who elect to run S1 solutions in our data center. We derive a significant portion of our revenues from licensing our
solutions and providing professional services. We generate recurring data
center revenues by charging our data center customers a monthly fixed fee or a
fee based on the number of their end users who use the solutions we provide,
subject to a minimum charge. We also generate recurring revenue by charging
customers who license our products a periodic fee for software maintenance. 1




---



##### Table of Contents



Edify Segment Through our Edify business segment, we deliver voice and speech solutions
for companies across a range of industries. Edifys products help companies
automate their customer service facilities, improve customer satisfaction and
create new revenue generating opportunities, while reducing operational costs.
Edifys voice and speech applications are scalable, multilingual and flexible,
allowing companies to easily integrate multiple back-end systems with a variety
of contact interfaces. Edifys voice and speech solutions combine speech
recognition, speaker verification, text-to-speech, fax, and touch-tone
automation with a powerful application development environment and natural
language capabilities to help organizations optimize customer service while
lowering costs. Revenues from the Edify business segment accounted for
approximately 12% of our total revenues in 2003. General Background We created the worlds first bank on the Internet in May of 1996 with the
launch of Security First Network Bank. In 1998, we sold the banking operations
to Royal Bank of Canada so that we could focus on software development,
implementation and services. While our core business was Internet banking for
several years, our management team had a broader vision of helping financial
institutions consolidate their systems and line-of-business applications to
reduce costs, increase revenue and deliver a more consistent experience across
their delivery channels and market segments. We make this possible through an
integrated suite of applications that address virtually every customer channel
of todays financial institutions. Over the past three years, we have invested over $100 million in product
development activities to build out our vision, which has now taken the form of
our flagship suite of products - S1 Enterprise. S1 is headquartered in
Atlanta, Georgia and is a global software and services organization that has
more than 4,000 financial institution customers, ranging from some of the
worlds largest financial services providers to community and regional banks in
the United States. While we primarily operate in the global financial services
industry, we also have our Edify division which provides voice and speech
solutions to a wide range of industries around the world. We have 24 offices in 13 countries around the world, including development
centers of excellence located in Atlanta, Georgia; Boston, Massachusetts;
Charlotte, North Carolina; Austin, Texas; West Hills, California; Pune, India;
and Dublin, Ireland. Financial Industry Background Financial institutions interact with their customers through a variety of
channels, including but not limited to the branch, call center, phone, ATM and
the Internet. As each of these channels was introduced and proliferated,
financial institutions took a tactical approach in expanding their offerings,
incrementally adding these new channels as they fit in with their evolving
business plans. By and large, each channel functioned independently, with
limited, if any, interactions and knowledge of the activities occurring in each
channel. This siloed infrastructure over time became cumbersome and expensive
for institutions to support and painful for consumers and businesses to try to
interact with their financial institution. Todays consumers demand a more compelling, personal relationship with a
financial provider, who understands their needs and can offer relevant,
value-added services. They require their information to be available through
any channel at any time. In addition, consumers have more options for their
financial services than ever before, including brokerage firms and even
retailers. This increased competition and the ever-changing demands from
consumers, along with tough economic conditions, is driving financial
institutions to consider new ways of implementing their customer interaction
applications for a better customer experience, lower operating costs, and a
higher return on their technology investments. This new way of approaching technology centers around an integrated
multi-channel strategy, one in which the financial institution implements a
single platform on which all of their customer interaction and market segment
applications reside. The strategy employs a single data model that captures all
of the transaction information no matter which channel the customer chooses to
use with the financial institution as well as all of the pertinent customer
information and preferences. These two elements, along with the reuse of
business components, were the basis in the design of the S1 Enterprise Platform
and all of the applications that operate on it. We believe that financial institutions that provide a unified experience
for their customers across multiple points of interaction, delivered at the
lowest possible price will have a key competitive advantage. Financial
institutions will need to deliver a consistent and compelling experience to
their customers and provide them with products and services that better 2




---



##### Table of Contents



meet their needs and are relevant to their stage in life. We believe it is very
challenging for financial institutions to deal with multiple channels, using
different technologies, all of which must be integrated with a variety of
legacy applications. Financial institutions are driven by technology and must
attempt to keep up with the rapid pace of change. They must determine how to
leverage their existing solutions while moving to new technologies that will
protect their investments and better position them for the future. Continuing
economic pressures and cost and resource cutting have forced them to try and do
more with less. In addition, many financial institutions are struggling to
absorb acquired businesses and rationalize the technologies and systems
involved. We believe these factors will drive financial institutions to pursue an
enterprise solution that helps them reduce their costs, increase their revenue
opportunities and improve customer loyalty. With a single platform and common
data model, institutions can reduce their costs by using single points of
integration to the legacy applications, decreasing operational complexity and
eliminating multi-vendor coordination, as well as drive revenue by enhancing
cross-selling opportunities, and improving the relationships they have with
their customers. We are in the process of delivering a fully integrated
solution that automates and integrates all of the front-office applications,
while providing a technology platform to simplify integration and operations as
well as speed implementation and time to market. Our activities during 2001,
2002 and 2003 were focused on execution of our strategy around the delivery and
implementation of this type of enterprise application and getting financial
institutions in production on this new platform. The S1 Solution In mid-2003, we delivered the second major release of our flagship suite
of products  S1 Enterprise. This release included the delivery of our retail
Internet banking, small business Internet banking, corporate cash management
and insurance applications on a single platform  the S1 Enterprise Platform.
Later in the year, we released a version of our branch automation applications
that integrate with the S1 Enterprise Platform through the common data model.
To date, more than 100 financial institutions have purchased an S1 Enterprise
application - over forty of these institutions are in live production with an
S1 Enterprise application, realizing tangible business benefits from our
software with the remainder in some stage of implementation and deployment. Our direction for the S1 Enterprise is to take a holistic approach to
unifying a financial institutions multiple channels, applications, and
customer segments. By taking a customer-centric view, we expect that the S1
Enterprise will enable financial institutions to deliver a personalized,
compelling experience to their retail, small business and corporate customers.
By supporting all customer interaction channels  including full-service
channels such as branches, agents and call centers; self-service channels such
as voice and the Web; and automated interactions such as ACH and wire transfers
 we believe that S1 Enterprise will enable financial institutions to deliver
a consistent customer experience while helping them rapidly deploy new products
and services. S1 Enterprise offers banking, investment, insurance and CRM
applications that can be used by both financial institution customers and
internal users, such as tellers, agents, brokers, and customer service
representatives. We provide flexible, customizable solutions with a modular
approach so financial institutions can innovate their enterprise at their own
pace, while increasing revenue, lowering costs and building stronger customer
loyalty. We believe that the S1 Enterprise, when fully implemented, will offer a
number of important benefits to our customers, including the following:  
    
    S1 Enterprise Turns Static Financial Institution Data into Actionable
Information to help financial institutions grow their revenues
Financial institutions have a wealth of valuable customer information
stored throughout their organizations. Their customers also have
multiple financial relationships with other providers. S1 Enterprise
will help financial institutions collect the data from internal and
external systems, giving greater insight into customers and the ability
to deliver more personalized service. S1 Enterprise will feature fully
integrated CRM capabilities so that our financial institution customers
can leverage customer information and marketing programs across all
customer touch points, helping them create profitable and satisfying
customer interactions. Our CRM approach goes beyond the traditional
approach by turning information such as alerts, awards and promotions
into actionable information at the delivery channel of choice for the
financial institutions customer. This includes multiple delivery
channels  not just the call center.  
    
    S1 Enterprise Delivers Compelling, Personalized Products and Services
that help increase customer retention In order to build customer
loyalty, financial institutions need to deliver personalized products
and services that are timely, relevant and accurate. S1 Enterprise will
help them understand their customers buying behaviors, attitudes toward
technology and short and long-term financial goals. S1 Enterprise will
help financial institutions create more cross-selling opportunities,
while maximizing the existing relationships they have established to
up-sell additional 3




---



##### Table of Contents



products and services and to reduce customer turn-over. We believe such
personalized service will increase opportunities for cross sell and create
more effective push marketing.  
    
    S1 Enterprise Provides Integration of Multiple Applications and
Channels to lower a financial institutions costs The S1 Enterprise
will deliver integrated solutions across all of an institutions
customer-interaction channels and market segments. Delivering all of
these services from a common platform will enable financial institutions
to achieve significant cost savings over time. With the deployment of
one application, they get the most comprehensive functionality on an
open, flexible, and operable industry platform. With multiple
applications, they begin to see true economies of scale with the single
platform. This not only reduces integration, maintenance and
implementation costs, it can also leverage the cross-channel CRM
capabilities for more effective personalization and sales opportunities.
All of this capability will be delivered while leveraging existing
investments in back-office system interfaces. S1 Vision and Strategy Our objective is to be the leading global provider of integrated
enterprise solutions that enable financial institutions to improve the way they
service their customers by integrating all delivery channels, expanding the
total financial relationship and increasing profits. To achieve this objective,
we intend to pursue the following initiatives: Achieve Financial and Operational Stability through a Combination of Enterprise
Revenue Growth and Continued Cost Control Within our financial institutions business, we generated approximately 39%
of our revenues from a subscription license and services provided to our two
major customers (Zurich Insurance Company and State Farm Mutual Automobile
Insurance Company) in 2003. The remainder of the revenue was generated from the
sale of licenses and services in the global financial services market. In the
fourth quarter of 2003, we substantially completed the transition from our
legacy Internet-only business to an Enterprise software and services business.
During the transition, we experienced a decrease of revenue from legacy
Internet-only customers. Zurich, which accounted for approximately $43 million
in revenue in both 2002 and 2003 will not generate any revenue for S1 in 2004.
Revenue from State Farm of approximately $65 million and $46 million in 2002
and 2003, respectively, is expected to be approximately $40 million in 2004. In
addition to these two customers, we had a number of other legacy Internet-only
customers that have cancelled their hosting contracts or moved to in house
implementations contributing to a decrease in data center revenue of
approximately $5 million in 2004. We believe the majority of these data center
revenue transitions were substantially completed during the third quarter of
2003. We believe the financial institutions segment revenue, excluding Zurich,
of $42.4 million for the quarter ended September 30, 2003, represents a stable
base from which we expect to grow revenues through the sale of single channel
and Enterprise solutions to the marketplace and our existing customer base of
over 4,000 financial institutions. In 2004, we will continue to sell Enterprise solutions to financial
institutions. We expect to generate license revenues and implementation fees
from these sales. Once these financial institutions have gone live on one of
our solutions, we earn recurring maintenance revenues from these customers. In
addition, we believe these Enterprise customers will purchase additional
Enterprise applications from us. In preparation for the revenue transition discussed above, we made a
number of changes to our operating structure which reduced total operating
expenses, before restructuring charges, from $310 million in
2002 to $271 million in 2003. These cost savings, achieved through a combination of office
consolidation, headcount reduction and other cost control initiatives, helped
us generate $22 million of cash from operations, increasing our cash and
short-term investments from $143 million at December 31, 2002 to $164 million
at December 31, 2003. We believe that the combination of new Enterprise revenue
and our continuing focus on cost control will result in the generation of
continued positive cash flow from operations and profits in 2004. Increase Revenues by Cross-Selling our Products and Services to Existing
Customers We intend to generate revenues by selling additional S1 products and
services to our existing customer base of over 4,000 financial institutions.
We believe that opportunities for cross-selling our products and services will
increase as we deliver more of our applications on the S1 Enterprise Platform,
and as we continue to add and enhance products through acquisition and internal
development. In addition to the sale of new products, the migration of our
customer base from single-channel solutions to the integrated Enterprise
applications will offer further revenue growth opportunities. 4




---



##### Table of Contents



S1 Products We have products that address both the community bank and credit union
marketplace, as well as those that address the needs of mid and large-size
financial services providers. We generate revenues from the following principal product groups: Banking
Solutions, Insurance Solutions, CRM Solutions, Website Solutions, Financial
Reporting Solutions and Account Aggregation. S1 Banking Solutions In mid-2003, we delivered the second major release of S1 Enterprise, which
included S1 Personal Banking, S1 Business Banking, and S1 Corporate Banking
products running on the new S1 Enterprise Platform. These products are
primarily focused on meeting the needs of the mid and large-size financial
institution. We also delivered a new release of our branch banking
applications that integrated with the S1 Enterprise Platform at the core data
model level. Going forward, we intend to deliver applications across the entire
front-office that are native to the S1 Enterprise Platform. In addition, we
will continue to deliver and support more turnkey, packaged applications for
Internet and voice banking, which primarily are used by the community bank
market and credit unions. In the retail and small business banking markets, we offer the following
products:  
    
    S1 Personal Bankinggives individual consumers anytime, anywhere
access to all of their banking accounts, including deposit, credit card
and loan accounts. Functions include the ability to view statements,
account activity, and cleared and pending transactions online, to
transfer funds between accounts and to pay bills electronically.
    
    S1 Business Bankingis a comprehensive banking product geared to the
unique needs of small business owner-operators. Available services
include daily account balance and transaction reporting, disbursement
services, payroll, account transfers, wires, and electronic tax
payments. Personalization options simplify cash management tasks for
easy organization and management of company funds.
    
    S1 Internet Banking System (IBS) Retail Bankingis designed
specifically with the unique needs of the community banking market in
mind. This turn-key, more packaged application includes functions such
as the ability to view statements, account activity, and cleared and
pending transactions online, to transfer funds between accounts and to
pay bills electronically.
    
    S1 IBS Cash Management Systemis designed to help community banks
deliver services to small businesses in the markets that they serve.
Functions include integrated front and back office systems, multiple
payment vehicles such as domestic and SWIFT wires, ACH, and EFTPS,
integration with the IBS retail Internet banking application and EDI
data display.In the commercial banking area, we offer the following Internet-based
applications:  
    
    S1 Corporate Bankingis a comprehensive Internet-based cash
management solution that helps financial institutions better serve large
corporations on a global basis. This application offers multi-lingual,
multi-currency and multi-delivery channel capability to perform such
functions as information reporting, global payments, check services,
file services and customer administration on a global basis.  
    
    S1 Trade Financesolutions help financial institutions increase the
efficiency of processing their trade transactions. S1 Trade Finance
delivers one integrated system to create and report on trade documents
from purchase order, to letter of credit, to direct collections. These
solutions enhance the risk evaluation process for global trade using
optimized workflow and reporting and deliver up-to-date status reports
on all outstanding trade finance engagements. In the branch automation space, we currently offer the following
Java-based products. In 2004, we will focus on delivery of J2EE-based branch
and call center applications and expect to deliver a web-based teller
application in late 2004.  
    
    S1 Tellerprovides the complete set of transactions and core services
necessary for fulfilling the rigorous requirements of todays teller
environment, including host communications, sharing and storing of
information, cumulative totals, electronic journal, transaction security
and approval, and balancing aids. 5




---



##### Table of Contents




    
    S1 Sales and Service Platformincludes an extensive set of
transactions, sales tools, and core services that expedite selling new
products, as well as servicing existing accounts.  
    
    S1 Banking Call Centerprovides the customer information, sales and
service capabilities, process flows, reporting, and fulfillment
management that are exclusive to call center operations. The S1 Banking
Call Center application integrates with other call center technologies,
including integrated voice response (IVR) systems, computer telephony
integration servers, and automatic call distributor systems. When it comes to voice banking, we currently offer two solutions: (1) a
packaged IVR system that is typically used by community banks and mid-size
institutions, and (2) a complex set of tools that an institution can use to
customize to meet its unique voice banking needs.  
    
    S1 Voice Bankingdelivers IVR functionality in a stable, flexible,
Windows-based application. With the push of a button or through simple
voice commands, users can check on a deposit or account balance, find a
CD rate, pay bills or transfer funds.  
    
    S1/Edify Voice and Speech Recognition productshelp companies
automate their customer service facilities, improving customer
satisfaction and enabling new revenue-generating opportunities while
reducing operational costs. Edifys voice and speech applications are
scalable, multilingual and flexible, allowing companies to easily
integrate multiple backend systems with a variety of contact interfaces.
Our voice and speech solutions combine speech recognition, speaker
verification, text-to-speech, fax, and touch-tone automation with a
powerful application development environment and natural language
capabilities to help organizations optimize customer service while
lowering costs. Edifys open, standards-based platform manages millions
of customer interactions every day across a broad range of industries. S1 Insurance Solutions S1 Insurance solutions include products for both the customer and the
agent/intermediary. The applications support product sales capabilities as well
as self-service capabilities for the property and casualty and life and annuity
markets.  
    
    S1 Consumer Insuranceprovides the features and functionality to
enable insurance providers to improve customer service, acquire new
business and reduce costs by providing anytime, anywhere access to meet
insurance needs. Customers can view policy information, request changes
to their policies, initiate the claims process and get insurance quotes
as well as apply and purchase products online. S1 CRM Solutions  
    
    S1 Analyticsfeatures easy to use analytical and segmentation tools,
comprehensive campaign development and management capabilities, and a
unique methodology to drive the results of CRM out to all channels. It
permits real time access to customer contact and value information, as
well as target campaigns, and significantly enhances the value of CRM
efforts.  
    
    S1 Marketing Centersupports the planning and execution of marketing
campaigns based on multiple segmentations of customers and prospects. It
includes robust inbound and outbound telemarketing features that can be
combined with advanced Computer Telephony Integration (CTI) functionality to enhance the efficiency of
our customers marketing personnel.  
    
    S1 Sales Centersupports sales associates and managers in a telesales
or field sales environment by tracking all relevant information and
proactively guiding the associate through initiating, closing and
tracking opportunities.  
    
    S1 Support Centerenables customer service representatives and
managers to create, assign and manage customer support requests such as
incidents, problems and resolutions. It provides details of the problem,
the ability to request status and history and the ability to suggest
products for cross-sell and up-sell. 6




---



##### Table of Contents



Website Solutions  
    
    S1 Customer Centeris a virtual financial lobby which provides
customers with a destination web site or portal that gives them access
to product information, news and other content, as well as community
pages and bulletin boards. The S1 Customer Center enables financial
institutions to efficiently create, manage and quantify their web
presence. Financial Reporting Solutions  
    
    Under the FRS brand, our financial reporting solutions provide
financial institutions worldwide with a suite of optimized regulatory
reporting, financial intelligence and analytic solutions. FRS
FinancialAnalytics provides a consolidated global data foundation to
help banks prepare and comply with Basel II and IAS. FRS Regulatory
Reporting eases the burden of complying with national regulatory
reporting requirements of central banks, monetary authorities, and other
financial regulators in more than 20 countries. More than 600 financial
institutions, including 37 of the top 50 European financial institutions
and 55 and the top 100 global institutions, utilize our financial
reporting solutions. Account Aggregation  
    
    Through our reseller agreement with Yodlee, Inc., which is described
in Note 18 to our consolidated financial statements included elsewhere
in this report, we provide account aggregation capabilities, which allow
the delivery of an integrated balance sheet consolidating, organizing
and presenting a consumers personal account information from a variety
of providers for confidential viewing and access. S1 Services We provide services to assist our customers in the planning,
implementation and customization of their applications as well as ongoing
maintenance and support and, if desired, application hosting services. S1 Hosting Services Our hosting services provide operational management and control across the
full range of banking, brokerage, insurance, loan, credit card and content
applications and information. We host S1 applications for more than 400
customers in our global data center facility in Atlanta, which handles more
than 2.5 million transactions every day. Our mature operating environment was
designed to address mission-critical operational issues for financial
applications, such as security, recovery and availability of data. Our global
data center is a hardened facility that can scale to support large volumes of
customers. S1 Customer Support The S1 Customer Support team offers various levels of service to meet an
organizations support needs and budgets:  
    
    Technical Support Customer support engineers will work to provide
solutions on S1 products;  
    
    Software Release Management Software upgrades that include
enhancements to our software as well as operational and performance
improvements; and  
    
    Online Support The S1 Support Website is designed to provide
one-stop access to technical information for S1 products. The S1
Support Website provides access to technical FAQs, download patches, the
latest documentation, and support bulletins. S1 Professional Services Our professional services team helps financial institutions bring their
solutions to market  rapidly and efficiently. Our professional services
organization is engaged in the following activities:  
    
    Project Management Our project managers are responsible for keeping
a project on schedule and within budget throughout the implementation
cycle; 7




---



##### Table of Contents




    
    Custom Software Development Our developers will customize our
solutions to meet the specific business requirements of our customers 
from analysis and design to building and testing;  
    
    Technical Services Our team will design, implement and test the
servers and network infrastructure to support our solutions. Our
expertise includes software integration, database services, networking
and the applications skills required to deliver secure, robust
solutions;  
    
    Educational Services Our training professionals help financial
institutions train their employees to use our solutions to better serve
their customers; and  
    
    Web Design Services Our web design group is available to assist
with delivery of a complete web presence for financial institutions. Customers and Markets We provide solutions to global financial services organizations as well as
regional and community financial institutions. Currently, we serve more than
4,000 banks, credit unions, insurance providers and investment firms. During
2002 and 2003, we had two major customers and during 2001, we had one major
customer (defined as those who individually contribute more than 10% of total
revenues). We provided implementation, hosting and product enhancement services to
State Farm Mutual Automobile Insurance Company. Revenues from State Farm were
28%, 22% and 18% of our total revenues during the years ended December 31,
2001, 2002 and 2003, respectively. We expect revenues from this customer to
be approximately 18% of our total revenues in 2004. The other major customer, Zurich Insurance Company and certain of its
affiliates or subsidiaries, accounted for 15% and 17% of our total revenues
during the years ended December 31, 2002 and 2003. These revenues were derived
from agreements to provide a subscription license, data center services and
professional services, all of which ended during 2003. We will not earn any
revenues from Zurich in 2004. This customer contributed less than 10% of our
total revenues in 2001. Strategic Alliances and Partners We have built a global network of more than 70 alliances, allowing us to
more fully extend our expertise, capabilities, and reach within the financial
services industry. We have established strategic, technology, and channel
relationships with a number of organizations. We have alliances with companies
such as IBM and BearingPoint as well as with numerous core processing vendors,
bill payment providers, credit card processing vendors and printed product
vendors. In certain geographies, including Asia, the Middle East and some
European countries, we are using partners as our primary sales channel to
increase our market reach. Sales and Marketing We sell our solutions to small, mid-sized and large financial
organizations. Our sales force is comprised of professionals structured in
three major regional groups: (i) the Americas region, (ii) the Europe, Middle
East and Africa region (EMEA) and (iii) the Asia-Pacific and Japan (APJ)
region. We reported revenues of $278.3 million, $292.2 million and $252.6
million in 2001, 2002 and 2003, respectively, of which 76%, 73% and 71%,
respectively, were attributed to sales in the United States. In the Americas region, our sales force is a mix of named account support,
geographic support and inside sales support, depending on the size of the
financial institution. The named accounts sales force focuses on developing
long-term relationships with senior management team members of financial
institutions. Once we have established a relationship with these organizations
and their senior management teams, the sales team continues to market
additional products and services to them. The sales cycle for large financial
institutions generally lasts from six to 18 months. Contracts with these large
financial organizations typically have multi-year terms. Sales to the small
community and regional financial institutions are executed by a telephone sales
team. The sales cycle for these small to mid-sized financial organizations
typically lasts from six to nine months, and the contracts entered into with
them typically provide for direct delivery and service requirements. In
addition, we have relationships with distribution partners, thereby maximizing
our market penetration through the reseller channel. 8




---



##### Table of Contents



In the EMEA region, we sell through both a named account structure in
specific territories such as the United Kingdom, Belgium, the Netherlands,
Germany, France, Luxemburg, Spain and Portugal, and through resellers in other
territories such as Switzerland, Italy, the Middle East and Africa. In the APJ
region our sales efforts are focused primarily through resellers in countries
such as China, Hong Kong, Taiwan, Malaysia and Singapore. Within each group are trained sales support personnel who provide
functional and technical expertise to maximize the customers understanding of
S1s solutions. In addition to internal sales efforts and joint efforts with distribution
partners, S1 markets its products and services in other ways to build awareness
of the S1 brand. Our marketing efforts include participating in and exhibiting
at industry conferences and trade shows, hosting an annual users conference,
maintaining memberships in key industry organizations and establishing close
relationships with industry analysts to help guide product development and
marketing efforts. Product Development  Our product development efforts are focused on:
    
    Enhancing the S1 Enterprise Platform.In mid-2003, we delivered the
second major release of our flagship suite of products  S1 Enterprise.
This release included the delivery of our retail Internet banking, small
business Internet banking, corporate cash management and insurance
applications on a single platform  the S1 Enterprise Platform. Later in
the year, we released a version of our branch automation applications
that could integrate with the S1 Enterprise Platform through the common
data model. Utilizing leading industry standards such as J2EE, the S1
Enterprise Platform is an open, flexible and scalable architecture that
will serve as a common base for S1 product deployments. Its layered
framework ensures that all applications are consistent in their
interpretation and presentation of all data and that they can be
consistently extended, upgraded, maintained and operated. It also allows
all applications and channels to access customer information via a
single database.  
    
    Creating Centers of Development Excellence.In 2003, we created
centers of development excellence that focus on development and delivery
of specific components of our product line. These development centers
include Charlotte, North Carolina for banking; Littleton, Massachusetts
for insurance; West Hills, California for branch automation; Dublin,
Ireland for CRM and the Enterprise Platform; Austin, Texas for community
banking and voice banking and Pune, India which provides general
development support to the other centers. Atlanta, Georgia serves as the
integration center supporting the development centers. Our development
center in Pune was developed through a build-to-buy arrangement with an
Indian software development company. In 2004, we expect to establish an
S1 owned operation in Pune.  
    
    Enhancing Existing Products and Services.We are developing new
functions and features across our entire product line in order to
provide a broader range of capabilities and continue to best meet our
customers needs. We spent $53.9 million, $51.2 million and $45.1 million on product
development efforts in 2001, 2002 and 2003, respectively. During 2004, we
expect product development costs to be approximately $45 million. Competition The market for financial software is competitive, rapidly evolving and
subject to technological change. We currently perceive our near-term
competition as coming from primary three areas: (1) in-house development
organizations of financial institutions, (2) best of breed solution providers
and (3) core processing vendors. We perceive our long-term competition as
coming from other enterprise software providers. In-house Development Organizations We believe financial organizations may encounter the following challenges
when building financial software in-house:  
    
    building, maintaining and upgrading an in-house solution can be very costly;  
    
    attracting and retaining the necessary technical personnel can be difficult and costly; and  
    
    technological development may be too far outside the financial
organizations core competencies to be effective or successful. 9




---



##### Table of Contents



Best of Breed Solution Providers These vendors offer solutions for a specific line of business and/or
channel for the financial institution. In the retail Internet banking space, we
compete primarily with Digital Insight Corporation, Financial Fusion (a
division of Sybase, Inc.) and Corillian Corporation. In branch banking, we
compete primarily with Argo Data Resource, Inc. and Fidelity Information
Services, Inc. In business banking, we compete primarily with Fundtech Ltd.,
Politzer & Haney and Metavante Corporation. In CRM, we compete with Siebel
Systems, Inc., PeopleSoft, Inc. and Onyx Software Corporation. We believe the
disadvantages associated with a best of breed solution approach include:  
    
    integrating additional applications and channels with multiple
vendors greatly lengthens a financial organizations time-to-market;  
    
    operating and upgrading solutions from multiple vendors is very
costly; and  
    
    a combination of best of breed solutions across different channels
does not provide an integrated 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 Metavante, Fiserv, Inc. and Jack Henry and Associates, Inc. Many of these
companies offer front-office products at a sharp discount to augment their
back-office capabilities. We believe the primary disadvantage of this approach
is that these front office applications will lag behind the market to some
degree in terms of functions and features and are of secondary focus to the
vendor behind their back-office products and services. Enterprise Solution Vendors As we continue to roll out our Enterprise suite in 2004, we believe we may
increasingly see interest and competition from various enterprise software and
solution providers such as SAP Aktiengesell, Oracle Corporation and PeopleSoft.
We believe our advantage in the financial services market will continue to
stem from our deep domain knowledge and tight integration with the various key
business systems within our financial organization customers base.
Additionally, our large installed base will differentiate our ability to
establish, deliver and defend our core market over time. Government Regulation We are subject to examination by, 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 and the various state financial regulatory agencies that
supervise and regulate the banks 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 and the
agreements giving rise to those processing activities. Laws and regulations that 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 institutions privacy practices,
restrict the sharing of non-public customer data with non-affiliated parties at
the customers request, and establish procedures and practices to protect and
secure customer data. These privacy provisions are implemented by regulations
with which compliance is now required. Additionally, there are many legislative
and regulatory actions 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 is currently
considering 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 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
are also subject to encryption and security export laws which, depending on
future developments, could adversely affect our business. 10




---



##### Table of Contents



Employees As of February 27, 2004, we had approximately 1,245 employees, including
437 in customer support, hosting services and professional services, 122 in
sales and marketing and 386 in product development. In addition to full-time
employees, we have used the services of various independent contractors for
professional services projects and product development. We also have 217
independent contractors in Pune, India working on product development and
professional services activities. 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) of the Securities Exchange Act of 1934 are available free of
charge at our website at www.s1.com as soon as reasonably practicable after we
electronically file such materials with, or furnish to, the Securities and
Exchange Commission. You may read and copy any materials we file with
the SEC at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains our
reports. Risk Factors You should consider carefully the following risks. If any of the following
risks actually occur, our business, financial condition 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. Our quarterly operating results may fluctuate and any fluctuations could
adversely affect the price of our common stock Our quarterly operating results have fluctuated significantly to date. 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:  
    
    we cannot accurately predict the number and timing of contracts 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;  
    
    the length of our sales cycle to large financial organizations generally lasts from six to eighteen months, which adds an
element of uncertainty to our ability to forecast revenues;  
    
    if we fail to introduce 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 consumer acceptance, which could cause our revenues 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; and  
    
    a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term if
revenues decrease. In 2004, we will depend on one customer for a significant portion of our
revenue and if that customer terminates its contract with us, our revenues and
financial performance would decline In 2002 and 2003, we derived 37% and 35% of our total revenues from two
customers, respectively. One customer accounted for 28%, 22% and 18% of our
total revenue in 2001, 2002 and 2003, respectively. Over the past three years,
this customer has moved from a period of heavy investment and is now entering a
stable maintenance state with their applications. We expect revenues from this
customer to be approximately 18% of our total revenues in 2004. In 2002 and
2003, another customer accounted for 15% and 17% of our total revenues.
Revenues from this customer were derived from a subscription license,
professional services and a hosting agreement all of which ended in 2003. We
do not expect to completely replace the loss of revenue from this customer in
2004. 11




---



##### Table of Contents



We have experienced substantial losses and may not achieve and/or maintain
profitable operations in the future Although we were profitable in the fourth quarter of 2002 and the fourth
quarter of 2003, we incurred losses in fiscal years 2001, 2002 and 2003. In
the past, we approved restructuring plans to streamline our worldwide
operations and to reduce our total operating expenses. We continue to review
our cost structure on a worldwide basis and look for additional ways to
streamline our operations. We believe our efforts to streamline operations,
including headcount reductions and consolidation of our operating facilities,
have resulted in cost savings that have improved our margins and our cash flows
from operating activities during 2001, 2002 and 2003. We cannot ensure that our
efforts to streamline our operations will improve our financial performance, or
that we will be able to achieve profitability on a quarterly or annual basis in
the future. We generally are unable to reduce our expenses significantly in the
short-term to compensate for any unexpected delay or decrease in anticipated
revenues. As a result, we may experience losses, which could negatively impact
the value of our common stock. 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, we established a relationship with an Indian-based
development organization in 2001 to outsource portions of our product
development. In 2002 and 2003, we expanded this relationship resulting in the
establishment of a development center in India. We also have a development
center in Dublin, Ireland. While our experience to date with these offshore
development activities has been positive, there is no assurance that 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 the time, 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 the conflicts in the Middle East region;  
    
    ramp-up time for our Indian based development efforts may adversely impact the ability to meet anticipated schedules;  
    
    the quality of the development efforts undertaken off-shore may not meet our requirements because of language, cultural and
experiential 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; and  
    
    in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general risk of
the potential for misappropriation of our intellectual property that might not be readily discoverable. Acquisitions and divestitures may be costly and difficult to integrate /
divest, divert management resources or dilute stockholder value We acquired one company in 2001 and two companies in the first quarter of
2002. We sold one company in January 2001. 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. We have
encountered difficulties, costs and delays in integrating the acquired
operations with our own and may continue to do so in the future. Among the
issues related to integration are:  
    
    potential incompatibility of business cultures;  
    
    potential delays in rationalizing diverse technology platforms;  
    
    potential difficulties in coordinating geographically separated organizations;  
    
    potential difficulties in re-training sales forces to market all of our products across all of our intended markets;  
    
    potential difficulties implementing common internal business systems and processes;  
    
    potential conflicts in third-party relationships; and  
    
    the loss of key employees and diversion of the attention of management from other ongoing business concerns. 12




---



##### Table of Contents



A significant portion of our customers are in a consolidating financial
services industry, which is subject to economic changes that could reduce
demand for our products and services For the foreseeable future, we expect to derive most of our revenue from
products and services we provide to the banking industry and other financial
services firms such as insurance and securities brokerage companies. Changes
in economic conditions and unforeseen events, like recession or inflation,
could occur and reduce consumers use of banking services. Any event of this
kind, or implementation for any reason by banks of cost reduction measures,
could result in significant decreases in demand for our products and services.
Mergers and acquisitions are pervasive in todays banking industry. Our
existing customers may be acquired by or merged into other financial
institutions that have their own financial software solution or decide to
terminate their relationships with us for other reasons. As a result, our
sales could decline if an existing customer is merged into or acquired by
another company. 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
declined significantly since reaching a high in 2000. Any further negative
change in the publics perception of the prospects of technology based
companies, particularly those which are associated with the Internet or
e-commerce 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 decrease 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;  
    
    announcements of new products, product enhancements, technological innovations or new services by us or our competitors;  
    
    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;  
    
    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 and warrants are exercised or shares of
our preferred stock are converted into common stock, the market price of our
common stock could fall. As of March 5, 2004, we had 70.9 million shares of
common stock outstanding, assuming no exercise of outstanding options or
warrants or conversion of preferred stock. As of March 5, 2004, there were
outstanding employee stock options to purchase 15.1 million shares of our
common stock, options and warrants to acquire 0.1 million shares of our common
stock, and 0.8 million shares of preferred stock convertible into an aggregate
of 1.1 million shares of our common stock. The common stock issuable after
vesting and upon exercise of these options and warrants and upon conversion of
this preferred 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. Some of the holders of restricted
shares of our common stock, our preferred stock and vested options or warrants
have rights that may require us to register shares of common stock with the
Securities and Exchange Commission. By exercising their registration rights and
causing a large number of shares to be sold in the public market, these
stockholders could cause the market price of our common stock to fall. Network or Internet security problems could damage our reputation and business Despite our security measures, the core of our network infrastructure
could be vulnerable to unforeseen technology problems. Although we have taken
steps to mitigate much of the risk, we may in the future experience
interruptions in service as a result of the accidental or intentional actions
of Internet users, current and former employees or others. Unknown security
risks may result in liability to us and also may deter financial organizations
from licensing our software and services. 13




---



##### Table of Contents



Although we intend to continue to implement and establish security
measures, there can be no assurance that measures we have implemented will not
be circumvented in the future, which could have a material adverse effect on
our business, financial condition or results of operations. The occurrence of
any of these problems could reduce product demand from potential customers and
cause existing customers to terminate their license or data center contracts
with us. These problems could also require us to spend significant capital to
remedy any failure and could subject us to costly litigation with customers or
their end users. Our market is highly competitive and if we are unable to keep pace with
evolving technology our revenue and 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 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, our revenue 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. System failures or performance problems with our products could cause demand
for these products to decrease, require us to make significant capital
expenditures or impair customer relations There are many factors that could adversely affect the performance,
quality and desirability of our products and could delay or prevent these
products from gaining market acceptance. These factors include, but are not
limited to the following:  
    
    extraordinary end-user volumes or other events could cause systems to fail;  
    
    our products could contain errors, or bugs, which could impair the services we provide;  
    
    during the initial implementation of some products, we have experienced significant delays in implementing and integrating
software, and we may experience similar difficulties or delays in connection with future implementations and upgrades to
new versions; and  
    
    many of our products require integration with third-party products and systems, and we may not be able to integrate these
products with new or existing products. International operations may adversely affect us 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 and economic changes and disruptions;  
    
    difficulties in enforcing our contracts in foreign jurisdictions;  
    
    export/import controls;  
    
    tariff regulations;  
    
    difficulties in staffing and managing foreign sales and support operations;  
    
    greater difficulties in trade accounts receivable collection; and  
    
    possible adverse tax consequences. Our solutions 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 our international executive offices and a significant portion
of our maintenance, consulting, and research and development operations in
Europe. Therefore, our operations may also be affected by economic conditions
in Europe. The risks associated with international operations may harm our
business. 14




---



##### Table of Contents



We are involved in litigation over proprietary rights, which may be costly and
time consuming We
have received a claim that certain of our products, trademarks or other
proprietary rights require a license of intellectual property rights or
infringe, or may infringe, on the intellectual property rights of others.
Those claims, with or without merit, could:  
    
    be time-consuming;  
    
    result in costly litigation;  
    
    cause product shipment delays;  
    
    require us to enter into royalty or licensing agreements; or  
    
    result in an injunction being issued against the use of our products. Royalty or licensing agreements, if required, may not be available on
terms acceptable to us, or at all, which could harm our business, financial
condition and results of operations. Litigation to determine the validity of
any claims could result in significant expense to us and divert the efforts of
our technical and management personnel from productive tasks, whether or not
the litigation is determined in our favor. In the event of an adverse ruling,
we may be required to:  
    
    pay substantial damages;  
    
    discontinue the use and sale of infringing products;  
    
    expend significant resources to develop non-infringing technology; or  
    
    obtain licenses to infringing technology. Our failure to develop or license a substitute technology could
significantly harm our business. We expect software to be increasingly subject
to third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlaps. Third
parties may have, or may eventually be issued, patents that would 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. In
addition, we may become involved in costly and time-consuming litigation to
protect the validity of our intellectual property rights. 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 now also have a significant international
presence. The laws of some foreign countries may not protect our proprietary
technology as well as the laws of the United States. Our ability to protect
our proprietary technology abroad may not be adequate. If we are unable to attract and retain highly skilled technical employees, we
may not be able to compete Based on the need for highly skilled technical employees, we believe that
our future success will depend in large part on our ability to attract and
retain highly skilled technical personnel. Because the development of our
software requires knowledge of computer hardware, as well as a variety of
software applications, we need to attract and retain technical personnel who
are proficient in all these disciplines. There is substantial competition for
employees with the technical skills we require. If we cannot hire and retain
talented technical personnel, this could adversely affect our growth prospects
and future success. We are subject to government regulation 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 and the various state financial regulatory agencies that supervise
and regulate the banks 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 and the
agreements giving rise to those processing activities. 15




---



##### Table of Contents



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 institutions privacy practices,
restrict the sharing of non-public customer data with non-affiliated parties at
the customers request, and establish procedures and practices to protect and
secure customer data. These privacy provisions are implemented by regulations
with which compliance is now required. Additionally, there are many legislative
and regulatory actions 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 is currently
considering 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 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. 
 Item 2.Properties. Our executive offices and our headquarters for our financial institutions
segment are located in Atlanta, Georgia. For our financial institutions
segment, our primary office for EMEA operations is in the United Kingdom and
our primary office for APJ operations is in Singapore. Our global data center
is located in the Atlanta metropolitan area. We also have data center
operations in New York and Singapore. We maintain additional domestic offices
in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New York,
New York; Guilford, Connecticut and West Hills, California. We maintain
additional international offices in Brussels, Beijing, Dublin, Hong Kong,
Lisbon, London, Luxembourg, Madrid, Munich, Paris, and Rotterdam. We lease all
of our office space and data center facilities. Our Edify business segment is headquartered in Santa Clara, California and
maintains offices in the United Kingdom, Ireland and France. 
 Item 3.Legal Proceedings. Except as noted below, there is no material pending legal proceeding,
other than ordinary routine litigation incidental to the business, to which S1,
or any of its subsidiaries is a party or which their property is subject. As previously reported, S1 Corporation and its subsidiary Davidge Data
Systems were involved in litigation with Scottrade, Inc. and Computer Research,
Inc. In March 2004, we reached an agreement-in-principle with the
parties involved in this matter and expect to settle on undisclosed terms all claims that have been asserted or could have been asserted in connection with this matter. As previously reported, S1 Corporation is involved in litigation with
Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588
filed in the U.S. District Court for the Southern District of New York. The
action was filed in March 2003 against S1 Corporation, Bank of America
Corporation and Bank of America National Association. There can be no
assurance on the ultimate outcome of this matter. An
adverse judgment or settlement could be material to our financial position and
results of operations. 16




---



##### Table of Contents



Item 4.Submission of Matters to a Vote of Security Holders. (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) Not applicable. 
 PART II 
 Item 5.Market for Registrants Common Equity and Related Stockholder Matters. (a) Our common stock is quoted on the Nasdaq National Market under the
symbol SONE. The following table shows, for the periods indicated, the high
and low prices per share of our common stock as reported on the Nasdaq National
Market. High
    
    Low2002First Quarter
    
    $
    20.13
    
    
    $
    13.35Second Quarter
    
    
    15.45
    
    
    
    5.16Third Quarter
    
    
    7.30
    
    
    
    3.76Fourth Quarter
    
    
    6.70
    
    
    
    3.412003First Quarter
    
    $
    5.78
    
    
    $
    4.50Second Quarter
    
    
    5.15
    
    
    
    3.50Third Quarter
    
    
    5.45
    
    
    
    3.45Fourth Quarter
    
    
    9.60
    
    
    
    4.93
 As of the close of business on March 5, 2004, there were 674 holders of
record of our common stock. 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. (b) Not applicable. 17




---



##### Table of Contents



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 31,1999
    
    2000(1)
    
    2001(2)
    
    2002(3)(4)
    
    2003(4)(in thousands, except per share data)Statement of Operations Data:Total revenues
    
    $
    92,890
    
    
    $
    233,888
    
    
    $
    278,310
    
    
    $
    292,169
    
    
    $
    252,581Net loss
    
    
    (125,087
    )
    
    
    (1,177,678
    )
    
    
    (221,543
    )
    
    
    (16,397
    )
    
    
    (38,172
    )Basic and diluted net loss per common share
    
    
    (4.28
    )
    
    
    (21.77
    )
    
    
    (3.74
    )
    
    
    (0.24
    )
    
    
    (0.55
    )
 As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    67,850
    
    
    $
    153,504
    
    
    $
    119,632
    
    
    $
    127,842
    
    
    $
    150,064Short-term investments
    
    
    
    
    
    
    19,762
    
    
    
    28,818
    
    
    
    14,843
    
    
    
    14,126Working capital
    
    
    96,226
    
    
    
    165,704
    
    
    
    129,827
    
    
    
    120,864
    
    
    
    125,940Goodwill, net
    
    
    788,293
    
    
    
    195,428
    
    
    
    79,723
    
    
    
    106,971
    
    
    
    93,462Total assets
    
    
    1,132,487
    
    
    
    606,704
    
    
    
    372,037
    
    
    
    376,974
    
    
    
    337,088Notes payable
    
    
    6,351
    
    
    
    3,822
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligation, excluding current portion
    
    
    1,086
    
    
    
    6,226
    
    
    
    1,450
    
    
    
    185
    
    
    
    523Stockholders equity
    
    
    990,807
    
    
    
    467,745
    
    
    
    274,618
    
    
    
    279,761
    
    
    
    243,814
 Year Ended December 31,1999
    
    2000(1)
    
    2001(2)
    
    2002(3)
    
    2003(in thousands)Other Selected Data:Cash (used in) provided by operating activities
    
    $
    (30,037
    )
    
    $
    (150,712
    )
    
    $
    11,894
    
    
    $
    21,421
    
    
    $
    22,374Depreciation
    
    
    6,924
    
    
    
    25,891
    
    
    
    29,252
    
    
    
    22,635
    
    
    
    16,915Amortization and impairment of acquisition
intangible assets
    
    
    40,206
    
    
    
    1,080,321
    
    
    
    79,787
    
    
    
    17,460
    
    
    
    17,392Weighted average common shares outstanding
    
    
    29,228
    
    
    
    54,096
    
    
    
    59,242
    
    
    
    67,725
    
    
    
    69,872
 (1)
    
    Our net loss, net loss per share and cash flows for the
year ended December 31, 2000 were affected by the results of the
operations from acquired businesses, including FICS Group, N.V.
(November 1999), Edify Corporation (November 1999), VerticalOne
Corporation (November 1999) and Q-Up Systems, Inc (April 2000).
Revenues and expenses from the operations of these acquired
businesses were included in our operations from their respective dates
of acquisition. Our net loss and net loss per share for the year
ended December 31, 2000 included an impairment charge of
$664.9 million for goodwill and other intangible assets.(2)
    
    Our net loss and net loss per share for the year ended
December 31, 2002 were affected by the loss on the sale of
VerticalOne of $52.3 million and charges of $61.9 million
from our equity in Yodlee.(3)
    
    Our net loss, net loss per share and cash flows for the year
ended December 31, 2002 were affected by the results of
operations from acquired businesses, including Software Dynamics,
Inc. (September 2001), Regency Systems, Inc. (February 2002) and the
assets and subsidiaries of Point Holdings, Ltd. (March 2002).
Revenues and expenses from the operations of these acquired
businesses were included in our operations from their respective
dates of acquisition.(4)
    
    Our net loss and net loss per share for the years ended
December 31, 2002 and 2003 were positively affected by the
adoption of a new accounting principle, Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible
Assets. Effective January 1, 2002, we stopped amortizing
goodwill and assembled workforce, which was reclassified to goodwill.
 18




---



##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations. This annual report contains forward-looking statements and information
relating to us, including our subsidiaries. The words believes, expects,
may, will, should, projects, contemplates, anticipates,
forecasts, intends or similar terminology identify forward-looking
statements. These statements are based on our beliefs as well as assumptions
made using information currently available to us. Because these statements
reflect our current views concerning future events, they involve risks,
uncertainties and assumptions. Therefore, actual results may differ
significantly from the results discussed in the forward-looking statements. For
a summary of significant risks, you should read the risk factors described
under the caption Risk Factors in Item 1 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. The following discussion should be read in conjunction with the audited
consolidated financial statements and notes appearing elsewhere in this report. Executive Overview We operate and manage S1 in two business segments: financial
institutions, which is our core business segment, and the Edify business. We
derive a significant portion of our revenues from licensing our solutions and
providing professional services. We generate recurring data center revenues by
charging our data center customers a monthly fixed fee or a fee based on the
number of their end users who use the solutions we provide, subject to a
minimum charge. We also generate recurring revenues by charging our customers a
periodic fee for maintenance and software support. Within our financial institutions business, we generated approximately 39%
of our revenues from licenses and services provided to our two major customers
(State Farm Mutual Automobile Insurance Company and Zurich Insurance Company).
The remainder of the revenue was generated from the sale of licenses and
services in the global financial services market. In the fourth quarter of
2003, we substantially completed a transition from our legacy Internet-only
business to an Enterprise software and services business. During the
transition, we experienced a loss or decrease of revenue from legacy
Internet-only customers. Zurich, which accounted for approximately $43 million
in revenue in both 2002 and 2003 will not generate any revenue for S1 in 2004.
Revenue from State Farm of approximately $65 million and $46 million in 2002
and 2003, respectively, is expected to be approximately $40 million in 2004. In
addition to these two customers, we had a number of other legacy Internet-only
customers that have cancelled their hosting contracts or moved to in house
implementations contributing to an anticipated loss of data center revenue from
2003 to 2004 of approximately $5 million. We believe the majority of these data
center revenue transitions were substantially completed during the third
quarter of 2003. We sell our solutions to small, mid-sized and large financial
organizations in two geographic regions: (i) the Americas region and (ii) the
International region, consisting primarily of Europe, Middle East and
Africa (EMEA) and Asia-Pacific
and Japan (APJ). Our S1 Enterprise solutions target banks, credit unions and insurance
companies. We have over 4,000 financial institution customers; the majority of
which are located in the United States. Through our Edify business segment, we deliver voice and speech solutions
for companies in a wide range of industries. Edifys products help companies
automate their customer service facilities, improve customer satisfaction and
create new revenue generating opportunities, while reducing operational costs.
Edifys voice and speech applications are scalable, multilingual and flexible,
allowing companies to easily integrate multiple back-end systems with a variety
of contact interfaces. Edifys voice and speech solutions combine speech
recognition, speaker verification, text-to-speech, fax, and touch-tone
automation with a powerful application development environment and natural
language capabilities to help organizations optimize customer service while
lowering costs. During the nine-month period from July 1, 2002 through March 31, 2003, we
reported the Edify business as held for sale. In April 2003, we terminated
our efforts to divest the Edify business. We considered our inability to sell
the Edify business on terms that were acceptable to us a triggering event under
SFAS No. 142 and 144 that required us to perform a current assessment of the
carrying value of the Edify business. Based on our analysis of fair value for
the Edify business, including estimates we based on discounted future cash
flows, market valuations of comparable businesses and offers from potential
buyers, we concluded that the fair value of the Edify business was less than
its carrying value. Accordingly, we allocated our estimate of fair value for
the unit to the existing assets and liabilities of the Edify business as of
March 31, 2003, resulting in a goodwill impairment charge of $11.7 million and
accelerated amortization on other intangible assets (developed technology and
customer base) and purchased software of $1.2 million and $0.5 million,
respectively. 19




---



##### Table of Contents



Our results of operations and cash flows for the year ended December 31,
2002 were affected by the results of operations from acquired businesses,
including Software Dynamics, Inc. (September 2001), Regency Systems, Inc.
(February 2002) and the assets and subsidiaries of Point Holdings, Ltd. (March
2002). Revenues and expenses from the operations of these acquired businesses
were included in our operations from their respective dates of acquisition.
During the year ended December 31, 2002, we recorded total revenues of $41.9
million in these acquired businesses. We believe that the results achieved in
the acquired businesses significantly exceeded those which they would have
achieved on a stand-alone basis. We made these acquisitions because the
acquired products and technologies are integral to our S1 Enterprise suite of
applications. We have been able to cross sell existing S1 offerings into the
acquired customer base and acquired product offerings into our existing
customer base. Furthermore, we believe that we have been able to leverage our
combined resources to increase the sales opportunities for these acquired
products, especially those of SDI, whose revenues increased approximately 68%
during the nine months ended September 30, 2002 over the same period in 2001,
respectively. You should also read our discussion of Acquisitions below and
in Note 3 to our consolidated financial statements. Excluding merger related costs and restructuring charges of $19.9 million
in 2003, $2.4 million in 2002 and $9.3 million in 2001, our total operating
expenses were $270.7 million in 2003, $310.4 million in 2002 and $381.8 million
in 2001. During 2002 and 2003, we focused on activities to reduce our total
operating costs in each of our business segments in order to align our
operating costs with our expected 2004 revenues. In 2003, management approved
restructuring plans in the financial institutions and Edify segments to
reorganize our worldwide operations by reducing the work force, relocating and
consolidating certain office facilities and selling certain corporate assets.
In connection with these plans, we recorded restructuring charges of $21.2
million during the year ended December 31, 2003. In total, we eliminated
approximately 200 positions worldwide and closed or consolidated office
facilities. As of December 31, 2003, we believe the reorganization of our
businesses are substantially complete, although we continue to look for
additional ways to streamline our global operations. In 2002 and 2003, our results of operations were positively affected by
the adoption of a new accounting principle, Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets. Effective January 1,
2002, we stopped amortizing goodwill and assembled workforce, which was
reclassified to goodwill. SFAS No. 142 prohibits retroactive application of
this new accounting treatment. Pro forma results for 2001 are presented in
Note 8 to our consolidated financial statements giving effect to the accounting
change as if it were applicable to those prior periods. Throughout 2002 and 2003, we continued to invest in the development of our
new integrated S1 Enterprise Platform as the technology foundation for the S1
Enterprise family of products. In the first quarter of 2002, we released for
general availability the first two applications to be deployed on the S1
Enterprise Platform: S1 Personal Banking and S1 Business Banking. In 2003, we
released for general availability additional applications for the S1 Enterprise
Platform including: retail Internet banking, small business Internet banking,
corporate cash management and branch automation. As of the date of this
report, over forty financial institutions are in production mode with a hosted
or on-premise S1 Enterprise solution. Historically, we have not capitalized software development costs because
of the insignificant amount of costs incurred between technological feasibility
and general customer release. If technological feasibility is reached earlier
in the development cycle, we may be required to capitalize certain software
development costs in the future. Revenue from Significant Customers Within our financial institutions business, we generated approximately 39%
of our revenues from license and services provided to our two major customers
(State Farm Mutual Automobile Insurance Company and Zurich Insurance Company)
in 2003. Revenues from State Farm were 33%, 26% and 20% of our financial
institution revenues and 28%, 22% and 18% of our total revenues during the
years ended December 31, 2001, 2002 and 2003, respectively. Revenues from State
Farm for the year ended December 31, 2003 decreased approximately $20 million
from the same period in 2002 due to a decrease in projects performed for them
in 2003. We expect State Farm to contribute approximately 21% of our
financial institution segment revenue for 2004. Over the past three years,
State Farm has moved from a period of heavy investment in its Internet
solutions including migrating its insurance application to S1 Enterprise and is
now entering a stage of reduced investment and maintenance of the applications. In March 2003, we amended the terms of our data center arrangement with
Zurich to shorten the term over which services would be provided and payments
received associated with the provision of data center services by S1. Revenue
of $8.6 million from the data center contract, which would have been recognized
ratably throughout 2003 and 2004 under the 20




---



##### Table of Contents



previously amended terms of the agreement, was accelerated and recognized
entirely in the first six months of 2003. Associated direct costs of $2.6
million were accelerated over the same period. Zurich accounted for 17% and 19%
of our revenues from our financial institutions segment and 15% and 17% of our
total revenues during the year ended December 31, 2002 and 2003, respectively.
For the year ended December 31, 2003, $32.7 million of the revenue earned
from Zurich was from a subscription license, which expired on December 31,
2003. We do not expect to earn any revenue from Zurich in 2004 and beyond.
This customer accounted for less than 10% of our total revenues in 2001. Acquisitions In March 2002, we acquired the assets and subsidiaries of Point Holdings,
Ltd., a Dublin, Ireland based CRM application provider. In February 2002, we
acquired Regency Systems, Inc., a Dallas, Texas based provider of telephone and
Internet banking applications and web design services for community and
mid-market banks. In September 2001, we acquired Software Dynamics, Inc., a
West Hills, California based provider of branch automation, teller, call center
and CRM solutions for financial institutions. We accounted for these acquisitions using the purchase method of
accounting with the excess of the purchase price over the estimated fair value
of the net assets (liabilities) recorded as goodwill. Other intangible assets
include developed technology and customer base. Additionally, for certain of
these acquisitions, we allocated a portion of the purchase price to in-process
research and development, which was expensed immediately upon closing the
acquisition. The consolidated financial statements include the results of
operations for the acquired companies from the date of acquisition. Restructuring Charges In 2003, management approved restructuring plans in the financial
institutions and Edify segments to reorganize our worldwide operations by
reducing the work force, relocating and consolidating certain office facilities
and selling certain corporate assets. In connection with these plans, we
recorded restructuring charges of $21.2 million during the year ended December
31, 2003. In total, we eliminated approximately 200 positions worldwide and
closed or consolidated office facilities. In the domestic operations of our financial institution segment, we
recorded $6.2 million in restructuring charges during the year ended December
31, 2003, which were primarily comprised of charges for severance costs
associated with headcount reductions, lease payments associated with excess
office space and other
corporate charges. In 2003, we consolidated our U.K.
data center operations into our global hosting center in Atlanta, relocated our
remaining U.K. operations to a smaller facility, decreased our workforce both
in our European and APJ operations and closed offices in our APJ operations.
As a result, in 2003, we recorded
restructuring charges of $9.4 million in our European operations and $1.3
million in our APJ operations. These charges were comprised of accelerated
depreciation of assets, severance costs, other related costs to relocate the
data center operations, losses on the vacated office space and the write off of
abandoned leasehold improvements. In the third quarter of 2003, we completed
the process of reorganizing our Edify business to align costs with expected
revenues. As a result, we hired a new general manager, reduced the workforce
and closed and consolidated several Edify office facilities worldwide. These
actions resulted in restructuring charges of $4.3 million for the year ended
December 31, 2003. In 2002, we recorded a charge of $0.7 million for
excess office space in our Edify business. Prior to 2001, we approved a restructuring plan that included plans to
close several of our facilities worldwide. During 2001, we determined that, as
a result of a softening in the domestic real estate markets, our original
estimate of the costs to dispose of unused real estate was below the currently
anticipated costs and the restructuring accrual was adjusted resulting in a
charge of $5.7 million. In 2001, we approved a restructuring plan to streamline
our European operations. In connection with this plan, we reduced our European
workforce by 77 people and consolidated the majority of our European operations
into two locations, resulting in a charge of $5.6 million. We
undertook these restructuring activities in 2001, 2002 and 2003 to
streamline our worldwide operations following a period of multiple
business acquisitions and to reduce our operating expenses to a level
that we believe is appropriate based on our estimate of future
revenues. We achieved cost savings from these activities throughout
the geographic and functional areas of our operating segments. For
additional information about these restructuring activities,
including tabular presentation of our restructuring charges, see
note 9 to our consolidated financial statements contained
elsewhere in this report. We
expect to make future cash expenditures, net of anticipated sublease
income, related to these restructuring charges of approximately
$11.4 million, of which we expect to pay $4.4 million in
2004. Adjustments to the restructuring accrual may be recorded in the future due
to changes in estimates of lease termination reserves arising from changing
real estate market conditions. 21




---



##### Table of Contents



Merger Related Costs During 2002, we incurred merger related costs of $3.7 million in
connection with the acquisition of Point. These costs, incurred in connection
with our plan to reorganize certain of our European operations, included
headcount reduction, consolidation of S1 and acquired Point office facilities
and disposal of redundant or obsolete computer equipment. This merger related
charge was partially offset by a $1.7 million decrease in reserves for legal
claims, which was established in connection with our acquisition of FICS Group,
N.V. in November 1999. We were able to resolve this legal matter during the
first quarter of 2002 for less than previously estimated amounts. Our
restructuring and merger related reserves include provisions for obligations
for unused real estate less estimates for sub-lease income. In 2002, we were
able to secure a sublease for one of our foreign properties at terms that were
$0.3 million more favorable than previously anticipated. In 2003, we decreased our merger related reserve for legal claims by $0.8
million, which was established in connection with our acquisition of FICS
Group, N.V. in November 1999. We were able to resolve two legal matters during
2003 for less than previously estimated. Additionally in 2003, we reduced our
merger related accrual by $0.5 million when we determined that we had an
alternate use for excess office space that was reserved when we completed the
acquisition of Point in March 2002. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Generally, we base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these
estimates under other assumptions or conditions. Critical accounting policies are those that we consider the most important
to the portrayal of our financial condition 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. Our critical accounting policies 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 technological feasibility and capitalization of software development costs;  
    
    recognition of costs in connection with restructuring plans and merger-related activities; and  
    
    reserve for contingencies. 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 arrangements generally
include multiple elements such as license fees for software products,
installation services, customization services, training services, post-contract
customer support, data center services and, in some cases, hardware or other
third party products. Software license revenue. We recognize software license sales in
accordance with Statement of Position No. 97-2, Software Revenue Recognition,
and SOP No. 98-9, Modification of SOP No. 97-2 With Respect to Certain
Transactions. For software license sales for which any 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 considered probable and (3) the fee
is fixed or determinable. In certain of these arrangements, vendor specific
objective evidence of fair value exists to allocate the total fee to all
elements of the arrangement. If vendor specific objective evidence of fair
value does not exist for the delivered element and exists for all undelivered
elements, we use the residual method under SOP No. 98-9. When the 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, measured by the percentage of labor hours incurred to date
to estimated total labor hours for each contract. For software licenses 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. 22




---



##### Table of Contents



For subscription license arrangements where we allow customers the rights
to unspecified products as well as unspecified upgrades and enhancements during
a specified term, the license revenue is recognized ratably over the term of
the arrangement. For license arrangements in which the fee is not considered
fixed or determinable, the license revenue is recognized as payments become
due. Support and maintenance revenue. Revenues for post-contract customer
support and maintenance are recognized ratably over the contract period. Professional services revenue. Revenues derived from arrangements to
provide professional services on a time and materials basis are recognized as
the related services are performed. Revenues from professional services
provided on a fixed fee basis are recognized using the percentage of completion
method, measured by the percentage of labor hours incurred to date to estimated
total labor hours for the contract. Data center revenue. We recognize data center revenue in accordance with
Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues
Task Force 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. We also consider the applicability of Emerging Issues Task
Force Issue No. 00-03, Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entitys
Hardware, to our data center arrangements on a contract-by-contract basis. If
it is determined that a software element covered by SOP No. 97-2 is present in
a hosting arrangement, the license, professional services and data center
revenue is recognized pursuant to SOP No. 97-2. If it is determined that a
software element covered by SOP No. 97-2 is not present in a hosting
arrangement, we recognize revenue for the arrangement pursuant to SAB No. 104
and EITF 00-21. See a full discussion of our revenue recognition policies in
Note 2 to the consolidated financial statements. Our contractual arrangements are evaluated on a contract-by-contract basis
and often require our judgment and estimates that affect the classification and
timing of revenue recognized in our statements of operations. Specifically, we
may be required to make judgments about:  
    
    whether the fees associated with our products and services are fixed or determinable;  
    
    whether or not collection of our fees is reasonably assured;  
    
    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 method; and  
    
    whether we have verifiable objective evidence of fair value for our products and services. Additionally, we may be required to make the following estimates:  
    
    percentage of labor hours incurred to date to the estimated total labor hours for each contract;  
    
    provisions for estimated losses on uncompleted contracts; and  
    
    the need for an allowance for doubtful accounts or billing adjustments. 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 revenue arrangements
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 it upon completion of the contract. 23




---



##### Table of Contents



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.
As a result, 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 expense. We review
specific accounts for collectibility 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. These estimates are based on
historical discounts, concessions and bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms. Accordingly, our judgments and estimates about the
collectibility of our accounts receivable affect revenue, selling expense and
the carrying value of our accounts receivable. 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 to
measure fair value in determining the amount of the long-lived assets that
should be written off. For long-term cost and equity investments, we
write-down their carrying values if it is determined that an impairment is
other than temporary. 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. During 2001, we recorded impairment charges in the aggregate amount of $4
million for cost-basis investments that we deemed were impaired. Additionally,
we recorded an $8.4 million impairment charge during the fourth quarter of 2001
on our investment in Yodlee. See further discussion of our equity investment
in Yodlee in Note 4 to the consolidated financial statements. In 2003, we sold
one cost-basis investment at a loss of approximately $0.6 million. The
aforementioned impairment charges required considerable analysis and judgment
in determining the timing and amount of the charges. If other assumptions and
estimates were used in our evaluations, the timing and amount of the charges
may have been significantly different. At December 31, 2003, the carrying
value of these investments was $1.0 million. SFAS No. 142, Goodwill and Other Intangible Assets which we adopted on
January 1, 2002, requires us to perform an annual test of goodwill value to
determine whether or not it has been impaired. Based on the results of our
initial and annual tests, except as explained in the following paragraph, the
fair value of our reporting units exceeds their carrying value. While we no
longer record amortization expense for goodwill and other indefinite lived
intangible assets, future events and changes in circumstances may require us to
record a significant impairment charge in any given period. In the first quarter of 2003, we terminated our efforts to divest the
Edify business. We considered our inability to sell the Edify business on terms
that were acceptable to us a triggering event under SFAS No. 142 and 144 that
required us to perform a current assessment of the carrying value of the Edify
business. Based on our current analysis of fair value for the Edify business,
including estimates we based on discounted future cash flows, market valuations
of comparable businesses and offers from potential buyers, we concluded that
the fair value of the Edify business was less than its carrying value.
Accordingly, we allocated our estimate of fair value for the unit to the
existing assets and liabilities of the Edify business as of March 31, 2003,
resulting in a goodwill impairment charge of $11.7 million and accelerated
amortization on other intangible assets (developed technology and customer
base) and purchased software of $1.2 million and $0.5 million, respectively. Determination of technological feasibility and capitalization of software
development costs.We are required to assess when technological feasibility
occurs for products that we develop. Based on our judgment, we have determined
that technological feasibility for our products generally occurs when we
complete 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. If we determined that technological feasibility had
occurred at an earlier point in the development cycle and that subsequent
production costs incurred before general availability of the product were
significant, we would have capitalized those costs and recognized them over
future periods. We continue to monitor changes in the software development
cycle and may be required to capitalize certain software development costs in
the future. 24




---



##### Table of Contents



Recognition of costs in connection with restructuring plans and
merger-related activities.During the last three years, we recorded charges in
connection with various restructuring activities. Additionally, we recorded
merger related charges related to a reorganization of our European operations
in connection with the acquisition of Point in the second quarter of 2002. See
further discussion of the terms of these charges in Note 9 to the consolidated
financial statements. Following the adoption of SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, we establish a liability for the estimated
fair value of exit costs at the date we incur a liability under an approved
restructuring plan. At that time, and thereafter until the plan activities are
complete, the actual costs or timing of payments associated with the plan may
differ from our estimates. We use our judgment and information available to us
at the date of the financial statements to reevaluate our initial estimates of
the exit costs. If we believe that our previous estimates of exit costs or
timing of payments are no longer accurate in light of current conditions, we
adjust the liability with a corresponding increase or decrease to current
period earnings. Any adjustments to estimates of our exit costs under
restructuring plans are reflected on the same line item in the statement of
operations as the initial charge to establish the restructuring liability.
Additionally, in periods subsequent to the initial measurement, we increase the
carrying amount of the liability by the amount of accretion recorded as an
expense due to the passage of time. This charge is included in Other Expense. Accrued restructuring costs at December 31, 2003 reflect our estimate of
the fair value of future rental obligations and other costs associated with
office space that we do not plan to use in our operations as a result of the
restructuring plans, offset by our estimate of the fair value of sublease
income for this space. The determination of fair value is based on a
discounted future cash flow model using a credit-adjusted risk-free rate. While
we know the terms of our contractual lease obligations and related future
commitments, we must estimate when and under what terms we will be able to
sublet the office space, if at all. Such estimates require a substantial
amount of judgment, especially given current real estate market conditions.
Actual sublease terms may differ substantially from our estimates. Any future
changes in our estimates of lease termination reserves could materially impact
our financial condition, results of operations and cash flows. In connection with the acquisition of certain businesses, we established
reserves for certain contingencies that existed at the date of acquisition. At
that time, we believed that the resolution of the contingency would result in
future cash expenditures that we estimated based on the information available
at the date of acquisition. As those contingencies are resolved, we reduce the
related liabilities for any related cash disbursements or if we determine that
the contingency is no longer likely to result in a loss. If the settlement
occurs beyond one year after the date of the acquisition, any difference in the
actual settlement amount is reflected as an adjustment to income or expense in
the period of resolution. These adjustments are included in the merger related
and restructuring costs line item in the consolidated statements of operations.
If the settlement occurs within one year of the date of acquisition, we record
the difference as an adjustment to goodwill. Reserve for contingencies.When a loss contingency exists, we are required to evaluate
the likelihood that a future event or events will confirm the loss. SFAS No. 5
Accounting for Contingencies states that a company must accrue for a loss
contingency by a charge to income when information available prior to issuance
of the financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial
statements, and that the amount of loss can be reasonably estimated. Recent Accounting
Pronouncements In
December 2003, the Securities and Exchange Commission issued SAB
No. 104, Revenue Recognition, which supercedes
SAB 101, Revenue Recognition in Financial
Statements. The primary purpose of SAB 104 is to rescind
accounting guidance contained in SAB 101 related to multiple
element arrangements, superceded as a result of the issuance of
EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The guidance contained in SAB 104
reflects the issuance of EITF 00-21, but the revenue recognition
principles remaining largely unchanged. As we have already
incorporated EITF 00-21 and SAB 101 into our revenue
recognition policies, the adoption of SAB 104 did not have a
significant impact on our financial statements. 25




---



##### Table of Contents



Results of Operations The following table sets forth our statement of operations data for the
three years ended December 31, 2001, 2002 and 2003 and the percentage of total
revenues of each line item for the periods presented. Our results of operations for the year ended December 31, 2002 and 2003
include the acquired operations SDI, Regency and Point, hereafter collectively
referred to as the acquired businesses, from their respective dates of
acquisition. SDI was acquired in September 2001; accordingly the results for
that year include SDIs results for only one quarter. 2001
    
    2002
    
    2003Revenues:Software licenses
    
    $
    71,385
    
    
    
    26
    %
    
    $
    88,742
    
    
    
    30
    %
    
    $
    61,619
    
    
    
    24
    %Support and maintenance
    
    
    40,995
    
    
    
    15
    %
    
    
    59,814
    
    
    
    21
    %
    
    
    59,382
    
    
    
    24
    %Professional services
    
    
    111,965
    
    
    
    40
    %
    
    
    101,779
    
    
    
    35
    %
    
    
    83,453
    
    
    
    33
    %Data center
    
    
    52,915
    
    
    
    19
    %
    
    
    40,560
    
    
    
    14
    %
    
    
    45,210
    
    
    
    18
    %Other
    
    
    1,050
    
    
    
    0
    %
    
    
    1,274
    
    
    
    0
    %
    
    
    2,917
    
    
    
    1
    %Total revenues
    
    
    278,310
    
    
    
    100
    %
    
    
    292,169
    
    
    
    100
    %
    
    
    252,581
    
    
    
    100
    %Direct costs:Software licenses
    
    
    4,017
    
    
    
    1
    %
    
    
    6,973
    
    
    
    2
    %
    
    
    4,048
    
    
    
    2
    %Professional services, support and maintenance
    
    
    93,684
    
    
    
    34
    %
    
    
    90,775
    
    
    
    31
    %
    
    
    85,572
    
    
    
    34
    %Data center
    
    
    27,055
    
    
    
    10
    %
    
    
    22,919
    
    
    
    8
    %
    
    
    23,062
    
    
    
    9
    %Other
    
    
    751
    
    
    
    0
    %
    
    
    1,267
    
    
    
    1
    %
    
    
    2,623
    
    
    
    1
    %Total direct costs
    
    
    125,507
    
    
    
    45
    %
    
    
    121,934
    
    
    
    42
    %
    
    
    115,305
    
    
    
    46
    %Gross margin
    
    
    152,803
    
    
    
    55
    %
    
    
    170,235
    
    
    
    58
    %
    
    
    137,276
    
    
    
    54
    %Operating expenses:Selling and marketing
    
    
    53,919
    
    
    
    19
    %
    
    
    58,140
    
    
    
    20
    %
    
    
    39,125
    
    
    
    15
    %Product development
    
    
    53,925
    
    
    
    19
    %
    
    
    51,178
    
    
    
    18
    %
    
    
    45,148
    
    
    
    18
    %General and administrative
    
    
    39,438
    
    
    
    14
    %
    
    
    38,701
    
    
    
    13
    %
    
    
    36,817
    
    
    
    14
    %Depreciation
    
    
    29,252
    
    
    
    11
    %
    
    
    22,635
    
    
    
    8
    %
    
    
    16,915
    
    
    
    7
    %Merger related and restructuring costs
    
    
    9,260
    
    
    
    3
    %
    
    
    2,417
    
    
    
    1
    %
    
    
    19,858
    
    
    
    8
    %Acquired in-process research and development
    
    
    
    
    
    
    0
    %
    
    
    350
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Amortization and impairment of acquisition
intangible assets
    
    
    79,787
    
    
    
    29
    %
    
    
    17,460
    
    
    
    6
    %
    
    
    17,392
    
    
    
    7
    %Total operating expenses
    
    
    265,581
    
    
    
    95
    %
    
    
    190,881
    
    
    
    66
    %
    
    
    175,255
    
    
    
    69
    %Operating loss
    
    
    (112,778
    )
    
    
    -40
    %
    
    
    (20,646
    )
    
    
    -8
    %
    
    
    (37,979
    )
    
    
    -15
    %Interest, investment and other income, net
    
    
    3,066
    
    
    
    1
    %
    
    
    1,479
    
    
    
    1
    %
    
    
    90
    
    
    
    0
    %Loss on sale of subsidiaries
    
    
    (53,186
    )
    
    
    -19
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Equity in net loss of affiliate
    
    
    (61,900
    )
    
    
    -23
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Income tax benefit (expense)
    
    
    3,255
    
    
    
    1
    %
    
    
    2,770
    
    
    
    1
    %
    
    
    (283
    )
    
    
    0
    %Net loss
    
    $
    (221,543
    )
    
    
    -80
    %
    
    $
    (16,397
    )
    
    
    -6
    %
    
    $
    (38,172
    )
    
    
    -15
    %
 26




---



##### Table of Contents



Comparison of the Year Ended December 31, 2003 to the Year Ended December 31,
2002 Revenues.The following table sets forth selected revenue data for the
years ended December 31, 2003 and 2002. Software
    
    Support and
    
    Professional
    
    DataLicenses
    
    Maintenance
    
    Services
    
    Center
    
    Other
    
    TotalYear Ended December 31, 2003:Financial institutions, excluding
Zurich
    
    $
    22,158
    
    
    $
    45,158
    
    
    $
    76,276
    
    
    $
    36,576
    
    
    $
    2,910
    
    
    $
    183,078Zurich
    
    
    32,704
    
    
    
    
    
    
    
    1,500
    
    
    
    8,634
    
    
    
    
    
    
    
    42,838Financial institutions
    
    
    54,862
    
    
    
    45,158
    
    
    
    77,776
    
    
    
    45,210
    
    
    
    2,910
    
    
    
    225,916Edify
    
    
    7,745
    
    
    
    16,403
    
    
    
    5,872
    
    
    
    
    
    
    
    7
    
    
    
    30,027Eliminations
    
    
    (988
    )
    
    
    (2,179
    )
    
    
    (195
    )
    
    
    
    
    
    
    
    
    
    
    (3,362
    )Total
    
    $
    61,619
    
    
    $
    59,382
    
    
    $
    83,453
    
    
    $
    45,210
    
    
    $
    2,917
    
    
    $
    252,581Year Ended December 31, 2002:Financial institutions, excluding
Zurich
    
    $
    35,105
    
    
    $
    42,016
    
    
    $
    92,071
    
    
    $
    34,660
    
    
    $
    1,274
    
    
    $
    205,126Zurich
    
    
    31,789
    
    
    
    1,745
    
    
    
    3,392
    
    
    
    5,900
    
    
    
    
    
    
    
    42,826Financial institutions
    
    
    66,894
    
    
    
    43,761
    
    
    
    95,463
    
    
    
    40,560
    
    
    
    1,274
    
    
    
    247,952Edify
    
    
    21,910
    
    
    
    17,303
    
    
    
    8,140
    
    
    
    
    
    
    
    
    
    
    
    47,353Eliminations
    
    
    (62
    )
    
    
    (1,250
    )
    
    
    (1,824
    )
    
    
    
    
    
    
    
    
    
    
    (3,136
    )Total
    
    $
    88,742
    
    
    $
    59,814
    
    
    $
    101,779
    
    
    $
    40,560
    
    
    $
    1,274
    
    
    $
    292,169
 Total revenues decreased by $39.6 million to $252.6 million for 2003
compared to $292.2 million for 2002, a decrease of 14%. This decrease is
attributable to a $27.1 million decrease in software license revenue and a
$18.3 million decrease in professional services revenue, offset in part by a
$4.7 million increase in data center revenues. Our financial institutions
segment generated $225.9 million of revenue in 2003 compared to $248.0 million
for 2002, a decrease of 9%. Revenues from our Edify business segment were
$30.0 million for 2003, a 37% decrease from $47.4 million in 2002. Below is a
detailed discussion of changes in revenue by revenue type. Software license revenues for our financial institutions segment were
$54.9 million for 2003, a $12.0 million decrease from 2002. License revenue
earned from Zurich was $32.7 million for 2003 and $31.8 million for 2002. This
revenue was earned from a subscription license that expired in December 2003.
We will not earn any license revenue from Zurich in 2004 and beyond. License
revenues declined in 2003 primarily due to an increase in the number of
contracts signed that required accounting for under the percentage of
completion method based on the terms of the agreement. As a result, license
revenues for these contracts are generally recognized over time as the related
implementation and customization services are provided, as opposed to up
front when the software is delivered in accordance with Statement of Position
No. 97-2. Software license revenues for our Edify business segment were $7.7 million
for 2003, a decrease of $14.2 million from 2002. We believe the following
items contributed to the decrease: (1) poor economic conditions in the primary
markets served by Edify (telecommunications, travel and retail) and (2) the
impact on the business of the reorganization activities. During the third and
fourth quarters of 2003, we experienced an improvement in Edify sales activity
as the business began to stabilize under new management. We expect continued
stability in Edify sales as economic conditions continue to improve in the
primary markets served by Edify. Support and maintenance revenues for our financial institution segment
were $45.2 million for 2003, an increase of $1.4 million or 3% from $43.8
million in 2002. This increase is attributable to new customer maintenance
contracts signed from customers who purchased new licenses in 2002 and 2003;
partially offset by the attrition from our Internet-only legacy customers and a
$1.7 million decrease in support and maintenance fees earned from Zurich. We
believe that the attrition of legacy customers is substantially complete and
that support and maintenance revenues from our financial institution segment
will continue to grow from a stable base of approximately $10 million per
quarter. Support and maintenance revenues for the Edify business were $16.4 million
for 2003, a decrease from $17.3 million for 2002 due principally to customer
attrition. The reduction in maintenance is directly related to the downturn in
the economy during 2001 and 2002, which saw a certain portion of Edifys base
of customers discontinue maintenance or shut down applications altogether. We
believe the quarterly run rate of $4 million at December 31, 2003 represents a
stable base for the company. 27




---



##### Table of Contents



Professional services revenues from our financial institution segment were
$77.8 million for 2003, a $17.7 million decrease from $95.5 million for 2002.
The decrease is primarily attributable to the $18.5 million decrease in
professional services revenues from State Farm and a $1.9 million decrease in
professional services revenues from Zurich. Over the past three years, State
Farm has moved from a period of heavy investment in its Internet solutions
including migrating its insurance application to S1 Enterprise and is now
entering a stable maintenance state with their applications. We believe the
reported quarterly revenue at September 30, 2003 of $17 million represents a
stable base from which to grow. Therefore, professional services revenues from
our financial institutions segment will grow on a quarterly basis, as revenues
from new projects will replace revenues lost to the completion of current
projects. The Edify business recorded $5.9 million of revenue for professional
services for 2003 compared to $8.1 million for 2002. This decrease is
attributable to the decrease in software sales and related implementation
projects. We expect professional services to remain stable in 2004, as
revenues from new projects should replace those lost to the completion of
current projects. Data center revenues were $45.2 million for 2003, an increase of $4.7
million for 2002. The increase resulted primarily from the acceleration of
data center revenues from Zurich (as discussed in the Overview). Increases
in data center revenues from new and existing clients were nearly offset by
other reductions in transitioning legacy customer revenues (as discussed in the
Overview). With the transition completed at end of our third quarter 2003,
we believe data center revenues will increase from a stable base of
approximately $9 million per quarter as new customers are added and our
existing customers continue to increase their number of end users. Other revenues are primarily related to the sale of third party hardware
and software that is used in connection with our products. Other revenue
fluctuates based on the mix of products and services sold and is not typical in
our sales arrangements. In 2003, we recorded $2.3 million in revenue for
third-party hardware delivered from inventory to one financial institution
customer. The related cost of the hardware sold is included in cost of other
revenue as the hardware is delivered. There is only minimal gross margin
associated with other revenue. Direct Costs and Gross Margins.Direct costs decreased $6.6 million to
$115.3 million for the year ended December 31, 2003 from $121.9 million for
2002. Overall gross margins were 54% and 58% for the years ended December 31,
2003 and 2002, respectively. The overall decrease in direct costs was
principally due to a $5.2 million reduction in cost of professional services,
support and maintenance related to lower staffing levels and reduced facilities
costs resulting from the consolidation of offices and a decrease in royalties
and other third party fees paid on a lower base of sales (especially in the
Edify business). These decreases were offset in part by the establishment of
accruals for professional services costs, as discussed below, and the cost of
the pass-through hardware (approximately $2.2 million) delivered to one
customer in 2003. The decrease in gross margins was primarily due to the mix
of revenue earned and a decrease in gross margins for professional services,
support and maintenance, from 44% in 2002 to 40% in 2003. Software license
revenues represented 24% and 30% of total revenues for the years ended December
31, 2003 and 2002, respectively. Historically, the gross margins on software
licenses have been higher than the gross margins on professional service,
support and maintenance and data center fees. Therefore, a significant
decrease in license revenues as a percentage of total sales negatively affects
the overall gross margin percentages. Gross margins on professional services
decreased as the amount of revenue from State Farm decreased. We expect a
significant decrease in license revenue margin in 2004 following the expiration
of the Zurich subscription license in December 2003. Direct costs exclude charges for depreciation of property and equipment
and the amortization of purchased technology. Costs of software licenses principally consist of royalties paid to third
parties. Historically, royalties paid on our financial institution software
product sales have been minimal because we internally develop most of the
software components, the cost of which is reflected in product development
expense as it is incurred. We anticipate that costs of software licenses will
increase in future periods as we license and install more of our new S1
Enterprise products because these products include some software components
that we license from third parties; however, the costs of software licenses
will continue to vary with the mix of products sold. Software licenses costs for our financial institutions segment increased
to $1.6 million in 2003 from $0.5 million in 2002, resulting from a higher
volume of product sales including third party software components. Software
license costs for the Edify business decreased to $3.5 million in 2003 from
$6.5 million in 2002 due to the decrease in product sales and a reduction in
the cost of third party voice recognition software. 28




---



##### Table of Contents



Costs of professional services, support and maintenance consist primarily
of personnel and related infrastructure costs. Direct costs associated with professional services, support and
maintenance were $85.6 million for the year ended December 31, 2003, a decrease
of $5.2 million from 2002. This decrease resulted from reductions in
professional services headcount, outside contractors and associated facilities
costs to a level that is more closely aligned with the projects and services
under contract. This decrease was partially offset by the accrual of
approximately $3.2 million for the estimated future costs to complete service
projects where our expected costs will exceed the contractual revenues. Gross
margins for professional services and customer support and maintenance
increased due to the revenue mix between lower margin professional services and
higher margin support revenues. Costs of data center consist of personnel costs, facility costs and
related infrastructure costs to support our data center business. Direct data
center costs increased $0.2 million to $23.1 million for the year ended
December 31, 2003 from $22.9 million for 2002. The increase resulted from the
acceleration of data center costs of $1.8 million in the first and second
quarters of 2003 associated with the amendment of the Zurich contract, as well
as the incremental costs incurred to the transfer the remaining data center
business from the U.K. to our global hosting center in Atlanta, Georgia. In
2004, we expect data center costs to be 8% to 12% lower than 2003 related to
fewer facilities and increased efficiencies in operations. Data center margins
are expected to increase in 2004 related to revenue growth and cost
containment. Selling and Marketing.For the year ended December 31, 2003, selling and
marketing expenses decreased $19.0 million to $39.1 million from $58.1 million
in 2002. Selling and marketing expenses decreased $11.8 million and $7.2
million in our financial institutions and Edify segments, respectively, as a
result of headcount reductions and the related decrease in compensation
expense, other payroll related expense and benefits, and travel expenses. Product Development.Total product development expenses decreased $6.1
million to $45.1 million for the year ended December 31, 2003 from $51.2
million for 2002. We achieved cost savings from the realignment of our product
development organization in 2002, including replacing outside contractors in
our domestic operations with lower cost offshore contractors in India and our
development center in Ireland. Historically we have not capitalized software development costs because of
the insignificant amount of costs incurred between technological feasibility
and general customer release. However, if we reach technological feasibility
earlier in the development cycle, we may be required to capitalize certain
software development costs in the future. General and Administrative.General and administrative expenses were
$36.8 million for the year ended December 31, 2003 compared to $38.7 million
for 2002, a decrease of $1.9 million or 5%. As a percentage of revenues,
general and administrative expenses increased slightly to 14% for the year
ended December 31, 2003 from 13% for the same period in 2002. The decrease in
general and administrative expenses resulted principally from a decrease in
administrative headcount, recruiting fees and professional fees, offset by a
$4.5 million reserve for loss contingencies established in the fourth quarter of 2003.
We expect general and administrative expenses to be approximately 10% to 12% of
revenue in 2004. Depreciation.Depreciation decreased $5.7 million to $16.9 million for
the year ended December 31, 2003 from $22.6 million in 2003. This decrease was
due to reductions in capital expenditures during 2001, 2002 and 2003 as
compared with those made in 2000. In addition, depreciation expense decreased
approximately $1.5 million as a result of the closure of our U.K. data center
operations and our disposal of the data center assets. We expect depreciation
expense to be approximately $3 million per quarter in 2004. Merger Related and Restructuring Costs.During 2003, we recorded merger
related costs and restructuring charges of $19.9 million, as compared to $2.4
million for 2002. During 2003, we undertook several initiatives to align our worldwide cost
structure with our anticipated 2004 revenues. As a result, management approved
restructuring plans in the financial institution and Edify segments to reduce
the work force, relocate and consolidate certain office facilities and sell
certain corporate assets. In addition we consolidated our EMEA data center
operations based in the United Kingdom into our global hosting center in
Atlanta. In connection with these plans, we recorded restructuring charges of
$21.2 million during the year ended December 31, 2003. In total, we eliminated
approximately 200 positions worldwide and closed or consolidated office
facilities. In the domestic operations of our financial institution segment,
we recorded $6.2 million in restructuring charges during 2003, which were
primarily comprised of charges for 29




---



##### Table of Contents



severance costs associated with headcount reductions, lease payments
associated with excess office space and other corporate charges. In the first quarter of 2003, we began the process of reorganizing our
international operations. As of December 31, 2003, we believe this
reorganization is complete. In 2003, we consolidated our U.K. data center
operations into our global hosting center in Atlanta, relocated our remaining
U.K. operations to a smaller facility, decreased our workforce both in our
European and APJ operations and closed offices in our APJ operations. As a
result, in the year ended December 31, 2003, we recorded restructuring charges
of $9.4 million in our European operations and $1.3 million in our APJ
operations. These charges were comprised of accelerated depreciation of
assets, severance costs, other related costs to relocate the data center
operations, losses on the vacated office space and the write off of abandoned
leasehold improvements. Under the provisions of SFAS No. 146, we recorded the
loss on vacated office space at the present value of the expected cash flows. In the third quarter of 2003, we completed the process of reorganizing our
Edify business to align costs with expected revenues. As a result, we hired a
new general manager, replaced the entire senior management team, reduced the
workforce and closed and consolidated several Edify office facilities
worldwide. These actions resulted in restructuring charges of $4.3 million for
the year ended December 31, 2003. In 2003, we decreased our merger related reserve for legal claims by $0.8
million, which was established in connection with our acquisition of FICS
Group, N.V. in November 1999. We were able to resolve two legal matters during
2003 for less than previously estimated. In the second quarter of 2003, we
further reduced our merger related accrual by $0.5 million when we determined
that we had an alternate use for excess office space that was reserved when we
completed the acquisition of Point in March 2002. During 2002, we incurred merger related costs of $3.7 million in
connection with the acquisition of the assets and subsidiaries of Point
Holdings, Ltd. These costs, incurred in connection with our plan to reorganize
certain of our European operations, include headcount reduction, consolidation
of S1 and acquired Point office facilities and disposal of redundant or
obsolete computer equipment. This merger related charge was partially offset by
a $1.7 million decrease in reserves for legal claims, which was established in
connection with our acquisition of FICS Group, N.V. in November 1999. We were
able to resolve this legal matter during the first quarter of 2002 for less
than previously estimated. Additionally, in 2002, we recorded a charge of $0.7
million for some excess office space in our Edify business. Acquired In-Process Research and Development.In connection with the
purchase price allocation for the Regency and Point acquisitions during the
year ended December 31, 2002, we allocated $0.4 million to acquired in-process
research and development, which we expensed immediately in accordance with the
applicable accounting rules. Amortization and Impairment of Acquisition Intangible Assets.Amortization
and impairment of acquisition intangible assets decreased $0.1 million to $17.4
million for the year ended December 31, 2003 from $17.5 million for the same
period in 2002. In April 2003, we terminated our efforts to divest the Edify business. We
considered our inability to sell the Edify business on terms that were
acceptable to us a triggering event under SFAS No. 142 and 144 that required us
to perform a current assessment of the carrying value of the Edify business.
Based on our current analysis of fair value for the Edify business, including
estimates we based on discounted future cash flows, market valuations of
comparable businesses and offers from potential buyers, we concluded that the
fair value of the Edify business was less than its carrying value. Accordingly,
we allocated our estimate of fair value for the unit to the existing assets and
liabilities of the Edify business as of March 31, 2003, resulting in a goodwill
impairment charge of $11.7 million and accelerated amortization on other
intangible assets and purchased software of $1.2 million and $0.5 million,
respectively. Interest, Investment and Other Income.Interest, investment and other
income, net was $0.1 million for the year ended December 31, 2003, a decrease
from $1.5 million from 2002. We recorded interest and investment income, net of
$1.4 million and $1.5 million in 2003 and 2002, respectively. Other expense
increased $0.7 million due to an increase in realized foreign currency
translation loss in 2003. Also, in 2003, we recorded a loss of $0.6 million on
the sale of an investment that we accounted for on a cost basis. Income Tax Benefit (Expense).We recorded income tax expense of $0.3
million during the year ended December 31, 2003 compared to an income tax
benefit of $2.8 million in 2002. We incurred foreign income tax expense in
certain European countries in 2002 and 2003. The income tax benefit in 2002
resulted from the amortization of other intangible assets acquired in 30




---



##### Table of Contents



the acquisition of FICS, which was offset by the foreign income tax
expense in 2002. This benefit ended with the complete amortization of the FICS
other intangible assets in 2002. Although we have net operating loss
carryforwards and tax credit carryforwards of approximately $445.7 million at
December 31, 2003, we may be required to record an income tax provision in
future periods for certain foreign subsidiaries which do not have net operating
loss carryforwards to utilize. Domestically, the limitation on our use of net
operating loss carryforwards for alternative minimum tax purposes may result in
income tax expense during 2004. At December 31, 2003, we had a valuation
allowance of $217.9 million on our deferred tax assets. If we can achieve
sustained profitability, we may reverse this valuation allowance, which would
have a positive impact on our income tax benefit in the period in which it may
be reversed. We do not expect to reverse this allowance during 2004. Comparison of the Year Ended December 31, 2002 to the Year Ended December 31,
2001 Revenues.The following table sets forth selected revenue data for the
years ended December 31, 2002 and 2001 (in thousands). Software
    
    Support and
    
    Professional
    
    DataLicenses
    
    Maintenance
    
    Services
    
    Center
    
    Other
    
    TotalYear Ended December 31, 2002:Financial institutions
    
    $
    66,894
    
    
    $
    43,761
    
    
    $
    95,463
    
    
    $
    40,560
    
    
    $
    1,274
    
    
    $
    247,952Edify
    
    
    21,910
    
    
    
    17,303
    
    
    
    8,140
    
    
    
    
    
    
    
    
    
    
    
    47,353Eliminations
    
    
    (62
    )
    
    
    (1,250
    )
    
    
    (1,824
    )
    
    
    
    
    
    
    
    
    
    
    (3,136
    )Total
    
    $
    88,742
    
    
    $
    59,814
    
    
    $
    101,779
    
    
    $
    40,560
    
    
    $
    1,274
    
    
    $
    292,169Year Ended December 31, 2001:Financial institutions
    
    $
    42,243
    
    
    $
    29,216
    
    
    $
    106,341
    
    
    $
    52,915
    
    
    $
    1,050
    
    
    $
    231,765Edify
    
    
    29,142
    
    
    
    12,654
    
    
    
    8,788
    
    
    
    
    
    
    
    
    
    
    
    50,584Eliminations
    
    
    
    
    
    
    (875
    )
    
    
    (3,164
    )
    
    
    
    
    
    
    
    
    
    
    (4,039
    )Total
    
    $
    71,385
    
    
    $
    40,995
    
    
    $
    111,965
    
    
    $
    52,915
    
    
    $
    1,050
    
    
    $
    278,310
 Total revenues for the year ended December 31, 2002 were $292.2 million,
an increase of $13.9 million, or 5% from $278.3 for the year ended December 31,
2001. Total revenues for the financial institutions segment increased by $16.2
million to $248.0 million for the year ended December 31, 2002 from $231.8
million for the year ended December 31, 2001, an increase of 7%. During 2002,
we continued to provide a substantial amount of implementation, hosting and
product enhancement services to State Farm. We derived 26% and 33% of our
financial institution segment revenues in 2002 and 2001, respectively, from
this customer. Additionally, in 2002, we provided a subscription license,
hosting and professional services to Zurich. We derived 17% of our financial
institution segment revenues from this customer in 2002. Total revenues for
our Edify business decreased $3.2 million to $47.4 million for the year ended
December 31, 2002, as compared to $50.6 million for the year ended December 31,
2001. Software license revenues for our financial institution segment were $66.9
million for the year ended December 31, 2002, an increase of $24.7 million from
2001. The increase in our license revenue was due to a subscription license
with Zurich and license revenues generated from products of the acquired
businesses of $12.7 million. Although most of our license revenue has to be
replaced each period, license revenue earned from Zurich comprised $31.8
million of our license revenue in 2002, an increase of $26.1 million over 2001.
License revenue from our legacy single channel solutions decreased from 2001
and was not completely replaced with revenue from our Enterprise solutions. Software license revenues for our Edify segment were $21.9 million for the
year ended December 31, 2002, a 25% decrease from $29.1 million for 2001.
Software license revenues decreased as a result of poor economic conditions in
the primary markets served by Edify (telecommunications, retail and travel)
offset in part by the inclusion of the non-financial institution customers of
the acquired Point business. Support and maintenance revenues for our financial institution segment
were $43.8 million for 2002, an increase of $14.5 million from 2001. This
increase is primarily attributable to support and maintenance fees of $13.6
million recorded in the acquired businesses. In our Edify segment, support and maintenance revenues increased $4.6
million to $17.3 million for the year ended December 31, 2002 from $12.7
million for 2001. This increase is attributable to support and maintenance
fees earned from customers who purchased licenses during prior to 2001 and the
inclusion of the non-financial institution customers of the acquired Point
business. 31




---



##### Table of Contents



In our financial institutions segment, professional services revenues were
$95.5 million for the year ended December 31, 2002, a decrease of $10.8 million
from $106.3 million for 2001. This decrease is principally attributable to the
decrease in professional services revenue from State Farm and from other large
projects, partially offset by professional service fees from the acquired
businesses of approximately $7.8 million. Professional services for the Edify segment were $8.1 million for the year
ended December 31, 2002, a decrease of 8% from $8.8 million in 2001. The
decrease is primarily attributable to the decrease in software sales and
related professional services projects, offset in part by the inclusion of the
non-financial institution customers of the acquired Point business. Data center revenues were $40.6 million for the year ended December 31,
2002, a decrease of $12.4 million from 2001. The decrease in data center
revenue was primarily due to the loss of several large data center customers,
offset by an increase in the number of community and mid-sized financial
institutions utilizing S1 solutions in our data centers. Several large
financial institution customers moved their Internet banking solutions in-house
either on our S1 Enterprise platform or on a competitors platform. In
addition, one large European bank shut down its Internet banking application
during 2001. None of the acquired businesses have a data center solution;
accordingly, there was no incremental data center revenue from the acquired
businesses during 2002. Other revenues are primarily related to the sale of third party hardware
and software that is used in connection with our products. Other revenue
fluctuates based on the mix of products and services sold. Direct Costs and Gross Margins.Total direct costs decreased $3.6 million
to $121.9 million for the year ended December 31, 2002 from $125.5 million for
2001. Overall gross margins were 58% and 55% for the years ended December 31,
2002 and 2001, respectively. The overall decrease in direct costs and
corresponding increase in gross margins resulted from reductions in employee
headcount and higher cost outside contractors, and reduced facilities costs
resulting from the consolidation of offices, offset by the added costs of the
acquired businesses. Direct costs exclude charges for depreciation of property and equipment
and the amortization of purchased technology. Costs of software licenses for our financial institution software products
are generally minimal because we internally develop most of the software
components. Cost of software licenses for our Edify segment fluctuates with the mix of
products sold. For the year ended December 31, 2002, cost of software licenses
for our Edify segment were $6.5 million, an increase from $3.5 million in 2001. In our financial institutions segment, costs of professional services,
support and maintenance consist primarily of personnel and related
infrastructure costs. Direct costs associated with professional services,
support and maintenance were $79.6 million for the year ended December 31,
2002, a decrease of $11.2 million from 2001. This decrease resulted from
reductions in professional services headcount, outside contractors and
associated facilities costs to a level that is more closely aligned with the
projects and services under contract, offset by the added costs of the acquired
businesses. Gross margins for professional services and customer support and
maintenance increased due to the cost reductions and the revenue mix between
lower margin professional services and higher margin support revenues. In our Edify segment, direct costs associated with professional services,
support and maintenance were $14.2 million for the year ended December 31,
2002, an increase of $7.2 million from $7.0 million for 2001. This increase
was attributable to the inclusion of the costs of the Point non-financial
institution business. Gross margins decreased from 68% in 2001 to 44%
in 2002
as a result of the change in the mix of products sold. Costs of data center consist of personnel costs, facility costs and
related infrastructure costs to support our data center business. Direct data
center costs decreased $4.2 million to $22.9 million for 2002 from $27.1
million for 2001. The decrease resulted from reductions in personnel, outside
contractors and purchases of non-capital equipment. For 2002, the gross margin
for data center was 43%, a decrease from 49% for 2001. This decrease is
attributable to declining revenues against the fixed costs of the data center.
Significant portions of the data center costs are fixed and are difficult to
reduce or eliminate proportionally with declining revenues. Selling and Marketing. For the year ended December 31, 2002, selling and
marketing expenses were $58.1 million, an increase of $4.2 million or 8% over
2001. This increase is primarily attributable to the added costs of the
acquired 32




---



##### Table of Contents



businesses (approximately $7.6 million) plus costs associated with the
strengthening of our internal sales force in our financial institutions
segment. These additional costs were partially offset by a $0.5 million
reduction in spending on marketing programs, a $0.6 million reduction in bad
debt expense and a decrease in the Edify segment as a result of cost-alignment
activities. Product Development. Total product development expenses decreased by $2.7
million to $51.2 million for the year ended December 31, 2002 from $53.9
million for 2001. Added product development costs from the acquired businesses
were offset by cost savings achieved through reductions of product development
personnel, from replacing outside contractors in our domestic operations with
lower cost offshore contractors and from the reorganization of the product
development organization. In the second half of 2002, we streamlined
development activities to eliminate redundancies and we established centers of
development excellence that focus on development and delivery of specific
components of our product offerings. Overall, product development head count
(including employees and offshore contractors) remained constant over the 2001
and 2002. General and Administrative.General and administrative expenses were $38.7
million for the year ended December 31, 2002 compared to $39.4 million for
2001, a decrease of $0.7 million or 2%. As a percentage of revenues, general
and administrative expenses decreased to 13% for the year ended December 31,
2002 from 14% for the same period in 2001, which is attributable to our ability
to leverage our existing infrastructure against increasing revenues. The
decrease in general and administrative expenses resulted principally from a
decrease in compensation and benefits relative to lower headcount, recruiting
fees and professional fees, offset by the added costs of the acquired
businesses (approximately $3.1 million) and costs incurred to improve our
internal systems. During 2002, we reduced our general and administrative
headcount and our use of external resources. Depreciation.Depreciation decreased 23% to $22.6 million for the year
ended December 31, 2002 from $29.3 million in 2001. This decrease was due to
reductions in capital expenditures during 2001 and 2002 as compared with those
made in 1999 and 2000. A significant portion of those items that we bought in
1999 and 2000, especially those related to the build-out of our global data
centers, became fully depreciated by the end of 2001. This decrease was offset
partially by the added depreciation expense of the acquired businesses of
approximately $0.6 million. Merger Related and Restructuring Costs. During 2002, we recorded merger
related costs of $2.4 million, a decrease from $9.3 million for 2001. During 2002, we incurred merger related costs of $3.7 million in
connection with the acquisition of Point. These costs, incurred in connection
with our plan to reorganize certain of our European operations, include
headcount reduction, consolidation of S1 and acquired Point office facilities
and disposal of redundant or obsolete computer equipment. This merger related
charge was partially offset by a $1.7 million decrease in a reserve for legal
claims, which was established in connection with our acquisition of FICS Group,
N.V. in November 1999. We were able to resolve this legal matter during the
first quarter of 2002 for less than previously estimated amounts. Our
restructuring and merger related reserves include provisions for obligations
for unused office space less estimates for sub-lease income. When we secure
sub-tenants, we adjust our reserves accordingly. Additionally, in 2002, we
recorded a charge of $0.7 million for some excess office space in our Edify
business. During the second quarter of 2001, we approved a restructuring plan to
streamline our European operations. In connection with this plan, we reduced
our European workforce by 77 people and consolidated most of our European
operations into two locations. As a result, we recorded a charge of $5.6
million for the estimated costs associated with the restructuring plan. Also in
2001, we recorded a charge of $4.5 million to increase our restructuring
reserves that initially were established during the fourth quarter of 2000. As
a result of a softening in the domestic real estate markets, we determined our
original estimate of costs to dispose of or sublet our unused real estate was
below the currently anticipated costs. Additionally, during 2001, in
connection with the closing of certain office facilities, we wrote-off
leasehold improvements of $1.2 million, which were not previously anticipated
in the initial restructuring accrual. During 2001, we released merger related
accruals of $2.0 million related to changes in estimates relative to pending or
threatened litigation. Acquired In-process Research and Development.In connection with the
purchase price allocation for the Regency and Point acquisitions during the
year ended December 31, 2002, we allocated $0.4 million to acquired in-process
research and development, which we expensed immediately in accordance with the
applicable accounting rules. 33




---



##### Table of Contents



Amortization and Impairment of Acquisition Intangible Assets.Amortization
of acquisition intangible assets decreased $62.3 million to $17.5 million for
the year ended December 31, 2002 from $79.8 million for 2001. In connection
with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets on
January 1, 2002, we stopped recording amortization expense on goodwill and
assembled workforce. This reduced our amortization expense for the year ended
December 31, 2002 by approximately $59.6 million. During the fourth quarter of
2002, certain intangibles related to the acquisition of FICS in 1999 became
fully amortized. The additional amortization of other intangible assets from
the acquired businesses of $2.4 million more than offset the reduction in
amortization expense from the fully amortized intangibles. Additionally, for
six months during 2002, the Edify business was accounted for as held-for-sale
under which we ceased the amortization of acquisition intangible assets. Interest, Investment and Other Income.Interest, investment and other
income, net was $1.5 million for the year ended December 31, 2002, a decrease
of $1.6 million from 2001. This decrease resulted from the following:  
    
    a charge of $4.0 million we recorded during 2001 to write down
our basis in certain equity investments (accounted for on a cost
basis) as a result of impairment in the value of these assets which
we believe is other than temporary; offset by  
    
    a gain of $0.9 million on the sale of investment securities
available for sale we recorded during 2001;  
    
    a $4.1 million decrease in interest income during the year
ended December 31, 2002 due to a decrease in average cash to invest
and a decrease in interest rates from the prior year period; and  
    
    a decrease in other items totaling approximately $0.6 million. Loss on Sale of Subsidiaries.In 2001, we recorded a loss on sale of
VerticalOne of $52.3 million and recorded non-cash charges of $61.9 million
based on our equity interest in the net loss of Yodlee, amortization of the
underlying goodwill and other intangible assets, and a write-down in the basis
of our investment in Yodlee. See further discussion of our investment in Yodlee
in Note 4 to the consolidated financial statements. Additionally, during 2001,
we recorded a charge of $0.9 million in connection with the sale of a small
European subsidiary. Equity in Net Loss of Affiliate.On January 16, 2001, we sold our
VerticalOne subsidiary to Yodlee in a stock-for-stock transaction in which we
received an ownership interest of approximately 33% in Yodlee. During the year
ended December 31, 2001, we recorded non-cash charges of $61.9 million based on
our equity interest in the net loss of the affiliate, amortization of the
underlying goodwill and other intangible assets, and a write-down in the basis
of our investment in Yodlee. See further discussion of our investment in Yodlee
in Note 4 to the consolidated financial statements. Since our share of
Yodlees underlying net assets was $0 at December 31, 2001 and we have not made
any commitments to Yodlee to provide additional funding, we did not record our
share of Yodlees operating results in 2002, and we will not record our share
of any future operating results until our basis in Yodlee increases above $0,
if ever. Income
Tax Benefit (Expense).We recorded an income tax benefit of
$2.8 million during the year ended December 31, 2002 compared to $3.3 million for
2001. The income tax benefit resulted from a reduction in the deferred tax
liability related to the 1999 acquisition of FICS offset by foreign income tax
expense incurred in certain European countries. The decrease in the benefit is
principally attributable to the decrease in the amortization of the FICS
intangible assets as described above as well as increases in taxable income in
certain of our foreign subsidiaries. Acquired In-process Research and Development In connection with the acquisitions of Regency and Point, we allocated a
portion of the respective purchase prices to acquired in-process research and
development based on appraisals prepared by independent valuation consultants. We determined the fair value of in-process research and development for
each of the above acquisitions using an income approach. This involved
estimating the present value of the after-tax cash flows expected to be
generated by the purchased in-process research and development, using
risk-adjusted discount rates and revenue forecasts as appropriate. Estimates of
future cash flows related to the in-process research and development were made
for each project based on our estimates of revenue, operating expenses and
income taxes from the project. These estimates were consistent with historical
pricing, margins and expense levels for similar products. Revenues were
estimated based on relevant market size and growth factors, expected industry
trends, individual product sales cycles and the estimated life of each
products underlying technology. Estimated operating expenses, income taxes and
charges for the use of contributory assets were deducted from estimated
revenues to determine estimated after-tax cash flows for each project.
Estimated operating expenses include cost of goods sold, selling, general and
administrative expenses and research and development expenses. The research and
development expenses include estimated costs to maintain the products once they
have been introduced into the market. The selection of the discount rate was
based on consideration of our weighted average cost of capital, as well as
factors including the useful life of each technology, profitability 34




---



##### Table of Contents



levels of each technology, the uncertainty of technology advances that were
known at the time, and the stage of completion of each technology. We believe
that the estimated in-process research and development amounts represent fair
value at the date of acquisition and do not exceed the amount a third party
would have paid for the projects. At the date of acquisition, the in-process research and development
projects had not yet reached technological feasibility and had no alternative
future uses. Accordingly, the values allocated to these projects were
immediately expensed upon acquisition. Where appropriate, we deducted an amount
reflecting the contribution of developed technology to the anticipated cash
flows of in-process research and development projects. The acquisitions and
related in-process research and development expenses are detailed in the table
below: In-process
    
    Costs toCompany
    
    Acquisition Date
    
    Purchase Price
    
    R&D Expense
    
    Complete(in millions)Regency Systems
    
    February 14, 2002
    
    $
    12.6
    
    
    $
    0.2
    
    
    
    0.8Point
    
    March 27, 2002
    
    
    17.9
    
    
    
    0.2
    
    
    
    1.1
 At the date of acquisition, Regency was working on an IVR system for the
NT platform, known as V3.1. Although this technology includes all of the same
features of the developed system, it is based on an entirely new code, and
includes additional features. We released this new product at the end of 2002
within the estimated costs and timeline used in the valuation. As of the acquisition date, Point had two projects under development:
e-point Version 6.5 for Windows NT and e-point Version 6.0 for Unix. E-point
Version 6.5 incorporates additional functionalities to the existing platform.
At the time of acquisition, conceptualization for Version 6.5 was complete,
however it had not progressed through the development cycle. e-point Unix has
the same features as existing Point technology, but for use as
interconnectivity with Unix operating systems. At the time of acquisition, the
coding, prototyping and stabilization of the e-point Unix project was not
complete. Both of these projects were completed during the first quarter of
2003 within the anticipated costs and timelines. Liquidity and Capital Resources The following tables show information about our cash flows during the
years ended December 31, 2001, 2002 and 2003 and selected balance sheet data as
of December 31, 2002 and 2003: Year Ended December 31,2001
    
    2002
    
    2003(in thousands)Net cash provided by operating activities before changes in
operating assets and liabilities
    
    $
    9,833
    
    
    $
    31,238
    
    
    $
    7,956Changes in operating assets and liabilities
    
    
    2,061
    
    
    
    (9,817
    )
    
    
    14,418Net cash provided by operating activities
    
    
    11,894
    
    
    
    21,421
    
    
    
    22,374Net cash used in investing activities
    
    
    (42,212
    )
    
    
    (3,805
    )
    
    
    (1,041
    )Net cash (used in) provided by financing activities
    
    
    (3,310
    )
    
    
    (9,893
    )
    
    
    37Effect of exchange rates on cash and cash equivalents
    
    
    (244
    )
    
    
    487
    
    
    
    852Net (decrease) increase in cash and cash equivalents
    
    $
    (33,872
    )
    
    $
    8,210
    
    
    $
    22,222
 As of December 31,2002
    
    2003(in thousands)Cash and cash equivalents
    
    $
    127,842
    
    
    $
    150,064Short-term investments
    
    
    14,843
    
    
    
    14,126Working capital (1)
    
    
    120,864
    
    
    
    125,940Total assets
    
    
    376,974
    
    
    
    337,088Total stockholders equity
    
    
    279,761
    
    
    
    243,814
   (1)
    
    Working capital includes deferred revenues of
$40.3 million and $38.5
million as of December 31, 2002 and 2003, respectively. 35




---



##### Table of Contents



Operating Activities.During the year ended December 31, 2003, cash
provided by operations was $22.4 million compared to $21.4 million and $11.9
million for the years ended December 31, 2002 and 2001, respectively. Changes
in operating assets and liabilities, especially trade accounts receivable,
trade accounts payable and accrued expenses, are generally the result of timing
differences between the collection of fees billed and payment of operating
expenses. Our
net loss of $38.2 million for the year ended December 31, 2003,
included non-cash items of $34.3 million in depreciation and amortization,
including acquisition intangibles and impairment charges, $3.9 million for the
loss on disposal of property and $6.1 million to provide for doubtful accounts
and billing adjustments. The
changes in operating assets and liabilities of $14.4 million in 2003
was primarily attributable to a decrease in accounts receivable of $11.1
million, a decrease in prepaid expenses and other assets of $6.2 million, and
an increase in accrued expenses of $6.3 million, offset in part by a $7.6
million decrease in accounts payable. Our net loss of $16.4 million for the year ended December 31, 2002,
included non-cash items of $40.4 million in depreciation and amortization,
including acquisition intangibles and the write-off of acquired in-process
research and development and $7.8 million to provide for doubtful accounts and
billing adjustments. The change in operating assets and liabilities of $9.8 million in 2002 was
primarily attributable to a decrease in accounts payable and other liabilities
of $6.9 million and an increase in prepaid expenses of $6.7 million and other
assets, partially offset by an increase in deferred revenues of $6.6 million. Cash provided by operations for the year ended December 31, 2001 included
our net loss for the period of $221.5 million offset by the following non-cash
items of:  
    
    $109.0 million of depreciation and amortization;  
    
    $61.9 million in the equity interest in net loss of an affiliate;  
    
    $53.2 million in losses recorded on the sale of subsidiaries;  
    
    $5.2 million to provide for doubtful accounts receivable and billing adjustments; and  
    
    $4.0 million write-down of cost-basis equity investments for other than temporary impairments. The change in operating assets and liabilities of $2.1 million in 2001 was
primarily due to a $35.4 million decrease in accounts receivable resulting from
aggressive collection efforts and a significant improvement in days sales
outstanding, offset by a decrease in accounts payable and accrued expenses of
$32.4 million as a result of the timing of payments. Investing Activities.Cash used in investing activities was $1.0 million
for the year ended December 31, 2003 compared to $3.8 million in 2002 and $42.2
million in 2001. We spent $3.9 million and $4.4 million in cash in connection with
acquisitions in the years 2002 and 2001, respectively. In 2001, we sold our
VerticalOne subsidiary, which included $15.1 million in cash. Short term investments consist of investments in certificates of deposit,
commercial paper and other highly liquid securities with original maturities
exceeding 90 days but less than one year. All of these investments are held to
maturity and are reported at amortized cost. We have the ability and the intent
to hold these investments to maturity. We converted a net $3.3 million and a
net $14.0 million of short-term investments to cash in 2003 and 2002,
respectively. In 2001, we made a net investment of $9.1 million in short term
investments in 2001. In 2002, we invested in a $2.5 million certificate of deposit. Because
its remaining maturity exceeded one year at December 31, 2002, it was
classified on our balance sheet in other assets. The remaining maturity for
this investment is less than one year at December 31, 2003; accordingly, it is
classified on our balance sheet in short-term investments. During 2001, we
received $1.0 million from the sale of investment securities. We purchased $6.4 million, $11.3 million and $14.7 million of property and
equipment in 2003, 2002 and 2001, respectively. During 2003 and 2002, our
property and equipment purchases were primarily related to computer equipment.
The purchases of property and equipment made in 2001 were primarily related to
leasehold improvements for our new corporate headquarters and computer
equipment. 36




---



##### Table of Contents



Financing Activities.Cash provided by financing activities was $37,000
for the year ended December 31, 2003, as compared to cash used in financing
activities of $9.9 million and $3.3 million for the years ended December 31,
2002 and 2001 respectively. In July 2002, our Board of Directors approved a $10.0 million stock
repurchase program. This program was completed in the first quarter of 2003.
In October 2003, our Board of Directors approved a $15.0 million stock
repurchase program. The principle objective of the stock repurchase
plan is to offset dilution of our common stock from shares granted
under our employee stock option plans. These programs were and continue to be funded from
available cash and short-term investments. In the year ended December 31,
2003, we repurchased 199,562 shares of our common stock for $1.2 million. In
the year ended December 31, 2002, we repurchased 1,906,300 shares of our common
stock for $9.3 million under this program. As of December 31, 2003, we are
authorized to repurchase additional common stock up to $14.6 million. We
expect to execute purchases of our common stock under this plan throughout
2004. In 2003, 2002 and 2001, we received $3.2 million, $5.4 million and $7.7
million from the sale of common stock under our employee stock plans,
respectively. We paid $2.0 million, $6.0 million and $7.2 million for capital lease
obligations in 2003, 2002 and 2001, respectively. In 2001, we repaid borrowings
of $3.8 million. In 2001, we entered into an arrangement for a $10.0 million secured line
of credit with a bank. During 2002, the secured line of credit expired. As of
December 31, 2003, we do not have any borrowing arrangements. Commitments.In connection with the lease of certain offices, we issued
standby letters of credit in the amount of $7.9 million to guarantee certain
obligations under the lease agreements. The amount of the letter of credit
reduces as our rent obligation declines. At December 31, 2003, there were no
drawings outstanding under the letter of credit. 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
non-cancelable sub-lease agreements for certain of our properties. We also
lease certain computer equipment under capital lease arrangements. In the normal course of business, we enter into contracts with vendors.
Some of these contracts include provisions for fixed or minimum purchase
quantities. These obligations are included in aggregate in the table below. Future minimum payments under operating and capital leases, operating
sublease income, and purchase obligations to vendors are as follows (in
thousands): Less than
    
    1 - 3
    
    3 - 5
    
    Greater1 year
    
    years
    
    years
    
    than 5 years
    
    TotalOperating leases
    
    $
    14,266
    
    
    $
    22,980
    
    
    $
    15,759
    
    
    $
    22,691
    
    
    $
    75,696Capital leases
    
    
    822
    
    
    
    574
    
    
    
    
    
    
    
    
    
    
    
    1,396Purchase obligations
    
    
    6,401
    
    
    
    4,794
    
    
    
    
    
    
    
    
    
    
    
    11,195Total
    
    $
    21,489
    
    
    $
    28,348
    
    
    $
    15,759
    
    
    $
    22,691
    
    
    $
    88,287Operating sub-lease income
    
    $
    (2,107
    )
    
    $
    (3,488
    )
    
    $
    (3,058
    )
    
    $
    (3,300
    )
    
    $
    (11,953
    )
 We believe that our expected cash flows from operations together with our
existing cash and cash equivalents will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. If cash generated from operations and existing cash and cash
equivalents are insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or issue debt securities or establish an additional
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 you
that financing will be available in amounts or on terms acceptable to us, if at
all. 37




---



##### Table of Contents



Item 7A.Qualitative and Quantitative Disclosures about Market Risk. The foreign currency financial statements of our international operations
are translated into U.S. dollars at current exchange rates, except revenues 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. At
this time, we do not use financial instruments to hedge our foreign exchange
exposure because the effect of foreign exchange rate fluctuations are not
material. The net assets of our foreign operations at December 31, 2003 were
approximately $1.5 million. Our capital lease obligations include only fixed rates of interest.
Therefore, we do not believe there is any material exposure to market risk
changes in interest rates relating to our capital lease obligations. 38




---



##### Table of Contents



Item 8.Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS PageFINANCIAL STATEMENTS:Report of Independent Auditors
    
    
    40Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    41Consolidated Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003
    
    
    42Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003
    
    
    43Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the Years Ended
December 31, 2001, 2002 and 2003
    
    
    44Notes to Consolidated Financial Statements
    
    
    45FINANCIAL STATEMENT SCHEDULE:For each of the three years ended December 31, 2003 Schedule II
 Valuation and Qualifying Accounts
    
    
    69
 All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto. 39




---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS 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 (the Company) at December 31,
2002 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003 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. These financial statements and financial statement
schedule are the responsibility of the Companys management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. As discussed in Note 8, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, as of January 1,
2002. PricewaterhouseCoopers LLP Atlanta, GA
March 12, 2004 40




---



##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS December 31,2002
    
    2003(in thousands, except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    127,842
    
    
    $
    150,064Short-term investments
    
    
    14,843
    
    
    
    14,126Accounts receivable, net of allowance for doubtful accounts and billing adjustments
of $7,601 and $5,106 at December 31, 2002 and 2003, respectively
    
    
    54,815
    
    
    
    37,188Prepaid expenses
    
    
    7,601
    
    
    
    5,745Other current assets
    
    
    7,232
    
    
    
    3,218Total current assets
    
    
    212,333
    
    
    
    210,341Property and equipment, net
    
    
    30,626
    
    
    
    15,661Intangible assets, net
    
    
    17,585
    
    
    
    14,073Goodwill, net
    
    
    106,971
    
    
    
    93,462Other assets
    
    
    9,459
    
    
    
    3,551Total assets
    
    $
    376,974
    
    
    $
    337,088LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,354
    
    
    $
    6,166Accrued compensation and benefits
    
    
    11,710
    
    
    
    11,500Accrued restructuring
    
    
    2,665
    
    
    
    4,711Accrued other expenses
    
    
    21,742
    
    
    
    22,726Deferred revenues
    
    
    40,305
    
    
    
    38,536Current portion of capital lease obligation
    
    
    1,693
    
    
    
    762Total current liabilities
    
    
    91,469
    
    
    
    84,401Capital lease obligation, excluding current portion
    
    
    185
    
    
    
    523Accrued restructuring, excluding current portion
    
    
    4,445
    
    
    
    7,063Other liabilities
    
    
    1,114
    
    
    
    1,287Total liabilities
    
    
    97,213
    
    
    
    93,274Commitments and contingencies (Note 11)Stockholders equity:Preferred stock, $0.01 par value. Authorized 25,000,000 shares. Issued and
outstanding 1,398,214 and 749,064 shares at December 31, 2002 and 2003,
respectively
    
    
    18,328
    
    
    
    10,000Common stock, $0.01 par value. Authorized 350,000,000 shares. Issued and
outstanding 71,259,901 and 73,230,760 shares at December 31, 2002 and 2003,
respectively
    
    
    713
    
    
    
    732Additional paid-in capital
    
    
    1,896,111
    
    
    
    1,907,918Common stock held in treasury, at cost. 1,906,300 and 2,105,862 shares at
December 31, 2002 and 2003, respectively
    
    
    (9,250
    )
    
    
    (10,438
    )Accumulated deficit
    
    
    (1,623,545
    )
    
    
    (1,661,717
    )Accumulated other comprehensive income (loss):Net unrealized gains on investment securities available for sale, net of tax
    
    
    62
    
    
    
    Cumulative foreign currency translation adjustment, net of tax
    
    
    (2,658
    )
    
    
    (2,681
    )Total stockholders equity
    
    
    279,761
    
    
    
    243,814Total liabilities and stockholders equity
    
    $
    376,974
    
    
    $
    337,088
 See accompanying notes to consolidated financial statements. 41




---



##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31,2001
    
    2002
    
    2003(in thousands, except share and per share data)Revenues:Software licenses
    
    $
    71,385
    
    
    $
    88,742
    
    
    $
    61,619Support and maintenance
    
    
    40,995
    
    
    
    59,814
    
    
    
    59,382Professional services
    
    
    111,965
    
    
    
    101,779
    
    
    
    83,453Data center
    
    
    52,915
    
    
    
    40,560
    
    
    
    45,210Other
    
    
    1,050
    
    
    
    1,274
    
    
    
    2,917Total revenues
    
    
    278,310
    
    
    
    292,169
    
    
    
    252,581Operating expenses:Cost of software licenses
    
    
    4,017
    
    
    
    6,973
    
    
    
    4,048Cost of professional services, support and maintenance
    
    
    93,684
    
    
    
    90,775
    
    
    
    85,572Cost of data center
    
    
    27,055
    
    
    
    22,919
    
    
    
    23,062Cost of other revenue
    
    
    751
    
    
    
    1,267
    
    
    
    2,623Selling and marketing
    
    
    53,919
    
    
    
    58,140
    
    
    
    39,125Product development
    
    
    53,925
    
    
    
    51,178
    
    
    
    45,148General and administrative, including stock option compensation
expense of $1,330, $1,322 and $281 for 2001, 2002 and 2003
    
    
    39,438
    
    
    
    38,701
    
    
    
    36,817Depreciation
    
    
    29,252
    
    
    
    22,635
    
    
    
    16,915Merger related and restructuring costs
    
    
    9,260
    
    
    
    2,417
    
    
    
    19,858Acquired in-process research and development
    
    
    
    
    
    
    350
    
    
    
    Amortization and impairment of acquisition intangible assets
    
    
    79,787
    
    
    
    17,460
    
    
    
    17,392Total operating expenses
    
    
    391,088
    
    
    
    312,815
    
    
    
    290,560Operating loss
    
    
    (112,778
    )
    
    
    (20,646
    )
    
    
    (37,979
    )Interest, investment and other income, net
    
    
    3,066
    
    
    
    1,479
    
    
    
    90Loss on sale of subsidiaries
    
    
    (53,186
    )
    
    
    
    
    
    
    Equity in net loss of affiliate
    
    
    (61,900
    )
    
    
    
    
    
    
    Loss before income tax benefit (expense)
    
    
    (224,798
    )
    
    
    (19,167
    )
    
    
    (37,889
    )Income tax benefit (expense)
    
    
    3,255
    
    
    
    2,770
    
    
    
    (283
    )Net loss
    
    $
    (221,543
    )
    
    $
    (16,397
    )
    
    $
    (38,172
    )Basic and diluted net loss per common share
    
    $
    (3.74
    )
    
    $
    (0.24
    )
    
    $
    (0.55
    )Weighted average common shares outstanding
    
    
    59,242,105
    
    
    
    67,724,593
    
    
    
    69,872,436
 See accompanying notes to consolidated financial statements. 42




---



##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,2001
    
    2002
    
    2003(in thousands)Cash flows from operating activities:Net loss
    
    $
    (221,543
    )
    
    $
    (16,397
    )
    
    $
    (38,172
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation, amortization and intangible asset impairment charges
    
    
    109,028
    
    
    
    40,095
    
    
    
    34,308Acquired in-process research and development
    
    
    
    
    
    
    350
    
    
    
    Provision for doubtful accounts receivable and billing adjustments
    
    
    5,220
    
    
    
    7,756
    
    
    
    6,063Compensation and marketing expense for options and warrants
    
    
    1,330
    
    
    
    1,322
    
    
    
    281Loss on sale of subsidiaries
    
    
    53,186
    
    
    
    
    
    
    
    Equity in net loss of affiliate
    
    
    61,900
    
    
    
    
    
    
    
    Benefit for deferred income taxes
    
    
    (3,007
    )
    
    
    (2,930
    )
    
    
    Gain on the sale of investment securities available for sale
    
    
    (931
    )
    
    
    
    
    
    
    (24
    )Loss on impaired cost-basis investments
    
    
    3,997
    
    
    
    
    
    
    
    615Loss on disposal of property and equipment
    
    
    1,822
    
    
    
    610
    
    
    
    3,931Other
    
    
    (1,169
    )
    
    
    432
    
    
    
    954Changes in operating assets and liabilitiesDecrease (increase) in accounts receivable
    
    
    35,415
    
    
    
    (2,698
    )
    
    
    11,089Decrease (increase) in prepaid expenses and other assets
    
    
    1,393
    
    
    
    (6,707
    )
    
    
    6,249(Decrease) increase in accounts payable
    
    
    (10,971
    )
    
    
    7,396
    
    
    
    (7,588
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (21,423
    )
    
    
    (14,363
    )
    
    
    6,314(Decrease) increase in deferred revenues
    
    
    (2,353
    )
    
    
    6,555
    
    
    
    (1,646
    )Net cash provided by operating activities
    
    
    11,894
    
    
    
    21,421
    
    
    
    22,374Cash flows from investing activities:Cash paid in connection with acquisition of businesses
    
    
    (4,424
    )
    
    
    (3,943
    )
    
    
    Cash exchanged in sale of subsidiaries
    
    
    (15,073
    )
    
    
    
    
    
    
    Maturities of short-term investment securities
    
    
    62,662
    
    
    
    74,789
    
    
    
    31,483Purchases of short-term investment securities
    
    
    (71,718
    )
    
    
    (60,814
    )
    
    
    (28,135
    )Purchase of long-term certificate of deposit
    
    
    
    
    
    
    (2,500
    )
    
    
    Proceeds from sale of other assets
    
    
    
    
    
    
    
    
    
    
    1,415Proceeds from sale of investment securities available for sale
    
    
    1,044
    
    
    
    
    
    
    
    92Proceeds from sale of cost-basis investment
    
    
    
    
    
    
    
    
    
    
    494Purchases of property, equipment, and technology
    
    
    (14,703
    )
    
    
    (11,337
    )
    
    
    (6,390
    )Net cash used in investing activities
    
    
    (42,212
    )
    
    
    (3,805
    )
    
    
    (1,041
    )Cash flows from financing activities:Proceeds from employee stock option plans and stock purchase plan
    
    
    7,739
    
    
    
    5,371
    
    
    
    3,217Repurchase of common stock held in treasury
    
    
    
    
    
    
    (9,250
    )
    
    
    (1,188
    )Payments on notes payable
    
    
    (3,822
    )
    
    
    
    
    
    
    Payments on capital lease obligations
    
    
    (7,227
    )
    
    
    (6,014
    )
    
    
    (1,992
    )Net cash (used in) provided by financing activities
    
    
    (3,310
    )
    
    
    (9,893
    )
    
    
    37Effect of exchange rate changes on cash and cash equivalents
    
    
    (244
    )
    
    
    487
    
    
    
    852Net increase (decrease) in cash and cash equivalents
    
    
    (33,872
    )
    
    
    8,210
    
    
    
    22,222Cash and cash equivalents at beginning of year
    
    
    153,504
    
    
    
    119,632
    
    
    
    127,842Cash and cash equivalents at end of year
    
    $
    119,632
    
    
    $
    127,842
    
    
    $
    150,064Non-cash financing and investing activities:Property and equipment acquired through leases
    
    $
    
    
    
    $
    479
    
    
    $
    1,399Equity interest in affiliate received in connection with sale of subsidiary
    
    
    62,900
    
    
    
    
    
    
    
    Conversion of preferred stock to common stock
    
    
    6,179
    
    
    
    225,778
    
    
    
    8,328Cancellation of series C preferred stock and subscription receivable
    
    
    (10,824
    )
    
    
    
    
    
    
    Effect of acquisitionsIssuance of preferred stock and common stock
    
    
    23,478
    
    
    
    22,767
    
    
    
    Liabilities assumed
    
    
    5,005
    
    
    
    10,002
    
    
    
    
 See accompanying notes to consolidated financial statements. 43




---



##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data) Preferred Stock
    
    Common Stock
    
    AdditionalPaid-in
    
    Treasury StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Shares
    
    AmountBalance at December 31, 2000
    
    
    1,186,564
    
    
    $
    252,781
    
    
    
    57,965,770
    
    
    $
    580
    
    
    $
    1,610,096
    
    
    
    
    
    
    $
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in net unrealized gains on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in cumulative foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Realized gains on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of preferred stock to common stock
    
    
    (6,500
    )
    
    
    (6,179
    )
    
    
    190,339
    
    
    
    2
    
    
    
    6,177
    
    
    
    
    
    
    
    Cancellation of preferred stock
    
    
    (193,500
    )
    
    
    (10,824
    )
    
    
    
    
    
    
    
    
    
    
    (1,714
    )
    
    
    
    
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    2,031,336
    
    
    
    20
    
    
    
    7,899
    
    
    
    
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,330
    
    
    
    
    
    
    
    Cancellation of warrant issued in connection with
marketing agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    Issuance of capital stock in connection with
acquisition
    
    
    649,150
    
    
    
    6,197
    
    
    
    1,257,109
    
    
    
    12
    
    
    
    17,269
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2001
    
    
    1,635,714
    
    
    $
    241,975
    
    
    
    61,444,554
    
    
    $
    614
    
    
    $
    1,640,972
    
    
    
    
    
    
    $
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in net unrealized gains on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in cumulative foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of preferred stock to common stock
    
    
    (237,500
    )
    
    
    (225,778
    )
    
    
    6,954,712
    
    
    
    70
    
    
    
    225,708
    
    
    
    
    
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    1,386,088
    
    
    
    14
    
    
    
    5,357
    
    
    
    
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322
    
    
    
    
    
    
    
    Issuance of capital stock in connection with
acquisitions
    
    
    
    
    
    
    2,131
    
    
    
    1,474,547
    
    
    
    15
    
    
    
    22,752
    
    
    
    
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,906,300
    )
    
    
    (9,250
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    1,398,214
    
    
    $
    18,328
    
    
    
    71,259,901
    
    
    $
    713
    
    
    $
    1,896,111
    
    
    
    (1,906,300
    )
    
    $
    (9,250
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in net unrealized gains on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in cumulative foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Realized gains on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of preferred stock to common stock
    
    
    (649,150
    )
    
    
    (8,328
    )
    
    
    649,150
    
    
    
    6
    
    
    
    8,322
    
    
    
    
    
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    1,321,709
    
    
    
    13
    
    
    
    3,204
    
    
    
    
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199,562
    )
    
    
    (1,188
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    749,064
    
    
    $
    10,000
    
    
    
    73,230,760
    
    
    $
    732
    
    
    $
    1,907,918
    
    
    
    (2,105,862
    )
    
    $
    (10,438
    )
   [Continued from above table, first column(s) repeated] AccumulatedReceivable
    
    
    
    
    
    Other
    
    TotalFrom the Sale
    
    Accumulated
    
    Comprehensive
    
    Stockholders
    
    Comprehensiveof Stock
    
    Deficit
    
    Income (Loss)
    
    Equity
    
    (Loss) IncomeBalance at December 31, 2000
    
    $
    (11,454
    )
    
    $
    (1,385,605
    )
    
    $
    1,347
    
    
    $
    467,745Net loss
    
    
    
    
    
    
    (221,543
    )
    
    
    
    
    
    
    (221,543
    )
    
    $
    (221,543
    )Change in net unrealized gains on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    (199
    )
    
    
    (199
    )
    
    
    (199
    )Change in cumulative foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    (2,375
    )
    
    
    (2,375
    )
    
    
    (2,375
    )Realized gains on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    (568
    )
    
    
    (568
    )
    
    
    Conversion of preferred stock to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of preferred stock
    
    
    11,454
    
    
    
    
    
    
    
    
    
    
    
    (1,084
    )
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,919
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,330
    
    
    
    Cancellation of warrant issued in connection with
marketing agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    Issuance of capital stock in connection with
acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,478
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (224,117
    )Balance at December 31, 2001
    
    $
    
    
    
    $
    (1,607,148
    )
    
    $
    (1,795
    )
    
    $
    274,618Net loss
    
    
    
    
    
    
    (16,397
    )
    
    
    
    
    
    
    (16,397
    )
    
    
    (16,397
    )Change in net unrealized gains on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )
    
    
    (11
    )Change in cumulative foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    (790
    )
    
    
    (790
    )
    
    
    (790
    )Conversion of preferred stock to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,371
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322
    
    
    
    Issuance of capital stock in connection with
acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,898
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,250
    )
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (17,198
    )Balance at December 31, 2002
    
    $
    
    
    
    $
    (1,623,545
    )
    
    $
    (2,596
    )
    
    $
    279,761Net loss
    
    
    
    
    
    
    (38,172
    )
    
    
    
    
    
    
    (38,172
    )
    
    
    (38,172
    )Change in net unrealized gains on investment
securities available for sale
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )
    
    
    (38
    )Change in cumulative foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    (23
    )
    
    
    (23
    )Realized gains on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )
    
    
    Conversion of preferred stock to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,217
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,188
    )
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (38,233
    )Balance at December 31, 2003
    
    $
    
    
    
    $
    (1,661,717
    )
    
    $
    (2,681
    )
    
    $
    243,814
 See accompanying notes to consolidated financial statements. 44




---



##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2002 and 2003  1.
    
    Business S1 Corporation is a global provider of enterprise software solutions for
more than 4,000 financial organizations including banks, credit unions,
investment firms and insurance companies. We operate and manage S1 in two
business segments: financial institutions, which is our core business segment,
and the Edify business. Our financial institution solutions automate
transactions and integrate the channels by which financial institutions
interact with their customers. Our objective is to be the leading global
provider of integrated enterprise solutions that enable financial institutions
to improve the way they service their customers by integrating all delivery
channels, expanding the total financial relationship and increasing profits. We
sell our solutions to small, mid-sized and large financial organizations in two
geographic regions: (i) the Americas region, and (ii) the International region,
consisting of Europe, Middle East and Africa (EMEA) and Asia-Pacific and Japan
(APJ). Through our Edify business segment, we deliver voice and speech solutions
for the enterprise. Edifys solutions help companies automate their customer
service facilities, improve customer satisfaction and create new revenue
generating opportunities, while reducing operational costs. Edifys voice and
speech applications are scalable, multilingual and flexible, allowing companies
to easily integrate multiple back-end systems with a variety of contact
interfaces. Edifys voice and speech solutions combine speech recognition,
speaker verification, text-to-speech, fax, and touch-tone automation with a
powerful application development environment and natural language capabilities
to help organizations optimize customer service while lowering costs. Edifys
products are sold across multiple vertical markets including financial
services, travel, retail and telecommunications. We derive a significant portion of our revenues from licensing our
solutions and providing professional services. We generate recurring data
center revenues by charging our data center customers a monthly fixed fee or a
fee based on the number of their end users who use the solutions we provide,
subject to a minimum charge. We also generate recurring revenues by charging
our customers a periodic fee for maintenance. S1 is headquartered in Atlanta, Georgia, USA, with additional domestic
offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New
York, New York; West Hills, California and Santa Clara, California; and
international offices in Brussels, Dublin, Hong Kong, Lisbon, London,
Luxembourg, Madrid, Munich, Paris, Rotterdam and Singapore. S1 is incorporated
in Delaware.  2.
    
    Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements include the accounts of S1
Corporation and its wholly owned subsidiaries. During 2001 and 2002, we
completed a total of three business acquisitions, which we discuss more fully
in Note 3. The results of operations and cash flows of these acquired
businesses are included in our consolidated statements of operations and cash
flows from their respective dates of acquisition. In January 2001, we sold our Internet aggregation business to Yodlee,
Inc., which we discuss more fully in Note 4. In connection with this sale, we
received an ownership interest of approximately 33% in the equity of Yodlee. We
account for our investment in Yodlee using the equity method of accounting,
which requires us to include our percentage share of Yodlees results in our
statement of operations. As of December 31, 2003, as a result of additional
equity issuances by Yodlee, our ownership percentage decreased to 27%. We accounted for the Edify business assets and liabilities as held for
sale for the period from July 1, 2002 until March 31, 2003. In April 2003, we
determined that we would not be able to sell the Edify business by June 30,
2003 on 45




---



##### Table of Contents



terms that were agreeable to us. The accompanying financial statements
reflect the Edify business as a part of our continuing operations for all
periods presented. As a result, we have:  
    
    reclassified the assets and liabilities of the Edify business from
assets held for sale and liabilities of business held for sale as of
December 31, 2002 in our condensed consolidated balance sheet;
    
    presented the results of operations for the Edify business as a
segment of continuing operations in our consolidated statements of
operations for all periods presented, which required a retroactive
reclassification of revenues and expenses for prior periods previously
reported; and
    
    recorded depreciation expense of $0.3 million on the fixed assets of
the Edify business and amortization expense of $1.7 million for other
intangible assets associated with the Edify business for the nine-month
period from July 1, 2002 through March 31, 2003. Use of estimates We have made estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from our estimates. Areas involving the use of significant estimates include:  
    
    revenue recognition;
    
    estimation of our allowance for doubtful accounts and billing adjustments;
    
    valuation and recoverability of long-lived assets, including goodwill;
    
    determination of technological feasibility and capitalization of software development costs;
    
    recognition of costs in connection with restructuring plans and merger-related activities; and
    
    reserve for contingencies. Financial instruments We use financial instruments in the normal course of business, including
cash and cash equivalents, investment securities, accounts receivable, accounts
payable, accrued compensation and benefits, other accrued expenses, deferred
revenues and capital lease obligations. Cash and cash equivalents include deposits with commercial banks with
original maturities of 90 days or less. Short-term investments consist of
investments in certificates of deposit, commercial paper and other highly
liquid securities with original maturities exceeding 90 days but less than one
year. All of these short-term investments are held to maturity and are
reported at amortized cost. We have the ability and the intent to hold these
investments to maturity. Investments with a remaining maturity that exceeds
one year are reported in other assets. These investments are held to maturity
and are reported at amortized cost. At December 31, 2003, we had no investments
whose remaining maturity exceeded one year. Certain of our investments are made with financial institutions who are
also our customers. These investments are made at market rates in arms-length
transactions. The carrying values of accounts receivable, accounts payable, accrued
compensation and benefits, other accrued expenses and deferred revenues
approximate fair value due to the short-term nature of these assets and
liabilities. The carrying value of our capital lease obligations approximates
their fair value given their market rates of interest and maturity schedules. Property and equipment We report property and equipment at cost, less accumulated depreciation.
We calculate depreciation using the straight-line method over the estimated
useful lives of the related assets ranging from 1.5 to 10 years. We amortize
leasehold improvements using the straight-line method over the estimated useful
life of the improvement or the lease term, whichever is shorter. Gains or
losses recognized on disposal or retirement of property and equipment are
recognized in the consolidated statement of operations. 46




---



##### Table of Contents



Goodwill and other long-lived assets We have recorded goodwill and other intangible assets in connection with
the acquisition of businesses accounted for using the purchase method. We
amortize identifiable intangible assets over their estimated useful lives
(ranging from three to ten years) using the straight-line method. On January
1, 2002, in connection with the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets we reclassified the unamortized balance of the assembled
workforce intangible asset to goodwill and discontinued amortization of
goodwill, as adjusted. Under the provisions of SFAS No. 142, we are required to perform an
impairment test at least once annually or upon the occurrence of a triggering
event. We have elected to test our intangible assets 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. If the carrying value of any reporting unit exceeds its fair
value in future periods, 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 as part of income (loss) from
operations. Based upon the results of our annual impairment test on October 1,
2003, no impairments were identified. Purchased technology represents technology acquired from third parties,
which we have incorporated in our products. We amortize purchased technology
over its estimated useful life (ranging from two to five years). 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 indicated a potential impairment, we used discounted cash flows to
measure fair value in determining the amount of these intangible assets that
should be written off. During 2003, we recorded a $11.7 million impairment
charge on goodwill and other intangible assets that we deemed impaired. This
charge, which we discuss more fully in Note 8, is included in amortization and
impairment of acquisition intangible assets in our consolidated statements of
operations. Cost-basis and equity method investments Other assets include investments in entities that we account for on the
cost basis as well as our investment in Yodlee, Inc., which we account for
using the equity method. We account for investments in affiliated entities,
which we do not manage and over which we exert significant influence, under 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. We adjust the carrying value of our equity method investments for
our share of their net operating results, unless our investment in the entity
has been reduced to $0. At the end of each period, we assess the recoverability
of these cost basis and equity method investments by comparing their carrying
value to the undiscounted estimated future net operating cash flows expected to
be derived from such assets. If we determine that the carrying value is not
recoverable and that the impairment is other than temporary, we reduce the
asset to its estimated fair value. During 2001, we recorded impairment charges
in the aggregate amount of $4.0 million for cost-basis equity investments that
we deemed impaired. In addition, we recorded an $8.4 million impairment charge
during the fourth quarter of 2001 for our investment in Yodlee. Since our
share of Yodlees underlying net assets was $0 at December 31, 2001 and we have
not made any commitments to Yodlee to provide additional funding, we did not
record our share of Yodlees operating results in 2002 and 2003, and we will
not record our share of any future operating results until our basis in Yodlee
increases above $0, if ever. See Note 4 for a discussion of our investment in
Yodlee. During 2003, we recognized a loss of $0.6 million on the sale of our
investment in an entity which was accounted for under the cost-basis. 47




---



##### Table of Contents



Concentration of credit risk We derive a significant portion of our revenue from products and services
we provide to the banking industry and other financial services firms such as
insurance and securities brokerage companies. Changes in economic conditions
and unforeseen events, like recession or inflation, could occur and reduce
consumers use of banking services. Our business success depends in part on our relationships with a limited
number of large customers. For the year ended December 31, 2001, one customer
represented 28% of total revenues. For the year ended December 31, 2002, two
customers represented 22% and 15% of total revenues, respectively. For the
year ended December 31, 2003, two customers represented 18% and 17% of total
revenues, respectively. One customer represented 13% and 8% of total
receivables at December 31, 2002 and 2003, respectively. We are subject to concentrations of credit risk from our cash and cash
equivalents and accounts receivable. We limit our exposure to credit risk
associated with cash and cash equivalents by placing our cash and cash
equivalents with a number of major domestic and foreign financial institutions
and by investing in investment grade securities. Revenue recognition, deferred revenues and cost of revenues Software license revenue.We recognize software license sales in
accordance with Statement of Position No. 97-2, Software Revenue Recognition,
and SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition
With Respect to Certain Transactions. For software license sales for which
any 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 considered
probable and (3) the fee is fixed or determinable. In certain of these
arrangements, vendor specific objective evidence of fair value exists to
allocate the total fee to all elements of the arrangement. If vendor specific
objective evidence of fair value does not exist for the license element, we use
the residual method under SOP No. 98-9 to determine the amount of revenue to be
allocated to the license element. When the 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, 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 those arrangements
where collectibility is not considered probable, revenue is recognized upon
cash collections. For subscription license arrangements where we allow customers the rights
to unspecified products as well as unspecified upgrades and enhancements during
a specified term, the license revenue is recognized ratably over the term of
the arrangement. Support and maintenance revenue.Revenues for post-contract customer
support and maintenance are recognized ratably over the contract period.
Services provided to customers under customer support and maintenance
agreements generally include technical support and unspecified product
upgrades. Professional services revenue.Revenues derived from arrangements to
provide professional services on a time and materials basis are recognized as
the related services are performed. Revenues from professional services
provided on a fixed fee basis are recognized using the percentage of completion
method, measured by the percentage of labor hours incurred to date to estimated
total labor hours for each contract. Provisions for estimated losses on
incomplete contracts are made in the period in which such losses are
determined. Data center revenue.We recognize data center revenue in accordance with
Staff Accounting Bulletin No. (SAB) 104, Revenue Recognition and Emerging
Issues Task Force No. (EITF) 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. We also consider the applicability of EITF 00-03,
Application of AICPA Statement of Position 97-2 to Arrangements That Include
the Right to Use Software Stored On Another Entitys Hardware, to our hosting 48




---



##### Table of Contents



arrangements on a contract-by-contract basis. If we determine that a
software element covered by SOP No. 97-2 is present in a hosting arrangement,
we recognize the license, professional services and data center revenue
pursuant to SOP No. 97-2. If we determine that a software element covered by
SOP No. 97-2 is not present in a hosting arrangement, we recognize revenue for
the arrangement pursuant to SAB No. 104 and EITF 00-21 as follows: Data center arrangements typically include two elements: implementation
and transaction processing services. For those data center 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 data center arrangements that contain elements that do not
qualify as separate units of accounting, the professional services revenue
earned under these arrangements is initially deferred and then recognized over
the term of the data center arrangement or the expected period of performance,
whichever is longer. Other revenue.Other revenue is primarily related to the sale of third
party hardware and software that is used in connection with our products. Other
revenue is recognized upon delivery of the third party hardware or software,
provided (1) there is evidence of an arrangement, (2) collection of our fee is
considered probable and (3) the fee is fixed or determinable. Deferred revenues. Deferred revenues represent (1) payments received
from customers for software licenses, services and maintenance in advance of
performing services and (2) amounts deferred in accordance with the applicable
accounting rules. Maintenance is normally billed quarterly or annually in
advance. Cost of revenues.Direct software license costs consist primarily of the
cost of third-party software used in our products. Support and maintenance and
professional services direct costs are primarily personnel and related
infrastructure costs. Direct data center costs consist of personnel and
infrastructure to support customer installations that we host in one of our
data centers. Costs of revenues exclude charges for depreciation of property
and equipment and amortization of purchased technology. Advertising We expense advertising costs as incurred. Advertising expense for 2001,
2002 and 2003 was $1.3 million, $0.7 million and $0.1 million, respectively. Product development Product development includes all research and development expenses and
software development costs. We expense all research and development expenses as
incurred. We expense all software development costs associated with
establishing technological feasibility, which we define as 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. Merger related and restructuring costs Merger related costs include expenses related to integrating the products
and platforms of acquired companies, training personnel on new products
acquired, establishing the infrastructure and consolidating the operations of
acquired companies and expenses incurred pursuing transactions that did not
result in a strategic arrangement. In addition, we established accruals for
pre-acquisition contingencies that existed at the date of acquisition in
connection with the acquisition of certain businesses. As those contingencies
are resolved, we reduce the related liabilities for any related cash
disbursements or changes in estimate. Any difference in the actual settlement
amount or any change in estimate is reflected as an adjustment to income or
expense within this line item in the period of resolution or adjustment. In 2001 and 2003, we approved restructuring plans related to the
reorganization of our business operations. We accrued the estimated costs of
exiting certain activities under these restructuring plans and recorded a
corresponding charge in the period the exit plan was approved. In subsequent
periods, we re-assessed the initial assumptions and estimates made in
connection with these restructuring plans based on current information and, as
a result, recorded additional charges for the estimated incremental costs of
exiting certain activities under this restructuring plan. See Note 9 for
further discussion of these restructuring activities. 49




---



##### Table of Contents



Reserve
for contingencies From
time-to-time, we are subject to litigation incidental to our
business. These situations involve uncertainty as to possible loss.
When a loss contingency exists, we are required to evaluate the
likelihood that a future event or events will confirm the loss. SFAS
No. 5 Accounting for Contingencies states that a company must accrue
for a loss contingency by a charge to income when information
available prior to issuance of the financial statements indicates
that it is probable that an asset has been impaired or a liability
has been incurred at the date of the financial statements, and that
the amount of loss can be reasonably estimated. Legal costs incurred
in connection with a loss contingency are expensed as incurred. 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. We
measure deferred income tax assets and liabilities using enacted tax rates
expected to apply to taxable income in the years in which we expect those
temporary differences to be recovered or settled. 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. Stock-based compensation We account for our stock option plans in accordance with the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and comply with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation. As such, we record compensation expense on the
date of grant only if the current market price of the underlying stock exceeds
the exercise price. Additionally, if a modification is made to an existing
grant, any related compensation expense is calculated on the date both parties
accept the modification and recorded on the date the modification becomes
effective. Otherwise, we do not record stock compensation expense when we
grant stock options to S1 employees. In 2001, 2002 and 2003, we recognized compensation cost of approximately
$1.3 million, $1.3 million and $0.3 million, respectively, relating to stock
options granted with exercise prices less than the market price on the date of
grant. Had we determined compensation cost based on the fair value at the grant
date for our stock options and stock purchase rights under SFAS No. 123, our
net loss would have increased to the unaudited pro forma amounts indicated
below (in thousands, except per share data): 2001
    
    2002
    
    2003Net loss, as reported
    
    $
    (221,543
    )
    
    $
    (16,397
    )
    
    $
    (38,172
    )Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects
    
    
    1,330
    
    
    
    1,322
    
    
    
    281Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (111,824
    )
    
    
    (128,828
    )
    
    
    (111,600
    )Pro forma net loss (unaudited)
    
    $
    (332,037
    )
    
    $
    (143,903
    )
    
    $
    (149,491
    )Basic and diluted net loss per common share:As reported
    
    $
    (3.74
    )
    
    $
    (0.24
    )
    
    $
    (0.55
    )Pro forma (unaudited)
    
    
    (5.60
    )
    
    
    (2.12
    )
    
    
    (2.14
    )
 The effect of applying SFAS No. 123 for providing these pro forma
disclosures is not necessarily representative of the effects on reported net
income (loss) in future periods. Net loss per common share We calculate basic net loss per common share as the net loss available to
common stockholders divided by the weighted average number of common shares
outstanding during the period reported. Diluted net loss per common share is
calculated to reflect the potential dilution that would occur if stock options
or other contracts to issue common stock were exercised and resulted in
additional common stock that would share in the earnings of S1. Because of our
net losses, the issuance of additional shares of common stock through the
exercise of stock options or stock warrants or upon the conversion of preferred
stock would have an anti-dilutive effect on our net loss per common share. 50




---



##### Table of Contents



Foreign currency translation We translate the financial statements of our international subsidiaries
into U.S. dollars at current exchange rates, except for revenues and expenses,
which are translated at average exchange rates during each reporting period.
Currency transaction gains or losses, which we include in our results of
operations, are immaterial for all periods presented. 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. Comprehensive income (loss) We report total changes in equity resulting from revenues, 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 and unrealized gains and
losses on available for sale investment securities classified as available for
sale in the consolidated statement of stockholders equity and comprehensive
income (loss). Reclassifications We reclassified certain amounts in the prior years consolidated financial
statements to conform to the current year presentation. Recent accounting pronouncements In December 2003, the Securities and Exchange Commission issued SAB No.
104, Revenue Recognition, which supercedes SAB 101, Revenue Recognition in
Financial Statements. The primary purpose of SAB 104 is to rescind accounting
guidance contained in SAB 101 related to multiple element arrangements,
superceded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. The guidance contained in SAB 104
reflects the issuance of EITF 00-21, but the revenue recognition principles
remaining largely unchanged. As we have already incorporated EITF 00-21 and SAB
101 into our revenue recognition policies, the adoption of SAB 104 did not have
a significant impact on our financial statements.  3.
    
    Business Acquisitions On September 20, 2001, we acquired all of the fully diluted shares of
Software Dynamics Inc., a privately held provider of branch automation, call
center and customer relationship management, or CRM, solutions for financial
institutions. In addition to gaining SDIs extensive domain knowledge in
branch, teller, call center and CRM solutions, we increased our customer base
worldwide with this acquisition. For accounting purposes, we treated the
acquisition as if it had occurred on October 1, 2001. Accordingly, our
consolidated results of operations for the year ended December 31, 2001 include
three months of operating results for SDI. On February 14, 2002, we completed the acquisition of Regency Systems,
Inc., a Dallas, Texas based provider of telephone and Internet banking
applications and web design services for community and mid-market banks. The
Regency acquisition enhanced our product offerings with a telephone banking
solution for community and mid-market banks and added over 1,000 customers.
For accounting purposes, we treated the acquisition as if it had occurred on
February 1, 2002. Accordingly, our consolidated results of operations for the
year ended December 31, 2002 include eleven months of operating results for
Regency. On March 27, 2002, we acquired the assets and subsidiaries of Point
Holdings, Ltd., a Dublin, Ireland based CRM provider. The acquisition of Point
strengthened our product offering, extended our insurance customer base and
expanded our presence in Europe. For accounting purposes, we treated the
acquisition as if it had occurred on March 31, 2002. Accordingly, our
consolidated results of operations for the year ended December 31, 2002 include
nine months of operating results for Point. Under the terms of the acquisition agreements, we issued common stock and
paid cash to the sellers and paid direct acquisition costs, including
principally advisory, legal and accounting fees. The values of the common
shares issued were determined based on the average market price of our common
shares over the two-day trading period before and the two-day 51




---



##### Table of Contents



trading period after the respective acquisition agreements were signed,
less the costs to register the securities. We calculated the purchase price
for SDI, Regency and Point as follows (in thousands, except share data): SDI
    
    Regency
    
    PointAcquisition date
    
    
    9/20/2001
    
    
    
    2/14/2002
    
    
    
    3/27/2002Common shares issued
    
    
    1,257,109
    
    
    
    400,561
    
    
    
    1,073,986Value of common shares issued
    
    $
    16,054
    
    
    $
    6,051
    
    
    $
    16,716Value of preferred shares issued (1)
    
    
    8,328
    
    
    
    
    
    
    
    Cash consideration
    
    
    4,450
    
    
    
    6,478
    
    
    
    500Value of converted stock options (2)
    
    
    1,227
    
    
    
    
    
    
    
    Direct acquisition costs
    
    
    855
    
    
    
    70
    
    
    
    634Total purchase price
    
    $
    30,914
    
    
    $
    12,599
    
    
    $
    17,850
   (1)
    
    We issued 649,150 shares of series E preferred stock in
acquisition of SDI. The value of the preferred shares of $6.2 million
was determined based on the value of the as-converted common stock,
less the estimated amount of contingent consideration of $2.1 million
at the date of purchase. In May 2002, we amended the purchase
agreement for SDI to eliminate the contingency associated with the
total consideration paid for SDI. As a result of the amendment, the
condition was removed and we reflected the full value of the series E
preferred stock issued to the sellers by increasing the reported
value of the series E preferred stock. The additional purchase price
was assigned to goodwill at the date of the amendment.(2)
    
    We converted all outstanding options to purchase SDI stock to
101,784 options to purchase S1 common stock with an estimated fair
value of $1.2 million. We estimated the fair value of the S1 stock
options using the Black Scholes option-pricing model. The entire SDI and Regency businesses and the operations of the Point
business that are focused on financial institutions are included in financial
institutions segment. The remaining Point operations (those that are not
focused on financial institutions) are included in the Edify segment. We
allocated the goodwill and customer relationship assets associated with the
Point acquisition between the financial institutions and Edify segments based
on the completion of an independent appraisal. The amounts of the Regency and
Point purchase prices allocated to in-process research and development were
expensed upon acquisition because technological feasibility had not been
established and no future alternative uses existed. The projects under
development at the time of the acquisitions were completed during the estimated
time lines and within anticipated costs. We accounted for the acquisitions of SDI, Regency and Point using the
purchase method of accounting prescribed by SFAS No. 141. We assigned the total
purchase price to the net assets and identifiable intangible assets of the
acquired entities with the remaining amount assigned to goodwill. The value
assigned to the identifiable intangible assets was based on an analysis
performed by an independent third party as of the date of the acquisitions. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands): SDI
    
    Regency
    
    PointCurrent assets
    
    $
    2,876
    
    
    $
    1,027
    
    
    $
    6,664Property and equipment
    
    
    496
    
    
    
    250
    
    
    
    552Other non-current assets
    
    
    80
    
    
    
    31
    
    
    
    Developed technology (1)
    
    
    5,700
    
    
    
    2,600
    
    
    
    2,200In-process research and development (2)
    
    
    
    
    
    
    200
    
    
    
    150Customer relationship assets (3)
    
    
    2,100
    
    
    
    3,900
    
    
    
    1,500Goodwill
    
    
    24,667
    
    
    
    8,623
    
    
    
    12,754Current liabilities
    
    
    (4,891
    )
    
    
    (3,989
    )
    
    
    (5,970
    )Non-current liabilities
    
    
    (114
    )
    
    
    (43
    )
    
    
    Total purchase price
    
    $
    30,914
    
    
    $
    12,599
    
    
    $
    17,850
 52




---



##### Table of Contents



(1)
    
    Developed technology has an estimated useful life of seven years for SDIs
technology and five years for Regencys and Points technology.(2)
    
    We expensed in-process research and development immediately upon closing
the acquisitions.(3)
    
    SDIs and Regencys customer relationship assets have an estimated useful
life of ten years and Points customer relationship assets have an
estimated useful life of five years. We did not present pro forma results of operations for the acquisitions of
SDI, Regency and Point because the effect of these acquisitions was not
significant in any year, individually or in the aggregate.  4.
    
    Loss on Sale of Subsidiaries and Equity Interest in Net Loss of Affiliate On January 16, 2001, we sold our VerticalOne subsidiary to Yodlee, Inc.,
then known as Yodlee.com, Inc., in a stock-for-stock transaction under which we
received an ownership interest of approximately 33% of Yodlee. In connection
with this transaction, we recorded a loss on sale of $52.3 million, which
represented the difference between the carrying value of VerticalOne and the
appraised value of our interest in Yodlee. We account for our investment in
Yodlee using the equity method. At the transaction date, the carrying value of
our investment in Yodlee exceeded its share of the underlying net assets of
Yodlee by $26.2 million. We allocated substantially all of this excess to
goodwill, which we were amortizing over a period of five years. Since our
initial investment in Yodlee in January 2001, Yodlee has continued to incur
substantial losses and the outlook for future revenue and cash flows is
substantially less than previously anticipated. In the fourth quarter of 2001,
Yodlee recorded an impairment charge to write off substantially all of the
goodwill and other intangible assets it recorded in connection with the
acquisition of VerticalOne from us in January 2001. Our share of that charge,
which we recorded through application of the equity method of accounting, was
$21.8 million. In addition, at that same time we recorded a charge of $8.4
million to write down our investment in Yodlee. At December 31, 2001, we owned
approximately 32% of Yodlee. At December 31, 2002 and 2003, as a result of
additional equity issuances by Yodlee, our ownership percentage decreased to
27%. We are a reseller of Yodlees account aggregation services. See Note 18
for a description of our sales representation agreement with Yodlee. During the second quarter of 2001, we recorded a charge of approximately
$0.9 million in connection with the sale of a small European subsidiary.  5.
    
    Investments We had short-term investments at December 31, 2002 and 2003 of $14.8
million and $14.1 million, respectively. The fair value of our short-term
investments was not significantly different from their carrying values at
December 31, 2002 and 2003. At December 31, 2002, we had investments with a
remaining maturity that exceeded one year (included in other assets) of $3.7
million. Certain of our investments are made with financial institutions that
are also our customers. These investments, consisting of approximately $5.0
million and $5.1 million in certificates of deposits at December 31, 2002 and
2003, respectively, are made at market rates in arms-length transactions.  6.
    
    Accounts Receivable Accounts receivable include unbilled receivables of approximately $13.6
million at December 31, 2002 and $13.3 million at December 31, 2003. Unbilled
receivables generally represent revenue recognized on contracts for which
billings have not been presented to the customers under the terms of the
contracts at the balance sheet dates. 53




---



##### Table of Contents



7.
    
    Property and Equipment Property and equipment consist of the following: December 31,2002
    
    2003(in thousands)Leasehold improvements
    
    $
    15,793
    
    
    $
    11,623Furniture and fixtures
    
    
    9,092
    
    
    
    6,542Computer equipment
    
    
    56,012
    
    
    
    22,411Software
    
    
    18,346
    
    
    
    8,66399,243
    
    
    
    49,239Accumulated depreciation
    
    
    (68,617
    )
    
    
    (33,578
    )$
    30,626
    
    
    $
    15,661
  8.
    
    Goodwill and Other Intangible Assets In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. Under these new
standards, the FASB eliminated accounting for certain mergers and acquisitions
as poolings of interests, eliminated amortization of goodwill and indefinite
life intangible assets and established new impairment measurement procedures
for goodwill. For S1, the standards became effective for all acquisitions
completed on or after June 30, 2001. Changes in financial statement treatment
for goodwill and intangible assets arising from mergers and acquisitions
completed prior to June 30, 2001 became effective January 1, 2002. We
implemented SFAS 142 on January 1, 2002 with the following effects:  
    
    We reclassified $7.0 million of unamortized assembled workforce
intangible assets into goodwill.
    
    We discontinued amortization on goodwill and assembled workforce of
$64.5 million, excluding goodwill recorded for the SDI transaction that
was never subject to amortization. We estimate that the resulting
reduction of amortization expense was approximately $55.5 million for
2002 and $6.8 million for 2003 and will be approximately $2.2 million
for 2004.At December 31, 2003, our other intangible assets consisted of the
following: Gross
    
    AccumulatedCarrying Value
    
    Amortization(in thousands)Purchased and acquired technology
    
    $
    12,412
    
    
    $
    (3,779
    )Customer relationships
    
    
    7,500
    
    
    
    (2,060
    )Total
    
    $
    19,912
    
    
    $
    (5,839
    )
 We recorded amortization expense of $17.5 million and $5.7 during the
years ended December 31, 2002 and 2003, respectively. We estimate aggregate
amortization expense for the next five calendar years to be as follows (in
thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008Financial institutions business segment
    
    $
    3,014
    
    
    $
    3,014
    
    
    $
    3,014
    
    
    $
    2,073
    
    
    $
    1,287Edify business segment
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 54




---



##### Table of Contents



The changes in the carrying value of our goodwill for the year ended December 31, 2003 are as follows: FinancialInstitutions
    
    Edify
    
    Total(in thousands)Balance, January 1, 2003
    
    $
    89,640
    
    
    $
    17,331
    
    
    $
    106,971Income tax refunds for
pre-acquisition periods
    
    
    (1,040
    )
    
    
    
    
    
    
    (1,040
    )Utilization of acquisition related
income tax benefits
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )Adjustments to goodwill for pre-acquisition tax liabilities
    
    
    (45
    )
    
    
    (735
    )
    
    
    (780
    )Purchase price adjustment for Point
Information Systems
    
    
    114
    
    
    
    
    
    
    
    114Impairment charge
    
    
    
    
    
    
    (11,710
    )
    
    
    (11,710
    )Balance, December 31, 2003
    
    $
    88,576
    
    
    $
    4,886
    
    
    $
    93,462
 In April 2003, we terminated our efforts to divest the Edify business. We
considered our inability to sell the Edify business on terms that were
acceptable to us a triggering event under SFAS No. 142 and 144 that required us
to perform a current assessment of the carrying value of the Edify business.
Based on our current analysis of fair value for the Edify business, including
estimates we based on discounted future cash flows, market valuations of
comparable businesses and offers from potential buyers, we concluded that the
fair value of the Edify business was less than its carrying value. Accordingly,
we allocated our estimate of fair value for the unit to the existing assets and
liabilities of the Edify business as of March 31, 2003, resulting in a goodwill
impairment charge of $11.7 million and accelerated amortization on other
intangible assets (developed technology and customer base) and purchased
software of $1.2 million and $0.5 million, respectively. Prior to the adoption of SFAS No. 142 on January 1, 2002, amortization
expense was recorded for goodwill and the assembled workforce intangible asset. For comparison purposes, supplemental net income and earnings per common share
for the year ended December 31, 2001 are provided as follows (in thousands,
except per share amounts): December 31,2001Reported net loss
    
    $
    (221,543
    )Add back: Goodwill amortization
    
    
    59,683Add back: Assembled workforce amortization
    
    
    2,251Adjusted net loss
    
    $
    (159,609
    )Basic and diluted loss per share:Reported loss per share
    
    $
    (3.74
    )Add back: Goodwill amortization
    
    
    1.01Add back: Assembled workforce amortization
    
    
    0.04Adjusted loss per share
    
    $
    (2.69
    )
  9.
    
    Merger Related and Restructuring Costs Components of merger related and restructuring costs are as follows: 2001
    
    2002
    
    2003(in thousands)Merger related costs
    
    $
    (1,999
    )
    
    $
    1,683
    
    
    $
    (1,312
    )Restructuring costs
    
    
    11,259
    
    
    
    734
    
    
    
    21,170$
    9,260
    
    
    $
    2,417
    
    
    $
    19,858
 55




---



##### Table of Contents



Our restructuring reserves include provisions for obligations for unused
real estate less estimates for sub-lease income. In 2000, we approved a
restructuring plan that included the closure of several of our facilities
worldwide. During 2000, we recorded a charge for the estimated costs associated
with the restructuring plan. At various times during 2001, we determined that,
as a result of weakening conditions in the domestic real estate markets, our
original estimate of the costs to dispose of unused real estate was below the
currently anticipated costs. Accordingly, we increased our reserves for lease
termination costs and recorded an additional restructuring charge of $4.5
million. Finally, during the third quarter of 2001, in connection with the
closing of certain office facilities, we wrote-off leasehold improvements of
$1.2 million, which were not previously anticipated in the restructuring
accrual. During the second quarter of 2001, we approved a restructuring plan to
streamline our European operations. In connection with this plan, we reduced
our European workforce by 77 people and consolidated the majority of our
European operations into two locations. As a result of these activities, we
recorded a charge of $5.6 million for the estimated costs associated with the
restructuring plan. During 2001, we released merger related accruals of
approximately $2.0 million related to changes in estimates relative to pending
or threatened litigation. During 2002, we incurred merger related costs of $3.7 million in
connection with the acquisition of Point. These costs, incurred in connection
with our plan to reorganize certain of our European operations, include
headcount reduction, consolidation of S1 and acquired Point office facilities
and disposal of redundant or obsolete computer equipment. This merger related
charge was partially offset by a $1.7 million decrease in reserves for legal
claims, which was established in connection with our acquisition of FICS Group,
N.V. in November 1999. We were able to resolve this legal matter during the
first quarter of 2002 for less than previously estimated amounts. Our merger
related reserves include provisions for obligations for unused real estate less
estimates for sub-lease income. In 2002, we were able to secure a sublease for
one of our foreign properties at terms that were $0.3 million more favorable
than previously anticipated. Additionally, in the third quarter of 2002, we
recorded a charge of $0.7 million for some excess office space in our Edify
business. During the year ended December 31, 2003, we undertook several initiatives
to align our worldwide cost structure with our anticipated 2004 revenues. As a
result, management approved restructuring plans in the financial institution
and Edify segments to reduce the work force, relocate and consolidate certain
office facilities and sell certain corporate assets. In addition we
consolidated our EMEA data center operations based in the United Kingdom into
our global hosting center in Atlanta. In connection with these plans, we
recorded restructuring charges of $21.2 million during the year ended December
31, 2003. In total, we eliminated approximately 200 positions worldwide and
closed or consolidated office facilities. In the domestic operations of our
financial institution segment, we recorded $6.2 million in restructuring
charges during 2003, which were primarily comprised of charges for severance
costs associated with headcount reductions, lease payments associated with
excess office space and other corporate charges. In the first quarter of 2003, we began the process of reorganizing our
international operations. As of December 31, 2003, we believe this
reorganization is complete. In 2003, we consolidated our U.K. data center
operations into our global hosting center in Atlanta, relocated our remaining
U.K. operations to a smaller facility, decreased our workforce both in our
European and APJ operations and closed offices in our APJ operations. As a
result, in 2003, we recorded restructuring charges of $9.4 million in our
European operations and $1.3 million in our APJ operations. These charges were
comprised of accelerated depreciation of assets, severance costs, other related
costs to relocate the data center operations, losses on the vacated office
space and the write off of abandoned leasehold improvements. Under the
provisions of SFAS No. 146, we recorded the loss on vacated office space at the
present value of the expected cash flows. We will accrete interest expense of
approximately $0.9 million over the remaining term of the lease, which is six
years. In the third quarter of 2003, we completed the process of reorganizing our
Edify business to align costs with expected revenues. As a result, we hired a
new general manager, reduced the workforce and closed and consolidated several
Edify office facilities worldwide. These actions resulted in restructuring
charges of $4.3 million for the year ended December 31, 2003. In 2003, we decreased our merger related reserve for legal claims by $0.8
million, which was established in connection with our acquisition of FICS
Group, N.V. in November 1999. We were able to resolve two legal matters during
2003 for less than previously estimated. In the second quarter of 2003, we
reduced our merger related accrual by $0.5 million when we determined that we
had an alternate use for excess office space that was reserved when we
completed the acquisition of Point in March 2002. 56




---



##### Table of Contents



The restructuring charges and their utilization as of December 31, 2001,
2002 and 2003 and for the years then ended are summarized as follows (in
thousands): Personnel Costs
    
    Lease Costs
    
    Other
    
    TotalBalance, December 31, 2000
    
    $
    3,170
    
    
    $
    6,762
    
    
    $
    629
    
    
    $
    10,5612001 restructuring charges
    
    
    1,692
    
    
    
    2,897
    
    
    
    976
    
    
    
    5,565Amounts utilized through December 31, 2001
    
    
    (5,134
    )
    
    
    (2,897
    )
    
    
    (2,435
    )
    
    
    (10,466
    )Change in estimate
    
    
    350
    
    
    
    3,954
    
    
    
    1,390
    
    
    
    5,694Balance, December 31, 2001
    
    
    78
    
    
    
    10,716
    
    
    
    560
    
    
    
    11,3542002 restructuring charge
    
    
    
    
    
    
    734
    
    
    
    
    
    
    
    734Amounts utilized through December 31, 2002
    
    
    
    
    
    
    (4,726
    )
    
    
    (252
    )
    
    
    (4,978
    )Balance, December 31, 2002
    
    
    78
    
    
    
    6,724
    
    
    
    308
    
    
    
    7,1102003 restructuring charge
    
    
    6,461
    
    
    
    7,492
    
    
    
    7,217
    
    
    
    21,170Amounts utilized through December 31, 2003
    
    
    (5,595
    )
    
    
    (3,904
    )
    
    
    (7,007
    )
    
    
    (16,506
    )Balance, December 31, 2003
    
    $
    944
    
    
    $
    10,312
    
    
    $
    518
    
    
    $
    11,774
 We expect to make future cash expenditures, net of anticipated sublease
income, related to these restructuring activities of approximately $11.4
million, of which we anticipate to pay approximately $4.4 million within the
next twelve months.  10.
    
    Accrued Other Expenses Accrued other expenses consists of the following: December 31,2002
    
    2003(in thousands)Accrued service fees payable
    
    $
    1,852
    
    
    $
    1,720Accrued merger related costs
    
    
    5,730
    
    
    
    2,407Sales and income taxes payable
    
    
    2,292
    
    
    
    1,675Loss contracts
    
    
    913
    
    
    
    3,959Accruals for loss contingencies
    
    
    
    
    
    
    4,500Other
    
    
    10,955
    
    
    
    8,465$
    21,742
    
    
    $
    22,726
  11.
    
    Commitments and Contingencies 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 $16.8 million, $16.1 million and $12.2
million in 2001, 2002 and 2003, respectively. 57




---



##### Table of Contents



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 LeaseCommitments
    
    Income
    
    Commitments2004
    
    $
    14,266
    
    
    $
    (2,107
    )
    
    $
    12,1592005
    
    
    12,907
    
    
    
    (1,813
    )
    
    
    11,0942006
    
    
    10,073
    
    
    
    (1,675
    )
    
    
    8,3982007
    
    
    8,034
    
    
    
    (1,508
    )
    
    
    6,5262008
    
    
    7,725
    
    
    
    (1,550
    )
    
    
    6,175Thereafter
    
    
    22,691
    
    
    
    (3,300
    )
    
    
    19,391$
    75,696
    
    
    $
    (11,953
    )
    
    $
    63,743
 In connection with the lease on our corporate offices, we issued to our
landlord a standby letter of credit in the amount of $7.0 million to guarantee
certain obligations under the lease agreement. The amount that we are required
to maintain under the standby letter of credit decreases as our future
obligations under the lease agreement decline. At December 31, 2003, there
were no drawings outstanding under the letter of credit. Additionally, we have
issued letters of credit in the aggregate amount of $0.9 million to guarantee
certain obligations for other leased facilities. Property and equipment as of December 31, 2002 includes computer equipment
under a capital lease with original cost and accumulated depreciation of
approximately $16.9 million and $15.0 million, respectively. Property and
equipment as of December 31, 2003 includes computer equipment under capital
lease with original cost and accumulated depreciation of approximately $5.1
million and $3.8 million, respectively. Future minimum annual lease payments
for the capital lease as of December 31, 2003 are as follows (in thousands): 2004
    
    $
    8222005
    
    
    5572006
    
    
    17$
    1,396Less amount representing interest
    
    
    (111
    )1,285Less current portion
    
    
    (762
    )Long-term capital lease obligations
    
    $
    523
 Contractual commitments In the normal course of business, we enter into contracts with vendors.
Some of these contracts include provisions for fixed or minimum purchase
quantities. At December 31, 2003, our payment obligations under these
contracts are $6.4 million for 2004, $4.3 million and $0.5 million for 2005. In the normal course of business, we enter into contracts with customers.
These contracts contain commitments including, but not limited to, minimum
standards and time frames against which our performance is measured. In the
event we do not meet our contractual commitments with our customers, we may
incur penalties and/or certain customers may have the right to terminate their
contracts with us. We do not believe that we will fail to meet our contractual
commitments to an extent that will result in a material adverse effect on our
financial position or results of operations. Guarantees We
typically grant our customers a warranty that guarantees that our
product will substantially conform to our current specifications for
90 days from the delivery date. We also indemnify our customers
from third party claims of intellectual property infringement
relating to the use of our products. Historically, costs related to
these guarantees have not been significant and we are unable to
estimate the potential impact of these guarantees on our future
results of operations. Litigation Except as noted below, there is no material pending legal proceeding,
other than ordinary routine litigation incidental to the business, to which S1,
or any of its subsidiaries, is a party or which their property is subject. 58




---



##### Table of Contents



As previously reported, S1 Corporation and its subsidiary Davidge Data
Systems were involved in litigation with Scottrade, Inc. and Computer Research,
Inc. In March 2004, we reached an agreement-in-principle with the parties involved in this matter and expect to settle on undisclosed terms all claims that have been asserted or could have been asserted in connection with this matter. As previously reported, S1 Corporation is involved in litigation with
Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588
filed in the U.S. District Court for the Southern District of New York. The
action was filed in March 2003 against S1 Corporation, Bank of America
Corporation and Bank of America National Association. There can be no
assurance on the ultimate outcome of this matter. An
adverse judgment or settlement could be material to our financial position and
results of operations. Contingencies From
time-to-time, we are subject to contingent matters incidental to our
business. These situations involve uncertainty as to possible loss. We have
established an accrual in the amount of $4,500,000 for losses that we believe
are probable.  12.
    
    Income Taxes Loss before income tax (benefit) expense consists of the following: 2001
    
    2002
    
    2003(in thousands)U.S. operations
    
    $
    (186,446
    )
    
    $
    (7,007
    )
    
    $
    (4,325
    )Foreign operations
    
    
    (38,352
    )
    
    
    (12,160
    )
    
    
    (33,564
    )$
    (224,798
    )
    
    $
    (19,167
    )
    
    $
    (37,889
    )
 Income tax (benefit) expense is summarized as follows: 2001
    
    2002
    
    2003(in thousands)Current:Federal
    
    $
    (189
    )
    
    $
    
    
    
    $
    96Foreign
    
    
    18
    
    
    
    252
    
    
    
    13State
    
    
    (77
    )
    
    
    25
    
    
    
    47Total current
    
    $
    (248
    )
    
    $
    277
    
    
    $
    156Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    Foreign
    
    
    (3,007
    )
    
    
    (3,047
    )
    
    
    127State
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    $
    (3,007
    )
    
    $
    (3,047
    )
    
    $
    127Total income tax (benefit) expense
    
    $
    (3,255
    )
    
    $
    (2,770
    )
    
    $
    283
 59




---



##### Table of Contents



A reconciliation of the income tax benefit to the amount computed by
applying the statutory federal income tax rate to the loss from continuing
operations before income tax benefit is as follows: 2001
    
    2002
    
    2003(in thousands)Expected income tax benefit at 35%
    
    $
    (78,679
    )
    
    $
    (6,708
    )
    
    $
    (13,261
    )State income tax benefit, net of federal benefit
    
    
    (8,992
    )
    
    
    (767
    )
    
    
    (1,516
    )Increase (decrease) in valuation allowance related to
current year operations
    
    
    20,522
    
    
    
    (1,495
    )
    
    
    7,258Foreign operations tax rate differences
    
    
    
    
    
    
    
    
    
    
    3,447Loss on sale of subsidiary
    
    
    20,398
    
    
    
    
    
    
    
    Equity loss
    
    
    8,688
    
    
    
    
    
    
    
    In-process R&D, goodwill amortization and other
permanent items
    
    
    34,808
    
    
    
    6,200
    
    
    
    4,355Income tax (benefit) expense
    
    $
    (3,255
    )
    
    $
    (2,770
    )
    
    $
    283
 The income tax effects of the temporary differences that give rise to our
deferred income tax assets and liabilities as of December 31, 2002 and 2003 are
as follows: 2002
    
    2003(in thousands)Deferred income tax assets:Net operating loss carryforwards
    
    $
    162,840
    
    
    $
    166,173Equity loss
    
    
    20,076
    
    
    
    20,076Accrued expenses
    
    
    6,608
    
    
    
    10,137Deferred revenue
    
    
    13,338
    
    
    
    13,389Tax credit carryforwards
    
    
    7,918
    
    
    
    7,175Foreign depreciation / restructuring
    
    
    
    
    
    
    3,744Property and equipment depreciation
    
    
    4,318
    
    
    
    1,193Total gross deferred income tax assets
    
    
    215,098
    
    
    
    221,887Valuation allowance for deferred income tax assets
    
    
    (209,530
    )
    
    
    (217,889
    )Total deferred income tax assets
    
    
    5,568
    
    
    
    3,998Deferred income tax liabilitiesIdentifiable intangibles
    
    
    5,493
    
    
    
    3,998Other
    
    
    75
    
    
    
    Total gross deferred income tax liabilities
    
    
    5,568
    
    
    
    3,998Net deferred
income taxes
    
    $
    
    
    
    $
    
 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. Because of the uncertainties with respect to our ability
to achieve and sustain profitable operations in the future, we have recorded a
valuation allowance to offset substantially all of our net deferred income tax
assets. At December 31, 2003, we had domestic and foreign net operating loss
carryforwards and tax credit carryforwards of approximately $354.4 million,
$84.1 million and $7.2 million, respectively. The domestic net operating loss
carryforwards expire at various dates through 2022 unless utilized. The
foreign net operating loss carryforwards generally do not expire and the tax
credit carryforwards expire at various dates through 2022. Our domestic net
operating loss carryforwards at December 31, 2003 include $224.9 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 when
realized. The acquisitions described in Note 3 created ownership changes for
federal income tax purposes. The result of an ownership change is to limit a
companys ability 60




---



##### Table of Contents



to utilize its net operating loss and credit carryforwards based on the
valuation of the company. Due to the value of the companies at the time of
their respective ownership changes, the limitation of net operating loss and
credit carryforwards is not expected to be meaningful. During 1999, we acquired FICS, which resulted in establishing non-goodwill
intangible assets of $48.0 million. These identifiable intangibles created a
$19.2 million deferred tax liability. We acquired net operating loss
carryforwards in the FICS transaction of approximately $45.3 million. We
established a valuation allowance relating to the FICS carryforwards that
resulted in the recording of a net deferred tax liability of $15.3 million as a
result of the acquisition. Amortization of the FICS non-goodwill intangible
assets resulted in a deferred tax benefit of $3.7 million in 2002. As the
benefit from the FICS net operating loss carryforwards was realized, we reduced
goodwill recorded in connection with the FICS transaction and increased
deferred tax expense. During 2002 and 2003, we reduced goodwill $0.5 million
and $0.1 million, respectively, in connection with the realization of these tax
benefits. As indicated in Note 4, the sale of VerticalOne to Yodlee in January 2001
was a stock-for-stock transaction that was treated as a tax-free
reorganization. The difference between the tax basis in S1s investment in
Yodlee and the net book value in S1s share of Yodlees assets is treated as a
temporary difference and is reported as a deferred tax asset in the table above
offset by a full valuation allowance.  13.
    
    Convertible Preferred Stock S1 has 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. At
December 31, 2003, there were 749,064 shares of series B convertible preferred
stock outstanding. As of December 31, 2003, series A, series C, series D and
series E shares have been converted to common stock or cancelled, as discussed
in Note 14. The terms of all series of preferred stock provide the holders with
identical rights to common stockholders with respect to dividends and
distributions in the event of liquidation, dissolution, or winding up of S1.
Except as described below, series B are nonvoting shares. Series B holders are
entitled to vote as a single class on the following matters:  
    
    any amendment to any charter provision that would change the specific
terms of that series which would adversely affect the rights of the
holders of that series, and
    
    the merger or consolidation of S1 with another corporation or the
sale, lease, or conveyance (other than by mortgage or pledge) of the
properties or business of S1 in exchange for securities of another
corporation if series B is to be exchanged for securities of such other
corporation and if the terms of such securities are less favorable in
any respect. Action requiring the separate approval of the series B stockholders
requires the approval of two-thirds of the shares of series B then outstanding
voting as a separate class. In addition, holders of the series B are entitled
to vote with the holders of common stock as if a single class, on any voluntary
dissolution or liquidation of S1. Holders of series B also are entitled to vote
with the holders of the common stock on any merger, acquisition, consolidation
or other business combination involving S1 and the sale, lease or conveyance
other than by mortgage or pledge of all or substantially all of our assets or
properties. When the series B is entitled to vote with the common stock, the
holders of series B are entitled to the number of votes equal to the number of
shares of common stock into which the series B could be converted. The 749,064
shares of series B preferred are convertible at the option of the holder after
October 1, 2000 into 1,070,090 shares of common stock based on a conversion
price of $9.345. The number of shares of common stock into which the series B
are convertible is subject to adjustment. 61




---



##### Table of Contents



14.
    
    Equity Transactions Stock and warrants issued to Royal Bank of Canada On February 25, 1999, we entered into an agreement with Royal Bank of
Canada under which:  
    
    Royal Bank purchased and agreed to implement certain S1 applications.
Royal Bank agreed to pay us $50.0 million over a five-year period as
they implemented our software;
    
    we issued 215,000 shares of newly designated series C redeemable
convertible preferred stock to Royal Bank. We recorded a subscription
receivable of $12.0 million, the estimated fair value of the preferred
stock at issuance, and reduced such subscription receivable, including
imputed interest, as the related revenue was recognized. On February 25,
2000, the first installment of 21,500 shares vested and became
convertible. These shares were converted to 43,000 shares of S1 common
stock in July 2000; and
    
    we granted Royal Bank a warrant to purchase 800,000 shares of common
stock at a price of $30.00 per share. We terminated the agreements with Royal Bank described above during the
fourth quarter of 2001. As a result, we cancelled 193,500 unvested series C
preferred shares and the related receivable from the sale of stock in the
amount of $11.5 million. In addition, we cancelled the warrant to purchase
800,000 shares of S1 common stock. Stock and options issued to Intuit, Inc. On May 16, 1999, S1 and Intuit entered into a Stock Purchase and Option
Agreement pursuant to which:  
    
    Intuit purchased 970,813 shares of S1 common stock for $50.0
million;
    
    S1 granted Intuit options(1) to purchase 3,629,187 and
950,000 shares of S1 common stock that vested upon the closing of the Edify and
FICS acquisitions, respectively; and
    
    S1 granted Intuit 445,000 additional options(1) to purchase S1
common stock that would become exercisable based on the achievement of
certain earn-out targets for FICS. In the fourth quarter of 2000, we
issued 1.8 million shares to the former stockholders of FICS and
terminated the remainder of the earn-out. Accordingly, 178,200 shares
of the Intuit options became exercisable in the fourth quarter of 2000.   (1)
    
    All of the Intuit options had an exercise price of $51.50 per share and an
initial expiration date of November 10, 2004. Concurrent with the Stock Purchase and Option Agreement, S1 and Intuit
entered into a five-year cross-license and distribution agreement. On October
31, 2001, we terminated the cross-license and distribution with Intuit, as well
as Intuits right to purchase shares of our common stock pursuant to the option
agreement. In connection with the termination of these arrangements, we paid
Intuit $85,000 which we recorded as a reduction of additional paid-in capital.
Following the settlement of these arrangements, Intuit has no outstanding
options to purchase S1 common stock. Other equity transactions On December 23, 1999, we granted a fully-vested, immediately exercisable
warrant to purchase 84,994 shares of S1 common stock at $80.00 per share in
connection with a pilot project and distribution agreement between a third
party and a subsidiary of S1. The fair value of the warrant was expensed over
the term of the agreement that was approximately 60 days. We recorded expense
of $715,000 in 1999 and $4.6 million 2000. At December 31, 2003, the warrant
was outstanding and exercisable. The warrant expires on December 23, 2004. In July 2001, one holder of series D convertible preferred stock exercised
its right to exchange its preferred shares for S1 common stock at a rate of
29.283 common shares for each preferred share. Accordingly, we issued 190,339
shares of S1 common stock in exchange for 6,500 shares of series D convertible
preferred stock. On April 30, 2002, our series D convertible preferred stock automatically
converted into S1 common stock at a rate of 29.283 common shares for each
preferred share. Accordingly, we issued 6,954,712 shares of S1 common stock in
exchange for 237,500 shares of series D convertible preferred stock. 62




---



##### Table of Contents



On September 20, 2001, we issued 649,150 shares of newly authorized Series
E convertible preferred stock in connection with the acquisition of SDI as
described in Note 3. The value of the preferred shares of $6.2 million was
determined based on the value of the as-converted common stock, less the
estimated amount of contingent consideration of $2.1 million. Of the total
series E preferred shares issued, we placed in escrow for the selling
shareholders 318,098 shares of series E preferred stock in connection with a
general indemnity provision and the collection of specific funds under a
pending sale of software licenses. In May 2002, we amended the purchase
agreement with SDI to eliminate the contingent consideration. We assigned an
additional $2.1 million of value to the series E preferred shares. The escrow
period expired on March 20, 2003 and the series E preferred shares were
released from escrow. On September 20, 2003, our series E convertible preferred stock
automatically converted into S1 common stock at a rate of one common share for
each preferred share. Accordingly, we issued 649,150 shares of S1 common stock
in exchange for 649,150 shares of series E preferred stock. In July 2002, our board of directors approved a $10.0 million stock
repurchase program to enhance long-term shareholder value. This program was
funded from available cash and short-term investments. As of December 31,
2002, we had repurchased 1,906,300 shares of our common stock at a cost of $9.3
million under this program. The stock repurchase program was completed in
January 2003. We repurchased a total of 2,051,862 shares of our common stock
at an average price of $4.87 per share. In
October 2003, our board of directors approved a $15.0 million stock
repurchase program to offset dilution of our common stock from shares
granted under our employee stock option plans. This program was
funded from available cash and short-term investments. As of December 31,
2003, we had repurchased 54,000 shares of our common stock at a cost of $0.4
million under this program.  15.
    
    Stock Option and Purchase Plans We maintain certain stock option plans providing for the grant of stock
options to officers, directors and employees. The plans provide for
20,335,050
shares of S1 common stock to be reserved for issuance under the plans.
Substantially all stock options granted under the plans have ten-year terms and
generally vest and become exercisable ratably over four years from the date of
grant. At December 31, 2003, 5,268,017 shares were available for future grants
under the plans. During 1999, we granted approximately 1,450,000 stock options that will
fully vest at the end of five years with accelerated vesting based on the
achievement of certain performance targets during fiscal years 1999 through
2002. Two performance goals were in place for each of these years. For each
performance target achieved, 12.5% of the options vested in the year
following the achievement of the target. Vesting related to performance targets
not met may be earned in subsequent years. As of December 31, 2003, three
performance goals had been met resulting in the vesting of 37.5% of the shares. A summary of our stock options as of December 31, 2001, 2002 and 2003, and
changes during the years ended on those dates is presented below: 2001
    
    2002
    
    2003Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    average
    
    
    
    
    
    averageShares
    
    Exercise
    
    Shares
    
    Exercise
    
    Shares
    
    Exercise(000)
    
    Price
    
    (000)
    
    Price
    
    (000)
    
    PriceOutstanding at beginning of year
    
    
    20,870
    
    
    $
    25.52
    
    
    
    16,864
    
    
    $
    14.74
    
    
    
    18,390
    
    
    $
    13.97Granted
    
    
    4,837
    
    
    
    8.87
    
    
    
    6,707
    
    
    
    13.99
    
    
    
    2,598
    
    
    
    3.80Options exchanged in acquisitions
    
    
    102
    
    
    
    6.10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (1,761
    )
    
    
    3.09
    
    
    
    (1,095
    )
    
    
    3.40
    
    
    
    (1,322
    )
    
    
    2.43Forfeited/canceled
    
    
    (7,184
    )
    
    
    44.86
    
    
    
    (4,086
    )
    
    
    19.99
    
    
    
    (4,599
    )
    
    
    18.02Outstanding at end of year
    
    
    16,864
    
    
    $
    14.74
    
    
    
    18,390
    
    
    $
    13.97
    
    
    
    15,067
    
    
    $
    12.00Exercisable at end of year
    
    
    6,190
    
    
    $
    16.44
    
    
    
    7,138
    
    
    $
    15.06
    
    
    
    7,751
    
    
    $
    15.37
 63




---



##### Table of Contents



The following table summarizes information about stock options outstanding at December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted-average
    
    Weighted-
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    average
    
    Number
    
    averageOutstanding
    
    Contractual
    
    Exercise
    
    Exercisable
    
    ExerciseRange of Exercise Price
    
    (000)
    
    Life
    
    Price
    
    (000)
    
    Price$
    0.32  3.50
    
    
    
    163
    
    
    
    2.8
    
    
    $
    2.66
    
    
    
    158
    
    
    $
    2.633.51  5.00
    
    
    
    3,030
    
    
    
    9.0
    
    
    
    3.82
    
    
    
    286
    
    
    
    4.515.01  7.00
    
    
    
    2,779
    
    
    
    7.0
    
    
    
    6.39
    
    
    
    1,602
    
    
    
    6.427.01  9.00
    
    
    
    2,774
    
    
    
    5.8
    
    
    
    8.26
    
    
    
    1,876
    
    
    
    8.249.01  14.00
    
    
    
    1,261
    
    
    
    4.6
    
    
    
    11.07
    
    
    
    972
    
    
    
    10.9914.01  17.00
    
    
    
    2,085
    
    
    
    6.2
    
    
    
    15.15
    
    
    
    883
    
    
    
    15.2017.01  20.00
    
    
    
    1,789
    
    
    
    7.2
    
    
    
    18.19
    
    
    
    688
    
    
    
    18.2220.01  98.75
    
    
    
    1,186
    
    
    
    5.5
    
    
    
    42.24
    
    
    
    1,286
    
    
    
    42.790.32  98.75
    
    
    
    15,067
    
    
    
    6.7
    
    
    $
    12.00
    
    
    
    7,751
    
    
    $
    15.37
 For stock options granted where the exercise price equaled the market
price of the stock on the date of grant, the per share weighted-average
exercise price was $8.87, $13.99 and $3.80 and the per share weighed-average
fair value was $7.78, $11.59 and $2.95 for stock options granted during 2001,
2002 and 2003, respectively. Under our employee stock purchase plan, each employee of S1 or a
participating subsidiary that is employed at least twenty hours per week over a
five-month period, is eligible to purchase S1 common stock at a discounted
price. The purchase price is equal to 85% of the fair market value of the
common stock on either the first or last day of the subscription period,
whichever is lower. Purchases under this plan are limited to 10% of an
employees compensation or $500 per purchase period; whichever is lower. Under
this plan, we issued 259,323 and 270,334 shares at an average price of $8.81
and $6.09 per share during 2001 and 2002, respectively. At December 31, 2003,
2,121,349 common shares were reserved for future issuance under this plan.
Effective January 1, 2003, we suspended the ESPP. The fair values were determined using the Black-Scholes option-pricing
model with the following weighted-average assumptions: 2001
    
    2002
    
    2003Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    114.5
    %
    
    
    115.7
    %
    
    
    111.1
    %Risk-free interest rate, stock option plans
    
    
    4.6
    %
    
    
    3.8
    %
    
    
    3.0
    %Expected life, stock option plans
    
    4.9 years
    
    4.5 years
    
    4.1 yearsRisk-free interest rate, stock purchase plan
    
    
    4.4
    %
    
    
    2.0
    %
    
    
    Expected life, stock purchase plan
    
    0.5 years
    
    0.5 years
    
    
    
 Options exchanged and granted in connection with acquisitions In connection with the acquisition of SDI in September 2001, we exchanged
101,784 options to purchase shares of S1 common stock for all the outstanding
options of SDI. To the extent the exchanged stock options were vested at the
date of acquisition, we included their fair value in the purchase price of the
acquired companies. In connection with our acquisitions during 2001 and 2002, we issued approximately:  
    
    325,000 new options to employees of SDI;
    
    100,000 new options to employees of Regency, and
    
    300,000 new options to employees of Point. 64




---



##### Table of Contents



Stock option exchange program On June 8, 2001, we offered eligible employees the opportunity to exchange
outstanding stock options to purchase shares of our common stock that have an
exercise price of $18.00 per share or more for new options under the S1
Corporation 1997 Employee Stock Option Plan. Through July 6, 2001, the
expiration date of the exchange offer, we accepted for exchange and canceled
2,937,162 stock options from eligible employees. Eligible employees who were
not senior managers received new options equal to the number of options
exchanged. Senior managers received new options equal to the number of options
exchanged multiplied by 0.75. To receive the new options, eligible employees
who participated in this voluntary exchange program had to remain continuously
employed by S1 or one of our consolidated subsidiaries from the date the
options were tendered for exchange through the date we granted the new options.
On January 8, 2002, which was the first business day that was at least six
months and one day following the date we canceled the options accepted for
exchange, we granted 2,410,613 new options to eligible employees at the fair
market value at the date of grant. We did not record a charge for stock
compensation expense as a result of this stock option exchange program. As of
December 31, 2003, we are not considering any additional stock option exchange
programs.  16.
    
    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 15% of his or her annual compensation to the
plan. S1, at managements discretion, may make matching contributions to the
plan. From January 1, 2001 through March 31, 2002, our discretionary match had
been made entirely to the S1 stock fund, up to 4% of the employees
compensation. Effective April 1, 2002, employees had a choice regarding the
form of the discretionary match. We matched up to 4% of the employees
compensation to the S1 stock fund or up to 3% of the employees compensation in
cash to be distributed according to the employees election. Effective January
1, 2003, the discretionary match percentages were reduced to 3% of the
employees compensation to the S1 stock fund or up to 2% of the employees
compensation in cash to be distributed according to the employees election.
In August 2003, the employers discretionary match was discontinued. Our matching contributions to the plan charged to expense for 2001, 2002
and 2003 were approximately $2.8 million, $2.6 million and $1.1 million,
respectively.  17.
    
    Segment Reporting, Geographic Disclosures and Major Customers We operate and manage S1 in two business segments: financial institutions,
our core business segment, and the Edify business. The financial institutions
segment develops, markets and implements integrated, transactional and
brandable enterprise applications for small, mid-sized and large financial
institutions worldwide, available as in-house or hosted solutions. The Edify
business segment provides a variety of voice and speech recognition
applications that help organizations globally in a wide range of
industries (including principally retail, telecommunications and
travel) increase customer retention
through automation and improved operational effectiveness. 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, 2001, 2002 and
2003. We do not use any asset-based metrics to measure the operating
performance of our segments. We have entered into reseller arrangements between our operating segments to sell the Edify IVR product to
financial institutions and the S1 CRM application to
non-financial institutions. Under these arrangements,
intercompany revenues and intercompany expenses are recorded in each
operating segment. These revenues and expenses are eliminated in
consolidation. Intercompany revenues recorded by the financial institutions
segment were $1.0 million for 2003. Intercompany revenues
recorded by the Edify segment were $4.0 million,
$3.1 million and $2.3 million for 2001, 2002 and 2003,
respectively. The
following table shows revenues by revenue type for our operating
segments: Software
    
    Support and
    
    Professional
    
    DataLicenses
    
    Maintenance
    
    Services
    
    Center
    
    Other
    
    Total(in
thousands)Year Ended December 31, 2001:Financial institutions
    
    $
    42,243
    
    
    $
    29,216
    
    
    $
    106,341
    
    
    $
    52,915
    
    
    $
    1,050
    
    
    $
    231,765Edify
    
    
    29,142
    
    
    
    12,654
    
    
    
    8,788
    
    
    
    
    
    
    
    
    
    
    
    50,584Eliminations
    
    
    
    
    
    
    (875
    )
    
    
    (3,164
    )
    
    
    
    
    
    
    
    
    
    
    (4,039
    )Total
    
    $
    71,385
    
    
    $
    40,995
    
    
    $
    111,965
    
    
    $
    52,915
    
    
    $
    1,050
    
    
    $
    278,310Year Ended December 31, 2002:Financial institutions
    
    $
    66,894
    
    
    $
    43,761
    
    
    $
    95,463
    
    
    $
    40,560
    
    
    $
    1,274
    
    
    $
    247,952Edify
    
    
    21,910
    
    
    
    17,303
    
    
    
    8,140
    
    
    
    
    
    
    
    
    
    
    
    47,353Eliminations
    
    
    (62
    )
    
    
    (1,250
    )
    
    
    (1,824
    )
    
    
    
    
    
    
    
    
    
    
    (3,136
    )Total
    
    $
    88,742
    
    
    $
    59,814
    
    
    $
    101,779
    
    
    $
    40,560
    
    
    $
    1,274
    
    
    $
    292,169Year Ended December 31, 2003:Financial institutions
    
    $
    54,862
    
    
    $
    45,158
    
    
    $
    77,776
    
    
    $
    45,210
    
    
    $
    2,910
    
    
    $
    225,916Edify
    
    
    7,745
    
    
    
    16,403
    
    
    
    5,872
    
    
    
    
    
    
    
    7
    
    
    
    30,027Eliminations
    
    
    (988
    )
    
    
    (2,179
    )
    
    
    (195
    )
    
    
    
    
    
    
    
    
    
    
    (3,362
    )Total
    
    $
    61,619
    
    
    $
    59,382
    
    
    $
    83,453
    
    
    $
    45,210
    
    
    $
    2,917
    
    
    $
    252,581 65




---



##### Table of Contents



The
following table shows the results of operations for our operating
segments: Year Ended December 31, 2001FinancialInstitutions
    
    Edify
    
    Eliminations
    
    Total(in thousands)Revenues
    
    $
    231,765
    
    
    $
    50,584
    
    
    $
    (4,039
    )
    
    $
    278,310Operating expenses:Direct costs
    
    
    119,104
    
    
    
    10,442
    
    
    
    (4,039
    )
    
    
    125,507Selling and marketing
    
    
    29,489
    
    
    
    24,430
    
    
    
    
    
    
    
    53,919Product development
    
    
    43,492
    
    
    
    10,433
    
    
    
    
    
    
    
    53,925General and administrative
    
    
    33,625
    
    
    
    5,813
    
    
    
    
    
    
    
    39,438Depreciation
    
    
    26,880
    
    
    
    2,372
    
    
    
    
    
    
    
    29,252Merger related and restructuring costs
    
    
    9,260
    
    
    
    
    
    
    
    
    
    
    
    9,260Amortization of acquisition intangible assets
    
    
    60,587
    
    
    
    19,200
    
    
    
    
    
    
    
    79,787Total operating expenses
    
    
    322,437
    
    
    
    72,690
    
    
    
    (4,039
    )
    
    
    391,088Segment operating loss
    
    $
    (90,672
    )
    
    $
    (22,106
    )
    
    $
    
    
    
    $
    (112,778
    )
 Year Ended December 31, 2002FinancialInstitutions
    
    Edify
    
    Eliminations
    
    Total(in thousands)Revenues
    
    $
    247,952
    
    
    $
    47,353
    
    
    $
    (3,136
    )
    
    $
    292,169Operating expenses:Direct costs
    
    
    104,297
    
    
    
    20,773
    
    
    
    (3,136
    )
    
    
    121,934Selling and marketing
    
    
    39,565
    
    
    
    18,575
    
    
    
    
    
    
    
    58,140Product development
    
    
    43,027
    
    
    
    8,151
    
    
    
    
    
    
    
    51,178General and administrative
    
    
    33,031
    
    
    
    5,670
    
    
    
    
    
    
    
    38,701Depreciation
    
    
    21,404
    
    
    
    1,231
    
    
    
    
    
    
    
    22,635Merger related and restructuring costs
    
    
    1,683
    
    
    
    734
    
    
    
    
    
    
    
    2,417Acquired in-process research and development
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    350Amortization of acquisition intangible assets
    
    
    15,943
    
    
    
    1,517
    
    
    
    
    
    
    
    17,460Total operating expenses
    
    
    259,300
    
    
    
    56,651
    
    
    
    (3,136
    )
    
    
    312,815Segment operating loss
    
    $
    (11,348
    )
    
    $
    (9,298
    )
    
    $
    
    
    
    $
    (20,646
    )
 Year Ended December 31, 2003FinancialInstitutions
    
    Edify
    
    Eliminations
    
    Total(in thousands)Revenues
    
    $
    225,916
    
    
    $
    30,027
    
    
    $
    (3,362
    )
    
    $
    252,581Operating expenses:Direct costs
    
    
    101,449
    
    
    
    17,218
    
    
    
    (3,362
    )
    
    
    115,305Selling and marketing
    
    
    27,733
    
    
    
    11,392
    
    
    
    
    
    
    
    39,125Product development
    
    
    39,275
    
    
    
    5,873
    
    
    
    
    
    
    
    45,148General and administrative
    
    
    32,452
    
    
    
    4,365
    
    
    
    
    
    
    
    36,817Depreciation
    
    
    16,261
    
    
    
    654
    
    
    
    
    
    
    
    16,915Merger related costs and restructuring charges
    
    
    15,599
    
    
    
    4,259
    
    
    
    
    
    
    
    19,858Amortization and impairment of acquisition intangible assets
    
    
    3,730
    
    
    
    13,662
    
    
    
    
    
    
    
    17,392Total operating expenses
    
    
    236,499
    
    
    
    57,423
    
    
    
    (3,362
    )
    
    
    290,560Segment operating loss
    
    $
    (10,583
    )
    
    $
    (27,396
    )
    
    $
    
    
    
    $
    (37,979
    )
 Revenues from international customers represented approximately 24%, 27%
and 29% of total revenues for the years ended December 31, 2001, 2002 and 2003,
respectively. 66




---



##### Table of Contents



At December 31, 2002 and 2003, approximately $9.0 million and $1.3
million, respectively, of total property and equipment is located outside of
the United States. For the years ended December 31, 2003 and 2002, we had two major customers
in the financial institutions segment (defined as those customers who
individually contribute more than 10% of total revenues). We derived 33%, 26%
and 20% of our financial institutions segment revenues from State Farm Mutual
Automobile Insurance Company during the years ended December 31, 2001, 2002 and
2003, respectively. The other major customer, Zurich Insurance Company and certain of its
affiliates or subsidiaries, accounted for 17% and 19% of our revenues from the
financial institutions segment during the years ended December 31, 2002 and
2003, respectively. Zurich contributed less than 10% of our total revenues in
2001. In March 2003, we amended the terms of our data center arrangement with
Zurich to shorten the term over which revenue will be recognized and payments
received. Revenue from the data center contract, which would have been
recognized ratably throughout 2003 and 2004, was recognized in the first six
months of 2003. Associated direct costs were accelerated over the same period. During the six months ended June 30, 2003, we reported data center revenue
of $8.6 million for data center services provided to Zurich. There is no
remaining data center revenue to record from Zurich after the quarter ended
June 30, 2003. Total costs associated with Zurich were approximately $2.6
million, including cost of goods sold and depreciation and do not include any
allocation of management or administration expenses during the six months ended
June 30, 2003. The subscription license and professional services components of our
arrangement with Zurich were not affected by the data center contract
amendment. We recognized $32.7 million of subscription license revenue in the
year ended December 31, 2003, at which time the subscription license terminated
with no further expected revenue. There were no direct costs associated with
this subscription license.  18.
    
    Related Party Transactions Yodlee, Inc. As a result of our sale of VerticalOne to Yodlee in January 2001, as
discussed in Note 4, we own approximately 27% of Yodlee at December 31, 2003.
The chairman of our board of directors is also a director of Yodlee. In
connection with the sale, we entered into the following agreements with Yodlee:  
    
    a sales representation (and OEM) agreement;
    
    a data center agreement; and
    
    a facilities sublease. Under the terms of the OEM agreement, we are a non-exclusive reseller of
Yodlees aggregation service. In connection with this arrangement, we made a
nonrefundable prepayment of $10.0 million to Yodlee, which we included as part
of our loss on the sale of VerticalOne. Subject to certain conditions, (i) we
may sell Yodlees aggregation service directly to certain of our customers and
retain 100% of the fees or (ii) we may assist Yodlee with the sale of its
aggregation service to one of its customers in return for 50% of their fees.
The OEM agreement expires in July 2005. During 2001, 2002 and 2003, we received
$0.4 million, $0.1 million and $0.1 million from Yodlee under this agreement,
respectively. Under the data center agreement, we agreed to provide Yodlee with certain
data center services for a fee. During 2001, 2002 and 2003, we provided data
center services in the amount of $0.2 million, $0.3 million and $0.5 million,
respectively. The original term of the data center agreement ended in January
2003, but is renewed annually in January. At December 31, 2002 and 2003, we
had receivables from Yodlee of approximately $0.2 million and $0.1 million,
respectively, for services performed under this agreement. 67




---



##### Table of Contents



Under the facilities sublease, we reimbursed Yodlee approximately $0.1
million for certain office space rentals and utilities through December 31,
2001.  19.
    
    Net Loss Per Share Because of our net losses, the issuance of additional shares of common
stock through the exercise of stock options or stock warrants or upon the
conversion of preferred stock would have an anti-dilutive effect on our net
loss per share. The total number of common shares that would have been included
in our computation of diluted loss per share if they had been dilutive is as
follows (in thousands): 2001
    
    2002
    
    2003Weighted average common shares outstanding
    
    
    59,242
    
    
    
    67,725
    
    
    
    69,872Weighted average affect of common stock equivalents:Convertible preferred stock
    
    
    8,258
    
    
    
    3,956
    
    
    
    1,534Stock options
    
    
    5,216
    
    
    
    2,636
    
    
    
    940Weighted average diluted shares outstanding
    
    
    72,716
    
    
    
    74,317
    
    
    
    72,346
  20.
    
    Quarterly Financial Information (Unaudited) The following table shows selected unaudited consolidated quarterly
statement of operations data for the years ended December 31, 2002 and 2003. 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 present 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. Three Months EndedMar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    Mar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,2002
    
    2002
    
    2002
    
    2002
    
    2003(2)
    
    2003(3)
    
    2003(3)
    
    2003(4)(in thousands, except per share data)Revenues
    
    $
    72,570
    
    
    $
    75,310
    
    
    $
    72,011
    
    
    $
    72,278
    
    
    $
    65,662
    
    
    $
    67,725
    
    
    $
    57,461
    
    
    $
    61,733Gross margin (1)
    
    
    43,085
    
    
    
    43,920
    
    
    
    41,218
    
    
    
    42,012
    
    
    
    32,544
    
    
    
    36,993
    
    
    
    31,201
    
    
    
    36,538Operating (loss) income
    
    
    (7,785
    )
    
    
    (6,828
    )
    
    
    (5,958
    )
    
    
    (75
    )
    
    
    (29,416
    )
    
    
    (5,912
    )
    
    
    (4,519
    )
    
    
    1,868Net (loss) income
    
    
    (6,706
    )
    
    
    (5,647
    )
    
    
    (5,200
    )
    
    
    1,156
    
    
    
    (29,289
    )
    
    
    (6,403
    )
    
    
    (4,360
    )
    
    
    1,880Net
(loss) income per common share - basic
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    0.02
    
    
    $
    (0.42
    )
    
    $
    (0.09
    )
    
    $
    (0.06
    )
    
    $
    0.03Net income
per common share - diluted
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    0.02
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    0.03
   (1)
    
    Gross margin is derived from our statements of operations as total
revenues less cost of software licenses, cost of professional services,
support and maintenance, cost of data center and cost of other revenue.
Cost of revenues exclude charges for depreciation of property and
equipment and amortization of purchased technology.(2)
    
    Our operating loss, net loss and net loss per common share for the
quarter ended March 31, 2003 reflect an impairment charge of $11.7 million
and a restructuring charge of $8.1 million.(3)
    
    Our operating loss, net loss and net loss per common share for the
quarters ended June 30, 2003 and September 30, 2003, reflect restructuring
charges of $8.4 million and $4.1 million, respectively.(4)
    
    Our operating loss, net loss and net loss per common share for the
quarter ended December 31, 2003 include a $4.5 million
charge for loss
contingencies.  21.
    
    Subsequent Event In
March 2004, we reached an agreement-in-principle over a disputed claim and expect to settle this claim on undisclosed terms. We
provided for this matter in 2003. 68




---



##### Table of Contents



Schedule II 
 VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Balance
    
    Additionsat
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    other
    
    
    
    
    
    end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    period(in thousands)Year ended December 31, 2001:Allowance for doubtful accounts
    
    $
    10,009
    
    
    
    5,220
    
    
    
    100
    (2)
    
    
    7,246
    (1)
    
    $
    8,083Valuation allowance for deferred taxes
    
    $
    139,592
    
    
    
    20,522
    
    
    
    40,994
    (3)
    
    
    490
    (4)
    
    $
    200,618Year ended December 31, 2002:Allowance for doubtful accounts
    
    $
    8,083
    
    
    
    7,756
    
    
    
    505
    (2)
    
    
    8,743
    (1)
    
    $
    7,601Valuation allowance for deferred taxes
    
    $
    200,618
    
    
    
    (1,495
    )
    
    
    10,407
    (3)
    
    
    
    
    
    $
    209,530Year ended December 31, 2003Allowance for doubtful accounts
    
    $

    7,601
    
    
    
    6,063
    
    
    
    
    
    
    
    8,558
    (1)
    
    $
    5,106Valuation allowance for deferred taxes
    
    $
    209,530
    
    
    
    7,258
    
    
    
    1,101
    (3)
    
    
    
    
    
    $
    217,889
    (1)
    
    Accounts deemed to be uncollectible and written off during the year.(2)
    
    Allowances related to companies acquired.(3)
    
    Allowances related to companies acquired and stock option expense.(4)
    
    Allowance related to investment securities available for sale. 69




---



##### Table of Contents



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. 
 Item 9A.Controls and Procedures. As of December 31, 2003, we carried
out an evaluation, under the supervision and with the participation of
management, including the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the chief executive officer and the chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC filings. There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls subsequent to
the date we carried out our evaluation. 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant. Information regarding the directors and executive officers of S1 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 is incorporated in
this report by reference. Information concerning the independence of our Audit Committee and audit
committee financial expert disclosure 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 is incorporated in this report by reference. 
 Item 11.Executive Compensation. Information regarding compensation of executive officers and directors 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 (excluding the
Compensation Committee Report on Executive Compensation and the Performance of
our Common Stock information) 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 is incorporated in this report by reference. 70




---



##### Table of Contents



The following table provides information with respect to compensation
plans under which equity securities of S1 Corporation are authorized for
issuance to employees, non-employee directors and others as of December 31,
2003: Number of securities to be
    
    Weighted-average
    
    Number of securities remaining availableissued upon exercise of
    
    exercise price of
    
    for future issuance under equityoutstanding options, warrants
    
    outstanding options,
    
    compensation plans (excluding securitiesand rights
    
    warrants and rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation plans
approved by shareholders
    
    
    2,389,500
    
    
    $
    3.76
    
    
    
    5,268,017Equity compensation plans
not approved by shareholders
Employee stock options
    
    
    12,677,533
    
    
    
    13.29
    
    
    
    Warrants
    
    
    84,994
    
    
    
    80.00
    
    
    
    Total
    
    
    15,152,027
    
    
    $
    12.38
    
    
    
    5,268,017
 
 Item 13.Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions 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 is incorporated in
this report by reference. 
 Item 14.Principal Accountant Fees and Services. Information regarding principal accountant fees and services 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 is incorporated in this
report by reference. 
 PART IV 
 Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K. (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 are filed as part of this report and incorporated
in this report by reference: ExhibitNo.
    
    Exhibit Description3.1
    
    Amended and Restated Certificate of Incorporation of S1 Corporation
(S1) (filed as Exhibit 1 to S1s Registration Statement on Form 8-A
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 S1s
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 S1s
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and
incorporated herein by reference).
 71




---



##### Table of Contents



ExhibitNo.
    
    Exhibit Description3.4
    
    Certificate of Designation for S1s Series B Redeemable Convertible
Preferred Stock (filed as Exhibit 2 to S1s Registration Statement on Form
8-A filed with the SEC on September 30, 1998 and incorporated herein by
reference).3.5
    
    Certificate of Designation for S1s Series C Redeemable Convertible
Preferred Stock (filed as Exhibit 3 to S1s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999 and incorporated herein by
reference).3.6
    
    Certificate of Designations for S1s Series D Convertible Preferred Stock
(filed as Exhibit 3 to S1s Current Report on Form 8-K filed with the SEC
on June 7, 2000 and incorporated herein by reference).3.7
    
    Certificate of Designations for S1s Series E Convertible Preferred Stock
(filed as Exhibit 3 to S1s Registration Statement on Form S-8 (File No.
333-72250) filed with the SEC on October 26, 2001 and incorporated herein
by reference).3.8
    
    Amended and Restated Bylaws of S1, as amended (filed as Exhibit 4.7 to
S1s Post-Effective Amendment No. 1 to Form S-8 Registration Statement
(File No. 333-82383) filed with the SEC on August 9, 2000 and incorporated
herein by reference).4.1
    
    Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2000 and incorporated herein by reference).4.2
    
    Specimen certificate for S1s Series B Redeemable Convertible Preferred
Stock (filed as Exhibit 4.3 to S1s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated herein by reference).4.3
    
    Specimen certificate for S1s Series C Redeemable Convertible Preferred
Stock (filed as Exhibit 4.10 to S1s Post-Effective Amendment No. 1 to
Form S-8 Registration Statement (File No. 333-82383) filed with the SEC on
August 9, 2000 and incorporated herein by reference).4.4
    
    Specimen certificate for S1s Series D Convertible Preferred Stock (filed
as Exhibit 4 to S1s Current Report on Form 8-K filed with the SEC on June
7, 2000 and incorporated herein by reference).4.5
    
    Specimen certificate for S1s Series E Convertible Preferred Stock (filed
as Exhibit 4.2 to S1s Registration Statement on Form S-3 (File No.
333-75178) filed with the SEC on December 14, 2001 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 S1s 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
    
    Stock Subscription Warrant, dated December 23, 1999, issued by S1 to
America Online, Inc. (filed as Exhibit 10.16 to S1s Annual Report on Form
10-K for the fiscal year ended December 31, 1999 and incorporated herein
by reference).10.3
    
    Alliance Center Office Lease Agreement, entered into as of February 25,
2000, by and between Solano Associates, as Landlord, and Security First
Technologies, Inc., as Tenant (filed as Exhibit 10.3 to S1s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2000 and
incorporated herein by reference).10.4
    
    Security First Technologies Corporation Amended and Restated 1995 Stock
Option Plan (filed as Appendix Bto S1s definitive proxy statement for
S1s 1999 annual meeting of shareholders and incorporated herein by
reference).*10.5
    
    Amendment to Security First Technologies Corporation Amended and Restated
1995 Stock Option Plan (filed as Exhibit 10.3 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated
herein by reference).*
 72




---



##### Table of Contents



ExhibitNo.
    
    Exhibit Description10.6
    
    Security First Network Bank Amended and Restated Directors Stock Option
Plan (filed as Exhibit 10.2 to Pre-Effective Amendment No. 2 to S1s
Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC
on August 21, 1998 and incorporated herein by reference).*10.7
    
    Amendment to Security First Network Bank Amended and Restated Directors
Stock Option Plan (filed as Exhibit 10.1 to S1s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000 and incorporated
herein by reference).*10.8
    
    Security First Technologies Corporation 1998 Directors Stock Option Plan
(filed as Exhibit 10.3 to Pre-Effective Amendment No. 1 to S1s
Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC
on July 30, 1998 and incorporated herein by reference).*10.9
    
    Amendment to Security First Technologies Corporation 1998 Directors
Stock Option Plan (filed as Exhibit 10.2 to S1s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000 and incorporated
herein by reference).*10.10
    
    Employment Agreement, entered into as of October 5, 2001, by and
between S1 and Matthew Hale (filed as Exhibit 10.36 to S1s Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 and incorporated
herein by reference).*10.11
    
    Employment Agreement, entered into as of April 27, 2001, by and between
S1 and Jaime Ellertson (filed as Exhibit 10.1 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2002 and incorporated
herein by reference).*10.12
    
    Employment Agreement, entered into as of April 30, 2001, by and between
S1 and James Mahan (filed as Exhibit 10.2 to S1s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2002 and incorporated herein
by reference).*10.13
    
    Employment Agreement, entered into as of January 14, 2002, by and
between S1 and Peter Dunning (filed as Exhibit 10.3 to S1s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2002 and
incorporated herein by reference).*10.14
    
    S1 Corporation 2003 Stock Option Plan (filed as Attachment A to S1s
Definitive Proxy Statement on Schedule 14A filed with the SEC on April
18,2003 and incorporated herein by reference).*21
    
    Subsidiaries of S1.23.1
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    Certificate of Chief Executive Officer31.2
    
    Certificate of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002
   *
    
    Management contract or compensatory plan. 73




---



##### Table of Contents



(b) Reports on Form 8-K S1 filed the following Current Report on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 2003: Current Report on Form 8-K filed with the SEC on October 30, 2003 (date of
report: October 30, 2003) (regarding a press release and analyst conference
call related to third quarter 2003 results and S1 and its operations). 74




---



##### Table of Contents



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 15,
2004. S1 CORPORATIONBy:
    
    /s/
    
    Jaime W. EllertsonJaime W. EllertsonChief Executive 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 indicated as of March 15, 2004. Name
    
    Title/s/
    
    Jaime W. EllertsonChief Executive Officer and DirectorJaime W. Ellertson
    
    (Principal Executive Officer)/s/
    
    Matthew HaleChief Financial Officer (Principal FinancialMatthew Hale
    
    Officer and Principal Accounting Officer)/s/
    
    James S. Mahan, IIIChairman of the BoardJames S. Mahan, III/s/
    
    David C. HodgsonDirectorDavid C. Hodgson/s/
    
    M. Douglas IvesterDirectorM. Douglas Ivester/s/
    
    Gregory J. OwensDirectorGregory J. Owens/s/
    
    Howard J. Runnion, Jr.DirectorHoward J. Runnion, Jr.
 75