-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GtQ//MJoverGbuqxZUPuBQPqNU/4wpyoRGVzrCEWKUcNnJFXSr80lr4/Kb4Scvcq pi2t9//APbH/FYMKpr6+4w== 0000950133-00-001355.txt : 20000510 0000950133-00-001355.hdr.sgml : 20000510 ACCESSION NUMBER: 0000950133-00-001355 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: S1 CORP /DE/ CENTRAL INDEX KEY: 0001063254 STANDARD INDUSTRIAL CLASSIFICATION: 7370 IRS NUMBER: 582395199 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24931 FILM NUMBER: 589342 BUSINESS ADDRESS: STREET 1: 3390 PEACHTREE ROAD NE STREET 2: SUITE 1700 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 4048126200 MAIL ADDRESS: STREET 1: 3390 PEACHTREE ROAD NE STREET 2: SUITE 1700 CITY: ATLANTA STATE: GA ZIP: 30326 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY FIRST TECHNOLOGIES CORP DATE OF NAME CHANGE: 19980603 10-K 1 S1 CORPORATION FORM 10-K 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-24931 S1 CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 58-2395199 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3390 PEACHTREE ROAD, NE, SUITE 1700 ATLANTA, GEORGIA 30326 (Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 812-6200 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 . --- --- 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. [ ] As of March 8, 2000, the aggregate market value of the shares of common stock of the registrant issued and outstanding on such date, excluding 11,348,342 shares held by all affiliates of the registrant, was approximately $4,185,909,000. This figure is based on the closing sales price of $105.50 per share of the registrant's common stock on March 8, 2000, and excludes shares held by directors and executive officers because such persons may be deemed to be affiliates. This reference to affiliate status is not necessarily a conclusive determination for other purposes. Shares of common stock outstanding as of March 8, 2000: 51,025,207 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: Not applicable. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. 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. WE DO NOT EXPECT TO ACHIEVE PROFITABLE OPERATIONS FOR THE FORESEEABLE FUTURE AND THIS MAY NEGATIVELY IMPACT THE VALUE OF OUR COMMON STOCK We incurred losses in 1999 and we expect to incur losses in 2000. At December 31, 1999, we had an accumulated deficit of $207.9 million. In addition, as a result of our recent acquisitions, we recorded approximately $928.7 million of goodwill and other intangible assets, resulting in amortization expense of approximately $306.8 million annually over approximately three years. Moreover, we expect that our expenses associated with sales, marketing, research and development, customer support and executive offices will continue to increase over the near term, even though revenues may not keep pace with these expenses. As a result, we expect to continue to incur net losses for the foreseeable future. Our future operating results will be adversely affected if, among other things: - there is insufficient demand for our products; - we are unsuccessful in attracting and retaining motivated and qualified personnel; or - the amount of price and product competition we face increases as a result of the growth of financial services activity on the Internet. ACQUISITIONS MAY BE COSTLY AND DIFFICULT TO INTEGRATE, DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE We acquired three companies in November 1999 and have signed agreements to acquire two additional companies since then. Integrating these companies and any future acquisitions into our existing operations is a complex, time-consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. We may encounter substantial difficulties, costs and delays in integrating acquired operations with our own, including: - 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 conflicts in third-party relationships; and - the loss of key employees and diversion of the attention of management from other ongoing business concerns. In addition, we intend to continue to pursue acquisition or investment opportunities in the future, which could cause us to: - issue additional shares of our stock, which would dilute our current stockholders' percentage ownership; - incur debt and assume liabilities; and - incur amortization expenses related to goodwill and other intangible assets or incur large and immediate write-offs. 1 3 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 expect that 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 clients are not within our control; - our clients' orders tend to be relatively large, and in any given period a substantial portion of our revenues may be attributable to a few clients; - the length of our sales cycle to large financial organizations generally lasts from six to 18 months, which adds an element of uncertainty to our ability to forecast 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 may even 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; - 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 if revenues decrease. WE DEPEND ON A LIMITED NUMBER OF CLIENTS FOR MOST OF OUR REVENUE AND, IF ANY OF THOSE CLIENTS TERMINATES ITS CONTRACT, OUR REVENUES AND FINANCIAL PERFORMANCE WOULD DECLINE Our business success depends on our relationships with a limited number of large clients. On a pro forma basis giving effect to our recent acquisitions of Edify Corporation, FICS Group N.V. and VerticalOne Corporation as if the transactions occurred on January 1, 1999, we had one client which accounted for our 21% of our revenue for 1999. We expect that we will continue to derive a significant portion of our revenue from a limited number of clients in the future. A substantial number of our client contracts do not allow our clients to terminate their contracts prior to the termination date without financial penalties. These financial penalties are usually insufficient to replace the ongoing revenue we would have otherwise received. 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 CLIENT RELATIONS There are many factors which 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: - extraordinary end-user volumes or other events could cause systems to fail or to operate at an unacceptably low speed, causing transaction delays for end users; - our products could contain errors, or "bugs", which could impair the services we provide; - during the initial implementation of some products, we experienced significant delays integrating software and bringing banks online, and we may experience similar difficulties or delays in connection with future implementations and upgrades to new versions; 2 4 - 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; and - our products, or the back-end systems or other software used by our clients, may not have adequately addressed the year 2000 problem, causing our products to fail. 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 computer problems. Although we believe 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. 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 clients or their end users. WE MAY BECOME INVOLVED IN LITIGATION OVER PROPRIETARY RIGHTS, WHICH MAY BE COSTLY AND TIME CONSUMING Other parties may assert that our products, trademarks or other proprietary rights require a license of intellectual property rights or infringe, or may infringe, on their intellectual property rights. Any claims, with or without merit, could: - be time consuming; - result in costly litigation; - cause product shipment delays; or - require us to enter into royalty or licensing agreements. 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 proprietary rights, including patents and trademarks. 3 5 IF WE FAIL TO DEVELOP AND EXPAND OUR DISTRIBUTION CHANNELS, IT WOULD IMPEDE REVENUE GROWTH An integral part of our strategy is to develop multiple distribution channels, including a field sales force, value added resellers and original equipment manufacturers. We intend to continue to expend resources to develop the reseller channel. The loss of resellers, their failure to perform under agreements with us, or our inability to attract and retain new resellers with the technical, industry and application expertise required to market our products successfully in the future could harm our business. To the extent that we are successful in increasing our sales through resellers, those sales will be at discounted rates, and our revenue for each sale will be less than if we had licensed the same products to the customer directly. Expansion of our direct distribution channel depends upon the increased productivity of existing field sales forces and our ability to integrate and train new sales personnel. The cost of these efforts could exceed the revenue generated, and our sales and marketing organization may not be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors. 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 clients 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 client 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. A SIGNIFICANT PORTION OF OUR CLIENTS ARE IN THE RAPIDLY 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 companies. Changes in economic conditions and unforeseen events, like recession or inflation, could occur and reduce consumers' use of bank 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 clients may be acquired by or merged into other financial institutions which already have their own financial Internet software solution or which decide to terminate their relationships with us for other reasons. As a result, our sales could decline if an existing client is merged into or acquired by another company. 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, including the laws of Belgium, where our subsidiary, FICS, is headquartered, 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. 4 6 IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED TECHNICAL EMPLOYEES, WE MAY NOT BE ABLE TO COMPETE Based on the significant growth in our operations, 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. IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR EXPECTED GROWTH, WE WILL NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN We expect to grow rapidly. Our failure to manage our growth effectively could impair our ability to successfully implement our business plan. Our growth will place additional demands on our management, operational capacity and financial resources, including our ability to recruit non-technical personnel for management, sales, marketing and delivery positions. Because many of our implementation and service engagements are large in scale, we must maintain numerous teams of qualified technical personnel to serve our clients efficiently. In addition, our systems, procedures, controls and resources, particularly our client service resources, may not be adequate to support continued expansion of operations. INTERNET-RELATED LAWS COULD ADVERSELY AFFECT OUR BUSINESS 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. For example, a recent session of the United States Congress resulted in Internet laws regarding copyrights, taxation and the transmission of specified types of material. The European Union recently 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. OUR VERTICALONE SERVICE MAY NOT SUCCEED IF FINANCIAL OR OTHER ACCOUNT PROVIDERS DO NOT ALLOW US TO ACCESS END USERS' ACCOUNT INFORMATION FROM THEIR HOST SYSTEMS Unless a significant number of financial organizations or other account providers allow us to access their host systems to gather information for aggregation by our VerticalOne service, we may not succeed in making the service sufficiently useful for our clients' customers to consider it useful. Some financial organizations or other account providers may object to this account access and attempt to block or impede us from performing our aggregation service. We may also choose to cease aggregating financial or other account information from an objecting organization to preserve an existing or potential client relationship or other business purpose. RESTRICTIONS ON OUR EXPORT OF ENCRYPTED TECHNOLOGY COULD CAUSE US TO INCUR DELAYS IN INTERNATIONAL SALES 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. 5 7 WE MAY NOT BE ABLE TO OBTAIN CAPITAL NEEDED FOR FUTURE GROWTH FROM EXTERNAL SOURCES AND, IF WE OBTAIN THIS CAPITAL THROUGH EQUITY ISSUANCES, YOUR INTEREST IN US COULD BE DILUTED OR, IF WE OBTAIN IT THROUGH DEBT, OUR OPERATING FLEXIBILITY COULD BE LIMITED BY COVENANTS We may require additional financing to support our continued operations and for general corporate purposes. We may not be able to fund all of our future capital needs from income from operations. Consequently, we may have to rely on third-party sources of capital, which may not be available to us on favorable terms, if at all. Our access to third-party sources of capital depends on a number of factors, including the market's perception of our growth potential and our present and future revenue. We may also pursue equity investments from strategic partners in the future. If we pursue additional equity offerings, our existing stockholders' interests will be diluted. If we decide to use debt financing, we may have to comply with a variety of operating covenants which could limit our operating flexibility. FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD NEGATIVELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS 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, in the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future. As of February 29, 2000, we had 50,973,048 shares of common stock outstanding, assuming no exercise of outstanding options or warrants or conversion of preferred stock. As of February 29, 2000, holders of approximately 7.4 million restricted shares of our stock or vested options or warrants to purchase restricted shares of our common stock, representing 14.5% of our shares outstanding on that date, have rights which may require us to register their shares with the SEC. In addition, in connection with our pending acquisitions, we have agreed, if these acquisitions close, to register with the SEC up to approximately 2.0 million additional restricted shares for sale for the accounts of holders of stock and options of these companies. 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. In addition, if these stockholders demand to include their shares in one of our registration statements, our ability to raise needed capital could be adversely affected. As of February 29, 2000, there were outstanding employee stock options to purchase 16,200,593 shares of our common stock, options and warrants to acquire 6,425,413 shares of our common stock, and 1,061,514 shares of preferred stock convertible into an aggregate of 1,694,990 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 options and warrants generally have exercise prices significantly below the current market price of our common stock. We have also reserved an aggregate of 4,500,000 shares of our common stock for issuance to the former stockholders of FICS if FICS meets specified performance targets while operating as our subsidiary. The possible sale of a significant number of these shares may cause the market price of our common stock to fall. OWNERSHIP OF OUR COMMON STOCK BY OUR OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT A CHANGE IN CONTROL Our directors, executive officers, principal stockholders and their affiliates beneficially own a significant percentage of our outstanding common stock. This concentration of ownership may: - delay, defer or prevent a change in control of our operations, which could prevent you from selling your shares at a premium; - impede a merger, consolidation, takeover or other business combination; or - discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, and may cause the market price of our common stock to fall. 6 8 MARKET VOLATILITY MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE The trading prices of Internet stocks in general, and ours in particular, have experienced extreme price fluctuations in recent months. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. The valuations of many Internet stocks, including ours, are extraordinarily high based on conventional valuation standards such as price to earnings and price to sales ratios. These trading prices and valuations may not be sustained. Any negative change in the public's perception of the prospects of Internet or e-commerce companies could 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 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 Internet and online commerce industries; - changes in the market valuations of other Internet or online service companies; - developments in Internet regulations; - announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - unscheduled system downtime; - additions or departures of key personnel; and - sales of our common stock or other securities in the open market. In the past, securities class-action lawsuits have often been instituted against companies following stock price declines. Litigation of this type, if instituted, could result in substantial costs and a diversion of our management's attention and resources. INTERNATIONAL OPERATIONS AND CURRENCY EXCHANGE RATE FLUCTUATIONS 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. 7 9 In addition, we maintain our international executive offices and a significant portion of our maintenance, consulting, and research and development operations in Belgium. Therefore, our operations may also be affected by economic conditions in Belgium. These risks associated with international operations may harm our business. BUSINESS OVERVIEW We are the leading global infrastructure provider of Internet-based solutions for financial organizations. Through our "engage, enable, everywhere" strategy, we provide the solutions that empower our client banks, brokerage firms and insurance companies to engage and enable their customers to access their financial information and conduct transactions everywhere the Internet is available. We believe our solutions empower our clients to increase revenue, strengthen customer relationships and gain competitive advantage by meeting the evolving needs of their customers across various lines of business, market segments and delivery channels. We provide a comprehensive set of Internet-based financial services solutions which touch every significant facet of the financial services industry. From banking, brokerage and insurance to personal financial management and tax preparation capabilities, our suites of consumer, retail, small business and corporate applications provide a comprehensive set of solutions for global, national, regional and local financial organizations. Our solutions, including our VerticalOne personal information aggregation service and our Edify interactive voice response technology, reach beyond traditional online financial services to help financial organizations deliver value to their customers, resulting in greater customer retention and increased revenue opportunities for our clients. In addition, we have implemented wireless solutions in the United States, Europe and Australia that allow our clients' customers to access account information and conduct transactions through cellular telephones and hand-held personal digital assistants. We built our revenue model based on charging our clients for our technology as they use it to deliver added value to their customers. To date, we have derived a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring revenues based on the numbers of our clients' end users who use the solutions we provide, as well as from the transactions we process through our Data Centers. INDUSTRY Use of the Internet is growing dramatically. In 1999, International Data Corporation, a global market research firm, estimated that there were 66 million Internet users in the United States and 132 million Internet users worldwide. By the end of 2002, IDC estimated that the number of Internet users will increase to 125 million in the United States and 320 million worldwide. A 1998 U.S. Department of Commerce study estimated that Internet users are spending an increasing amount of time on the Internet, with Internet traffic doubling every 100 days. The growing acceptance of the Internet as a safe, secure and cost-effective means of doing business represents an enormous opportunity for companies to generate additional revenues through Internet commerce. IDC estimated that revenue from business-to-consumer e-commerce will increase from approximately $15 billion in 1997 to more than $178 billion in 2003, a compound annual growth rate of 51%. Forrester Research, a consulting and analysis firm, estimates that revenue from business-to-business e-commerce will increase from approximately $43 billion in 1998 to more than $1.3 trillion in 2003, a compound annual growth rate of 98%. We expect Internet banking to increase in popularity, as well. As Internet banking increases in popularity with consumers and businesses, we expect more financial organizations to offer Internet-based financial services to their customers. IDC estimated that the number of banks offering online banking services will increase from 1,150 in 1998 to 15,845 by 2003. Similar changes are occurring around the world. Forrester Research estimates that nearly 16 million Europeans became Internet-enabled in 1999, doubling penetration to 49 million Internet users, or 13% of the 8 10 population of Europe. In addition, Datamonitor, a market research firm, predicts that there will be over 21 million people in Europe banking over the Internet by 2004. The market for financial services in Europe is changing dramatically with the advent of a single currency and less restrictive work and travel laws across a large block of Western Europe. Our clients and potential clients are taking advantage of these changes to pursue pan-European financial services strategies which we believe will rely heavily on the Internet. Worldwide use of wireless telecommunications has grown rapidly as cellular and other emerging wireless communications services have become more widely available and affordable for the mass business and consumer markets. Advances in technology, changes in telecommunications regulations and the allocation and licensing of additional radio spectrum have contributed to this growth worldwide. Dataquest, a market research firm, estimates that there were approximately 217 million digital wireless subscribers worldwide at the end of 1998 and that the number of subscribers will grow to 706 million by the end of 2002. While use of the Internet has grown, changes have occurred to the regulatory framework facing financial organizations like banks, brokerage firms and insurance companies. In the fourth quarter of 1999, Congress repealed the Banking Act of 1933 (Glass-Steagall), which separated commercial banking from investment banking, and also repealed a 1956 law that separated bank and insurance companies. Under the current guidelines, banks, insurance companies and securities firms are allowed to enter one another's businesses through direct offerings or through mergers or consolidations. As a result of these market trends and industry changes, financial organizations must compete for customers who are demanding the enhanced service and increased personal convenience they can derive by using the Internet. This competition is accelerating the demand for an integrated technology solution that satisfies the service demands of customers, while providing the financial organizations with a convenient personalized communication and marketing channel. Because of the technological difficulties, long development times and risks associated with building internal solutions, many financial organizations are seeking third-party providers, like us, to design and implement their Internet solutions. THE S1 ADVANTAGE We believe we are well positioned to provide solutions to the problems posed by the changing financial services industry because we offer financial organizations a one-stop-shop for their Internet financial services needs. We believe that we derive our competitive advantage from our: - ability to serve financial organizations across all of their targeted markets and applications; - broad range of innovative products, including Internet financial services applications, our personal information aggregation service and our customer contact technology, all of which are scalable to meet increasing end user demand; - global reach with clients on five continents and 1,626 employees worldwide; - management team's experience, vision and expertise in the financial services industry; and - ability to offer our clients the option to implement our solutions directly or to outsource them to our Data Centers. We offer our solutions to all sizes and types of financial organizations, ranging from small banks to global financial institutions, brokerage firms and insurance companies. In addition, through our pending acquisition of Q-Up Systems, Inc., we intend to expand our coverage of the community bank market. To these financial organizations, we offer solutions designed to span all of their targeted markets. We provide products that empower our clients to engage over the Internet not only individuals of varying degrees of wealth and financial sophistication, but also small businesses and large corporations. To community banks and other financial organizations that prefer to focus solely on their Internet banking strategies, we offer a complete turnkey, Microsoft Windows NT-based Internet banking product. We have implemented our NT-based product for more financial organizations than any other company offering an NT-based Internet banking product. To financial organizations desiring to offer additional functionality to 9 11 consumers, we offer a product that integrates banking, investments and insurance applications with personalized content, resulting in a complete financial destination site. We also offer business-oriented Internet-based products that deliver banking and cash management along with customizable content. In addition, we complement these financial services products with our personal information aggregation service and our customer contact technology. We have established a global infrastructure and distribution network through which we deliver our products and services through our acquisitions of FICS and Edify in November 1999 and our strategic relationship with Andersen Consulting. Because all of our Internet financial services solutions can be customized for use with multiple languages and currencies, we believe we are well-positioned to exploit this infrastructure advantage through continued global expansion. Since November 1999, we have established several new client relationships abroad. In addition, we have licensed our wireless solutions to clients in Greece, Luxembourg and Australia over the last year. Our management team's experience, vision and expertise in the financial services industry also differentiate us from our competitors. Using technology we developed while we were a subsidiary of Security First Network Bank, in 1995 we launched SFNB as the first FDIC-insured Internet bank in the world. Our executive team is consistently recognized for its industry experience, talent and visionary strength. Our co-founder and chief executive officer, James S. Mahan, III, was recently named one of the top ten most influential personalities in banking by FutureBanker magazine. In addition, Mr. Mahan and virtually all of our senior executives gained experience in the financial services industry before joining us. We believe this experience provides us with insight into the needs of financial organizations. We believe our Data Center operations provide us with another advantage over our competitors. We believe that Internet-based solutions are more difficult for our clients to support than other technologies they may employ. As a result, to meet our clients' increasing outsourcing needs, we built a Data Center near our Atlanta headquarters. Through our Data Centers, we provide organizations with a cost-effective alternative to building, staffing and maintaining their own data centers to host their Internet financial services offerings. Our Data Center operations provide us with recurring revenues from our clients based on the number of their customers who are using our products. Because we anticipate that global demand for outsourcing of Internet-based financial applications will increase, we intend to expand our Data Center operations internationally. We are currently establishing data center sites in London and Singapore to serve our clients in Europe and the Asia/Pacific region. THE S1 STRATEGY We provide Internet-based solutions to financial organizations worldwide through our "engage, enable, everywhere" strategy. Our solutions allow our clients to engage and enable their customers to access their financial information and conduct transactions with them everywhere the Internet is available. Through our solutions, we enable our clients to extend and strengthen customer relationships, increase revenue and create a competitive advantage. We describe the key elements of our "engage, enable, everywhere" strategy below. Maintain technology leadership. We have invested heavily in the development of our technology since our inception. In February 2000, we received a patent for our invention of the three-tier architecture, which combines local data storage with interfaces to the main financial system, creates a superior capability to access financial information for customers of our clients by providing greater availability of the information and an interactive register. In addition, we continue to engineer our technology to provide increased scalability. Performance testing on our most recent version of our Consumer Suite indicated that the product could support up to 20 million end users in a typical client configuration. We also continue to expand the ability of our product to work with all Internet-enabled devices. We have implemented wireless solutions in the United States, Europe and Australia that enable customers of our clients to access their account information and conduct transactions over the Internet through cellular telephones and hand-held personal digital assistants. We intend to expand the availability and breadth of our wireless solutions to meet the growing demand we perceive for wireless solutions. We plan to continue to offer leading-edge technology that empowers our clients to offer feature-rich and easy-to-use Internet financial services in a secure environment. 10 12 Continue to introduce leading-edge products and services. We plan to develop and acquire additional products and enhancements to existing products to respond to changing client needs and market demands. Our solutions enable end users of our clients to consolidate, store, personalize and process their financial information. We incorporate into our solutions a broad range of products, allowing our clients to engage their customers over the Internet. For example, we incorporate BroadVision's "One-to-One" marketing product in our solutions, which allows our clients to market additional products and services to particular customers based on their characteristics and the activities they perform while using our products. Also, as a result of our acquisition of VerticalOne Corporation in November 1999, we now offer an innovative aggregation service that makes our solutions more appealing to end users who wish to view all of their financial information and other personal account information at our clients' Web sites. We also offer interactive voice response solutions. Partner with leading distribution and implementation players. We intend to expand and leverage our relationships with key business partners. These relationships broaden our distribution network and provide resources that contribute to effectively maximizing opportunities. For example, in 1999 we entered into a relationship with Andersen Consulting. Andersen Consulting provides us with associates whom we train to assist us in the implementation of our products and also supports our marketing of our products to large financial organizations worldwide. In addition, we have formed distribution alliances with third-party data processors, including Fiserv, Inc., M&I Data Services and NCR Corporation, through which we support our small and mid-sized financial organization clients. Continue to expand our operations internationally. Our acquisition of FICS and Edify and our strategic relationship with Andersen Consulting have provided us with a global infrastructure and distribution network through which we can deliver our solutions. We plan to continue to expand our operations in Europe and the Asia/Pacific region through continued development of integrated banking, investment and insurance solutions. We also intend to market our aggregation service and our wireless solutions aggressively, both alone and bundled with our core products. In addition, we expect to expand our existing Data Center operations to meet anticipated growth in international demand for outsourcing services. We are currently establishing a European-based Data Center in London and a Data Center in Singapore for our Asia/Pacific regional operations. Like our existing Data Center in Atlanta, we are designing each of these new facilities to host our entire line of products and to ensure the security of data and communications. We may enhance our global expansion efforts through strategic relationships or joint ventures with key players in a particular region if we determine that joining forces can help us achieve our goals more efficiently. In addition, we will evaluate and may pursue alternative capital structures, including strategic partnerships, joint ventures or equity offerings, to enhance our global expansion efforts. For example, in December 1999 we announced a letter of intent with Zurich Financial Services under which Zurich would invest in a separate business unit that would operate our European-based Data Center. We are continuing to evaluate that structure, as well as alternative structures for our European operations. Pursue strategic acquisitions. We intend to pursue strategic acquisitions that would provide additional technology, product or service offerings, additional industry expertise, a broader client base or an expanded geographic presence. In November 1999, using these criteria, we acquired three companies: Edify, based in Santa Clara, California; FICS, based in Brussels, Belgium; and VerticalOne, based in Atlanta Georgia. Since January 1, 2000, we have entered into agreements to acquire two additional companies: Davidge Data Systems, Inc., a New York, New York-based provider of order routing services to brokerage firms; and Q-Up Systems, Inc., an Austin, Texas-based provider of Internet financial services solutions to community banks. If we had closed on each of these two pending acquisitions on March 8, 2000, we would have issued an aggregate of approximately 2.6 million shares of our common stock and assumed and issued options that, if exercised, would have required us to issue up to approximately 1.7 million additional shares of our common stock. We intend to structure our organization to maximize our ability to apply our management team's experience and expertise to address the changing financial services industry. In fiscal year 2000, we are operating our VerticalOne subsidiary and our interactive voice response divisions as separate business units that pursue their own business plans. We plan to operate Davidge and Q-Up as separate business units after we close on these acquisitions, as well. We will also continue to evaluate and make strategic investments in, 11 13 and develop relationships with, start-up companies that we believe offer promise of developing additional products or services complementary to our own. PRODUCTS AND SERVICES We build integrated Internet-based solutions that enable our clients to deliver value to their customers, allowing our clients to increase revenue, strengthen customer relationships, and gain competitive advantage. Our core financial services products enable customers of financial organizations to access their account information and conduct most of their financial transactions over the Internet. Our financial services products can be combined with financial planning tools and personalized content which enhance our clients' abilities to keep their customers engaged. Our recently acquired VerticalOne aggregation service increases the frequency, duration and quality of these customers' visits to our clients' Web sites. We also maintain a global professional services staff whose members are fully trained in the customization and implementation of our solutions. Our products and services address the needs of financial organizations to offer solutions across multiple markets ranging from the typical consumer to high net worth individuals and from small businesses to large corporations. Our products integrate components covering the full scope of the financial services industry, including banking, brokerage and insurance applications. We design our products to ensure scalability as the number of customers using our clients' Internet financial services applications increases. Performance testing on the most recent version of our Consumer Suite indicated that the product could support up to 20 million end users in a typical client configuration. We separate our product lines into those serving the consumer and business markets. We describe the features of our products within each of these categories below. Consumer-Oriented Products We offer two Internet banking solutions targeted to meet both the needs of financial organizations that desire a turnkey solution and the needs of organizations that desire a more comprehensive solution. To community banks and other financial organizations that prefer to focus solely on their Internet banking strategies, we offer S1 Retail Banking, a Windows NT-based banking solution that is complete and ready to operate when delivered to the financial organization. S1 Retail Banking offers a targeted group of services and functionality ideal for financial organizations focused on banking, and can be customized with optional bill payment and presentment and targeted marketing capabilities. S1 Retail Banking is the most widely installed NT-based Internet solution at mid-sized and large banks. Our other Internet banking product, S1 Consumer Banking, may be integrated with the rest of the S1 Consumer Suite products, resulting in a comprehensive product offering. S1 Consumer Banking provides an interactive check register that is updated daily with cleared transactions and real-time for any future dated transactions entered by the customer. In addition, financial information can be supplemented with personalized categories for reporting and financial management. The S1 Consumer Suite is comprised of the additional following applications: - S1 Consumer Investments - S1 Relationship Management - S1 Consumer Insurance - S1 Bill Presentment - Content and Planning Tools The S1 Consumer Suite appeals to financial organizations that want to integrate multiple capabilities for the convenience of their customers. The S1 Consumer Suite is a comprehensive and customizable suite that allows financial organizations to provide their customers with Internet banking, brokerage, bill presentment and payment and insurance products and services. In addition, through the S1 Consumer Suite, by identifying 12 14 the activities they perform while using our applications, financial organizations can engage in personalized "one-to-one" marketing of additional products and services geared to meet the needs of their existing customers. This suite creates financial destination sites with broad, robust functionality integrated across multiple financial products, including many optional add-ons such as customer care, tax preparation and financial planning tools. Business-Oriented Products S1 Business Suite. The S1 Business Suite is designed for financial organizations that want to deepen their relationships with small to mid-sized businesses by offering remote access to their financial information along with cash and financial management tools. The S1 Business Suite delivers a wide range of financial services including banking, cash management, and customizable content to create a financial destination site for the business user. S1 Corporate Suite. We developed the S1 Corporate Suite for financial organizations that want to focus on their large corporate customers by offering a comprehensive, Internet-based cash management offering. The S1 Corporate Suite offers broad-ranging banking functionality over the Internet for global payments, balance and transaction reporting, check services, customer messaging, custody and trade finance. It is designed for financial organizations looking to provide integrated Internet banking applications to meet their customers worldwide needs. Complementary Offerings In addition to the products and services described above, we deliver a number of other products and services that extend our core products. Aggregation Service. Through our wholly owned subsidiary, VerticalOne, we offer a service that consolidates, organizes and presents the personal account information of our clients' customers at our clients' Web sites. Our service allows customers of our clients to go to our clients' Web sites to view summary snapshots of their account balances from a variety of sources, including: - airline and other reward programs; - communications companies, including telephone and cellular services; - brokerage and other investment sites; - credit card companies; - banks; - Web-based e-mail; and - other service providers that bill customers over the Internet. Because our aggregation service offers our clients' customers the convenience of a single master password and user identification code, it allows these customers to eliminate the need to remember and key in disparate user names and passwords at each source's site. In addition, with our "Quick Login" feature, our clients' customers can use a hyperlink to jump directly to their opening screens at a particular Web site if they want to after viewing their account balances from our clients' sites. We have marketed our aggregation service successfully to non-financial organizations including BellSouth Corporation and Disney's Go Network, and we intend to continue to target other organizations that maintain an active Internet presence. Moreover, we believe that this service is particularly useful for clients that employ our financial services solutions. By combining our financial services solutions, which consolidate the customer's financial data within an organization, with our aggregation service, financial organizations can act as an aggregator of their customers' account information from other financial organizations or account sources. As a result, financial organizations can position their Web sites as financial destinations that provide customers with access to all of their personal account information. 13 15 Customer Contact Technology. We offer interactive voice response solutions that allow organizations to automate, integrate and personalize interactions with customers through multiple channels, yielding stronger, more profitable relationships. Using customer-determined profiles and interests, our clients can notify their customers about new products or services. Calls that do require human assistance can automatically be routed to the most appropriate person. All of these goals can be accomplished through a combination of channels, including telephone, Internet, e-mail, fax, and pager. In addition, we offer a natural language speech recognition product and an optional marketing campaign management component that enables businesses to deliver products and services to targeted prospects consistently through multiple channels. Data Center Services. In August 1999, we opened a new Data Center in Atlanta to accommodate our clients' increasing outsourcing needs. The Data Center employs the latest, proven technology to support some of our largest financial organization clients. We earn recurring revenues for each end user we process for our clients through our Data Center. Through our Data Center operations, we provide organizations with a cost-effective alternative to building, staffing and maintaining their own data centers to host their Internet financial services offerings. By outsourcing to our Data Centers, organizations can gain immediate access to highly skilled information systems specialists who know the online financial services business and can deliver solutions to the organizations' customers faster. We expect to continue to extend our Data Center operations to meet anticipated growth in international demand. We recently entered into a sublease for property on which we are establishing a European-based Data Center. In addition, we are currently establishing a Data Center in Singapore for our Asia/Pacific regional operations as demand for these outsourcing services increases. Like our existing Data Center in Atlanta, we are designing each of these new facilities to host our entire line of products and to ensure the security of data and communications. Professional Services. We surround our applications with flexible implementation, maintenance and support options. We provide professional services for the installation and integration of our products, including installation at third-party data processing centers and direct licensee sites or integration of the financial organization's data processing systems within our Data Centers. In addition, we provide training, consulting and product enhancement services. We maintain a worldwide customer engagements team of more than 512 qualified professionals to assist with customization and implementation of our applications and to support the efforts of our partners to integrate our solutions with their own. In addition, we have partnered with Andersen Consulting, one of the world's largest and most highly regarded systems integrators, to offer a comprehensive and experienced team of consultants and implementation specialists. A significant number of Andersen Consulting associates have already been trained on implementing our applications and are now working actively with our organization to service our customers. CLIENTS AND MARKETS We provide innovative Internet-based financial services solutions to global financial services organizations. We also provide aggregation services to leading Internet portal providers. In addition, we provide our customer relationship management technology to companies in the consumer goods, manufacturing, insurance and healthcare, technology and telecommunications industries. During 1999, we provided implementation and product enhancement services for State Farm Mutual Automobile Insurance Company. We derived 40% of our total revenues in 1999 from State Farm. On a pro forma basis, giving effect to our acquisitions of FICS, Edify and VerticalOne as if the transactions occurred on January 1, 1999, State Farm accounted for 21% of our total revenue for 1999. 14 16 ALLIANCES AND PARTNERSHIPS We have established strategic alliances with organizations around the globe to deliver competitive and comprehensive Internet-based financial service solutions to our customers. Through these global alliances, we intend to accelerate the pace of innovation, implementation and service delivery to financial organizations worldwide. Following is a description of four strategic alliances that we consider particularly important to our operations: Andersen Consulting LLP In February 1999, we formed a strategic alliance with Andersen Consulting to jointly develop business strategies and implementation processes that increase an organization's ability to leverage new technology, enhance speed to market and compete more effectively in delivery of Internet-based services. This alliance added significant resources that helped expand our capacity for product development, distribution, delivery and implementation. In addition, Andersen Consulting agreed to promote us as its preferred provider of Internet banking solutions. As part of the alliance, a member of the Andersen Consulting worldwide organization made an investment in our common stock, and we issued to Andersen Consulting a warrant to purchase additional shares of our common stock. We expect to benefit from the extensive relationships Andersen Consulting has established with strategic financial services companies throughout the world. In addition, Jackson L. Wilson, Jr., Managing General Partner -- AC Ventures, a unit of Andersen Consulting that invests in new and innovative businesses, joined our Board of Directors in August 1999. Mr. Wilson is also a member of Andersen Consulting's Executive Committee. Hewlett-Packard Company In February 1999, we entered into an alliance with Hewlett-Packard to provide integrated financial services. As part of the alliance, Hewlett-Packard made an investment in our common stock. Since February 1999, Hewlett-Packard has promoted us as its preferred provider of Internet applications for the financial services industry. We anticipate that this alliance will continue to expand our distribution capacity through Hewlett-Packard's global infrastructure. Intuit Inc. In May 1999, we entered into a strategic agreement with Intuit to deliver online financial software and services to financial organizations. In connection with that agreement, Intuit made an investment in our common stock and we granted Intuit an option to purchase a significant number of additional shares of our common stock. Since signing this agreement, we have worked on integrating Intuit's TurboTax software within our applications. Further, we plan to equip several of our customers with personal financial management and income tax preparation and electronic filing capabilities in time for preparation of individuals' tax returns for the year 2000. BroadVision, Inc. We have established a relationship with BroadVision to integrate the BroadVision "One-to-One" marketing product with our solutions. As part of this relationship, we obtained a license to use and resell BroadVision's "One-to-One" marketing suite of products and BroadVision made an investment in our common stock. By integrating the "One-to-One" product into the S1 Consumer Suite, financial services firms using our products will be able to collect and organize data resulting from customer transactions and use that data to specifically target cross selling of products. 15 17 ADVISORY RELATIONSHIPS We maintain a Customer Advisory Council to provide our executive management team with strategic intelligence, insight, forward vision and guidance to ensure our strategic vision is aligned with the evolving market for Internet-based financial services solutions. The Advisory Council: - reviews product strategy; - assesses potential strategic partnership opportunities; - provides intelligence on competitive offerings and other financial institutions; and - provides technical guidance on product functionality. The Advisory Council includes representatives of Citibank, BankAmerica, The Principal Financial Group, Synovus Financial Corp., Royal Bank of Canada, and other financial organizations. In addition, we have established a Product Advisory Committee that assists us in defining and prioritizing detailed requirements for the products that comprise the S1 Consumer Suite, the S1 Business Suite and the S1 Corporate Suite. SALES AND MARKETING We sell our solutions to small, mid-sized and large financial organizations. As of February 29, 2000, our sales force was comprised of 189 professionals structured in three major regional groups -- Americas, EMEA (Europe, Middle East and Africa) and APAC (Asia/Pacific/Australia). Within each group, we divide our sales force into two teams: named accounts and field sales. Our named accounts sales team manages our relationships with existing customers and markets our products to the 300 largest financial organizations in the world based on asset size. Our named accounts sales force focuses on developing long-term relationships with senior management of large financial organizations, typically including these organizations' chief executive officers and the heads of their retail banking and information technology divisions. The sales cycle for these large financial organizations generally lasts from six to 18 months. Contracts we enter into with these large financial organizations typically have multi-year terms. Once we have established a relationship with these organizations and their senior management teams, we continue to market additional products and services to them. Our field sales team focuses on building successful relationships with smaller financial organizations. In addition, our field sales team assumes responsibility for our relationships with our distribution partners including M&I Data Services, Fiserv and NCR, thereby maximizing our market penetration through the reseller channel. Our acquisition of Q-Up will provide us with additional relationships and management focus to further expand our penetration into community financial institutions. The sales cycle for these small to mid- sized financial organizations typically lasts from two to six months, and the contracts we enter into with them typically provide for direct delivery and service requirements which we perform over a shorter period of time than our contracts with large financial organizations. To maximize the understanding of our solutions, our sales support team provides functional and technical sales support. In addition to our internal sales efforts and our joint efforts with distribution partners like Andersen Consulting, M&I Data Services, Fiserv and NCR, we market our 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; - maintaining memberships in key industry organizations, such as Bank Administration Institute and Global Concepts, a payment systems consulting firm; - establishing close relationships with industry analysts to help guide our product development and marketing efforts; and - establishing "preferred vendor" relationships like those we have solidified with Andersen Consulting, Hewlett-Packard and Intuit. 16 18 PRODUCT AND SOFTWARE DEVELOPMENT As of February 29, 2000, our product management and development staff consisted of 483 employees located in three countries. Our product management group is responsible for strategic product planning, managing customer and market demands, performing competitive analysis and managing the product roll-out process for each product under development. The department consists of individuals with extensive industry expertise related to the product they are managing. The product managers work closely with the development group to ensure that the functionality in the product exceeds industry standards. Our development group creates new products following an iterative and incremental development life cycle. The software life cycle consists of six phases: initiation planning, analysis-design, construction, testing, implementation and maintenance. Our software developers have extensive experience in advanced software development techniques and work closely with our product managers to ensure that they are considering the complex processes involved in financial services systems. This same group is also responsible for quality assurance of products utilizing expertise in software quality assurance techniques. The group utilizes an incremental form of testing for all products. Testing is accomplished in three separate phases: unit testing, system testing and integration testing. These three phases or levels of testing accompany the product development cycle from initial coding through product pre-release for each developmental project. The goal of each testing phase is to detect errors at the earliest stage of the system/product development cycle. TECHNOLOGY Our product architecture provides an open, scalable platform to maximize the value and power of the applications while enabling integration of future technologies. Our platform is equipped to deliver hybrid solutions that are designed to meet various business needs of our clients. We deliver both fat and thin server capabilities to suit individual customer requirements. Fat server technology provides the capability to consolidate the end user's financial data from disparate host systems and allows end users to categorize and report on this information. Thin server capabilities provide a cost-effective solution for financial organizations that are looking to provide base functionality to their customers. Our applications are designed for various operating systems and platforms. We offer solutions that operate within a UNIX or NT environment, as well as solutions that run on IBM, HP or Sun Microsystems platforms. Our applications are designed with open standards that facilitate integration with both front and back-end systems. Our extensible open object architecture facilitates the integration of applications developed on the same or disparate platforms, developed by us or our partners, internal development teams or other third-party application developers. We have integrated our applications with more than 90 different back-end systems to date. The resulting integrated solutions not only leverage the individual strengths of these separate applications, but also create new service opportunities that yield a higher value to financial organizations than each of the applications alone. Multiple delivery channel support and application integration is accomplished through the use of a number of standards based on approaches such as Extensible Markup Language (XML), Component Object Model (COM), CORBA and Open Financial Exchange (OFX). Our Data Center provides access to host computers for messaging, online updates and inquiry into the systems operating our solutions. All communications between the applications running in the Data Center and the organization's host network are routed through a Virtual Private Network connection in order to provide enhanced security. The Data Center is responsible for ensuring availability of all types of communications including online, email, frame relay circuit and host communications. In addition, the Data Center provides production, change control, job scheduling, data storage management, storage of backups and job performance analysis for systems operating our products. Our recovery plan provides the organization with a defined recovery site, data processing resources and vital records required for restoration of all the organization's operations in the Data Center. 17 19 COMPETITION The market for online banking and financial software is competitive, rapidly evolving and subject to technological change. With the continued development of the Internet as an accepted avenue for providing financial services, we expect competition to intensify. Currently, we perceive that our primary competition comes from the in-house development efforts of our target clients, as some financial organizations believe in using their own resources to build solutions. We believe that this strategy is inefficient for financial organizations because: - building an Internet-based financial services solution greatly lengthens time to market; - building, maintaining and upgrading the solution is very costly; - attracting and retaining the necessary technical personnel is difficult for these organizations; and - technology development may be too far outside the financial organizations' core competencies to be effective or successful. Additional competitors currently include software companies that provide turnkey online banking and brokerage solutions and Internet integration tools. Among the companies offering Internet banking solutions are Digital Insight Corporation, BROKAT Infosystems AG, Corillian Corporation, Fundtech, Magnet, IBM, BroadVision, Sybase and Online Resources Corporation. Our primary competitors with respect to our aggregation service include Yodlee, EZLogin and Corillian's OneSource product. The offerings of these competitors are at various stages of development and marketing. In the customer contact area, we compete principally with stand-alone interactive voice response vendors including InterVoice-Brite, Inc., Lucent Technologies Inc., Periphonics Corporation, Syntellect Technology Corporation and TALX Corp. We believe that our ability to compete successfully depends on a variety of factors, including: - our ability to empower our clients to engage their customers by offering our comprehensive, scalable and easy-to-use products; - our ability to expand our existing offerings, maintain technological leadership and introduce new products; - our success with our global expansion efforts; - the quality and reliability of our Data Centers and professional services; - our ability to integrate successfully the products and service offerings of companies we acquire through strategic acquisitions; - the reputation of our solutions in the marketplace; and - our pricing policies. INTELLECTUAL PROPERTY Our success is partially dependent upon our leading-edge proprietary technology and information. We rely upon a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary technology and information. We generally enter into nondisclosure agreements with our employees, contractors, consultants, distributors and corporate partners that limit access to and distribution of our software, documentation and other proprietary information. In many cases, we make efforts to protect our proprietary software and business practices by obtaining patents for such technology. In February 2000, we were issued a patent based on our invention of a three-tier architecture with local data storage to provide customers of our clients with access to their account information at financial organizations. We currently have seven patents pending on our technology. We cannot guarantee, however, that applications for such patents will be granted by U.S. or international authorities, nor 18 20 can we assure that we will be able to enforce such patents, if issued, against third parties. Further, we cannot be sure that a known or unknown competitor has patented technology similar or identical to ours, and that such patents may take priority over ours. It is our intention to vigorously protect our innovations. Despite our efforts to protect our proprietary software, unauthorized parties may attempt to copy or otherwise obtain and use products or technology that we consider proprietary and third parties may attempt to develop similar technology independently. In particular, we provide our existing and potential distribution partners with access to our product architecture and other proprietary information underlying our licensed software. Policing unauthorized use of our software is very difficult due to the nature of software, and, while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. Accordingly, there can be no assurance that the steps we have taken to protect our services and products are adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. 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, or "FRB", 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. In addition, the FRB has determined that three bank holding companies, Area Bancshares Corporation, Huntington Bancshares Corporation and Wachovia Corporation, control our subsidiary, S1, Inc. As a result, S1, Inc. is subject to restrictions on its activities and supervision, regulation and examination by the FRB as a company controlled by bank holding companies. 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. For example, a recent session of the United States Congress resulted in Internet laws regarding copyrights, taxation and the transmission of specified types of material. Congress also adopted legislation imposing obligations on financial institutions to develop privacy policies, restrict the sharing of non-public customer data with nonaffiliated parties at the customer's request, and establish procedures and practices to protect and secure customer data. These privacy provisions, which may apply to us because of the broad definition of "financial institution" contained in the legislation, will be implemented by regulations that will take effect on or after November 12, 2000. Even if the regulations do not apply directly to us, they will apply to our financial institution clients. In addition, the European Union recently 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. Any development that substantially impairs the growth of the Internet or its acceptance as a medium for transaction processing could render our business or operations more costly, less efficient or impossible. EMPLOYEES As of February 29, 2000, we had 1,626 employees. Our employees are not represented by a collective bargaining unit, and we believe our relationships with our employees are satisfactory. In addition to full-time 19 21 employees, we have used the services of various independent contractors for professional services projects and product development. ITEM 2. PROPERTIES. Our executive offices are currently located at 3390 Peachtree Road, NE, Atlanta, Georgia. We have, however, entered into a lease for new executive office space at a location near our current facilities and intend to move into the new space once construction is completed in 2001. Our Atlanta-based Data Center is located at 705 Westech Drive, Norcross, GA. Our European headquarters are located at Excelsiorlaan 87, B-1930 Zaventem, Brussels, Belgium. We also maintain offices in the United States in Boston, Charlotte, Dallas, and Santa Clara. We maintain international offices in Johannesburg, Lisbon, London, Luxembourg, Madrid, Melbourne, Paris, Rotterdam, Singapore and Sydney. We lease all of our office space as well as our Data Center sites. We owned computer equipment with a book value of $19.6 million at December 31, 1999. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which S1 or any of our subsidiaries is a party or of which any of our property or the property of any of our subsidiaries is the subject, other than ordinary routine litigation incidental to our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) A special meeting of S1's shareholders was held on November 10, 1999. (b) Not applicable. (c) The following matters were voted on and approved by S1's shareholders at the special meeting held on November 10, 1999: (i) issuance of shares of S1 common stock in the acquisition of FICS Group N.V. (Proposal 1); (ii) issuance of shares of S1 common stock in the acquisition of Edify Corporation (Proposal 2); (iii) issuance of shares of S1 common stock in the acquisition of VerticalOne Corporation (Proposal 3); and (iv) amendment to S1's charter to change its name to "S1 Corporation." As to Proposal 1, shareholders cast 18,785,907 votes for, 94,811 votes against, 27,437 abstentions and 6,894,557 broker non-votes. As to Proposal 2, shareholders cast 18,793,846 votes for, 89,071 votes against, 25,238 abstentions and 6,894,557 broker non-votes. As to Proposal 3, shareholders cast 18,763,976 votes for, 123,386 votes against, 20,793 abstentions and 6,894,557 broker non-votes. As to Proposal 4, shareholders cast 24,884,511 votes for, 172,955 votes against, 17,401 abstentions and 727,845 broker non-votes. The record date for the special meeting was October 1, 1999. (d) Not applicable. 20 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Our common stock has been quoted on the Nasdaq National Market under the symbol "SONE" since October 1998. Prior to that time, the common stock of S1's predecessor, Security First Network Bank, was quoted on the Nasdaq National Market under the symbol "SFNB" from its initial public offering on May 23, 1996 through September 1998. 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, as adjusted for the May 1999 two-for one stock split of the common stock.
HIGH LOW ------ ------ 1998 - - --------------------------------------------------------- First Quarter............................................ $ 6.94 $ 3.19 Second Quarter........................................... 7.88 3.75 Third Quarter............................................ 13.81 5.38 Fourth Quarter........................................... 18.88 4.63 1999 - - --------------------------------------------------------- First Quarter............................................ $38.00 $14.50 Second Quarter........................................... 79.25 29.50 Third Quarter............................................ 50.25 25.13 Fourth Quarter........................................... 89.00 32.13
As of the close of business on March 8, 2000, there were 599 holders of record of our common stock. We have not paid or declared cash dividends on our common stock or preferred stock since our initial public offering in May 1996 and do not anticipate paying cash dividends on our capital stock in the forseeable future. On December 23, 1999, S1 issued to America Online, Inc. a Stock Subscription Warrant to purchase 84,994 shares of S1's common stock at a price per share of $80.00. The warrant may be exercised in whole or in part at any time or times from December 23, 1999 to the fifth anniversary of that date. A copy of the Warrant is filed as Exhibit 10.16 to this report and incorporated herein by reference. (b) Not applicable. 21 23 ITEM 6. SELECTED FINANCIAL DATA. The following table presents our selected statement of operations data and our selected balance sheet data 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, ------------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues: Software licenses.............................. $ -- $ 512 $ 4,142 $ 4,781 $ 19,050 Professional services.......................... -- 699 6,277 13,747 56,432 Data center.................................... -- 56 411 3,181 8,858 Other.......................................... -- -- -- 2,471 8,550 -------- -------- -------- -------- ----------- Total revenues.......................... -- 1,267 10,830 24,180 92,890 -------- -------- -------- -------- ----------- Direct costs: Software licenses.............................. -- 796 1,605 503 642 Professional services.......................... -- 535 5,346 8,098 36,327 Data center.................................... -- 2,266 6,947 7,218 9,008 Other.......................................... -- -- -- 2,285 7,112 -------- -------- -------- -------- ----------- Total direct costs...................... -- 3,597 13,898 18,104 53,089 -------- -------- -------- -------- ----------- Gross margin............................ -- (2,330) (3,068) 6,076 39,801 -------- -------- -------- -------- ----------- Operating expenses: Selling and marketing.......................... -- 2,154 4,305 4,723 12,169 Product development............................ -- 4,048 10,507 13,768 24,036 General and administrative..................... 46 3,635 3,981 5,451 13,913 Depreciation and amortization.................. -- 256 1,741 5,347 6,924 Stock option compensation expense.............. -- -- 656 1,544 1,118 Marketing cost from warrant issued............. -- -- -- -- 715 Merger related costs........................... -- -- -- -- 8,744 Acquired in-process research and development... -- -- -- -- 59,300 Amortization of acquisition intangible assets....................................... -- 7,072 4,525 4,384 40,206 -------- -------- -------- -------- ----------- Total operating expenses................ 46 17,165 25,715 35,217 167,125 -------- -------- -------- -------- ----------- Operating loss.......................... (46) (19,495) (28,783) (29,141) (127,324) Interest income.................................. 101 1,672 1,481 583 2,237 -------- -------- -------- -------- ----------- (Loss) income from continuing operations......... 55 (17,823) (27,302) (28,558) (125,087) ======== ======== ======== ======== =========== Discontinued operations: Loss from operations........................... (1,535) (4,236) (689) (3,059) -- Gain on sale................................... -- -- -- 812 -- -------- -------- -------- -------- ----------- Loss from discontinued operations................ (1,535) (4,236) (689) (2,247) -- -------- -------- -------- -------- ----------- Net loss......................................... $ (1,480) $(22,059) $(27,991) $(30,805) $ (125,087) ======== ======== ======== ======== =========== Basic and diluted net loss per common share from continuing operations.......................... $ -- $ (1.52) $ (1.53) $ (1.30) $ (4.28) Basic and diluted net loss per common share from discontinued operations........................ (0.08) (0.36) (0.04) (0.10) -- -------- -------- -------- -------- ----------- Basic and diluted net loss per common share...... $ (0.08) $ (1.88) $ (1.57) $ (1.40) $ (4.28) -------- -------- -------- -------- ----------- Weighted average number of shares of common stock outstanding.................................... 18,902 11,748 17,846 22,037 29,228 ======== ======== ======== ======== =========== BALANCE SHEET DATA: Cash and cash equivalents...................... $ 3,710 $ 4,122 $ 3,137 $ 14,504 $ 67,850 Total assets................................... 3,948 45,941 36,192 48,293 1,132,487 Notes payable.................................. -- -- -- -- 6,351 Capital lease obligation, excluding current portion...................................... -- -- -- 159 1,086 Stockholders' equity........................... 3,367 40,859 25,140 17,229 990,807
22 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD LOOKING STATEMENTS The annual report and the documents incorporated into this annual report 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 S1's, FICS's, Edify's and VerticalOne's financial condition, results of operations and business and on the expected impact of the FICS Transaction, the Edify Transaction and the VerticalOne Transaction on S1's financial performance. Words such as anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include: - the possibility that the anticipated benefits from our recent acquisition transactions will not be fully realized; - the possibility that costs or difficulties related to our integration of FICS, Edify and VerticalOne will be greater than expected; - our dependence on the timely development, introduction and customer acceptance of new internet services; - rapidly changing technology and shifting demand requirements and internet usage patterns; - other risks and uncertainties, including the impact of competitive services, products and prices, the unsettled conditions in the internet and other high-technology industries and the ability to attract and retain key personnel; and - other risk factors as may be detailed from time to time in our public announcements and filings with the SEC. OVERVIEW We are the leading global infrastructure provider of Internet-based solutions for financial organizations. Prior to September 30, 1998, we were the technology subsidiary of Security First Network Bank, which was the first Internet bank. On September 30, 1998, we completed a reorganization to separate our banking and technology businesses, and then sold the banking business to a subsidiary of Royal Bank of Canada. In November 1999, we completed the acquisitions of Edify, FICS and VerticalOne. On November 10, 1999, we changed our name from Security First Technologies Corporation to S1 Corporation. Revenues We derive our revenues primarily from three sources: Software licenses. We receive license fees from direct licensees and third-party data processors. Direct licensees install and operate our products in their own data centers. We generally receive an initial license fee plus ongoing fees which are based on either the number of end-users or a percentage of the initial license fee. We generally recognize revenues from software license sales upon shipment where no significant obligations remain, in accordance with AICPA Statement of Position 97-2. When services are considered essential to the functionality of the software, the software license and the related services are recognized over the implementation period using the percentage of completion method of accounting. A portion of our software license revenue is being recognized on a straight-line basis over either the term of the agreement or, for contracts without a term, the estimated period during which post-contract support is expected to be provided. Under these arrangements, post-contract support and maintenance were bundled as 23 25 part of the license agreements and sufficient vendor specific evidence did not exist to allocate the total fee to all elements of the arrangement. Third-party data processors install our products in their own data processing centers and license the product to their client institutions, typically smaller financial services entities like community banks and thrifts. We receive monthly fees from third party data processors based on the total number of end-users served by the processors' client institutions. These fees are recognized as revenue in the period earned. Professional Services. We provide professional services related to the installation and integration of our products. These services include: - installing the product at direct licensees and third-party data processing centers; - integrating the financial organization data processing systems with our data center for data center clients; - providing product enhancements; - consulting; and - training. Revenues derived from contracts to provide 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. Data Center. We receive recurring monthly fees from financial institutions that have chosen to use our software and outsource the processing of their financial transactions to our data center. These fees are based on the number of end users of the client institution. In addition, we receive monthly fees for technical support. We recognize these revenues as the services are performed. Expenses We expect to continue making significant investments in product development to enhance our existing products, develop new products and further advance our technology. Future expenditures in product development will be primarily attributable to the addition of software development personnel with the technological and industry expertise relevant to our technology. We expect to increase our sales and marketing efforts to expand our customer base. We expect the sales and marketing staff, which numbered 189 at December 31, 1999, to grow significantly during 2000. We also intend to continue promoting our products and services through conferences, seminars, direct marketing and trade publications. We record software development costs in accordance with Financial Accounting Standards Board Statement No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed". We currently do not have any capitalized software development costs. We had net operating loss and tax credit carryforwards of approximately $211.0 million at December 31, 1999 with expiration dates beginning in the year 2010 and ending in the year 2019. Of this amount, $87.1 million related to stock option tax deductions, which will be reflected as additional paid-in capital when realized. We have incurred annual and quarterly losses from operations since inception. At December 31, 1999, we had an accumulated deficit of $207.9 million. BUSINESS ACQUISITIONS On November 10, 1999, we completed the acquisitions of Edify and VerticalOne. On November 18, 1999, we completed the acquisition of FICS. All three acquisitions have been accounted for as purchase 24 26 business combinations. Accordingly, the consolidated financial statements include the results of operations of Edify and VerticalOne from November 1, 1999 and the results of operations of FICS from December 1, 1999. We exchanged 5,966,333 shares of common stock and 1,319,044 employee stock options with a value of approximately $378.2 million for all of the outstanding shares and stock options of Edify. Of the total purchase price of $381.7 million, which includes $3.5 million of costs incurred directly related to the acquisition, we allocated $296.7 million to goodwill, $34.0 million to identifiable intangible assets, $20.0 million to in-process research and development and $31.0 million to net assets acquired. We exchanged 3,842,487 shares of common stock and 471,440 employee stock options with a value of approximately $161.4 million for all of the outstanding shares and stock options of VerticalOne. Of the total $179.4 million purchase price, which includes $3.0 million of acquisition costs and $15.0 million of preferred stock purchased before the closing of the acquisition, we allocated $126.2 million to goodwill, $22.5 million to identifiable intangible assets, $7.3 million to in-process research and development and $23.4 million to net assets acquired. We exchanged 10,000,000 shares of common stock and 1,149,638 employee stock options with a value of approximately $421.3 million for all of the outstanding shares and stock options of FICS. Of the total $426.1 million purchase price, which includes $4.8 million of costs incurred directly related to the acquisition, we allocated $401.3 million to goodwill, $48.0 million to identifiable intangible assets, $32.0 million to in-process research and development and $55.2 million to net liabilities acquired. The former FICS stockholders may also be able to obtain up to an additional 4,500,000 shares of our common stock over a two-year period if FICS meets specified criteria while operating as our subsidiary. RESULTS OF OPERATIONS The following discussion of our results of operations for the years ended December 31, 1997, 1998 and 1999 is based on data derived from the statements of operations contained in our audited consolidated financial statements appearing elsewhere herein. The following table presents this data as a percentage of total revenues:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1998 1999 ------ ------ ------ Revenues: Software licenses.................................. 38.2% 19.8% 20.5% Professional services.............................. 58.0 56.9 60.8 Data center........................................ 3.8 13.1 9.5 Other.............................................. -- 10.2 9.2 ------ ------ ------ Total revenues............................. 100.0 100.0 100.0 ------ ------ ------ Direct costs: Software licenses.................................. 14.8 2.1 0.7 Professional services.............................. 49.4 33.5 39.2 Data center........................................ 64.1 29.9 9.7 Other.............................................. -- 9.4 7.7 ------ ------ ------ Total direct costs......................... 128.3 74.9 57.3 ------ ------ ------
25 27
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1998 1999 ------ ------ ------ Operating expenses: Selling and marketing.............................. 39.8 19.5 13.1 Product development................................ 97.0 56.9 25.8 General and administrative......................... 36.8 22.6 15.0 Depreciation and amortization...................... 16.1 22.1 7.5 Stock option compensation expense.................. 6.0 6.4 1.1 Marketing cost from warrant issued................. -- -- 0.8 Merger related costs............................... -- -- 9.4 Acquired in-process research and development....... -- -- 63.8 Amortization of acquisition intangible assets...... 41.8 18.1 43.3 ------ ------ ------ Total operating expenses................... 237.5 145.6 179.8 ------ ------ ------ Operating loss....................................... (265.8) (120.5) (137.1) Interest income...................................... 13.7 2.4 2.4 ------ ------ ------ Loss from continuing operations...................... (252.1)% (118.1)% (134.7)% ====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenues Total revenues increased by $68.7 million to $92.9 million for the year ended December 31, 1999 from $24.2 million in the year ended December 31, 1998, an increase of 284%. The components of 1999 revenue were $19.1 million in software license fees, $56.4 million in professional service fees, $8.9 million in data center fees and $8.5 million in other revenue. As a result of the size of the companies with which we do business, the magnitude of our implementations and our limited amount of capacity to perform implementations, a significant portion of our revenues may be attributed to a limited number of clients in any given period. Software Licenses. Software license fees increased by $14.3 million to $19.1 million in the year ended December 31, 1999 from $4.8 million in the year ended December 31, 1998, an increase of 298%. Software license fees represented 21% of total revenues in the year ended December 31, 1999 compared to 20% of total revenues in the year ended December 31, 1998. Approximately $9.9 million of the increase in software license fees relates to the acquisitions of Edify and FICS in the fourth quarter of 1999. Approximately $4.0 million of the remaining increase relates to the recognition of revenue from licensing agreements entered into in the fourth quarter of 1998. These license fees have been recorded as deferred revenue and are recognized as revenue over a three-year maintenance period. Professional Services. Professional services revenues increased by $42.7 million to $56.4 million in the year ended December 31, 1999 from $13.7 million in the year ended December 31, 1998, an increase of 312%. Professional services revenues represented 61% of total revenues in the year ended December 31, 1999 compared to 57% of total revenues in the year ended December 31, 1998. Approximately $8.3 million of the increase relates to the acquisitions of Edify and FICS during the fourth quarter of 1999. Excluding the effect of the acquisitions, the increase in professional services revenue related to several large implementation projects and product enhancement projects performed for existing clients during 1999. Data Center. Data Center revenues increased by $5.7 million to $8.9 million in the year ended December 31, 1999 from $3.2 million in the year ended December 31, 1998, an increase of 178%. Data Center revenues represented 10% of total revenues in the year ended December 31, 1999 compared to 13% of total revenues in the year ended December 31, 1998. The decrease in Data Center revenue as a percentage of total revenues is a result of the increase in total revenues due to the acquisitions discussed above. The dollar increase can be attributed to increased end user demand for our Internet financial applications, minimum fees for new financial institutions implemented during the year and increased support fees. The average quarterly revenue per end user increased slightly to $15.45 in the fourth quarter of 1999 from $15.21 in the fourth quarter of 1998. We anticipate that the average quarterly revenue per end user will decrease as financial services entities increase the number of their customers using our product. 26 28 Revenues associated with the our Data Centers are directly influenced by the number of financial services entities that are using our products through our Data Centers and the number of end users of these financial services entities. During the month of December 1999, our Atlanta-based Data Center processed in excess of 347,000 Internet accounts, representing approximately 226,000 end users. This amount represents an increase of 134% in the number of accounts processed from approximately 148,000 and an increase of 143% in the number of end users from approximately 93,000 for the month of December 1998. Other. Other revenue increased by $6.1 million to $8.6 million in the year ended December 31, 1999 from $2.5 million in the year ended December 31, 1998, an increase of 244%. Other revenue, primarily related to the sale of third-party hardware and software used in connection with our products, represented 9% of total revenues in the year ended December 31, 1999 compared to 10% of total revenues in the year ended December 31, 1998. The increase relates to the sale of third party hardware and software for two large implementations, which occurred during 1999. We do not expect to experience this level of other revenues in future periods. Direct Costs Direct costs increased by $35.0 million to $53.1 million in the year ended December 31, 1999 from $18.1 million in the year ended December 31, 1998, an increase of 193%. Direct costs represented 57% of total revenues in the year ended December 31, 1999 compared to 75% of total revenues in the year ended December 31, 1998. Software License Costs. Direct software license costs consist primarily of the cost of third-party software used in our products. Direct costs associated with software licenses increased by $139,000 to $642,000 in the year ended December 31, 1999 from $503,000 in the year ended December 31, 1998, an increase of 28%. Direct costs associated with software licenses represented 3% of software license fees in the year ended December 31, 1999 compared to 10% of software license fees in the year ended December 31, 1998. The decrease in direct costs as a percentage of revenue from 1998 to 1999 relates primarily to license sales generated from acquired companies that did not include third-party software. We anticipate that direct costs associated with software licenses will increase in future periods as we sell additional products that include third-party software. Professional Services Costs. Direct professional services costs consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services increased by $28.2 million to $36.3 million in the year ended December 31, 1999 from $8.1 million in the year ended December 31, 1998, an increase of 348%. The increase in direct professional services costs relates primarily to increased personnel working on an increased number of professional services projects. In addition, the increase relates to the acquisitions of Edify and FICS during the fourth quarter of 1999. Direct costs associated with professional services represented 64% of professional services revenues in the year ended December 31, 1999 compared to 59% of professional services revenues in the year ended December 31, 1998. We anticipate that professional services margins will decrease in future periods as the acquired companies historically experienced lower professional services margins than we experienced on a stand-alone basis. Data Center Costs. Direct Data Center costs consist of personnel and computer equipment costs. Direct costs associated with Data Center services increased by $1.8 million to $9.0 million in the year ended December 31, 1999 from $7.2 million in the year ended December 31, 1998, an increase of 25%. The increase in direct Data Center costs is primarily attributable to additional costs of our new Atlanta-based Data Center facility, which went into full operation in July 1999. Direct Data Center costs represented 101% of Data Center revenues in the year ended December 31, 1999 compared to 225% of Data Center revenues in the year ended December 31, 1998. The improvement was primarily the result of increased end user volume. Other Direct Costs. Other direct costs consist of the cost of third-party hardware and software sold to customers for use with our products. Other direct costs increased by $4.8 million to $7.1 million in the year ended December 31, 1999 from $2.3 million in the year ended December 31, 1998, an increase of 209%. The increase relates to the sale of third-party hardware and software for two large implementations, which 27 29 occurred during 1999. Other direct costs represented 83% of other revenues in the year ended December 31, 1999 compared to 92% of other revenues in the year ended December 31, 1998. Operating Expenses Operating expenses increased by $131.9 million to $167.1 million in the year ended December 31, 1999 from $35.2 million in the year ended December 31, 1998, an increase of 375%. Selling and Marketing. Selling and marketing expenses increased by $7.5 million to $12.2 million in the year ended December 31, 1999 from $4.7 million in the year ended December 31, 1998, an increase of 160%. Selling and marketing expenses were 13% of total revenues in the year ended December 31, 1999 compared to 20% of total revenues in the year ended December 31, 1998. The dollar increase was due primarily to the acquisition of Edify during the fourth quarter of 1999. Edify's sales model was targeted at a larger number of smaller financial institutions, resulting in higher sales expense as a result of having a larger sales force. The decrease in selling and marketing expenses as a percentage of sales was due to our ability to leverage our relatively fixed selling and marketing expenses over a larger revenue base. Product Development. Product development expenses increased by $10.2 million to $24.0 million in the year ended December 31, 1999 from $13.8 million in the year ended December 31, 1998, an increase of 74%. Product development expenses were 26% of total revenues in the year ended December 31, 1999 compared to 57% of total revenues in the year ended December 31, 1998. The dollar increase relates primarily to an increase in personnel expenses for additional product development initiatives, the integration of the products of acquired companies and the acquisitions of Edify and FICS. During 1999, we completed the development of the next version of Consumer Suite and continued development efforts on bill presentment, the next version of investments and the integration of the Intuit products with our products. The increase in product development costs represents our commitment to enhancing the current products by migrating the existing products to a more efficient software architecture and to developing new applications. The decrease as a percentage of total revenues in the year ended December 31, 1999 from the year ended December 31, 1998 resulted from our ability to leverage product development expenses over a larger revenue base. General and Administrative. General and administrative expenses increased by $8.4 million to $13.9 million in the year ended December 31, 1999 from $5.5 million in the year ended December 31, 1998, an increase of 153%. General and administrative expenses were 15% of total revenues in the year ended December 31, 1999 compared to 23% of total revenues in the year ended December 31, 1998. The dollar increase is attributable to the increased personnel and infrastructure related to the acquisitions of Edify, FICS and VerticalOne. The decrease as a percentage of our total revenues in the year ended December 31, 1999 from the year ended December 31, 1998 resulted from our ability to leverage general and administrative expenses over a larger revenue base. Depreciation and Amortization. Depreciation and amortization expenses increased by $1.6 million to $6.9 million in the year ended December 31, 1999 from $5.3 million in the year ended December 31, 1998, an increase of 30%. Depreciation and amortization expenses were 8% of total revenues for the year ended December 31, 1999 compared to 22% of total revenues in the year ended December 31, 1998. Approximately $1.1 million of the increase was due to the acquisitions during the fourth quarter of 1999. The remaining increase is primarily related to the completion of our new Data Center in 1999. Stock Option Compensation Expense. Stock option compensation expense decreased by $400,000 to $1.1 million in the year ended December 31, 1999 compared to $1.5 million in the year ended December 31, 1998. Stock option compensation expense represents the difference between the exercise price of stock options granted and the fair value of our common stock at the time of grant. This amount is being amortized over the vesting periods of the applicable options. We expect this number to increase in future periods as a result of options granted to employees of the newly acquired companies. Marketing Cost for Warrant Issued. We recorded $715,000 of marketing costs in the year ended December 31, 1999 related to the issuance to a third-party of a stock warrant to purchase 84,994 shares of our common stock at an exercise price of $80.00 per share. The warrant was issued in connection with a pilot 28 30 project and distribution agreement between the third-party and one of our subsidiaries. The fair value of the warrant was determined based on the Black Scholes option-pricing model. This amount is being amortized over the period of the pilot project and distribution agreement, which is approximately 60 days. We expect to recognize approximately $4.7 million of expense related to this agreement in the first quarter of 2000. Merger Related Costs. We recorded $8.7 million in the year ended December 31, 1999 related to the acquisitions of Edify, FICS, and VerticalOne. Merger related costs consist primarily of expenditures related to building and consolidating infrastructure and other operations of the companies we acquired in the fourth quarter of 1999. Acquired In-process Research and Development. In connection with the acquisitions of Edify, FICS and VerticalOne, we allocated a portion of the respective purchase prices to acquired in-process research and development. As part of the process of analyzing each of these acquisitions, we made a decision to buy technology that had not yet been commercialized rather than develop the technology internally. We based this decision on factors such as the amount of time it would take to bring the technology to market, available resources and its progression in developing comparable technology, if any. 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 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 and do not exceed the amount a third party would pay 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. If the projects are not successful or completed in a timely manner, our product pricing and growth rates may not be achieved and we may not realize the financial benefits expected from the projects. The acquisitions and related in-process research and development expenses are detailed in the table below (in millions):
PURCHASE IN-PROCESS COSTS TO COMPANY ACQUISITION DATE PRICE R&D EXPENSE COMPLETE ------- ----------------- -------- ----------- -------- Edify............................... November 10, 1999 $381.7 $20.0 $8.8 FICS................................ November 18, 1999 426.1 32.0 6.7 VerticalOne......................... November 10, 1999 179.4 7.3 4.9
Specific details relating to the three acquisitions are discussed below. On November 10, 1999, we completed the purchase of Edify for $381.7 million. Edify was involved in the development of interactive voice response ("IVR") and related customer service technology. Edify also was 29 31 involved in the development of technology to provide financial institutions with the means to deploy a suite of automated banking services via the Internet. The allocation of $20.0 million to in-process research and development represents its estimated fair value using the methodology described above. We allocated the $20.0 million to the following projects: Electronic Workforce ("EWF") ($6.7 million) and Electronic Banking System ("EBS"), which was renamed S1 Retail Banking after the acquisition ($13.3 million). At the time of the acquisition we forecasted that aggregate revenues attributable to the projects would reach approximately $120.0 million in 2000. We expected revenues for the projects to peak between 2001 to 2003 and decline thereafter through the end of the products' lives (2006) as we expected to introduce new product technologies. At the acquisition date, we estimated costs to complete the research and development efforts related to the initial release of the projects to be approximately $8.8 million. We utilized an average risk-adjusted discount rate of 19% to discount projected cashflows. Development of the in-process EWF technologies started in April 1999 and had a scheduled release date of April 2000. The most substantial features of the in-process EWF technologies were international capabilities and significant improvements to scalability. These improvements are critical to compete in the international markets. At the acquisition date, Edify had completed the investigation phase, identified the business requirements, and created an engineering task list with a preliminary development schedule, cost and a resource plan. Efforts remaining included completion of the external and internal design, quality assurance, and documentation. The EWF projects were determined to be approximately 60% complete at the acquisition date. Development of the in-process EBS technologies began in December 1998 and was slated for completion in late 1999. This project consisted of one-to-one marketing functionality and was designed to provide private branding and cross-selling functionality. The technologies also were expected to incorporate significant enhancements to bill payment and bill presentment functionality. At the acquisition date, Edify had completed its technical investigation of the project and determined the business requirements. Primary efforts remaining to complete the project included external and internal implementation of the branding functionality. The development of the in-process EBS technology was completed in December 1999. Edify also was in the process of developing EBS add-ons related to a small business portal. This project was expected to serve as a one-stop solution for the small business owner. Features were slated to include business banking as well as Web-based payroll, human resources, and procurement applications. These development efforts were expected to require significant work related to the integration of the architecture. At the acquisition date, Edify had completed its investigation of the project, developed a business case, and was in the process of finalizing the business requirements. Development of a significant portion of the content of the financial portal had also been completed. Efforts remaining included external and internal design, IVR integration, and implementation of the financial portal. This project was slated for introduction in the second quarter of 2000. The EBS projects were determined to be approximately 40% complete at the acquisition date. On November 18, 1999, we completed the purchase of FICS for $426.1 million. FICS was involved in the development of online customer interaction solutions for corporate and retail banking customers. The allocation to in-process research and development of $32.0 million represents its estimated fair value using the methodology described above. We allocated approximately $19.0 million to Corporate Internet Banking ("CIB"), which was renamed S1 Corporate Suite after the acquisition, a system that will enable secure, browser-based corporate banking over the Internet. We allocated approximately $13.0 million to Retail Internet Banking ("RIB"), which was renamed S1 Retail Banking after the acquisition, a system that will enable secure, browser-based retail banking over the Internet. At the time of the acquisition, we forecasted that aggregate revenues attributable to the projects would reach approximately $68.0 million in 2000. We expected revenues to peak in 2004 and decline thereafter through the end of the products' lives (2006) as we expected to introduce new product technologies. At the acquisition date, we estimated costs to complete the research and development efforts to be approximately $4.3 million. We utilized an average risk-adjusted discount rate of 25% to discount projected cashflows. The CIB and RIB products were designed with three distinct segments: the core, localization and customization layers. The primary development efforts were to make the core and localization layers standardized, so that they require minimal client-specific customization work. 30 32 The in-process CIB technology was slated for introduction in late 1999. Additions planned for the technology included retrofitting the development of billing into the new code base, introduction of file import/ export capability, structured messaging functionality, fax-out functionality, and support of the Euro currency. The in-process CIB technology was completed in December 1999. A follow-on release requiring a major architecture upgrade was scheduled for February 2000. This release was intended to support usage in geographical markets with slow Internet connections and will also contain separate localized modules for different regions. Several new features and functions also were planned to be introduced, including trade finance functionality, multiple payments, and automated customer notification. Developmental efforts as of the acquisition date included creation of the concept plan, function analysis, and high-level architecture design. The CIB project was determined to be approximately 50% complete as of the acquisition date. The in-process RIB technology was intended to introduce new customer interface and filtering features. The new features are one-to-one marketing, customer alerting functionality, and smart forms. Related efforts include developmental projects utilizing an Extensible Markup Language ("XML")-based tool kit to define data and business rules for internet banking solutions. These related projects commenced in October 1998 and were intended to ease the work required for customization and localization of the CIB and RIB products. The work required addresses identification, performance benchmarking, and validating to determine which middleware application is best and to customize its performance. The feasibility of these new technologies was slated to be validated in late 1999. Overall, the RIB project was estimated to be approximately 70% complete at the acquisition date. The in-process RIB technology was completed in December 1999. On November 10, 1999, we completed the purchase of VerticalOne for $179.4 million. VerticalOne was involved in the development of a system that allows users to aggregate their online personal account information on a single, highly secure site. The allocation to in-process research and development of $7.3 million represents its estimated fair value using the methodology described above. At the time of the acquisition, we forecasted that revenues attributable to the in-process projects would reach approximately $6.5 million in 2000. We expected revenues to peak in 2002 and decline thereafter through the end of the product's life (2004) as we expected to introduce new product technologies. At the acquisition date, we expected costs to complete the research and development efforts related to the in-process project to be approximately $2.3 million. We utilized an average risk-adjusted discount rate of 45% to discount projected cashflows. VerticalOne completed a limited-functionality version of its system in September 1999, which was categorized as developed technology. In-process technology consists of a vastly expanded version that will support commercially necessary features such as access to multiple accounts from a single provider (e.g., two checking or cellular phone accounts) and wireless access to the system via devices such as the Palm VII personal digital assistant. These features were completed in December 1999. The technology under development also was slated to incorporate an extensive redesign of the system and related databases to improve performance and increase scalability. Development efforts related to creation of core engines to handle registration, data mining, account aggregation, display information and quick login functions, as well as product support systems that handle its interface with external content providers. Development of these in-process technologies began in August 1999 and were expected to finish in late 1999. These additional features were not completed in 1999 and are expected to be completed during the second quarter of 2000. Developments of additional technologies, including the wireless overlay, also began in August 1999 and were expected to be completed in the fourth quarter of 2000. Overall, the developmental efforts were estimated to be approximately 25% complete as of the acquisition date. Amortization of Acquisition Intangible Assets. Amortization of acquisition intangible assets increased by $35.8 million to $40.2 million in the year ended December 31, 1999 from $4.4 million in the year ended December 31, 1998, an increase of 814%. Amortization of acquisition intangibles was 43% of total revenues in the year ended December 31, 1999 compared to 18% of total revenues in the year ended December 31, 1998. The increase related to the amortization of goodwill and other identifiable intangible assets resulting from the acquisitions of Edify, FICS, and VerticalOne. We anticipate amortization of acquisition intangible assets in future periods to be approximately $306.8 million annually over the next three years. 31 33 Loss from Continuing Operations. Loss from continuing operations increased by $96.5 million to $125.1 million in the year ended December 31, 1999 from $28.6 million in the year ended December 31, 1998. The increase in net loss was primarily the result of the increase in amortization of acquisition intangible assets, merger related costs and acquired in-process research and development resulting from the acquisitions in November 1999. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenues Our total revenues increased by $13.4 million to $24.2 million for the year ended December 31, 1998 from $10.8 million in the year ended December 31, 1997, an increase of 124%. The components of 1998 revenue were $4.8 million in software license fees, $13.7 million in professional service fees, $3.2 million in data center fees and $2.5 million of other revenue. As a result of the size of the companies we do business with, the magnitude of our implementations and our limited amount of capacity to perform implementations, a significant portion of our revenues may be attributed to a limited number of clients in any given period. Software Licenses. Software license fees increased by $639,000 to $4.8 million in the year ended December 31, 1998 from $4.1 million in the year ended December 31, 1997, an increase of 15%. Software license fees represented 20% of total revenues in the year ended December 31, 1998 compared to 38% of total revenues in the year ended December 31, 1997. This increase in software license fees relates primarily to the recognition of revenue from the license fees included in the technology and licensing agreements with Royal Bank of Canada. These license fees have been recorded as deferred revenue and are recognized as revenue over a three-year maintenance period. In addition, the increase in 1998 is also attributed to a license sale of our Relationship Management product. Professional Services. Professional services revenues increased by $7.4 million to $13.7 million in the year ended December 31, 1998 from $6.3 million in the year ended December 31, 1997, an increase of 117%. Professional services revenues represented 57% of total revenues in the year ended December 31, 1998 compared to 58% of total revenues in the year ended December 31, 1997. The dollar increase in professional services revenue in 1998 was driven by projects at a number of large financial services institutions. Additionally, during 1998, we began performing professional services related to product enhancement projects, which include the initial development of an insurance product, incorporation of BroadVision's One-to-One marketing with our Consumer Suite and the integration of a new bill payment provider. Also, in 1997, we were limited in the amount we could bill for professional services because of fixed pricing for implementation services contained in initial contracts. Data Center. Data Center revenues increased by $2.8 million to $3.2 million in the year ended December 31, 1998 from $411,000 in the year ended December 31, 1997, an increase of 681%. Data Center revenues represented 13% of total revenues in the year ended December 31, 1998 compared to 4% of total revenues in the year ended December 31, 1997. This increase can be attributed to increased end user demand for our Internet financial applications, the initiation of minimum fees based on capacity requirements and increased maintenance fees. The average quarterly revenue per billable end user increased to $15.21 in the fourth quarter of 1998 from $9.55 in the fourth quarter of 1997. We anticipate that the average quarterly revenue per billable end user will decrease as financial services entities increase the number of their customers using the product. Revenues associated with the data center are directly influenced by the number of financial organizations that are using our products through our data center and the number of end users of these financial organizations. During the month of December 1998, the data center processed in excess of 148,000 Internet accounts, representing approximately 93,000 end users. This represents an increase of 199% in the number of accounts processed from approximately 49,500 and an increase of 184% in the number of end users from approximately 32,700 for the month of December 1997. Other. Other revenues were $2.5 million in the year ended December 31, 1998, representing 10% of total revenues in the year ended December 31, 1998. Other revenue is primarily related to the sale of third 32 34 party hardware and software that are used in connection with our products. We began selling third party hardware and software during 1998 related to two large customer implementations. Direct Costs Direct costs increased by $4.2 million to $18.1 million in the year ended December 31, 1998 from $13.9 million in the year ended December 31, 1997, an increase of 30%. Direct costs represented 75% of total revenues in the year ended December 31, 1998 compared to 128% of total revenues in the year ended December 31, 1997. Software License Costs. Direct software license costs consist primarily of the cost of third-party software used in our products. Direct costs associated with software licenses decreased by $1.1 million to $503,000 in the year ended December 31, 1998 from $1.6 million in the year ended December 31, 1997, a decrease of 69%. Direct software license costs in 1998 consisted primarily of the cost of third-party software used in Relationship Management, whereas direct software license costs in 1997 consisted primarily of the amortization of purchased technology. This purchased technology included technology acquired in previous acquisitions and software development costs paid to a contractor in 1995 and 1996. These costs have been amortized using the straight line method over a period of three years. During the fourth quarter of 1997, we wrote off the remaining unamortized balance of goodwill and purchased technology associated with 1996 acquisitions after determining that there were minimal future cash flows expected to be derived from these intangible assets as discussed further below. Direct costs associated with software licenses represented 10% of software license fees in the year ended December 31, 1998 compared to 39% of software license fees in the year ended December 31, 1997. Professional Services Costs. Direct professional services costs consist of primarily personnel and related infrastructure costs. Direct costs associated with professional services increased by $2.8 million to $8.1 million in the year ended December 31, 1998 from $5.3 million in the year ended December 31, 1997, an increase of 53%. In addition to increases in personnel, we experienced delays in early implementations of our products, due to integration issues with clients' legacy mainframe systems, which resulted in increased implementation costs, and loss accruals for some fixed-fee contracts. In 1998, we were in the process of converting all financial services entities to version 4.0 of our product. Direct costs associated with professional services represented 59% of professional services revenues in the year ended December 31, 1998 compared to 84% of professional services revenues in the year ended December 31, 1997. Data Center Costs. Direct Data Center costs consist of personnel and computer equipment costs. Direct costs associated with Data Center services increased by $271,000 to $7.2 million in the year ended December 31, 1998 from $6.9 million in the year ended December 31, 1997, an increase of 4%. The increase in direct Data Center costs is primarily attributable to the establishment of the basic infrastructure of personnel and equipment needed to process accounts for the growing number of end users of our financial services clients. In an effort to contain Data Center costs, we ended our Data Center facilities management agreement with a third party. We experienced cost savings of approximately $300,000 in the fourth quarter of 1998 from both the elimination of the cost-plus arrangement and the ability to use more efficiently the existing infrastructure. Direct Data Center costs represented 225% of data center revenues in the year ended December 31, 1998 compared to 1,679% of Data Center revenues in the year ended December 31, 1997. Other Direct Costs. Other direct costs consist of the cost of third party hardware and software sold to customers for use with our products, which we began selling in 1998. Other direct costs were $2.3 million in the year ended December 31, 1998 and related to hardware and software purchased for two large customer implementations. Operating Expenses Operating expenses increased by $9.5 million to $35.2 million in the year ended December 31, 1998 from $25.7 million in the year ended December 31, 1997, an increase of 37%. 33 35 Selling and Marketing. Selling and marketing expenses increased by $418,000 to $4.7 million in the year ended December 31, 1998 from $4.3 million in the year ended December 31, 1997, an increase of 10%. Selling and marketing expenses were 20% of total revenues in the year ended December 31, 1998 compared to 40% of total revenues in the year ended December 31, 1997. The dollar increase was due primarily to an increase in the provision for uncollected receivables as a result of the increased revenues in 1998. The decrease in selling and marketing expenses as a percentage of sales was due to our ability to leverage our relatively fixed selling and marketing expenses over a larger revenue base. Product Development. Product development expenses increased by $3.3 million to $13.8 million in the year ended December 31, 1998 from $10.5 million in the year ended December 31, 1997, an increase of 31%. Product development expenses were 57% of total revenues in the year ended December 31, 1998 compared to 97% of total revenues in the year ended December 31, 1997. The dollar increase relates primarily to an increase in personnel expenses for additional product development initiatives. During 1998, we completed the development of version 4.0 of our product and added loan functionality to the banking module. In addition, during 1998, we released our Investments product and our Relationship Management product, which integrates BroadVision's "One-to-One" marketing suite of software products our product. The increase in product development costs represents our commitment to enhancing current products by migrating the existing products to more efficient software architecture and to developing new applications. The decrease as a percentage of our total revenues in the year ended December 31, 1998 from the year ended December 31, 1997 resulted from our ability to leverage product development expenses over a larger revenue base. General and Administrative. General and administrative expenses increased by $1.5 million to $5.5 million in the year ended December 31, 1998 from $4.0 million in the year ended December 31, 1997, an increase of 38%. General and administrative expenses were 23% of total revenues in the year ended December 31, 1998 compared to 37% of total revenues in the year ended December 31, 1997. A portion of the dollar increase is attributable to charges related to the termination of the facilities management agreement for the data center discussed in depreciation and amortization below. In addition, general and administrative expenses for 1998 include a charge of approximately $600,000 for professional fees related to an unsuccessful transaction. The remaining increase relates to the expanded personnel infrastructure to manage our growth. The decrease as a percentage of our total revenues in the year ended December 31, 1998 from the year ended December 31, 1997 resulted from our ability to leverage general and administrative expenses over a larger revenue base. Depreciation and Amortization. Depreciation and amortization expenses increased by $3.6 million to $5.3 million in the year ended December 31, 1998 from $1.7 million in the year ended December 31, 1997, an increase of 212%. Depreciation and amortization expenses were 22% of total revenues for the year ended December 31, 1998 compared to 16% of total revenues in the year ended December 31, 1997. The increase was due primarily to a one-time charge of approximately $1.2 million related to the termination of an outsourcing contract for the Data Center. In addition, we wrote-off computer equipment totaling approximately $500,000 as the result of a physical inventory performed in 1998. The remaining increase in depreciation and amortization related to increased technology purchases in 1998 as a result of our growth. Stock Option Compensation Expense. Stock option compensation expense amounted to $1.5 million in the year ended December 31, 1998 compared to $656,000 for the year ended December 31, 1997. Stock option compensation expense represents the difference between the exercise price of stock options granted and the fair value of our common stock at the time of grant. This amount is being amortized over the vesting periods of the applicable options. Amortization of Acquisition Intangible Assets. Amortization of acquisition intangible assets charges decreased $141,000 to $4.4 million in the year ended December 31, 1998 from $4.5 million in the year ended December 31, 1997, a decrease of 3%. Amortization of acquisition intangible assets charges were 18% of total revenues in the year ended December 31, 1998 compared to 42% of total revenues in the year ended December 31, 1997. Included in the 1997 amortization of acquisition intangible assets charges are one-time charges of $1.4 million for the write-off of goodwill and purchased technology from previous acquisitions. Excluding this charge in 1997, amortization of acquisition intangible assets increased $1.3 million to $4.4 million in the year ended December 31, 1998 from $3.1 million in the year ended December 31, 1997, an 34 36 increase of 42%. The increase related to the amortization of goodwill and other identifiable intangible assets resulting from an acquisition in November 1997. Results of Discontinued Operations On September 30, 1998, we completed the sale of our banking operations to a U.S. based subsidiary of Royal Bank of Canada. The Royal Bank subsidiary agreed to pay $3.0 million in excess of the net assets sold. Also, there is a $1.5 million holdback for indemnification which we will receive by March 31, 2000 if there are no indemnifiable claims. The banking operations included substantially all of the loans and investment securities as well as its deposit relationships and were legally separated from the technology operations through the formation of a holding company and the contribution of $10.0 million in capital in connection with the sale of the banking operations. We recorded a gain of $812,000 on the sale of our banking operations. The gain on sale includes a $1.3 million charge related to the estimated fair value of options to purchase our capital stock issued to Royal Bank in March 1998 in connection with the sale by Security First Network Bank of the banking operations. The losses from the banking operations are reflected in the accompanying consolidated statements of operations as discontinued operations. Net interest income for the nine month period ended September 30, 1998 was $1.3 million and the net loss, excluding the gain on disposal, was $3.1 million. The increase in the loss from discontinued operations for the three months ended September 30, 1998 is the result of one time charges related to the sale of the banking operations. 35 37 CONSOLIDATED QUARTERLY OPERATING RESULTS The following table shows selected unaudited consolidated quarterly statement of operations data and that data as a percentage of total revenues for the years ended December 31, 1999 and 1998. 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 ENDED ---------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 1999 1999 1999 1999 -------- -------- --------- -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Software licenses.................... $ 669 $ 770 $ 1,069 $ 2,273 $ 2,308 $ 2,330 $ 2,260 $ 12,152 Professional services................ 2,449 2,608 3,748 4,942 7,722 10,911 14,769 23,030 Data center.......................... 310 594 927 1,350 1,547 2,044 2,072 3,195 Other................................ -- 577 801 1,093 423 390 5,698 2,039 ------- ------- ------- ------- ------- ------- ------- --------- Total revenues................. $ 3,428 $ 4,549 $ 6,545 $ 9,658 $12,000 $15,675 $24,799 $ 40,416 ------- ------- ------- ------- ------- ------- ------- --------- Direct costs: Software licenses.................... 20 20 20 443 133 99 99 311 Professional services................ 1,504 1,638 2,028 2,928 4,955 6,431 8,480 16,461 Data center.......................... 1,823 1,825 1,937 1,633 1,687 2,029 2,163 3,129 Other................................ -- 514 778 993 344 333 4,425 2,010 ------- ------- ------- ------- ------- ------- ------- --------- Total direct costs............. $ 3,347 $ 3,997 $ 4,763 $ 5,997 $ 7,119 $ 8,892 $15,167 $ 21,911 ------- ------- ------- ------- ------- ------- ------- --------- Operating expenses: Selling and marketing................ 1,071 1,137 955 1,560 1,079 1,174 1,153 8,763 Product development.................. 2,989 3,144 3,717 3,918 4,321 4,439 5,221 10,055 General and administrative........... 955 1,129 1,287 2,080 1,562 2,132 3,291 6,928 Depreciation and amortization........ 637 652 761 3,297 1,194 1,267 1,465 2,998 Stock option compensation expense.... 709 648 83 104 107 107 107 797 Marketing cost from warrant issued... -- -- -- -- -- -- -- 715 Merger related costs................. -- -- -- -- -- 250 1,851 6,643 Acquired in-process research and development........................ -- -- -- -- -- -- -- 59,300 Amortization of acquisition intangible assets.................. 2,088 2,083 110 103 103 103 -- 40,000 ------- ------- ------- ------- ------- ------- ------- --------- Total operating expenses....... $ 8,449 $ 8,793 $ 6,913 $11,062 $ 8,366 $ 9,472 $13,088 $ 136,199 ------- ------- ------- ------- ------- ------- ------- --------- Operating loss......................... (8,368) (8,241) (5,131) (7,401) (3,485) (2,689) (3,456) (117,694) Interest income........................ 255 135 52 141 227 527 777 706 ------- ------- ------- ------- ------- ------- ------- --------- Loss from continuing operations........ $(8,113) $(8,106) $(5,079) $(7,260) $(3,258) $(2,162) $(2,679) $(116,988) ======= ======= ======= ======= ======= ======= ======= ========= Basic and diluted net loss per common share from continuing operations..... $ (0.39) $ (0.38) $ (0.23) $ (0.31) $ (0.13) $ (0.08) $ (0.10) $ (3.05) ======= ======= ======= ======= ======= ======= ======= ========= Weighted average number of shares of common stock outstanding............. 21,047 21,526 22,351 23,194 24,698 26,052 27,628 38,339 ======= ======= ======= ======= ======= ======= ======= =========
36 38
AS A PERCENTAGE OF TOTAL REVENUES: Revenues: Software licenses.................... 20% 17% 16% 24% 19% 15% 9% 30% Professional services................ 71 57 58 51 64 70 60 57 Data center.......................... 9 13 14 14 13 13 8 8 Other................................ -- 13 12 11 4 2 23 5 ------- ------- ------- ------- ------- ------- ------- --------- Total revenues................. 100 100 100 100 100 100 100 100 ------- ------- ------- ------- ------- ------- ------- --------- Direct costs: Software licenses.................... 1 -- -- 5 1 1 -- 1 Professional services................ 44 36 31 30 41 41 34 41 Data center.......................... 53 40 30 17 14 13 9 8 Other................................ -- 11 12 10 3 2 18 5 ------- ------- ------- ------- ------- ------- ------- --------- Total direct costs............. 98 87 73 62 59 57 61 55 ------- ------- ------- ------- ------- ------- ------- --------- Operating Expenses: Selling and marketing................ 31 25 15 16 9 7 5 22 Product development.................. 87 69 57 41 36 28 21 25 General and administrative........... 28 25 20 22 13 14 13 17 Depreciation and amortization........ 19 14 12 34 10 8 6 7 Stock option compensation expense.... 21 14 1 1 1 1 -- 2 Marketing cost from warrant issued... -- -- -- -- -- -- -- 2 Merger related costs................. -- -- -- -- -- 2 7 16 Acquired in-process research and development........................ -- -- -- -- -- -- -- 147 Amortization of acquisition intangible assets.................. 61 46 2 1 1 1 -- 99 ------- ------- ------- ------- ------- ------- ------- --------- Total operating expenses....... 247 193 107 115 70 61 52 337 ------- ------- ------- ------- ------- ------- ------- --------- Operating loss......................... (245) (180) (80) (77) (29) (18) (13) (292) Interest income........................ 7 3 -- 1 2 3 3 2 ------- ------- ------- ------- ------- ------- ------- --------- Loss from continuing operations........ (238)% (177)% (80)% (76)% (27)% (15)% (10)% (290)% ======= ======= ======= ======= ======= ======= ======= =========
Due to our limited operating history, we cannot forecast operating expenses based on our historical operating results. As a result, we establish expense levels based in part on future projections of revenues. Revenues currently depend heavily on our ability to sell software licenses and implementation and outsourcing services for Internet banking solutions. Future revenues will likely include more Data Center revenues, which will depend on our customers' ability to attract and retain end users. If actual revenues are less than projected revenues, we may be unable to reduce expenses proportionately, which could adversely affect our operating results, cash flows and liquidity. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations from private sales of common and preferred stock. As of December 31, 1999, we had cash and cash equivalents of $67.9 million compared to $14.5 million at December 31, 1998 and investment securities available for sale, which consisted entirely of equity securities, of $62.8 million at December 31, 1999 compared to $3.9 million at December 31, 1998. In 1999, cash used in continuing operations was $30.0 million compared to $11.9 in 1998. The increase in cash used in operations between 1999 and 1998 is primarily the result of an increase in accounts receivable resulting from the increase in revenues in 1999 as compared to 1998. Cash provided by investing activities was $14.3 million in 1999 compared to $7.4 million in 1998. The increase in cash provided by investing activities was the result of the net cash acquired through acquisitions of $31.4 million, which was offset by purchases of property and equipment of $17.1 million. Capital expenditures in 1999 relate to the establishment of our new Data Center facilities and expansion of our facilities infrastructure to accommodate our growth. Cash provided by financing activities was $69.1 million in 1999 compared to $13.5 million in 1998. The increase relates to equity sales to Intuit, Hewlett-Packard and Andersen Consulting, which are described below. In addition, proceeds from the exercise of stock options was $11.9 million in 1999 compared to $3.6 million in 1998. These increases were offset by payments made on notes payable of $6.8 million in 1999. On February 19, 1999, we entered into strategic alliances with Hewlett-Packard and Andersen Consulting. As part of these alliances, Hewlett-Packard agreed to make a $10.0 million equity investment in our common stock and Andersen Consulting agreed to make a $4.0 million equity investment in our common 37 39 stock. The stock sales closed as of April 30, 1999. At closing, we issued an aggregate of 254,804 shares of our common stock. On February 19, 1999, we granted to Andersen Consulting warrants to purchase up to an additional 200,000 shares of our common stock at $54.94 per share. The warrants will vest, if at all, in three installments of 40,000, 80,000 and 80,000 shares only if we enter into agreements to sell our services or license our products to a list of specified customers as a result of our relationship with Andersen Consulting. The warrants expire in February 2001. Vested warrants expire two years from the vesting date. At December 31, 1999, 200,000 warrants were outstanding and none were exercisable. On February 25, 1999, we granted Royal Bank a warrant to purchase 800,000 shares of our common stock at a price of $30.00 per share. The warrant will vest in four equal installments if, as of four annual measurement dates, beginning one year after the completion of the implementation of specified applications within our Consumer Suite, Royal Bank has an additional one million end users using our software. Each installment terminates if the targeted customer levels are not achieved or if an installment vests, the warrant terminates ninety days after the vesting date. At December 31, 1999, 800,000 warrants were outstanding and none were exercisable. As part of the sale of the banking operations to Royal Bank, we issued to Royal Bank four separate options to purchase up to an aggregate of $10.0 million in capital stock. In 1998, Royal Bank exercised the first option for 420,876 shares at an exercise price of $5.94 per share. In 1999, Royal Bank exercised options to purchase 382,614 shares at $6.53 per share and 347,831 shares at $7.19 per share. The fourth option for 316,232 with a per share exercise price of $7.91 expires in June 2000 and remains exercisable and outstanding at December 31, 1999. On February 25, 1999, we entered into an agreement with Royal Bank under which Royal Bank agreed to implement certain applications within our Consumer Suite. Royal Bank has agreed to pay $50.0 million to us on the following schedule: the first $5.0 million was due to be paid no later than February 2000, with the remaining amount to be paid equally over a four year period after Royal Bank has implemented our software. Royal Bank paid us $5.0 million to satisfy the first installment. If Royal Bank terminates its minimum payment obligation, it is required to pay a termination fee equal to 40% of the unpaid amount. In connection with this agreement, we issued 215,000 shares of newly designated Series C redeemable convertible preferred stock. We recorded a subscription receivable of $12.0 million, the estimated fair value of the preferred stock at issuance, and will reduce such subscription receivable, including imputed interest, as the payments under the arrangement are received. The right to convert Series C on a two-for-one (post-split) basis into our common stock will vest, if at all, in five installments. On February 25, 2000, the first installment of 21,500 shares vested and became convertible. The remaining four installments each comprised of 48,375 shares, will vest and become convertible if Royal Bank has paid minimum fees of $11,250,000 per year for the first four years following the completion date of the implementation. If the minimum fees paid by Royal Bank at any anniversary date of the completed implementation exceed the minimum fee level for the next anniversary date, Royal Bank may elect to vest in the next installment of shares. The right to convert Series C into common stock expires ninety days after the vesting date. Any shares of Series C that do not vest and become convertible into shares of common stock on or before March 31, 2004 become mandatorily redeemable by us for an amount equal to $0.01 per share. At December 31, 1999, no shares of Series C were vested and convertible. On May 16, 1999, we entered into a Stock Purchase and Option Agreement with Intuit pursuant to which Intuit purchased 970,813 shares of our common stock for $50.0 million. We also granted Intuit options to purchase 3,629,187 and 950,000 shares of our common stock that vested upon the closing of the Edify and FICS acquisitions, respectively. Intuit was granted 445,000 additional options to purchase our common stock that may become exercisable based on the achievement of certain earn-out targets for FICS. All of the Intuit options were granted with an exercise price of $51.50 per share and expire on November 10, 2004. At December 31, 1999, 5,024,187 of these options were outstanding and 4,579,187 were exercisable. On March 5, 2000, Intuit transferred its shares and the options to Intuit Ventures Inc., a wholly owned subsidiary of Intuit. On December 23, 1999, we granted a vested, immediately exercisable warrant to purchase 84,994 shares of our common stock at $80.00 per share in connection with a pilot project and distribution agreement 38 40 between a third party and one of our subsidiaries. At December 31, 1999, the warrant was outstanding and exercisable. The warrant expires on December 23, 2004. At December 31, 1999, we had approximately $4.4 million outstanding and approximately $2.2 million available under various line of credit facilities. The amounts outstanding under the lines of credit at December 31, 1999 were subsequently paid. Approximately $2.0 million was outstanding at December 31, 1999 under notes payable to a bank and we expect to pay this amount in 2000. We believe that our current 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 is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or 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 incurrence of additional 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. Basic loss per share is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common stock that would share in our earnings. Because of our net losses, the issuance of additional shares of common stock under stock options and warrants or upon the conversion of preferred stock would be antidilutive. The total number of common shares that would have been used in our computation of diluted earnings per share if they had been dilutive was 39,993,097 in 1999 and 31,436,512 in 1998. YEAR 2000 READINESS DISCLOSURE STATEMENT Our business operations were not adversely affected by any year 2000 issues. Prior to the end of 1999, we acted to ensure that our products and critical internal business systems were year 2000 compliant, including forming a company-wide task force, with representation from all major business units to evaluate and manage the risks, solutions and cost associated with addressing this issue. The Task Force identified all business systems, products and services, including third party software we used in conjunction with our products and implemented actions for the systems, products and services which were not year 2000 compliant. Our Task Force developed and implemented a strategy to minimize the impact of year 2000 technology problems. Our strategic plan included regular reporting of progress to our management and board of directors. The costs incurred in addressing the year 2000 problem were expensed as incurred in compliance with generally accepted accounting principles. None of these costs were material to the results of operations in any one period. Significant portions of the costs which were incurred were not incremental but rather related to development efforts. However, we may incur significant costs if unanticipated year 2000 compliance problems arise. These unanticipated costs, or our failure to correct any unanticipated year 2000 problems in a timely manner, could have a material adverse effect on our business, financial condition, results of operations and prospects for growth. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This statement is effective for financial statements for all fiscal quarters of all fiscal years beginning after June 15, 2000. We intend to adopt this statement when required. We are currently assessing the impact of this pronouncement on the Company. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB101"). In March 2000, the SEC released SAB101A which defers reporting on the effects of the adoption of SAB 101 until the second fiscal quarter of 2000. The Company is evaluating the 39 41 implications of SAB 101 and to date nothing has been identified that would significantly change the Company's historical practices with respect to the events that trigger revenue recognition and the measurement of revenue. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK. The foreign currency financial statements of our international operations are translated into U.S. dollars at current exchange rates, except revenues, costs 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. 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 instruments to hedge our foreign exchange exposure because the effect of foreign exchange rate fluctuations would not be material. The net liabilities of our foreign operations at December 31, 1999 was approximately $20.4 million. For our operating locations in countries participating in the European Union, the euro was adopted as their common legal currency effective January 1, 1999. We have not experienced any significant problems related to the euro conversion and do not expect the euro conversion to have a material impact on our results of operations. We are exposed to market risk from changes in our investment securities available for sale which consists entirely of our investment in BroadVision, Inc. common stock. At December 31, 1999, our marketable securities were recorded at fair value of approximately $62.8 million. Our investment in BroadVision, Inc. common stock has exposure to price risk, which is estimated as the potential loss in fair value due to a hypothetical change of 10% in quoted market prices. This hypothetical change would reduce the carrying value of our investment as well as our unrealized gain on investment securities available for sale which is included as a component of stockholders' equity. This hypothetical change would have an immaterial effect on the recorded value of our investment securities available for sale. Our only long term liabilities are capital lease obligations at a fixed rate. Therefore, we do not believe there is any material exposure to market risk changes in interest rates relating to current or long term liabilities. 40 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
PAGE ---- FINANCIAL STATEMENTS: Report of Independent Accountants........................... 42 Independent Auditors' Report................................ 43 Consolidated Balance Sheets -- December 31, 1998 and December 31, 1999......................................... 44 Consolidated Statements of Operations -- For the Years Ended December 31, 1997, 1998 and 1999.................................................. 45 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1997, 1998 and 1999.................................................. 46 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended December 31, 1997, 1998 and 1999................................... 47 Notes to Consolidated Financial Statements.................. 50 FINANCIAL STATEMENT SCHEDULE: For each of the three years ended December 31, 1999 II -- Valuation and Qualifying Accounts................... 67 Independent Auditors' Report................................ 68
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 41 43 REPORT OF INDEPENDENT ACCOUNTANTS 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, 1999, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth for the year ended December 31, 1999 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, 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 audit provides a reasonable basis for the opinion expressed above. The consolidated financial statements of the Company as of December 31, 1998 and for each of the two years in the period ended December 31, 1998 were audited by other independent accountants whose report dated February 4, 1999 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP Atlanta, GA February 21, 2000, except for Note 14, as to which the date is March 6, 2000 42 44 INDEPENDENT AUDITORS' REPORT The Board of Directors S1 Corporation: We have audited the accompanying consolidated balance sheet of S1 Corporation and subsidiary as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of S1 Corporation and subsidiary as of December 31, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Atlanta, Georgia February 4, 1999 43 45 S1 CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- 1998 1999 ------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................... $14,504 $ 67,850 Investment securities available for sale (cost of $1,800 at December 31, 1998 and 1999) (note 3)...................... 3,936 62,754 Accounts receivable, net of allowance for doubtful accounts of $415 at December 31, 1998 and $8,584 at December 31, 1999 (note 4)............................................. 17,520 70,136 Note receivable............................................. -- 1,500 Prepaid expenses............................................ 505 6,625 Other current assets........................................ 805 678 ------- ---------- Total current assets...................................... 37,270 209,543 Property and equipment, net (note 4)........................ 5,355 24,580 Intangible assets, net (note 1)............................. 2,677 106,508 Goodwill, net (note 2)...................................... 237 788,293 Note receivable............................................. 1,500 -- Other assets................................................ 1,254 3,563 ------- ---------- Total assets.............................................. $48,293 $1,132,487 ======= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................ $ 3,232 $ 29,493 Accrued salaries and benefits............................... 566 12,123 Accrued other expenses...................................... 3,145 44,122 Deferred revenues........................................... 10,378 20,469 Notes payable (note 5)...................................... -- 6,351 Current portion of capital lease obligation (note 8)........ 875 759 ------- ---------- Total current liabilities................................. 18,196 113,317 Deferred revenues........................................... 12,034 9,283 Capital lease obligation, excluding current portion (note 8)........................................................ 159 1,086 Deferred tax liability (note 7)............................. 675 15,386 Other liabilities........................................... -- 2,608 ------- ---------- Total liabilities......................................... 31,064 141,680 ------- ---------- Stockholders' equity (notes 6 and 9): Preferred stock, $0.01 par value. Authorized 25,000,000 shares. Issued and outstanding 1,385,528 and 1,393,014 shares at December 31, 1998 and 1999, respectively........ 11,911 23,089 Common stock, $0.01 par value. Authorized 350,000,000 shares. Issued and outstanding 24,527,004 and 48,831,243 shares at December 31, 1998 and 1999, respectively........ 245 488 Additional paid-in capital.................................. 86,811 1,126,607 Receivable from the sale of stock........................... -- (11,735) Accumulated deficit......................................... (82,840) (207,927) Accumulated other comprehensive income: Net unrealized gains on investment securities available for sale, net of taxes.................................. 1,325 60,143 Cumulative foreign currency translation adjustment, net of taxes................................................... (223) 142 ------- ---------- Total stockholders' equity................................ 17,229 990,807 ------- ---------- Commitments and contingencies (note 8) Total liabilities and stockholders' equity................ $48,293 $1,132,487 ======= ==========
See accompanying notes to consolidated financial statements. 44 46 S1 CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1998 1999 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Software licenses................................. $ 4,142 $ 4,781 $ 19,050 Professional services............................. 6,277 13,747 56,432 Data center....................................... 411 3,181 8,858 Other............................................. -- 2,471 8,550 ----------- ----------- ----------- Total revenues.................................. 10,830 24,180 92,890 ----------- ----------- ----------- Direct costs: Software licenses................................. 1,605 503 642 Professional services, excluding stock option compensation expense of $144,000 and $119,000 for 1998 and 1999............................... 5,346 8,098 36,327 Data center....................................... 6,947 7,218 9,008 Other............................................. -- 2,285 7,112 ----------- ----------- ----------- Total direct costs.............................. 13,898 18,104 53,089 ----------- ----------- ----------- Expenses: Selling and marketing, excluding stock option compensation expense of $125,000 in 1999........ 4,305 4,723 12,169 Product development, excluding stock option compensation expense of $377,000, $857,000, and $544,000 for 1997, 1998 and 1999................ 10,507 13,768 24,036 General and administrative, excluding stock option compensation expense of $279,000, $543,000 and $330,000 for 1997, 1998 and 1999................ 3,981 5,451 13,913 Depreciation and amortization..................... 1,741 5,347 6,924 Stock option compensation expense................. 656 1,544 1,118 Marketing cost from warrant issued................ -- -- 715 Merger related costs.............................. -- -- 8,744 Acquired in-process research and development...... -- -- 59,300 Amortization of acquisition intangible assets..... 4,525 4,384 40,206 ----------- ----------- ----------- Total operating expenses........................ 25,715 35,217 167,125 ----------- ----------- ----------- Operating loss.................................... (28,783) (29,141) (127,324) Interest income................................... 1,481 583 2,237 ----------- ----------- ----------- Loss from continuing operations................... (27,302) (28,558) (125,087) Discontinued operations: Loss from operations.............................. (689) (3,059) -- Gain on sale...................................... -- 812 -- ----------- ----------- ----------- Loss from discontinued operations................. (689) (2,247) -- ----------- ----------- ----------- Net loss........................................ $ (27,991) $ (30,805) $ (125,087) =========== =========== =========== Basic and diluted net loss per common share from continuing operations........................... $ (1.53) $ (1.30) $ (4.28) Basic and diluted net loss per common share from discontinued operations......................... (0.04) (0.10) -- ----------- ----------- ----------- Basic and diluted net loss per common share....... $ (1.57) $ (1.40) $ (4.28) =========== =========== =========== Weighted average number of shares of common stock outstanding..................................... 17,845,524 22,036,652 29,227,732 =========== =========== ===========
See accompanying notes to consolidated financial statements. 45 47 S1 CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1998 1999 -------- -------- --------- (IN THOUSANDS) Cash flows from operating activities: Net loss.................................................... $(27,991) ($30,805) $(125,087) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations........................... 689 3,059 -- Gain on sale of discontinued operations..................... -- (812) -- Depreciation and amortization including acquisition charges................................................... 4,996 10,006 47,130 Write-down of purchased technology.......................... 1,400 -- -- Acquired in-process research and development................ -- -- 59,300 Compensation and marketing expense for options and warrant................................................... 656 1,544 1,833 Provision for doubtful accounts receivable.................. 257 871 785 Increase in accounts receivable............................. (3,252) (14,213) (27,950) Decrease (increase) in other assets......................... (807) 110 (3,575) (Decrease) increase in accounts payable..................... (1,920) 2,746 8,782 Increase (decrease) in accrued expenses..................... (6) 2,194 8,883 Increase (decrease) in deferred revenue..................... 7,409 13,396 (138) -------- -------- --------- Net cash used in continuing operations.................... (18,569) (11,904) (30,037) Net cash provided by discontinued operations................ 3,213 3,310 -- -------- -------- --------- Net cash used in operating activities..................... (15,356) (8,594) (30,037) -------- -------- --------- Cash flows from investing activities: Sale of banking operations.................................. -- 1,500 -- Net cash acquired through acquisitions...................... -- -- 31,440 Purchases of investment securities available for sale....... (8,736) -- -- Sales of investment securities available for sale........... 14,979 1,983 -- Maturities of investment securities available for sale...... 5,000 8,000 -- Purchases of property, equipment, and purchased technology................................................ (2,861) (4,097) (17,140) -------- -------- --------- Net cash provided by investing activities................. 8,382 7,386 14,300 -------- -------- --------- Cash flows from financing activities: Sale of preferred stock..................................... 1,315 10,000 -- Sale of common stock, net of expenses....................... 4,676 970 63,957 Proceeds from exercise of stock options..................... 149 3,634 11,902 Payment of notes payable.................................... -- -- (6,760) Payment on receivable from sale of stock.................... -- -- 962 Payments on capital lease obligations....................... -- (1,070) (955) -------- -------- --------- Net cash provided by financing activities................. 6,140 13,534 69,106 -------- -------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... (151) (208) (23) Cash held in escrow, included in other assets............... -- (751) -- -------- -------- --------- Net increase (decrease) in cash and cash equivalents........ (985) 11,367 53,346 Cash and cash equivalents at beginning of period............ 4,122 3,137 14,504 -------- -------- --------- Cash and cash equivalents at end of period.................. $ 3,137 $ 14,504 $ 67,850 ======== ======== ========= Noncash financing and investing activities: Issuance of common stock for purchased technology........... -- 2,000 -- Issuance of common stock in exchange for marketable equity securities................................................ -- 1,800 -- Capital lease obligations................................... -- 2,026 -- Conversion of preferred stock to common stock............... 683 768 849 Acquisition of businesses through issuance of common stock..................................................... 5,701 -- 960,748 Investment securities transferred to banking operations..... 3,902 5,557 -- Issuance of Series C Preferred Stock in exchange for subscription receivable................................... -- -- 12,027
See accompanying notes to consolidated financial statements. 46 48 S1 CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE PREFERRED STOCK ------------------------------------------------------------ SERIES A SERIES B SERIES C ------------------ ----------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------ ------- ------- ---------- ------ Balance at December 31, 1996........................ 1,637,832 $2,047 -- $ -- -- $ -- Net loss........................................... -- -- -- -- -- -- Change in net unrealized gains on investment securities available for sale, net of taxes...... -- -- -- -- -- -- Conversion of preferred stock to common stock...... (546,700) (683) -- -- -- -- Proceeds from issuance of preferred and common stock, net of expenses........................... 159,952 1,315 -- -- -- -- Issuance of common stock in acquisition............ -- -- -- -- -- -- Common stock issued upon the exercise of stock options.......................................... -- -- -- -- -- -- Stock option compensation.......................... -- -- -- -- -- -- Cumulative foreign currency translation adjustment....................................... -- -- -- -- -- -- Comprehensive income (loss)........................ --------- ------ ------- ------- ---------- ---- Balance at December 31, 1997........................ 1,251,084 $2,679 -- $ -- -- $ -- Net loss........................................... -- -- -- -- -- -- Change in net unrealized gains on investment securities available for sale, net of taxes...... -- -- -- -- -- -- Conversion of preferred stock to common stock...... (614,620) (768) -- -- -- -- Sale of common stock, net of expenses.............. -- -- -- -- -- -- Sale of preferred stock............................ -- -- 749,064 10,000 -- -- Common stock issued upon the exercise of stock options.......................................... -- -- -- -- -- -- Stock option compensation.......................... -- -- -- -- -- -- Issuance of options to acquire common and preferred stock............................................ -- -- -- -- -- -- Issuance of common stock in exchange for purchased technology....................................... -- -- -- -- -- -- Issuance of common stock in exchange for marketable equity securities................................ -- -- -- -- -- -- Change in cumulative foreign currency translation adjustment, net of taxes......................... -- -- -- -- -- -- Comprehensive income (loss)........................ --------- ------ ------- ------- ---------- ---- Balance at December 31, 1998........................ 636,464 $1,911 749,064 $10,000 -- $ -- ========= ====== ======= ======= ========== ==== RECEIVABLE COMMON STOCK ADDITIONAL FROM THE ------------------- PAID-IN SALE OF ACCUMULATED SHARES AMOUNT CAPITAL STOCK DEFICIT ---------- ------ ---------- ------------ ------------- Balance at December 31, 1996........................ 16,520,046 $165 $62,562 $ -- $(24,044) Net loss........................................... -- -- -- -- (27,991) Change in net unrealized gains on investment securities available for sale, net of taxes...... -- -- -- -- -- Conversion of preferred stock to common stock...... 1,093,400 11 672 -- -- Proceeds from issuance of preferred and common stock, net of expenses........................... 1,139,956 12 4,664 -- -- Issuance of common stock in acquisition............ 2,000,000 20 5,681 -- -- Common stock issued upon the exercise of stock options.......................................... 221,088 2 147 -- -- Stock option compensation.......................... -- -- 656 -- -- Cumulative foreign currency translation adjustment....................................... -- -- -- -- -- Comprehensive income (loss)........................ ---------- ---- ------- -------- -------- Balance at December 31, 1997........................ 20,974,490 $210 $74,382 $ -- $(52,035) Net loss........................................... -- -- -- -- (30,805) Change in net unrealized gains on investment securities available for sale, net of taxes...... -- -- -- -- -- Conversion of preferred stock to common stock...... 1,229,240 12 756 -- -- Sale of common stock, net of expenses.............. 185,186 2 968 -- -- Sale of preferred stock............................ -- -- -- -- -- Common stock issued upon the exercise of stock options.......................................... 1,515,464 15 4,824 -- -- Stock option compensation.......................... -- -- 787 -- -- Issuance of options to acquire common and preferred stock............................................ -- -- 1,300 -- -- Issuance of common stock in exchange for purchased technology....................................... 363,220 4 1,996 -- -- Issuance of common stock in exchange for marketable equity securities................................ 259,404 2 1,798 -- -- Change in cumulative foreign currency translation adjustment, net of taxes......................... -- -- -- -- -- Comprehensive income (loss)........................ ---------- ---- ------- -------- -------- Balance at December 31, 1998........................ 24,527,004 $245 $86,811 $ -- $(82,840) ========== ==== ======= ======== ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE INCOME EQUITY INCOME ------------- ------------- ------------- Balance at December 31, 1996........................ $ 129 $ 40,859 Net loss........................................... -- (27,991) (27,991) Change in net unrealized gains on investment securities available for sale, net of taxes...... (74) (74) (74) Conversion of preferred stock to common stock...... -- -- Proceeds from issuance of preferred and common stock, net of expenses........................... -- 5,991 Issuance of common stock in acquisition............ -- 5,701 Common stock issued upon the exercise of stock options.......................................... -- 149 Stock option compensation.......................... -- 656 Cumulative foreign currency translation adjustment....................................... (151) (151) (151) -------- Comprehensive income (loss)........................ $(28,216) -------- -------- ======== Balance at December 31, 1997........................ $ (96) $ 25,140 Net loss........................................... -- (30,805) (30,805) Change in net unrealized gains on investment securities available for sale, net of taxes...... 1,270 1,270 1,270 Conversion of preferred stock to common stock...... -- -- Sale of common stock, net of expenses.............. -- 970 Sale of preferred stock............................ -- 10,000 Common stock issued upon the exercise of stock options.......................................... -- 4,839 Stock option compensation.......................... -- 787 Issuance of options to acquire common and preferred stock............................................ -- 1,300 Issuance of common stock in exchange for purchased technology....................................... -- 2,000 Issuance of common stock in exchange for marketable equity securities................................ -- 1,800 Change in cumulative foreign currency translation adjustment, net of taxes......................... (72) (72) (72) -------- Comprehensive income (loss)........................ $(29,607) -------- -------- ======== Balance at December 31, 1998........................ $ 1,102 $ 17,229 ======== ========
See accompanying notes to consolidated financial statements. 47 49 S1 CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) -- (CONTINUED)
CONVERTIBLE PREFERRED STOCK ----------------------------------------------------------------- SERIES A SERIES B SERIES C COMMON STOCK ------------------ ----------------- ------------------------ ---------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES --------- ------ ------- ------- ---------- ----------- ---------- Net loss..................................... -- -- -- -- -- -- -- Change in net unrealized gains on investment securities available for sale, net of taxes....................................... -- -- -- -- -- -- -- Change in cumulative foreign currency translation adjustment, net of taxes........ -- -- -- -- -- -- -- Conversion of preferred stock to common stock....................................... (207,514) (849) -- -- -- -- 415,028 Issuance of preferred stock.................. -- -- -- -- 215,000 12,027 -- Sale of common stock, net of expenses........ -- -- -- -- -- -- 1,225,617 Payment on receivable from the sale of stock....................................... -- -- -- -- -- -- -- Interest earned on receivable from the sale of stock.................................... -- -- -- -- -- -- -- Common stock issued upon the exercise of stock options............................... -- -- -- -- -- -- 2,854,774 Stock option compensation.................... -- -- -- -- -- -- -- Warrant issued in connection with marketing agreement................................... -- -- -- -- -- -- -- Issuance of common stock in connection with acquisitions................................ -- -- -- -- -- -- 19,808,820 Comprehensive income (loss).................. --------- ------ ------- ------- ---------- ----------- ---------- Balance at December 31, 1999................. 428,950 $1,062 749,064 $10,000 215,000 $ 12,027 48,831,243 ========= ====== ======= ======= ========== =========== ========== RECEIVABLE ACCUMULATED COMMON STOCK FROM THE OTHER ---------- PAID-IN SALE OF ACCUMULATED COMPREHENSIVE AMOUNT CAPITAL STOCK DEFICIT INCOME -------- ---------- ------------ ------------- ------------- Net loss..................................... -- -- -- (125,087) -- Change in net unrealized gains on investment securities available for sale, net of taxes....................................... -- -- -- -- 58,818 Change in cumulative foreign currency translation adjustment, net of taxes........ -- -- -- -- 365 Conversion of preferred stock to common stock....................................... 4 845 -- -- -- Issuance of preferred stock.................. -- -- (12,027) -- -- Sale of common stock, net of expenses........ 12 63,945 -- -- -- Payment on receivable from the sale of stock....................................... -- -- 962 -- -- Interest earned on receivable from the sale of stock.................................... -- 750 (670) -- -- Common stock issued upon the exercise of stock options............................... 29 11,873 -- -- -- Stock option compensation.................... -- 1,118 -- -- -- Warrant issued in connection with marketing agreement................................... -- 715 -- -- -- Issuance of common stock in connection with acquisitions................................ 198 960,550 -- -- -- Comprehensive income (loss).................. -------- ---------- -------- --------- -------- Balance at December 31, 1999................. $ 488 $1,126,607 $(11,735) $(207,927) $ 60,285 ======== ========== ======== ========= ======== TOTAL STOCKHOLDERS' COMPREHENSIVE EQUITY INCOME ------------- ------------- Net loss..................................... (125,087) (125,087) Change in net unrealized gains on investment securities available for sale, net of taxes....................................... 58,818 58,818 Change in cumulative foreign currency translation adjustment, net of taxes........ 365 365 Conversion of preferred stock to common stock....................................... -- Issuance of preferred stock.................. -- Sale of common stock, net of expenses........ 63,957 Payment on receivable from the sale of stock....................................... 962 Interest earned on receivable from the sale of stock.................................... 80 Common stock issued upon the exercise of stock options............................... 11,902 Stock option compensation.................... 1,118 Warrant issued in connection with marketing agreement................................... 715 Issuance of common stock in connection with acquisitions................................ 960,748 ---------- Comprehensive income (loss).................. $ (65,904) -------- ========== Balance at December 31, 1999................. $990,807 ========
See accompanying notes to consolidated financial statements. 48 50 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998 AND 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Presentation S1 Corporation develops integrated Internet software applications that enable financial organizations to offer products, services and transactions over the Internet in a secure environment. S1 Corporation also offers product integration, training, call center technology and data center processing services. On November 10, 1999, the shareholders of Security First Technologies Corporation approved the name change of Security First Technologies Corporation to S1 Corporation ("S1" or the "Company"). S1 operates in three business segments: Professional Services, Data Center and Product Development. The Professional Services segment provides integration, training, consulting and product enhancement services related to S1's software products. The Product Development segment creates new products to supplement the existing product suite. The Data Center segment provides processing and support services to customers using S1's software products in the S1 data center. S1 manages the business based on these operating segments. The information presented in the consolidated statements of operations reflects the revenues and costs associated with these segments that management used to make operating decisions and assess performance during 1999. In the fourth quarter of 1999, the Company completed the acquisitions of Edify Corporation ("Edify"), VerticalOne Corporation ("VerticalOne") and FICS Group, N.V. ("FICS"). The results of operations of these companies are included from the dates of acquisition (see further discussion in Note 2). The consolidated financial statements include the accounts of S1 Corporation and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported revenues and expenses during the reporting periods. Actual results could differ from those estimates. S1 Corporation is the successor company to Security First Network Bank ("SFNB") as a result of the reorganization completed on September 30, 1998. The reorganization was accounted for in a manner similar to a pooling of interests and, as a result, the historical financial statements of SFNB became the historical financial statements of the Company. As more fully discussed in Note 13, the Company sold its banking operations on September 30, 1998, which have been presented as discontinued operations for the years ended December 31, 1997 and 1998 in the accompanying consolidated financial statements. The technology market for Internet related financial services is characterized by significant risk as a result of rapid, evolving industry standards, emerging competition and frequent new product and service introductions. To a great extent, the Company's success is dependent on the evolution of the technology markets for Internet related financial services and on its successful implementation of technology for Internet related financial services for certain large customers. Negative developments related to technology for Internet related financial services or problems in implementations for large customers could have an adverse impact on the Company's financial position and results of operations. Stockholders' equity, share and per share amounts for all periods presented have been adjusted for a two-for-one stock split effected in the form of a stock dividend paid on May 7, 1999 to holders of record on April 26, 1999. Revenue Recognition and Deferred Revenues The Company derives substantially all of its revenues from licensing software, providing professional services, and providing data center processing services. For software license sales where no significant obligations remain, revenue is recognized upon delivery of the software, provided collection is considered probable, the fee is fixed or determinable, there is evidence of 49 51 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) an arrangement, and vendor specific evidence exists to allocate the total fee to all elements of the arrangement. When services are considered essential to the functionality of the software, the software license and the related services are recognized over the implementation period using the percentage of completion method of accounting. A portion of the Company's software license revenue is being recognized on a straight-line basis over either the term of the agreement or, for contracts without a term, the estimated period during which post-contract support is expected to be provided. Under these arrangements, post-contract support and maintenance were bundled as part of the license agreement and sufficient vendor specific evidence did not exist to allocate the total fee to all elements of the arrangement. Revenues derived from contracts to provide 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 uncompleted contracts are made in the period in which such losses are determined. Professional services revenues also include reimbursable expenses and revenues from post-contract customer support and maintenance. Revenues for post-contract customer support and maintenance are recognized ratably over the contract period. Data center processing revenues are recognized as the services are performed, and are determined based on the number of end-users of the client institutions during the period or based upon certain agreed upon contractual minimum fees. Deferred revenues represent payments received from customers for software licenses or services in advance of revenue recognition. Financial Instruments Cash and cash equivalents include deposits with commercial banks with original maturities of 90 days or less. Investment securities consist entirely of marketable equity securities. The investment securities are classified as available for sale and are reported at fair value, with net unrealized gains or losses included as a component of accumulated other comprehensive income in stockholders' equity. Unrealized losses on all securities that are other than temporary are reported in the statement of operations upon determination that the loss is other than temporary. The specific identification method is used in determining gains and losses on the sale of securities. The Company uses financial instruments in the normal course of business. The carrying values of accounts receivable, accounts payable, accrued expenses, deferred revenues and notes payable approximate fair value due to the short-term maturities of these assets and liabilities. The fair values of the Company's investment securities available for sale are included in Note 3 and are based on quoted market prices. Property and Equipment Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets ranging from 1.5 to 5 years. Leasehold improvements are amortized using the straight-line method over the estimated useful life of the improvement or the lease term, whichever is shorter. Amortization of assets held under capital lease arrangements is included in depreciation and amortization in the consolidated statement of operations. Product Development Product development includes all research and development expenses and software development costs. All research and development expenses are expensed as incurred. The Company's policy is to expense all 50 52 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) software development costs associated with establishing technological feasibility, which the Company defines as completion of beta testing. Because of the insignificant amount of costs incurred by the Company between completion of beta testing and customer release, the Company has not capitalized any software development costs in the accompanying consolidated financial statements. Merger Related Costs Merger related costs include expenses related to establishing the infrastructure and consolidating the operations of acquired companies. Intangible Assets and Goodwill Intangible assets include purchased technology of $3.1 million at December 31, 1998 and $8.1 million at December 31, 1999, net of accumulated amortization of $0.4 million and $2.1 million at December 31, 1998 and 1999, respectively. Goodwill and other identifiable intangible assets, excluding purchased technology, totaled $6.0 and $934.7 million at December 31, 1998 and 1999, respectively, net of accumulated amortization of $5.8 million at December 31, 1998 and $45.9 million at December 31, 1999. Goodwill and other identifiable intangible assets relate to the Company's acquisitions and are amortized over their estimated useful lives (ranging from eight months to five years) using the straight-line method. Purchased technology represents technology incorporated in the Company's products and is amortized over the useful life of the purchased technology (ranging from two to three years). The Company evaluates the recoverability of intangible assets at the end of each period or 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, the Company uses fair value in determining the amount of these intangible assets that should be written off. Stock Option Plans The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Loss Per Common Share Basic loss per share is calculated as loss available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common stock that would share in the earnings of the Company. Because of the Company's net losses, the issuance of additional shares of common stock under stock options, warrants or upon the conversion of preferred stock would be antidilutive. The total number of common shares that would have been included in the Company's computation of diluted loss per share if they had been dilutive was 24,936,556 in 1997, 31,436,512 in 1998 and 39,993,097 in 1999. Income Taxes The Company uses 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 carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary 51 53 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign Currency Translation The financial statements of the Company's international subsidiaries are translated 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 are included in the results of operations, are immaterial for all periods presented. Net exchange gains or losses resulting from the translation of assets and liabilities are included as a component of accumulated other comprehensive income in stockholders' equity. Reclassifications Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation. 2. BUSINESS ACQUISITIONS During 1997, the Company expensed the unamortized balance of goodwill and purchased technology resulting from the 1996 acquisitions of Five Paces, Inc. ("FPI") and SecureWare, Inc. ("SecureWare") of approximately $1.4 million, which has been included in the amortization of acquisition intangible assets for the year ended December 31, 1997. The Company made this assessment after determining that there was limited future cash flows associated with the intangible assets acquired. On November 24, 1997, the Company completed the acquisition of Solutions By Design, Inc. ("SBD"), a technology consulting firm. The Company exchanged 1,999,998 shares of restricted common stock with a value of approximately $5.7 million for all of the outstanding shares of SBD. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of SBD have been included in the results of operations of the Company since the effective date of the acquisition. Of the $6.2 million total purchase price, which included common stock valued at $5.7 million and transaction costs and liabilities assumed of $0.5 million, $4.2 million was assigned to identifiable intangible assets and $2.0 million was assigned to goodwill. The identifiable intangible assets include employment contracts, which were amortized over the contract life of eight months, exclusivity and non-solicitation agreements, which were amortized over the term of the contract of 18 months, and assembled workforce, which is being amortized over three years. The Company amortized goodwill over a period of two years, which was the period that it will receive benefit from the projects that were developed by the former SBD employees. Additionally, the Company has included $489,000 of nonrecurring charges associated with the SBD acquisition in amortization of acquisition intangible assets for the year ended December 31, 1997. These amounts represent the premium paid to SBD by the Company for services rendered during the fourth quarter of 1997 prior to consummation of the SBD acquisition. On November 10, 1999, the Company completed the acquisitions of Edify and VerticalOne. On November 18, 1999, the Company completed the acquisition of FICS. All three acquisitions have been accounted for using the purchase method of accounting with the excess of the purchase price over the estimated fair value of the net assets recorded as goodwill. The consolidated financial statements include the results of operations of Edify and VerticalOne from November 1, 1999 and the results of operations of FICS from December 1, 1999. The amounts allocated to in-process research and development were based on the results of independent appraisals and were expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. Certain related core technology was valued as existing technology and was not included in the value of the acquired in-process research and development. The value of the purchased in-process research and development was determined using an income approach. This approach involved estimating the present value of the after-tax cash flows expected to be generated by the 52 54 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purchased in-process research and development, using risk-adjusted discount rates and revenue forecasts as appropriate. Finally, a stage of completion factor was applied to the sum of the present values of the cash flows in the projection period. The stage of completion factor was calculated giving consideration to the costs incurred to date on the in-process research and development relative to the total anticipated costs for each project. The Company issued 5,966,333 shares of common stock with a value of approximately $313.5 million for all of the outstanding shares of Edify. The Company also exchanged all outstanding options to purchase Edify stock into 1,319,044 options to purchase S1 common stock with an estimated fair value of $64.7 million. Of the total purchase price of $381.7 million, which includes $3.5 million of costs incurred directly related to the acquisition, $31.0 million was allocated to net assets acquired, $34.0 million to identifiable intangible assets, $296.7 million to goodwill and $20.0 million to in-process research and development. The liabilities assumed included approximately $2.0 million of employee termination costs, of which $0.8 million were unpaid at December 31, 1999. The in-process research and development was expensed upon the closing of the acquisition. Amounts allocated to goodwill, developed technology, and customer lists are being amortized on a straight-line basis over three years. The intangible asset related to the assembled work force is being amortized on a straight-line basis over five years. The Company issued 3,842,487 shares of common stock with a value of approximately $144.0 million for all of the outstanding shares of VerticalOne. Approximately, 186,360 of the total shares exchanged were issued to escrow in connection with a general indemnity provision. If no claims arise that are covered by this indemnity provision, the shares will be released after the expiration of one year. These shares are included in the purchase price as they do not relate to specific contingencies and it is not expected that any claims will arise. The Company also exchanged all outstanding options to purchase VerticalOne stock into 471,440 options to purchase S1 common stock with an estimated fair value of $17.4 million. Of the total purchase price of $179.4 million, which includes $3.0 million of acquisition costs and $15.0 million of preferred stock purchased before the closing of the acquisition, $23.4 million was allocated to net assets acquired, $22.5 million to identifiable intangible assets, $126.2 million to goodwill and $7.3 million to in-process research and development. The in-process research and development was expensed upon the closing of the acquisition. Amounts allocated to goodwill and developed technology are being amortized on a straight-line basis over three years. The intangible asset related to the assembled work force is being amortized on a straight-line basis over five years. The Company issued 10,000,000 shares of common stock with a value of approximately $378.9 million to acquire all of the outstanding stock of FICS. The Company also exchanged all outstanding options to purchase FICS stock into 1,149,638 options to purchase S1 common stock with an estimated fair value of $42.4 million. Of the total purchase price of $426.1 million, which includes $4.8 million of costs incurred directly related to the acquisition, $55.2 million was allocated to net liabilities acquired, $48.0 million to identifiable intangible assets, $401.3 million to goodwill and $32.0 million to in-process research and development. The liabilities assumed included approximately $0.5 million of lease termination costs related to the elimination of duplicate facilities, which remained unpaid at December 31, 1999. Approximately $0.8 million of fixed assets with no future value as the result of the relocation of certain facilities were written off in the purchase price allocation. A deferred tax liability of $15.2 million was recognized for the difference between the assigned values for book purposes and the tax bases of assets in accordance with SFAS 109. The in-process research and development was expensed upon the closing of the acquisition. Amounts allocated to goodwill, developed technology, and customer list are being amortized on a straight-line basis over three years. The intangible asset related to the assembled work force is being amortized on a straight-line basis over five years. FICS stockholders will also have the opportunity to earn up to an additional 4,500,000 shares of S1 common stock through 2001 if certain operating units meet revenue targets of $89 million and $123 million for the years ended December 31, 2000 and 2001, respectively. FICS stockholders can earn up to one half of the 4,500,000 shares by closing sales with specifically identified large customers. These shares have not been 53 55 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) included in the purchase price as they were not issuable at the time of the acquisition. The purchase price will be adjusted when and if these shares become issuable. The Company plans to sell the Financial Reporting Systems ("FRS") segment of the FICS business. The expected proceeds from the sale of the FRS segment and the projected net cash used by the FRS business during the holding period, which is expected to be one year, were taken into consideration in the purchase price allocation. Approximately $10.6 million of the total purchase price was allocated to identifiable intangible assets and approximately $1.0 million was allocated to goodwill. These amounts are included in the total purchase price of FICS. The operating loss of the FRS business excluded from the consolidated operating results of the Company for the year ended December 31, 1999 was $0.3 million. The following unaudited pro forma summary presents information as if the Edify, VerticalOne and FICS acquisitions occurred at the beginning of fiscal year 1998. The proforma consolidated results are based on historical information and include the impact of certain adjustments, including amortization of intangibles. The proforma information is not necessarily indicative of what actually would have occurred if the acquisitions had been in effect at the beginning of fiscal year 1998 and it is not necessarily indicative of future results from operations of the combined company.
(UNAUDITED) ------------------------- YEAR ENDING DECEMBER 31, ------------------------- 1998 1999 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues.............................................. $ 117,055 $ 177,728 Net loss.................................................. (370,197) (393,170) Loss per share............................................ (8.85) (8.47)
3. INVESTMENT SECURITIES AVAILABLE FOR SALE At December 31, 1998 and 1999, investment securities available for sale consisted entirely of marketable equity securities (369,003 shares of BroadVision, Inc.) with a cost of $1.8 million, and a fair value of $3.9 million and $62.8 million, and a gross unrealized gain of $2.1 million and $61.0 million, at December 31, 1998 and 1999, respectively. Proceeds from the sales of investment securities were $15.0 million and $2.0 million in 1997 and 1998, respectively. Gross gains of approximately $5,000 in 1997 and $4,000 in 1998 and gross losses of approximately $4,000 in 1997 were realized on sales of investment securities. 54 56 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. OTHER FINANCIAL DATA Property and Equipment A summary of property and equipment at December 31, 1998 and 1999 is as follows:
1998 1999 ------- -------- (IN THOUSANDS) Leasehold improvements...................................... $ 2,215 $ 7,058 Furniture and fixtures...................................... 1,720 4,879 Computer equipment.......................................... 5,739 19,571 Software.................................................... 1,663 4,286 ------- -------- 11,337 35,794 Accumulated depreciation and amortization................... (5,982) (11,214) ------- -------- $ 5,355 $ 24,580 ======= ========
During 1998, the Company terminated a data center facilities management agreement and, as a result, purchased approximately $1.8 million of computer equipment. Immediately thereafter, the Company entered into a sale-leaseback arrangement for this computer equipment with a third party which is accounted for as a capital lease. The Company recorded a charge which has been included in depreciation and amortization of approximately $1.2 million to adjust the carrying value of the leased computer equipment to its fair market value. Additionally, the Company recorded a write-down of computer equipment of $0.5 million in 1998 to reflect the results of a physical inventory of computer equipment. At December 31, 1999, approximately $3.6 million of total property and equipment is located outside of the United States. Accounts Receivable Included in accounts receivable are unbilled receivables of approximately $0.7 million and $16.6 million at December 31, 1998 and 1999, respectively. The unbilled receivables are comprised primarily of revenue recognized on contracts for which billings have not been presented under the terms of the contracts at the balance sheet dates. It is anticipated that such unbilled amounts at December 31, 1999 will be received upon presentment of billings or completion of contracts. Substantially all unbilled amounts are expected to be collected within six months. At December 31, 1999, one customer represented 26% of total receivables. 5. NOTES PAYABLE The Company had two bank notes outstanding secured by equipment at December 31, 1999. They consisted of a note with a balance of $0.4 million due on January 1, 2002 bearing interest at the prime interest rate plus 2% and a note with a balance of $1.6 million due on July 10, 2002 bearing interest at the prime interest rate plus 1.5%. The Company is required to maintain certain financial covenants. As a result of non-compliance with the covenants at December 31, 1999, the notes are classified as short-term. The remaining notes payable of approximately $4.4 million consist of lines of credit with various banks with interest rates ranging from 3.86% to 7%. The weighted average interest rate at December 31, 1999 was 4.15%. The lines of credit are due upon demand and are classified as short-term. At December 31, 1999, the Company had unused bank lines of credit of approximately $2.2 million with interest rates ranging from 4.04% to 10.5%. 55 57 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. STOCKHOLDERS' EQUITY Preferred Stock The Company 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 ("Series A"), 749,064 shares have been designated as Series B Redeemable Convertible Preferred Stock ("Series B") and 215,000 shares have been designated as Series C Redeemable Convertible Preferred Stock ("Series C"). The terms of the Series A, Series B and Series C (collectively the "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 the Company. Series C is non-voting and except as described below, Series A and Series B are nonvoting. Each series is entitled to vote as a single class on the following matters: (i) 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 (ii) the merger or consolidation of the Company with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of the properties or business of the Company in exchange for securities of another corporation if Series A or 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 A and Series B stockholders requires the approval of two-thirds of the shares of Series A and Series B then outstanding voting as a separate class. In addition, holders of the Series A and Series B are entitled to vote with the holders of common stock as if a single class, on any voluntary dissolution or liquidation of the Company. 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 the Company and the sale, lease or conveyance other than by mortgage or pledge of all or substantially all of the Company's assets or properties. When the Series A votes with the common stock on a dissolution or liquidation, each share of Series A is entitled to one vote. 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. Subject to certain limitations related to ownership, each share of Series A is convertible into two shares of common stock at the option of the holder. 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 A preferred and Series B preferred are convertible is subject to adjustment. The Series B preferred is redeemable at the option of the Company through September 2000 by paying the holder $10,000,000 plus interest. Equity Transactions During 1997, the Company sold 1,139,956 shares of common stock and 159,952 shares of Class A convertible preferred stock for approximately $6 million. During 1998, the Company sold 185,186 shares of common stock for approximately $1 million and 749,064 shares of Series B convertible redeemable preferred stock for approximately $10 million. In 1998, the Company entered into a relationship with BroadVision, Inc. ("BroadVision") whereby the Company exchanged 363,220 shares of the Company's common stock worth $2.0 million for a software license and prepaid royalty agreement which gives the Company the right to resell the software by integrating the software with S1's software products. In addition, the Company exchanged 259,404 shares of common stock valued at $1.8 million for 369,003 shares of BroadVision. As part of the sale of the banking operations to Royal Bank of Canada ("Royal Bank"), the Company issued to Royal Bank four separate options to purchase up to an aggregate $10.0 million in capital stock of the Company. In 1998, Royal Bank exercised the first option for 420,876 shares at an exercise price of $5.94 per share. In 1999, Royal Bank exercised options to purchase 382,614 shares at $6.53 per share and 347,831 shares at $7.19 per share. The fourth option for 316,232 with a per share exercise price of $7.91 expires in June 2000 and remains outstanding at December 31, 1999. 56 58 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On February 19, 1999, S1 entered into strategic alliances with Hewlett-Packard and Andersen Consulting. As part of these alliances, Hewlett-Packard agreed to make a $10.0 million equity investment in the Company's common stock and Andersen Consulting agreed to make a $4.0 million equity investment in the Company's common stock. The stock sales closed as of April 30, 1999, with the Company issuing 254,804 shares of common stock. On February 19, 1999, Andersen Consulting received warrants to purchase up to an additional 200,000 shares of S1 common stock at $54.94 per share. The warrants will vest, if at all, in three installments of 40,000, 80,000 and 80,000 shares only if the Company enters into agreements to sell its services or license its products to specified customers as a result of its relationship with Andersen Consulting. The warrants expire in February 2001. Vested warrants expire two years from the vesting date. At December 31, 1999, 200,000 warrants were outstanding and none were exercisable. The Company expects to record a non-cash charge for the fair value of each warrant installment earned. This charge will be measured at the reporting date in which the target to earn a warrant installment is achieved. As of December 31, 1999, the Company has not recorded any charge under the terms of the warrants. On February 25, 1999, the Company entered into an agreement with Royal Bank under which Royal Bank purchased additional software modules and agreed to implement certain applications within S1's Consumer Suite. Royal Bank has agreed to pay $50.0 million to the Company over the next five years on the following schedule: the first $5.0 million was due to be paid no later than February 2000 with the remaining amount to be paid equally over a four year period after Royal Bank has implemented S1's software. Royal Bank paid S1 $5.0 million to satisfy the first installment. If Royal Bank terminates its minimum payment obligation, it is required to pay a termination fee equal to 40% of the unpaid amount. In connection with this agreement, the Company issued 215,000 shares of newly designated Series C redeemable convertible preferred stock. The Company recorded a subscription receivable of $12.0 million, the estimated fair value of the preferred stock at issuance, and will reduce such subscription receivable, including imputed interest, as the payments under the arrangement are received. The right to convert Series C on a two-for-one basis (post-split) into the Company's common stock will vest, if at all, in five installments based upon the payment schedule in the agreement. On February 25, 2000, the first installment of 21,500 shares vested and became convertible. The remaining four installments each comprised of 48,375 shares, will vest and become convertible if Royal Bank has paid minimum fees of $11,250,000 per year for the first four years following the completion date of the implementation. If the minimum fees paid by Royal Bank at any anniversary date of the completed implementation exceed the minimum fee level for the next anniversary date, Royal Bank may elect to vest in the next installment of shares. The right to convert Series C into common stock expires ninety days after the vesting date. Any shares of Series C that do not vest and become convertible into shares of common stock on or before March 31, 2004 become mandatorily redeemable by the Company for an amount equal to $0.01 per share. At December 31, 1999, no shares of Series C were vested and convertible. On February 25, 1999, Royal Bank was granted a warrant to purchase 800,000 shares of common stock at a price of $30.00 per share. The warrant will vest in four equal installments if, as of four annual measurement dates, beginning one year after the completion of the implementation of certain applications within S1's Consumer Suite, Royal Bank has an additional one million end-users using the S1 software. Each installment terminates if the targeted customer levels are not achieved or if an installment vests, the warrant terminates ninety days after the vesting date. At December 31, 1999, 800,000 warrants were outstanding and none were exercisable. The Company expects to record a non-cash charge for the fair value of the warrants on the date when the warrants become exercisable. 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 also granted Intuit options 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. Intuit was granted 445,000 additional options to purchase S1 common stock that may become exercisable based on the achievement of certain earn-out targets for FICS. All of the Intuit options were granted with an exercise price of $51.50 per share and expire on November 10, 2004. At December 31, 1999, 5,024,187 of these options were outstanding and 4,579,187 were exercisable. Concurrent 57 59 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with the Stock Purchase and Option Agreement, the Company and Intuit entered into a five-year cross-license and distribution agreement. Under the terms of the cross-license agreement, Intuit and the Company agreed to exchange technologies to enable delivery of interactive financial management software and Internet based financial tools. This agreement is considered a non-monetary exchange in accordance with APB 29 and accordingly, has not been given any recognition in the consolidated financial statements. Under the distribution agreement, the Company has a license to distribute Intuit products and services and will receive a royalty fee on such sales. There was no significant activity under the distribution agreement during 1999. On December 23, 1999, S1 granted a 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. At December 31, 1999, the warrant was outstanding and exercisable. The warrant expires on December 23, 2004. The fair value of the warrant of $5.4 million is being expensed over the term of the agreement which is approximately 60 days. The Company recorded $715,000 of expense in the year ended December 31, 1999. 7. INCOME TAXES The Company has not recorded an income tax benefit for 1997, 1998 or 1999 because operating losses were incurred and a valuation allowance has been recorded against substantially all of its net deferred income tax assets, primarily comprised of net operating loss carryforwards. A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to loss from continuing operations is as follows:
1997 1998 1999 ------- ------- -------- (IN THOUSANDS) Expected income tax benefit at 35%.................. $(9,556) $(9,995) $(43,780) State income tax benefit, net of federal benefit.... (819) (857) (5,003) Increase in valuation allowance related to current year loss......................................... 9,614 10,089 7,015 In-process R&D, goodwill amortization and other permanent items................................... 761 763 41,768 ------- ------- -------- Income tax expense (benefit)........................ $ -- $ -- $ -- ------- ------- --------
58 60 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The income tax effects of the temporary differences that give rise to the Company's deferred income tax assets and liabilities as of December 31, 1998 and 1999 are as follows:
1998 1999 -------- -------- (IN THOUSANDS) Deferred income tax assets: Net operating loss carryforwards.......................... $ 17,403 $ 78,702 Accrued expenses.......................................... 1,063 9,659 Deferred revenue.......................................... 8,516 8,868 Tax credit carryforwards.................................. 376 3,660 Property and equipment depreciation....................... 795 2,172 Other..................................................... 78 -- -------- -------- Total gross deferred income tax assets............ 28,231 103,061 -------- -------- Valuation allowance for deferred income tax assets........ (27,808) (55,497) -------- -------- Total deferred income tax assets.................. 423 47,564 -------- -------- Deferred income tax liabilities: Identifiable intangibles.................................. -- 39,146 Unrealized gain on investment securities available for sale................................................... 812 23,456 Other..................................................... 286 348 -------- -------- Total gross deferred income tax liabilities....... 1,098 62,950 -------- -------- Net deferred income tax liability........................... $ 675 $ 15,386 ======== ========
The valuation allowance increased $9.9 million, $10.9 million and $27.7 million during the years ended December 31, 1997, 1998 and 1999, respectively. Deferred income tax assets and liabilities are recognized 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. A valuation allowance is then established to reduce the deferred income tax assets to the level at which it is "more likely than not" that the tax benefits will be realized. Realization of tax benefits of 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) taxable income in the current year or prior years that is available through carryback, (2) future taxable income that will result from the reversal of existing taxable temporary differences, and (3) future taxable income generated by future operations. Because of the uncertainties with respect to the Company's ability to achieve and sustain profitable operations in the future, the Company has recorded a valuation allowance to offset substantially all of its net deferred income tax assets. During 1999, the Company acquired VerticalOne, Edify and FICS which resulted in establishing identifiable intangibles of $22.5 million, $34.0 million and $48.0 million, respectively. The identifiable intangibles created the $39.1 million deferred tax liability included in the table of deferred taxes above. The Company acquired net operating loss carryforwards in the Edify and FICS transactions of approximately $18.3 million and $45.3 million, respectively. The Company established a valuation allowance relating to the FICS carryforwards of $15.2 million. If the benefit from these net operating loss carryforwards is realized, the Company will reduce goodwill recorded in connection with the FICS transaction. The net operating loss carryforwards for which a valuation allowance was not established were utilized to offset the deferred tax liabilities created by the identifiable intangibles. 59 61 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As shown in the table of deferred taxes above, the deferred income tax liability related to the unrealized gain on investment securities available for sale is offset against the Company's deferred tax assets. The resulting credit from the reversal of the valuation allowance is recorded in the consolidated statement of stockholders' equity and comprehensive income (loss). At December 31, 1999, the Company has domestic and foreign net operating loss carryforwards and tax credit carryforwards of approximately $163.5 million, $43.8 million and $3.7 million, respectively. The domestic net operating loss carryforwards expire at various dates through 2019 unless utilized, the foreign net operating loss carryforwards generally do not expire and the tax credit carryforwards expire at various dates through 2019. The Company's domestic net operating loss carryforwards at December 31, 1999 include $87.1 million in income tax deductions related to stock options which will be reflected as a credit to additional paid-in capital when realized. The acquisitions of VerticalOne, Edify and FICS created ownership changes for federal tax purposes. The result of an ownership change is to limit a company's ability 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 change, the limitation of net operating loss and credit carryforwards is not expected to be meaningful. 8. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company and its subsidiaries lease office facilities and computer equipment under non-cancelable operating lease agreements, which expire at various dates through 2013. Total rental expense under these leases was $1,004,000, $1,638,000 and $5,817,000 in 1997, 1998 and 1999, respectively. Future minimum annual payments under non-cancelable operating lease agreements are as follows:
YEAR ENDING DECEMBER 31, ------------ 2000........................................................ 17,104 2001........................................................ 13,304 2002........................................................ 9,985 2003........................................................ 8,370 2004........................................................ 6,139 Thereafter.................................................. 11,543 ------- $66,445 =======
60 62 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property and equipment as of December 31, 1999 includes computer equipment under a capital lease with original cost and accumulated depreciation of approximately $6.3 million and $5.1 million, respectively. Future minimum annual lease payments for the capital lease as of December 31, 1999 are as follows: 2000........................................................ $ 759 2001........................................................ 1,100 ------ $1,859 Less amount representing interest........................... 14 ------ 1,845 Less current portion...................................... 759 ------ Long-term capital lease obligations......................... $1,086 ======

Cash Held in Escrow At December 31, 1999, the Company had $501,000 in cash in an escrow account that was established as a result of the termination of a data center facilities management agreement. This amount is included in cash and cash equivalents. The amount required to be held in escrow will be reduced by $250,000 each year following the termination, provided there have been no indemnification claims. At December 31, 1999, the Company had approximately $98,000 cash on deposit with a bank to guarantee certain rent payments. Intellectual Property Settlement In November 1998, Edify entered into an agreement with Lucent Technologies Inc. ("Lucent") under which each company released the other from claims of past infringement and settled patent disputes that had been ongoing since 1996. Under the agreement, Edify agreed to pay Lucent a minimum annual royalty fee of approximately $500,000 up to a maximum of approximately $700,000 in each of the fiscal years from 1999 to 2004. In addition, in fiscal years 2005 and 2006, if Edify exceeds certain targets that are specified in the Lucent agreement, the Company will be required to pay additional amounts. Contractual Commitments In the normal course of business, the Company enters into contracts with customers. These contracts contain commitments including, but not limited to, minimum standards and time frames against which the Company's performance is measured. In the event the Company does not meet its contractual commitments with its customers, the Company may incur penalties and/or certain customers may have the right to terminate their contracts with the Company. The Company does not believe that it will fail to meet its contractual commitments to an extent that will result in a material adverse effect on its financial position or results of operations. Litigation The Company is involved in litigation incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 61 63 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK OPTION PLANS The Company maintains certain stock option plans providing for the grant of stock options to officers, directors and employees. The plans provide for 21,117,000 shares of the Company's 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, 1999, there were 4,660,000 shares available for future grants under the plans. In connection with the acquisitions of Edify, VerticalOne and FICS, the Company exchanged 1,319,044, 471,440 and 1,149,638 options to purchase shares of S1 common stock, respectively, for all the outstanding options of Edify, VerticalOne and FICS. The fair value of these options was included in the purchase price. In conjunction with the merger agreements, approximately 3,160,000 new options were granted to employees of Edify, FICS and VerticalOne. During 1999, the Company granted approximately 1,450,000 stock options which 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 are in place for each of these years. For each performance target achieved, 12.5% of the options will vest in the year following the achievement of the target. Vesting related to performance targets not met may be earned in subsequent years. Upon the acquisition of SBD, the Company granted 550,000 stock options to the former SBD employees which became exercisable upon the achievement of certain performance and software development goals during 1998 and 1999. For stock options granted where the exercise price was less than the market price of the stock on the date of grant, the per share weighted-average exercise price was $0.52 and $38.38 and the per share weighted average fair value was $3.30 and $43.76 for stock options granted during 1998 and 1999, respectively. 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 $3.28, $4.21, and $35.05 and the per share weighted-average fair value was $2.17, $4.04, and $32.73 for stock options granted during 1997, 1998, and 1999, respectively. The fair values were determined using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of -0-%, risk-free interest rate of 5.2% in 1997 and 1998 and 5.8% in 1999, expected volatility of 79.2% in 1997, 94.2% in 1998 and 102.0% in 1999, and an expected life of 10 years. The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, compensation cost in the amount of approximately $0.7 million, $2.0 (including approximately $0.5 million included in discontinued operations) and $1.1 million has been recognized in 1997, 1998, and 1999, respectively, relating to stock options granted with exercise prices less than the market price. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under 62 64 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 123, the Company's net loss would have been increased to the unaudited pro forma amounts indicated below:
1997 1998 1999 -------- -------- --------- Net loss: As reported.................................... $(27,991) $(30,805) $(125,087) Pro forma (unaudited).......................... (29,749) (33,118) (141,199) Basic and diluted net loss per common share: As reported.................................... $ (1.57) $ (1.40) $ (4.28) Pro forma (unaudited).......................... (1.67) (1.51) (4.83)
A summary of the Company's stock options as of December 31, 1997, 1998 and 1999, and changes during the years ended on those dates is presented below:
1997 1998 1999 ------------------ ------------------ ------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE (000) PRICE (000) PRICE (000) PRICE ------ --------- ------ --------- ------ --------- Outstanding at Beginning of Year.......................... 6,668 $1.80 7,754 $1.38 7,752 $ 2.08 Granted......................... 2,794 2.82 2,008 4.21 8,108 35.80 Options exchanged in acquisitions.................. -- -- -- -- 2,940 12.20 Exercised....................... (222) 0.64 (1,094) 1.09 (2,121) 3.02 Forfeited/Canceled.............. (1,486) 6.13 (916) 2.14 (222) 10.21 ------ ----- ------ ----- ------ ------ Outstanding at End of Year...... 7,754 $1.38 7,752 $2.08 16,457 $20.27 ------ ----- ------ ----- ------ ------ Exercisable at End of Year...... 2,888 $1.09 3,998 $1.23 5,309 $ 3.20 ====== ===== ====== ===== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ----------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- NUMBER OF REMAINING AVERAGE NUMBER AVERAGE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICE (000) LIFE PRICE (000) PRICE ----------------------- ----------- ----------- --------- ----------- --------- $ 0.32 - 0.63................. 3,419 5.84 $ 0.38 3,331 $0.38 0.95 - 5.44................. 3,516 6.98 3.12 1,432 2.70 5.50 - 33.32................. 4,041 8.34 18.75 491 19.63 34.06 - 48.25................. 5,223 9.86 44.19 43 37.96 52.50 - 74.88................. 258 9.76 56.87 12 49.30 ------ ----- 0.32 - 74.88................. 16,457 8.04 $20.27 5,309 $3.20 ====== =====
63 65 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. EMPLOYEE BENEFIT PLANS 401(k) Plan The Company provides a 401(k) Retirement Savings Plan (the "Plan") for substantially all of its full-time employees in the United States. Benefit plans of acquired companies will be merged with the Company's plan and all full-time employees will be included in the Company's plan. Each participant in the Plan may elect to contribute from 1% to 15% of his or her annual compensation to the Plan. The Company, at its discretion, may make matching contributions to the Plan. The Company is currently matching up to 4% of the employees compensation, first to the Company's stock fund $1 for each dollar contributed by the employee and second to the remaining investment funds $.25 for each dollar contributed by the employee. Beginning January 1, 2000, the Company's discretionary match will change to 100% of the Company's stock fund, up to 4% of the employees' compensation. The Company's contributions to the Plan charged to expense for 1997, 1998 and 1999 were approximately $171,000, $286,000 and $526,000, respectively. Employee Stock Purchase Plan Under the Company's Employee Stock Purchase Plan (ESPP), each employee of the Company who is customarily employed at least twenty hours per week over a five month period, is eligible to purchase the Company's common stock at a 15% discount. The ESPP was adopted during 1999 and there were no shares issued under the plan as of December 31, 1999. 11. MAJOR CUSTOMERS AND INTERNATIONAL REVENUES Major Customers For the year ended December 31, 1997, two customers represented 18% and 10% of total revenues, respectively. For the year ended December 31, 1998, two customers represented 39% and 12% of total revenues, respectively. For the year ended December 31, 1999, two customers represented 40% and 12% of total revenues, respectively. Revenue from one customer was greater than 10% of total revenues in all three years. International Revenues Revenues from international customers represented 19%, 7% and 12% of total revenues for the years ended December 31, 1997, 1998 and 1999, respectively. 12. RELATED PARTY TRANSACTIONS During the latter part of 1996, among its ordinary course of research and development activities, the Company started a project known as "WebTone". After the assessment phase of the WebTone project was completed, the board of directors determined not to proceed with the WebTone project. With the board's full knowledge and agreement, the former Chairman of the board of SFNB, Michael C. McChesney, created and funded his own company to develop WebTone. In undertaking these activities, Mr. McChesney and the board agreed to enter into some form of arrangement for a future business relationship. In June 1999, the Company and WebTone reached an agreement whereby WebTone issued common stock to the Company in return for the cancellation of the outstanding receivable and other expenses incurred by the Company during the period the project was sponsored by S1, resulting in a 3% investment in WebTone. The agreement allows for settlement of future receivables in cash or WebTone stock based on fair market value as determined by WebTone Board of Directors, at the discretion of the Company. 64 66 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In November 1999, the Company entered into a three-year license and reseller agreement with WebTone whereby the Company received a license to use the WebTone software for internal purposes and to resell to its customers. In exchange, WebTone received a license to market and demonstrate the S1 software to its customers. This agreement is considered a non-monetary exchange in accordance with APB 29 and accordingly, has not been given any accounting recognition in the consolidated financial statements. There was no significant activity under this agreement during 1999. The Company performed certain administrative and technical services for WebTone amounting to approximately $80,000 in 1997, $192,000 in 1998 and $47,000 in 1999. The Company's current President and Chief Executive Officer is on the Board of Directors of WebTone. As of December 31, 1998 and 1999, respectively, the Company had a receivable from WebTone related to these services of $173,000 and $90,000. During 1998 and 1999, the Company paid a technology consulting company, McCall Consulting Group, approximately $1.1 million and $3.0 million, respectively for consulting services. As of December 31, 1998 and 1999, S1 has a payable to McCall Consulting Group of $282,000 and $91,000, respectively. The president of McCall Consulting Group is a director of the Company. In February 1999, S1 and Andersen Consulting LLP entered into a strategic partnership. S1 issued a warrant to purchase 200,000 shares of S1 common stock to Andersen Consulting in February. The number of shares represented by the warrant is adjusted to reflect the May 1999 two-for-one split of S1's common stock. In April 1999, S1 issued 72,800 shares of S1 common stock to an affiliate of Andersen Consulting. In 1999, S1 and Andersen Consulting paid each other for work done on contracts where the other entity was the primary contractor. S1 paid Andersen Consulting a total of $10.0 million for such work and Andersen Consulting paid S1 a total of $627,000. Jackson L. Wilson, Jr., a director of S1, is a member of the Executive Committee of Andersen Consulting. At December 31, 1999, the accounts receivable due from Andersen was $270,000. 13. DISCONTINUED OPERATIONS On September 30, 1998, the Company completed the sale of its banking operations to the Royal Bank, through one of its U.S. based subsidiaries. Royal Bank paid $3 million in excess of the net assets sold less a $1.5 million holdback for indemnification which will be received eighteen months from the closing date and is shown as a note receivable in the 1998 and 1999 consolidated balance sheets. The banking operations included substantially all of the loans and investment securities and deposit relationships of SFNB and were legally separated from the technology operations through the formation of a holding company. The Company recorded a gain of $812,000 on the sale of the banking operations which included a $1.3 million charge related to the estimated fair value of options to purchase the Company's capital stock issued to Royal Bank in connection with the sale of the banking operations. The losses from the banking operations are reflected in the accompanying consolidated statements of operations as discontinued operations. Net interest income for the nine month period ended September 30, 1998 was $1.3 million and the net loss, excluding the gain on disposal, was $3.1 million. In addition to the sale of the banking operations, the Company entered into technology licensing and consulting arrangements with Royal Bank for $6 million, which were effective September 30, 1998. 14. SUBSEQUENT EVENTS On January 18, 2000, the Company entered into a merger agreement with Davidge Data Systems, Inc., a provider of order routing services to brokerage firms. The acquisition is expected to be completed in the second quarter of 2000 and will be accounted for as a purchase. On March 1, 2000, the Company entered into a 10-year lease in a new building complex located in Atlanta, Georgia. The building is expected to be completed in late 2001. 65 67 S1 CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 6, 2000, the Company entered into a merger agreement with Q-Up Systems, Inc., a premier provider of Internet banking and e-commerce portal solutions for financial institutions, primarily community banks. The acquisition is expected to be completed in the second quarter of 2000 and will be accounted for as a purchase. * * * 66 68 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
ADDITIONS BALANCE ----------------------- AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - - ----------- --------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Year ended December 31, 1997: Allowance for Doubtful Accounts.................... $ -- 257 -- -- $ 257 Valuation allowance for deferred taxes.............. $ 7,077 9,855 -- -- $16,932 Year ended December 31, 1998: Allowance for Doubtful Accounts.................... $ 257 871 -- 713(1) $ 415 Valuation allowance for deferred taxes.............. $16,932 10,876 -- -- $27,808 Year ended December 31, 1999: Allowance for Doubtful Accounts.................... $ 415 785 7,929(2) 545(1) $ 8,584 Valuation allowance for deferred taxes.............. $27,808 7,015 44,130(3) 23,456(4) $55,497
- - --------------- (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. 67 69 INDEPENDENT AUDITORS' REPORT The Board of Directors S1 Corporation: Under date of February 4, 1999, we reported on the consolidated balance sheet of S1 Corporation and subsidiary as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 1998, which are included in the December 31, 1999 annual report on Form 10-K of S1 Corporation. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule listed under Item 8 in the December 31, 1999 annual report on Form 10-K of S1 Corporation. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. KPMG LLP Atlanta, Georgia February 4, 1999 68 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. INFORMATION AS TO DIRECTORS AND EXECUTIVE OFFICERS The following table presents information about our current directors and executive officers, including their ages as of December 31, 1999, the periods during which they have served as a director of S1 and its predecessor, Security First Network Bank, and positions currently held with S1.
AGE AT DECEMBER 31, DIRECTOR EXPIRATION NAME 1999 SINCE OF TERM POSITIONS HELD WITH S1 ---- ------------ -------- ---------- ---------------------- James S. Mahan, III.............. 48 1995 2000 Chief Executive Officer, President and a Director Michel Akkermans................. 39 1999 2002 Chairman of the Board Robert W. Copelan, D.V.M. ....... 73 1995 2002 Director Gregg S. Freishtat............... 32 1999 2002 Director Dorsey R. Gardner................ 57 1998 2001 Director David C. Hodgson................. 43 1999 2002 Director Joseph S. McCall................. 50 1998 2001 Director Howard J. Runnion, Jr. .......... 69 1995 2000 Director Jackson L. Wilson, Jr. .......... 52 1999 2002 Director Robert F. Stockwell.............. 45 -- -- Chief Financial Officer Daniel H. Drechsel............... 39 -- -- Chief Operating Officer
The service of directors and officers prior to May 1998 was as a director or officer of Security First Network Bank, the former parent of S1. Security First Network Bank was a wholly owned subsidiary of Cardinal Bancshares, Inc. until May 1996. In connection with S1's acquisition of FICS Group N.V. in November 1999, S1 agreed to appoint Mr. Akkermans and Mr. Hodgson to three-year terms on the S1 Board of Directors. As part of S1's November 1999 acquisition of VerticalOne Corporation, S1 agreed to appoint Mr. Freishtat to a three-year term on the S1 Board. Provided below is a brief description of the principal occupation of each of our directors and executive officers for the past five years. The executive officers are elected by the board to serve a one-year term. James S. Mahan, III has served as a director and as Chief Executive Officer since 1995 and as President since June 1998. He served as Chairman of the Board of S1 from February 1999 until Mr. Akkermans assumed that position upon joining S1 in November 1999. Mr. Mahan was the Chairman of the Board and Chief Executive Officer of Cardinal Bancshares, Inc., as well as some of its subsidiaries, from November 1987 until September 1996. Mr. Mahan has served as a director of WebTone Technologies, Inc. since February 1999 and NetAssets, Inc. since January 2000. Mr. Mahan is the stepson of director Robert W. Copelan. Michel Akkermans has served as Chairman of the Board of S1 and as Chief Executive Officer of FICS Group N.V., a subsidiary of S1, since S1 acquired FICS in November 1999. Mr. Akkermans served as the Chief Executive Officer and Chairman of the Board of Directors of FICS from its inception in 1989. From 1986 to 1988, he was Manager at Econocom Expert N.V., an international financial software consulting company. From 1985 to 1986, Mr. Akkermans was a Project Manager of Continental Bank. From 1984 to 1985, he was a Systems Analyst and Project Leader at Morgan Guaranty Trust Company of New York. 69 71 Robert W. Copelan, D.V.M. has served as a director since 1995. He has been President of Copelan & Thornbury, Inc. in Paris, Kentucky since 1959 and President of R.W. Copelan, PSC in Paris, Kentucky since 1979. Dr. Copelan is a veterinarian in private practice. From 1987 through September 1996, he served on the Board of Directors of Cardinal Bancshares, Inc. and some of its subsidiaries. Dr. Copelan is the stepfather of James S. Mahan, III, who serves as Chief Executive Officer, President and a director of S1. Gregg S. Freishtat has served as a director of S1 and as Chief Executive Officer of VerticalOne Corporation, a subsidiary of S1, since S1 acquired VerticalOne in November 1999. Mr. Freishtat served as Chairman and Chief Executive Officer of VerticalOne since its founding in October 1998. He served as Senior Vice President of Premiere Technologies, Inc. from September 1996 until he founded VerticalOne. In 1995, Mr. Freishtat founded and served as CEO of Telet Communications LLC, which was sold to Premiere Technologies in September 1996. He worked with the law firm of Freishtat and Sandler in Baltimore, MD from 1993 until he founded Telet Communications. Dorsey R. Gardner has served as a director of S1 since his appointment in June 1998. Mr. Gardner is a general partner of Hollybank Investment, LP. Mr. Gardner has served as a managing member of Thistle Investments, LLC from 1999 to the present. Since 1980, he has served as President of Kelso Management Co., Inc., advisor to Fidelity International Limited, Integrity Fund-FM&R private capital, American Values I-IV, Fidelity American Situations Trust, Fidelity Discovery Fund, Johnson family accounts, Johnson Foundation, and Fidelity Foundation from 1980 to 1993. Mr. Gardner is also an adviser to Hollybank Investments, LP. Mr. Gardner has served on the board of directors of several corporations, and is currently a member of the boards of Crane Company and Huttig Building Products, Inc. David C. Hodgson has served as a director of S1 since his appointment in November 1999. Mr. Hodgson is a managing member of General Atlantic Partners, LLC. a private equity investment firm that invests in Internet and information technology investments on a global basis. Mr. Hodgson has been with General Atlantic Partners, LLC or its predecessor since 1982. Mr. Hodgson is also a director of Atlantic Data Services, Inc., a provider of professional computer services for the banking industry, Baan Company, N.V., a business management software company, ProBusiness Services, Inc., an employee administrative services company, Proxicom, Inc., an Internet professional services provider, and several private information technology companies. Joseph S. McCall has served as a director of S1 since his appointment in October 1998. In 1986, Mr. McCall founded and remains the President of McCall Technology LLC, a company that provides consulting primarily to software companies that are building software products with new technology or transitioning old products to new technology. McCall Technology also provides direct sales and training support to enabling technology software companies that are launching products with leading edge technologies. Since 1991, Mr. McCall also has served as a director of Clarus Corp. (formerly known as SQL Financials International, Inc.), a publicly traded software company that sells web-enabled financial and human resource application software. Mr. McCall founded SQL in 1991 and served as Chief Executive Officer until early 1998. In 1994, Mr. McCall founded Technology Ventures, LLC, which is an investment company that owns all of McCall Technology and is the largest single shareholder of Clarus Corp. Technology Ventures serves as Mr. McCall's vehicle for investing in new companies and providing equity incentives to employees of the companies in which Technology Ventures has invested. Mr. McCall currently is a member of the boards of directors of McCall Consulting, Technology Ventures and LastMinuteTravel.com. Howard J. Runnion, Jr. has served as a director since 1995. Since 1992, Mr. Runnion has served as an investor and an insurance broker. He was a director of Cardinal Bancshares, Inc. and some of its subsidiaries until September 1996. Mr. Runnion was Vice Chairman of the Board and Chief Financial Officer of Wachovia Corporation in Winston-Salem, North Carolina from December 1985 to June 1990. Jackson L. Wilson, Jr. has served as a director of S1 since his appointment in August 1999. Mr. Wilson is Managing General Partner -- AC Ventures, a unit of Andersen Consulting LLP that invests in new and innovative businesses, a position he has held since December 1999. He previously served in several positions at Andersen Consulting, most recently as Managing Partner -- Global Markets. Mr. Wilson currently serves as a 70 72 member of Andersen Consulting's Executive Committee. He joined Andersen Consulting in 1975 and became a partner in 1983. Mr. Wilson also is a member of the World Economic Forum. In addition to serving as a director of S1, he currently is a member of the boards of directors of two other Andersen Consulting portfolio companies: Qpass Inc. and Software Technologies Corporation. Robert F. Stockwell has served as Chief Financial Officer since May 1996. From May 1996 to January 2000, Mr. Stockwell also served as Treasurer and from June 1998 to November 1998, as Secretary. From October 1996 through September 1998, he served as Acting President of Security First Network Bank. Mr. Stockwell served as Treasurer of Cardinal Bancshares, Inc. from January 1994 to September 1996 and as a director of Jefferson Banking Company during 1994. From 1987 to 1993, Mr. Stockwell was Executive Vice President and Chief Financial Officer of Security Financial Holding Company, a thrift holding company located in Durham, North Carolina. Daniel H. Drechsel has served as Chief Operating Officer of S1 since November 1999 and as President and Chief Operating Officer of S1, Inc., a subsidiary of S1, since June 1998. In his position as Chief Operating Officer, Mr. Drechsel oversees the day-to-day operations of S1 and S1, Inc. He served as Vice President of Marketing with Meta4 Software, S.A., a Madrid-based enterprise software company from September 1997 to June 1998. Mr. Drechsel served as General Manager of ECPartners, a joint venture between Checkfree Corporation and Automatic Data Processing, Inc.'s Electronic Services Division from 1995 to 1997. He served on the Board of Directors of InfoWare Technologies, Inc. from 1997 to 1999. Mr. Drechsel's previous experience included a variety of management positions in sales, marketing and software development at both Automatic Data Processing and Dun & Bradstreet Corporation. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors and officers, and persons who own more than 10% of our common stock, to file with the Securities and Exchange Commission initial reports of ownership of our equity securities and to file subsequent reports when there are changes in their ownership. Based on a review of reports submitted to us, we believe that during the fiscal years ended December 31, 1999 and 1998, all Section 16(a) filing requirements applicable to our directors, officers and more than 10% owners were complied with on a timely basis, other than as described below:
NAME LATE REPORTS REPORTS NOT FILED TRANSACTIONS ---- ------------ ----------------- ------------ Daniel H. Drechsel............................ 1 -- N/A Michel Akkermans.............................. 1 -- N/A Gregg S. Freishtat............................ 1 -- N/A Dorsey R. Gardner............................. 1 -- N/A Joseph S. McCall.............................. 1 -- N/A Michael C. McChesney.......................... 1 -- 2 Robert W. Copelan, D.V.M. .................... -- 1 1
ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE AND DIRECTOR COMPENSATION The following table shows the cash compensation paid by S1 for the last three fiscal years, as well as compensation paid or accrued for those years, to the Chief Executive Officer and the three other highest paid executive officers serving at December 31, 1999, whose total annual salary and bonus for the fiscal year ended December 31, 1999 exceeded $100,000. We refer to these four officers as our named executive officers. No stock appreciation rights have been granted by S1 or its public company predecessor, Security First Network Bank. 71 73 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ANNUAL COMPENSATION ------------ ----------------------------------- SECURITIES NAME AND OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(a) COMPENSATION(b) ------------------ ---- ------- ----- --------------- ------------ --------------- ($) ($) ($) (#) ($) James S. Mahan, III.................. 1999 200,000 -- -- 1,400,000 9,249 Chief Executive Officer, 1998 200,000 -- -- -- 7,872 President and a Director 1997 200,000 -- $9,861 -- 9,756 Michel Akkermans(c).................. 1999 360,150 -- -- -- 2,850 Chairman of the Board Daniel H. Drechsel................... 1999 182,500 -- -- 200,000 11,678 Chief Operating Officer 1998 83,061(d) -- -- 150,000 3,725 1997 -- -- -- -- -- Robert F. Stockwell.................. 1999 150,000 -- -- 120,000 10,266 Chief Financial Officer 1998 150,000 -- -- 100,000 5,950 1997 119,141 -- -- 40,000 6,392
- - --------------- (a) Reflects the May 1999 two-for-one split of our common stock. (b) All other compensation includes contributions to S1's 401(k) plan and insurance premiums. 401(k) contributions for 1999, 1998 and 1997 were $2,667, $2,666 and $2,667 for Mr. Mahan; and $4,500, $2,750 and $3,292 for Mr. Stockwell. 401(k) contributions for 1999 and 1998 were $5,143 and $1,217 for Mr. Drechsel. Insurance premiums for 1999, 1998 and 1997 were $6,582, $5,206 and $7,089 for Mr. Mahan; and $5,766, $3,200 and $3,100 for Mr. Stockwell. Insurance premiums for 1999 and 1998 for Mr. Drechsel were $6,535 and $2,508. Insurance premiums for 1999 for Mr. Akkermans were $2,850. (c) Mr. Akkermans joined S1 on November 18, 1999 upon the acquisition of FICS Group N.V. by S1. All information reported prior to November 18, 1999 is compensation received from FICS. This includes compensation paid directly to Mr. Akkermans and amounts paid to Pamica N.V. pursuant to a Management Agreement entered into by and among FICS, Pamica and Mr. Akkermans. Pamica is an entity controlled by Mr. Akkermans. (d) Mr. Drechsel joined S1, Inc. in June 1998. Our directors do not receive any fees or other compensation for their service as directors. Directors, however, are reimbursed for travel and other expenses incurred in connection with attending meetings of our Board of Directors. Dr. Copelan was awarded options to purchase 30,000 shares of S1 common stock upon his reelection as a director in June 1999 under our 1998 Directors' Stock Option Plan. Upon joining our Board of Directors in 1999, Messrs. Wilson and Hodgson each were granted options to purchase 30,000 shares of S1 common stock under our 1998 Directors' Stock Option Plan. EMPLOYMENT CONTRACTS We currently do not have any employment contracts or other compensatory plans or arrangements relating to resignation, retirement or any other termination of a named executive officers' employment with S1 or our subsidiaries or from a change in control of S1 or a change of the named executive officer's responsibilities following a change in control of S1, except as described below. Many unvested stock options, however, vest upon a change in control, as defined. In connection with S1's acquisition of VerticalOne, S1 granted Gregg Freishtat stock options to purchase 300,000 shares of S1 common stock. Pursuant to a Letter Agreement, dated as of September 23, 1999, by and between S1 and Mr. Freishtat, the options will vest 25% annually, with the first vesting date being September 23, 2000. The Letter Agreement also provides that 50% of any unvested options will accelerate and become exercisable as of the effective date of any change of control of S1. FICS Group N.V. entered into a 72 74 Management Agreement with Michel Akkermans and Pamica N.V. on December 4, 1998. FICS was acquired by S1 in November 1999. Mr. Akkermans is a director of S1 and Pamica is an entity controlled by him. In this section, we refer to Mr. Akkermans and Pamica as the managers. Under the agreement, the managers are responsible for the daily management of FICS. For 1999, FICS paid approximately $360,150 to the managers, as established by the FICS Board of Directors. The agreement provides for normal fringe benefits, home office support and reimbursement of company expenses incurred by the managers. It contains provisions that restrict that ability of the managers to compete with FICS during the term of the agreement and for two years after termination. The agreement is for an unlimited duration and may be terminated by a party with six months advance notice. Immediate termination is permitted only in the case of a serious breach, which is defined to include dishonesty, fraud, indictable offenses and acts which bring FICS into disrepute. In the event of a termination by FICS other than in the case of a serious breach, the agreement provides for the payment of a one time indemnity in an amount equal to the total of the amount paid to the managers in the preceding twelve months. OPTION GRANTS The following table contains information concerning the grant of stock options to the named executive officers during fiscal year 1999. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------- % OF TOTAL POTENTIAL REALIZABLE VALUE NUMBER OPTIONS AT ASSUMED ANNUAL RATES OF SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM OPTIONS IN FISCAL OR BASE EXPIRATION --------------------------- NAME GRANTED YEAR PRICE DATE 5% 10% ---- ------------- ------------- --------- ----------- ------------ ------------ (#) (%) ($/SHARE) James S. Mahan, III........ 400,000(a) 4.9 15.25(a) 1/21/09(b) $ 3,868,257 $ 9,721,829 1,000,000 12.3 48.25 12/1/09(c) 30,344,166 76,898,074 Michel Akkermans........... -- -- -- -- -- -- Daniel H. Drechsel......... 100,000(a) 1.2 15.25(a) 1/21/09(b) $ 959,064 $ 2,430,457 100,000 1.2 48.25 12/1/09(c) 3,034,417 7,689,807 Robert F. Stockwell........ 70,000(a) 0.9 15.25(a) 1/21/09(b) $ 671,345 $ 1,701,320 50,000 0.6 48.25 12/1/09(c) 1,517,208 3,844,904
- - --------------- (a) Adjusted to reflect the May 1999 two-for-one split of S1's common stock. (b) Vests upon the earlier of the satisfaction of certain performance criteria each year or 5 years. One of the performance criteria for 1999 was met, resulting in vesting of the option in fiscal 2000 as to 50,000 shares for Mr. Mahan, 8,750 shares for Mr. Stockwell and 12,500 shares for Mr. Drechsel. Vests in full upon a change in control, as defined. (c) Vests in four equal installments beginning on December 1, 2000. 1999 OPTION EXERCISES AND VALUES The following table provides information on exercises of stock options during fiscal year 1999 by the named executive officers and the value of unexercised options at the end of the year. The information in this table reflects the May 1999 two-for-one split of our common stock. 73 75 AGGREGATED OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE SHARES OPTIONS AT FY-END MONEY OPTIONS AT FY-END(b) ACQUIRED ON VALUE ------------------------- --------------------------- NAME EXERCISE REALIZED(a) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- ----------- ----------- ------------------------- --------------------------- (#) ($) (#) ($) James S. Mahan, III........... -- -- 1,858,400/1,400,000 144,606,750/55,025,000 Michel Akkermans.............. -- -- --/-- --/-- Daniel H. Drechsel............ 20,000 894,550 55,000/425,000 3,997,813/25,629,688 Robert F. Stockwell........... -- -- 150,840/215,000 11,607,858/13,007,808
- - --------------- (a) Based on the market value of our common stock at date of exercise, less the exercise price. (b) Based on the closing price per share of our common stock on December 31, 1999 of $78.125 on the Nasdaq National Market, less the exercise price, of all unexercised stock options having an adjusted exercise price less than that market value. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Since 1996 through the corporate reorganization of Security First Network Bank in September 1998, the full Board of Directors of Security First Network Bank served as a compensation committee. In the fourth quarter of 1998, a separate compensation committee of the S1 Board was established. The current Chairman of the compensation committee is Mr. Wilson and the other members are Mr. Gardner, Mr. Hodgson, and Mr. Runnion. The compensation committee recommends to the full board of directors, which has ultimate responsibility over compensation matters. Set forth below is a report of the compensation committee addressing S1's compensation policies for fiscal year 1999 as they affected our executive officers. Compensation Policies for Executive Officers. S1's executive compensation policies are designed to provide competitive levels of compensation, to assist S1 in attracting and retaining qualified executives and to encourage superior performance. In determining levels of executive officers' overall compensation, the qualifications and experience of the persons concerned, the size of the company and the complexity of its operation, the financial condition, including revenues, the compensation paid to other persons employed by the company and the compensation paid to persons having similar duties and responsibilities in the technology industry were considered. Compensation paid to our executive officers in 1999 consisted of the following components: base salary, long-term incentives (awards of stock options) and participation in S1's other employee benefit plans. No bonuses were paid to executive officers for 1999. While each of these components has a separate purpose and may have a different relative value to the total, a significant portion of the total compensation package for 1999 for the executive officers is highly dependent on the public market value of S1 and total return to shareholders. Our executive officers have significant equity interests in S1's success by virtue of stock-based compensation. Base Salary. Base salary is intended to signal the internal value of the position. In establishing the 1999 salary for each executive officer, the officer's responsibilities, qualifications and experience were considered. None of our executive officers received an increase in base salary for 1999. Base salaries for 2000 have increased to provide a competitive level of compensation. The 2000 base salaries for our named executive officers are as follows: Mr. Mahan, $350,000; Mr. Akkermans, $360,150; Mr. Drechsel, $265,000; and Mr. Stockwell, $185,000. Long-Term Incentive Compensation. S1 uses stock options to provide long-term incentive compensation. The compensation committee endorses the position that stock ownership by management is beneficial in aligning management's and shareholders' interests in the enhancement of shareholder value. The purpose of stock option awards is to provide an opportunity for the recipients to acquire or increase a proprietary interest in S1, thereby creating a stronger incentive to expend maximum effort for the long-term growth and success of S1 and encouraging recipients to remain in the employ of S1. Officers and other full-time employees of S1 and its subsidiaries are eligible for grants under our 1995 and 1997 stock option plans. Stock options are normally 74 76 granted each year with the size of the grants generally tied to and weighted approximately equally based on an officer's responsibility level and performance. During 1999, 1,720,000 stock options were granted to our executive officers, as adjusted to reflect the May 1999 two-for-one split of our common stock. Other. In addition to the compensation paid to executive officers described above, executive officers received, along with and on the same terms as other employees, certain benefits such as health insurance and participation in S1's 401(k) Plan participation in S1's Employee Stock Purchase Plan. Mr. Akkermans only received health insurance benefits in 1999. CEO Compensation. Since the company began its current Internet business in 1995, the compensation for the Chief Executive Officer has been primarily cash compensation in the form of a base salary and stock-based in the form of options. In 1999, the Chief Executive Officer's 1999 base salary was $200,000, which was the same as his 1998 and 1997 base salary. The Chief Executive Officer did not receive a bonus in 1997, 1998 or 1999 or an award of stock options in 1997 or 1998. In January 1999, the Chief Executive Officer was awarded options to purchase 400,000 shares of S1 common stock that vest upon the earlier of the satisfaction of certain performance criteria for S1 or five years. Also, in December 1999, the Chief Executive Officer was granted options to purchase 1,000,000 shares of common stock in recognition of the successful strategic alliances entered into during 1999 between S1 and Andersen Consulting LLP, Hewlett-Packard Company and Intuit Inc. and the completion of S1's acquisitions of Edify Corporation, VerticalOne Corporation and FICS Group N.V. As noted above, a significant portion of S1's total compensation package is highly dependent on the public market value of S1 and total return to shareholders. This has been the case since the company began its operations as an Internet business in 1995. The public market value of S1 common stock increased significantly during 1999, thereby considerably enhancing the value of long-term stock awards granted to the Chief Executive Officer in fiscal 1999 and in previous years. At the beginning of 1999, the reported per share closing price of our common stock was $15.313, as adjusted for the May 1999 two-for-one split of our common stock. At year-end 1999, it was $78.125. Internal Revenue Code Section 162(m). In 1993, the Internal Revenue Code of 1986, as amended, was amended to disallow publicly traded companies from receiving a tax deduction on compensation paid to executive officers in excess of $1 million (section 162(m) of the Code), unless, among other things, the compensation meets the requirements for performance-based compensation. S1 did not take this limitation into account prior to fiscal 1999 in structuring most of its equity compensation programs and in determining executive compensation. The compensation committee considered the deductibility limit for compensation when awarding equity-based compensation beginning in fiscal 1999. Our Amended and Restated 1995 Stock Option Plan contains provisions to allow option grants to qualify for an exemption from that limit. COMPENSATION COMMITTEE Dorsey R. Gardner David C. Hodgson Howard J. Runnion, Jr. Jackson L. Wilson, Jr. (Chairman) PERFORMANCE OF OUR COMMON STOCK The following table sets forth comparative information regarding the cumulative shareholder return on our common stock since May 26, 1996. Share information from May 26, 1996 to September 30, 1998 is based on the common stock of Security First Network Bank, the former parent of Security First Technologies Corporation. From September 30, 1998 to November 10, 1999, our company name was Security First Technologies Corporation. Since November 10, 1999, our name has been S1 Corporation. Total shareholder return is measured by dividing cumulative dividends for the measurement period (assuming dividend reinvestment) plus share price change for the period by the share price at the beginning of the measurement period. Neither S1 nor Security First Network Bank has paid dividends on its common stock from May 26, 1996 to December 31, 1999. Our cumulative shareholder return over this period is based on an investment of 75 77 $100 on May 26, 1996 and is compared to the cumulative total return of the Interactive Week Internet Index and the Nasdaq Composite Index. COMPARISON OF CUMULATIVE TOTAL RETURN AMONG S1, INTERACTIVE WEEK INTERNET INDEX AND NASDAQ COMPOSITE INDEX FROM MAY 26, 1996 TO DECEMBER 31, 1999 [CHART]
NASDAQ SI INTERACTIVE WEEK INDEX ------ -- ---------------------- 5/23/96 100.0000 100.0000 100.0000 12/31/96 103.3940 25.0000 88.7628 12/31/97 125.7640 17.6829 94.6432 12/31/98 175.6040 74.3902 233.1580 12/31/99 325.8970 381.0980 625.5400

PERIOD ENDING --------------------------------------------------- INDEX 5/26/96 12/31/96 12/31/97 12/31/98 12/31/99 ----- ------- -------- -------- -------- -------- S1 Corporation.......................... 100.00 25.00 17.68 74.39 381.10 Interactive Week Internet Index......... 100.00 88.76 94.60 233.16 625.54 NASDAQ Composite Index.................. 100.00 103.39 125.76 175.60 325.90
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Chairman of our compensation committee is Mr. Wilson and the other members of the committee currently are Mr. Gardner, Mr. Hodgson and Mr. Runnion. None of the members of this committee have served as an officer or employee of S1 or any of S1's subsidiaries. During 1999, S1 used software development consulting services from McCall Consulting Group. Mr. McCall is the President of McCall Consulting. During 1999, the total amount paid to McCall Consulting was approximately $3.0 million. At December 31, 1999, S1 had outstanding payables to McCall Consulting Group of $91,000. 76 78 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. STOCK OWNED BY MANAGEMENT The following table presents information known to us regarding the beneficial ownership of our common stock as of March 8, 2000 by each of our directors and named executive officers and by all of our directors and executive officers as a group. At March 8, 2000, there were 51,025,207 shares of our common stock issued and outstanding. All information as to beneficial ownership has been provided to us by the directors and executive officers, and unless otherwise indicated, each of the directors and executive officers has sole voting and investment power over all of the shares that they beneficially own.
NUMBER OF SHARES PERCENT OF AND NATURE OF COMMON STOCK NAME AND POSITION(S) WITH S1 BENEFICIAL OWNERSHIP(a) OUTSTANDING ---------------------------- ----------------------- ------------ James S. Mahan, III........................................ 2,055,615(b) 3.88% Chief Executive Officer, President and a Director Robert F. Stockwell........................................ 210,702(c) * Chief Financial Officer Daniel H. Drechsel......................................... 68,225(d) * Chief Operating Officer Michel Akkermans........................................... 4,870,000(e) 9.54% Chairman of the Board Robert W. Copelan, D.V.M. ................................. 287,064(f) * Director Gregg S. Freishtat......................................... 1,018,085(g) 2.00% Director Dorsey R. Gardner.......................................... 1,268,368(h) 2.48% Director David C. Hodgson........................................... 2,793,000(i) 5.47% Director Joseph S. McCall........................................... 47,000(j) * Director Howard J. Runnion, Jr. .................................... 220,848(k) * Director Jackson L. Wilson, Jr. .................................... 800 * Director All directors and executive officers as a group (11 persons)................................................. 12,839,707 25.16%
- - --------------- * Less than one percent. (a) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of common stock if that person has or shares voting power or investment power over the security, or has the right to acquire beneficial ownership at any time within 60 days from March 8, 2000. For this table, voting power includes the power to vote or direct the voting of shares and investment power includes the power to dispose or direct the disposition of shares. (b) The share ownership of Mr. Mahan includes 1,908,400 shares of common stock that would be issued upon the exercise of options exercisable within 60 days of March 8, 2000, 1,224 shares that are held directly by Mr. Mahan, 10,117 shares held in S1's 401(k) plan, 326 shares held in S1's Employee Stock Purchase Plan and 135,548 shares held by his wife. (c) The share ownership of Mr. Stockwell includes 114,590 shares of common stock that would be issued upon the exercise of options exercisable within 60 days of March 8, 2000, 83,576 shares held jointly with his wife, 6,974 shares held in S1's 401(k) plan, 3,728 shares held in an IRA and 1,834 shares held by his mother in an IRA. 77 79 (d) The share ownership of Mr. Drechsel includes 67,500 shares of common stock that would be issued upon the exercise of options exercisable within 60 days of March 8, 2000, 562 shares held in S1's 401(k) plan and 163 shares held in S1's Employee Stock Purchase Plan. (e) The share ownership of Mr. Akkermans includes 3,165,000 shares held directly by Mr. Akkermans and 1,705,000 shares owned by Pamica N.V., a company controlled by Mr. Akkermans. (f) The share ownership of Dr. Copelan includes 185,840 shares of common stock that would be issued upon the exercise of options exercisable within 60 days of March 8, 2000, 83,872 shares that are held directly by Dr. Copelan, 14,904 shares that are held by the Robert W. Copelan D.V.M. Retirement Plan and 2,448 shares that are held by his wife. (g) The share ownership of Mr. Freishtat includes 518,085 shares held directly by Mr. Freishtat, 29,977 of which are held in escrow until November 2000 in connection with the November 1999 acquisition of VerticalOne Corporation by S1, 100,000 shares owned by the Freishtat 2000 Charitable Remainder Unitrust dated 1/28/2000, and 400,000 shares owned by GSF, LLP, a limited liability partnership of which Mr. Freishtat is a managing partner, 19,400 of which are held in escrow. Gregg and Ruth Freishtat share voting power over all shares held by GSF, LLP, including the escrowed shares. (h) The share ownership of Mr. Gardner includes 20,000 shares of common stock that would be issued upon the exercise of options exercisable within 60 days of March 8, 2000, 130,000 shares held directly by Mr. Gardner, 1,100,000 shares held by Hollybank Investment, LP, a limited partnership of which Mr. Gardner is a general partner, and 18,368 shares held by Thistle Investment LLC, of which Mr. Gardner is a managing member. (i) The share ownership for Mr. Hodgson includes 2,399,000 shares held by General Atlantic Partners 20, L.P., 53,000 shares held by General Atlantic Partners 52, L.P. and 341,000 shares held by GAP Coinvestment Partners, L.P. Mr. Hodgson disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the shares. For information about these entities, see note (d) to the table presented under the caption "Principal Shareholders." (j) The share ownership of Mr. McCall includes 45,000 shares held directly by Mr. McCall and 2,000 shares held by Mr. McCall in an IRA. (k) The share ownership of Mr. Runnion includes 20,848 shares of common stock that would be issued upon the exercise of options exercisable within 60 days of March 8, 2000 and 200,000 shares owned directly by Mr. Runnion. 78 80 PRINCIPAL SHAREHOLDERS The following table presents information known to us regarding the beneficial ownership of our common stock as of March 8, 2000 by each person believed by management to be the beneficial owner of more than 5% of our outstanding common stock.
NUMBER OF SHARES PERCENT OF AND NATURE OF COMMON STOCK NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(a) OUTSTANDING ------------------------------------ ----------------------- ------------ Intuit Inc./Intuit Ventures Inc. .................. 5,550,000(b) 9.98% 2535 Garcia Avenue Mountain View, CA 94043 Michel Akkermans................................... 4,870,000(c) 9.54% Excelsiorlaan 87 B-1930 Zaventem, Belgium David C. Hodgson/General Atlantic Partners, LLC.... 2,793,000(d) 5.47% 3 Pickwick Plaza Greenwich, CT 06830
- - --------------- (a) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of common stock if that person has or shares voting power or investment power over the security, or has the right to acquire beneficial ownership at any time within 60 days from March 8, 2000. For this table, voting power includes the power to vote or direct the voting of shares and investment power includes the power to dispose or direct the disposition of shares. (b) Intuit Inc. filed an amended Schedule 13G dated March 13, 2000 with the Securities and Exchange Commission reporting shared voting and shared dispositive power over the shares listed above. The Schedule 13G reports that the number of shares listed above includes 4,579,187 shares issuable upon the exercise of an option exercisable within 60 days of March 8, 2000. The number of shares subject to the option may increase by up to 445,000 if certain earn-out shares are purchased from S1 by former holders of FICS Group N.V. capital stock by April 2001 and April 2002, provided that Intuit may not exercise the option for a number of shares that would result in Intuit beneficially owning more than 5,995,000 shares of S1 common stock. The amended Schedule 13G reports that these shares are owned by Intuit Ventures Inc., a wholly owned subsidiary of Intuit, and that Intuit disclaims beneficial ownership of the shares. The address of Intuit Ventures Inc. is 1285 Financial Boulevard, Reno, NV 89502. (c) The share ownership of Mr. Akkermans includes 3,165,000 shares held directly by Mr. Akkermans and 1,705,000 shares owned by Pamica N.V., a company controlled by Mr. Akkermans. (d) A Schedule 13D dated November 24, 1999 was filed with the Securities and Exchange Commission on behalf of General Atlantic Partners, LLC, General Atlantic Partners 20, L.P., General Atlantic Partners 52, L.P. and GAP Coinvestment Partners, L.P. reporting shared voting and shared dispositive power of all of the shares listed above by each of these entities. In connection with the November 1999 acquisition of FICS Group N.V. by S1, the Schedule 13D reports that three of these entities purchased shares of S1 common stock as follows: General Atlantic Partners 20, L.P., 2,399,000 shares; General Atlantic Partners 52, L.P., 53,000 shares; and GAP Coinvestment Partners, L.P., 341,000 shares. The Schedule 13D also reports that David C. Hodgson, one of the directors of S1, is one of the managing members of General Atlantic Partners, LLC and one of the general partners of GAP Coinvestment Partners, L.P., and that General Atlantic Partners, LLC is the general partner of General Atlantic Partners 20, L.P. and General Atlantic Partners 52, L.P. Accordingly, Mr. Hodgson is deemed to beneficially own these shares. Mr. Hodgson disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in them. 79 81 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During 1999, S1 used software development consulting services from McCall Consulting Group. The President of McCall Consulting, Mr. Joseph S. McCall, is one of our directors. During 1999, the total amount paid to McCall Consulting was approximately $3.0 million. At December 31, 1999, S1 had outstanding payables to McCall Consulting of $91,000. During the latter part of 1996, among its ordinary course of research and development activities, S1 started a project known as "WebTone." The WebTone project was established to assess the customer care issues raised as a result of interacting with retail customers over new delivery channels and subsequently to develop software solutions to resolve such issues more efficiently. In November 1997, after the assessment phase of the project was completed at a cost of approximately $300,000, the board of directors of Security First Network Bank, the predecessor public company of S1, determined not to proceed with WebTone, primarily because of the SFNB board's uncertainty regarding the potential of such a project and because of limited resources, both capital and personnel. With the SFNB board's full knowledge and agreement, the former Chairman of the Board of SFNB, Michael C. McChesney, created and funded his own company to develop WebTone. In undertaking these activities, Mr. McChesney and the board of directors agreed that WebTone and Mr. McChesney should enter into some form of arrangement for a future business relationship. In 1999, S1 engaged in transactions with WebTone and Mr. McChesney resigned as Chairman of the Board of S1 in February 1999. James S. Mahan, III, a Director, President and Chief Executive of S1 is on the Board of Directors of WebTone. In June 1999, S1 and WebTone entered into a Letter of Understanding pursuant to which S1 received approximately 3% of WebTone's fully diluted outstanding shares in exchange for cancelling $173,000 of outstanding receivables and in recognition of S1's interest in the development of WebTone. As contemplated by the Letter of Understanding, in November 1999 WebTone entered into a License and Reseller Agreement with S1. Under that Reseller Agreement, WebTone licensed to S1 certain WebTone software for internal development purposes, data processing purposes and to resell to financial institution customers. Under the Reseller Agreement, S1 can elect to receive payments of fees due in cash or in WebTone stock valued at $2.00 per share in 1999 and at fair market value, as determined by WebTone's Board, thereafter. There has been no activity to date under the Reseller Agreement. WebTone paid S1 $47,000 in 1999 for certain administrative and technical services. In February 1999, S1 and Andersen Consulting LLP entered into a strategic partnership. S1 issued a warrant to purchase 200,000 shares of S1 common stock to Andersen Consulting in February. The number of shares represented by the warrant is adjusted to reflect the May 1999 two-for-one split of S1's common stock. In April 1999, S1 issued 72,800 shares of S1 common stock to an affiliate of Andersen Consulting. In 1999, S1 and Andersen Consulting paid each other for work done on contracts where the other entity was the primary contractor. S1 paid Andersen Consulting a total of $10.0 million for such work and Andersen Consulting paid S1 a total of $627,000. Jackson L. Wilson, Jr., a director of S1, is a general partner of Andersen Consulting. At December 31, 1999, the accounts receivable due from Andersen was $270,000. 80 82 PART IV ITEM 14. 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 herein 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 herein 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 herein by reference:
EXHIBIT NO. EXHIBIT DESCRIPTION - - ------- ------------------- 3.1 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 ("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. 3.4 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 ending March 31, 1999 and incorporated herein by reference). 3.6 Amended and Restated Bylaws of S1, as amended. 4.1 Specimen certificate for S1's common stock (filed as Exhibit 4 to S1's Registration Statement on Form 8-A filed with the SEC on September 30, 1998 and incorporated herein by reference). 4.2 Specimen certificate for S1's Series A Convertible Preferred Stock (filed as Exhibit 4.2 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 B Convertible Redeemable 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). 4.4 Specimen certificate for S1's Series C Redeemable Convertible Preferred Stock (filed as Exhibit 4 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.1 Second Amended and Restated Plan of Reorganization, dated as of March 9, 1998, by and among Security First Network Bank ("SFNB"), S1 and New Security First Network Bank, as amended on June 4, 1998 and September 25, 1998 (filed as Exhibit 10.2 to S1's Current Report on Form 8-K filed with the SEC on October 14, 1998 and incorporated herein by reference). 10.2 Stock Purchase Agreement, dated as of March 9, 1998, by and among Royal Bank of Canada, RBC Holdings (Delaware) Inc., SFNB and S1, as amended on June 5, 1998 (attached as Appendix C to the Proxy Statement/Prospectus that formed a part of S1's Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on June 5, 1998 and incorporated herein by reference).
81 83
EXHIBIT NO. EXHIBIT DESCRIPTION - - ------- ------------------- 10.3 Common Stock Purchase and Option Agreement, dated as of March 9, 1998, by and among SFNB, RBC Holdings (Delaware) Inc. and S1, as amended on June 5, 1998 (filed as Exhibit 2.3 to S1's Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on June 5, 1998 and incorporated herein by reference). 10.4 Registration Rights Agreement, dated as of February 25, 1999, by and among S1, Royal Bank of Canada and RBC Holdings (Delaware) Inc. (filed as Exhibit 10.1 to S1's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999 and incorporated herein by reference). 10.5 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). 10.6 Stock Purchase Agreement, dated as of February 19, 1999, by and between S1 and Hewlett-Packard Company, as amended on April 30, 1999 (filed as Exhibit 10.2 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.7 Stock Purchase Agreement, dated as of February 19, 1999, by and between S1 and AC II Technology (ACT II) B.V., as amended on April 30, 1999 (filed as Exhibit 10.3 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.8 Warrant, dated February 19, 1999, issued by S1 to Andersen Consulting LLP (filed as Exhibit 10.4 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.9 Warrant, dated February 25, 1999, issued by S1 to Royal Bank of Canada (filed as Exhibit 10.5 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.10 Stock Purchase and Option Agreement, dated as of May 16, 1999, by and between S1 and Intuit Inc. (filed as Exhibit 10.1 to S1's Current Report on Form 8-K filed with the SEC on May 21, 1999 and incorporated herein by reference). 10.11 Amendment No. 1 to Stock Purchase and Option Agreement, dated as of November 2, 1999, by and between S1 and Intuit Inc. (filed as Exhibit 10.1 to S1's Current Report on Form 8-K filed with the SEC on November 9, 1999 and incorporated herein by reference). 10.12 Agreement and Plan of Merger, dated as of May 16, 1999, by and among S1, Sahara Strategy Corporation and Edify Corporation (filed as Exhibit 2.2 to S1's Current Report on Form 8-K filed with the SEC on May 21, 1999). 10.13 Stock Purchase Agreement II, dated as of September 21, 1999, by and among S1 and the individuals and entities who are signatories thereto and for the limited purposes set forth therein FICS Group N.V., as amended by Amendment to Stock Purchase Agreement II, dated as of October 7, 1999 (filed as Annex B to Prospectus/Proxy Statement that formed a part of Amendment No. 1 to S1's Form S-4 Registration Statement (File No. 333-82711) filed with the SEC on October 12, 1999 and incorporated herein by reference). 10.14 Share Purchase Agreement II, dated as of September 21, 1999, by and among S1 Europe Holdings N.V. and the stockholders of FICS Group N.V. who are signatories thereto, and for the limited purposes stated therein, S1 and FICS Group N.V., as amended by Amendment to Share Purchase Agreement II, dated as of October 7, 1999 (filed as Annex A to Prospectus/Proxy Statement that formed a part of Amendment No. 1 to S1's Form S-4 Registration Statement (File No. 333-82711) filed with the SEC on October 12, 1999 and incorporated herein by reference).
82 84
EXHIBIT NO. EXHIBIT DESCRIPTION - - ------- ------------------- 10.15 Agreement and Plan of Merger, dated as of September 23, 1999, by and among S1, VerticalOne Acquisition Corporation and VerticalOne Corporation (filed as Exhibit 2.1 to S1's Current Report on Form 8-K filed with the SEC on October 1, 1999 and incorporated herein by reference). 10.16 Stock Subscription Warrant, dated December 23, 1999, issued by S1 to America Online, Inc. 10.17 Security First Technologies Corporation Amended and Restated 1995 Stock Option Plan (filed as Appendix B to S1's definitive proxy statement for S1's 1999 annual meeting of shareholders and incorporated herein by reference).* 10.18 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).* 10.19 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).* 10.20 Letter Agreement, dated as of September 23, 1999, by and between S1 and Gregg Freishtat.* 10.21 Management Agreement, dated as of December 4, 1998, by and among FICS, Michel Akkermans and Pamica N.V.* 21 Subsidiaries of S1. 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of KPMG LLP 27 Financial Data Schedule.
- - ------------------ * Management contract or compensatory plan. (b) Reports on Form 8-K S1 filed the following Current Reports on Form 8-K with the Securities and Exchange Commission (the "SEC") during the quarter ended December 31, 1999: Current Report on Form 8-K filed with the SEC on October 1, 1999 (date of report September 23, 1999) (announcing S1's proposed acquisition of VerticalOne Corporation and S1's purchase of VerticalOne Series C preferred stock). Current Report on Form 8-K filed with the SEC on November 1, 1999 (date of report October 25, 1999) (announcing the appointment of PricewaterhouseCoopers LLP as S1's independent accountants and the dismissal of S1's former independent accountants, KPMG LLP). Current Report on Form 8-K filed with the SEC on November 9, 1999 (date of report November 2, 1999) (attaching a press release describing S1's results of operations for the third quarter 1999, attaching materials related to an analyst conference call and announcing the amendment of the Stock Purchase and Option Agreement between S1 and Intuit Inc.). Current Report on Form 8-K filed with the SEC on November 18, 1999 (date of report November 10, 1999) (announcing the completion of S1's acquisition of Edify Corporation and VerticalOne Corporation, the appointment of Gregg Freishtat to serve as a member of S1's Board of Directors and the amendment of S1's Amended and Restated Certificate of Incorporation to change the name of S1 to "S1 Corporation"). 83 85 Current Report on Form 8-K filed with the SEC on December 3, 1999 (date of report November 18, 1999) (announcing the completion of the acquisition of FICS Group, N.V. by S1's Belgian subsidiary and the appointment of Michel Akkermans and David Hodgson to serve on S1's Board of Directors). Current Report on Form 8-K filed with the SEC on December 15, 1999 (date of report December 15, 1999) (announcing an S1 analyst conference to be held on December 15, 1999). 84 86 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 17, 2000. S1 CORPORATION By: /s/ JAMES S. MAHAN, III ------------------------------------ James S. Mahan, III Chief Executive Officer and President 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 17, 2000.
NAME TITLE ---- ----- /s/ JAMES S. MAHAN, III Chief Executive Officer, President and - - --------------------------------------------- Director (Principal Executive Officer) James S. Mahan, III /s/ ROBERT F. STOCKWELL Chief Financial Officer (Principal Financial - - --------------------------------------------- Officer and Principal Accounting Officer) Robert F. Stockwell /s/ MICHEL AKKERMANS Chairman of the Board - - --------------------------------------------- Michel Akkermans /s/ ROBERT W. COPELAN Director - - --------------------------------------------- Robert W. Copelan, D.V.M /s/ GREGG S. FREISHTAT Director - - --------------------------------------------- Gregg S. Freishtat /s/ DORSEY R. GARDNER Director - - --------------------------------------------- Dorsey R. Gardner /s/ DAVID C. HODGSON Director - - --------------------------------------------- David C. Hodgson /s/ JOSEPH S. MCCALL Director - - --------------------------------------------- Joseph S. McCall /s/ HOWARD J. RUNNION, JR. Director - - --------------------------------------------- Howard J. Runnion, Jr. /s/ JACKSON L. WILSON, JR. Director - - --------------------------------------------- Jackson L. Wilson, Jr.
85 87 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - - ------- ------------------- 3.1 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 ("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. 3.4 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 ending March 31, 1999 and incorporated herein by reference). 3.6 Amended and Restated Bylaws of S1, as amended. 4.1 Specimen certificate for S1's common stock (filed as Exhibit 4 to S1's Registration Statement on Form 8-A filed with the SEC on September 30, 1998 and incorporated herein by reference). 4.2 Specimen certificate for S1's Series A Convertible Preferred Stock (filed as Exhibit 4.2 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 B Convertible Redeemable 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). 4.4 Specimen certificate for S1's Series C Redeemable Convertible Preferred Stock (filed as Exhibit 4 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.1 Second Amended and Restated Plan of Reorganization, dated as of March 9, 1998, by and among Security First Network Bank ("SFNB"), S1 and New Security First Network Bank, as amended on June 4, 1998 and September 25, 1998 (filed as Exhibit 10.2 to S1's Current Report on Form 8-K filed with the SEC on October 14, 1998 and incorporated herein by reference). 10.2 Stock Purchase Agreement, dated as of March 9, 1998, by and among Royal Bank of Canada, RBC Holdings (Delaware) Inc., SFNB and S1, as amended on June 5, 1998 (attached as Appendix C to the Proxy Statement/Prospectus that formed a part of S1's Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on June 5, 1998 and incorporated herein by reference). 10.3 Common Stock Purchase and Option Agreement, dated as of March 9, 1998, by and among SFNB, RBC Holdings (Delaware) Inc. and S1, as amended on June 5, 1998 (filed as Exhibit 2.3 to S1's Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on June 5, 1998 and incorporated herein by reference). 10.4 Registration Rights Agreement, dated as of February 25, 1999, by and among S1, Royal Bank of Canada and RBC Holdings (Delaware) Inc. (filed as Exhibit 10.1 to S1's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999 and incorporated herein by reference).
88
EXHIBIT NO. EXHIBIT DESCRIPTION - - ------- ------------------- 10.5 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). 10.6 Stock Purchase Agreement, dated as of February 19, 1999, by and between S1 and Hewlett-Packard Company, as amended on April 30, 1999 (filed as Exhibit 10.2 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.7 Stock Purchase Agreement, dated as of February 19, 1999, by and between S1 and AC II Technology (ACT II) B.V., as amended on April 30, 1999 (filed as Exhibit 10.3 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.8 Warrant, dated February 19, 1999, issued by S1 to Andersen Consulting LLP (filed as Exhibit 10.4 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.9 Warrant, dated February 25, 1999, issued by S1 to Royal Bank of Canada (filed as Exhibit 10.5 to S1's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1999 and incorporated herein by reference). 10.10 Stock Purchase and Option Agreement, dated as of May 16, 1999, by and between S1 and Intuit Inc. (filed as Exhibit 10.1 to S1's Current Report on Form 8-K filed with the SEC on May 21, 1999 and incorporated herein by reference). 10.11 Amendment No. 1 to Stock Purchase and Option Agreement, dated as of November 2, 1999, by and between S1 and Intuit Inc. (filed as Exhibit 10.1 to S1's Current Report on Form 8-K filed with the SEC on November 9, 1999 and incorporated herein by reference). 10.12 Agreement and Plan of Merger, dated as of May 16, 1999, by and among S1, Sahara Strategy Corporation and Edify Corporation (filed as Exhibit 2.2 to S1's Current Report on Form 8-K filed with the SEC on May 21, 1999). 10.13 Stock Purchase Agreement II, dated as of September 21, 1999, by and among S1 and the individuals and entities who are signatories thereto and for the limited purposes set forth therein FICS Group N.V., as amended by Amendment to Stock Purchase Agreement II, dated as of October 7, 1999 (filed as Annex B to Prospectus/Proxy Statement that formed a part of Amendment No. 1 to S1's Form S-4 Registration Statement (File No. 333-82711) filed with the SEC on October 12, 1999 and incorporated herein by reference). 10.14 Share Purchase Agreement II, dated as of September 21, 1999, by and among S1 Europe Holdings N.V. and the stockholders of FICS Group N.V. who are signatories thereto, and for the limited purposes stated therein, S1 and FICS Group N.V., as amended by Amendment to Share Purchase Agreement II, dated as of October 7, 1999 (filed as Annex A to Prospectus/Proxy Statement that formed a part of Amendment No. 1 to S1's Form S-4 Registration Statement (File No. 333-82711) filed with the SEC on October 12, 1999 and incorporated herein by reference). 10.15 Agreement and Plan of Merger, dated as of September 23, 1999, by and among S1, VerticalOne Acquisition Corporation and VerticalOne Corporation (filed as Exhibit 2.1 to S1's Current Report on Form 8-K filed with the SEC on October 1, 1999 and incorporated herein by reference). 10.16 Stock Subscription Warrant, dated December 23, 1999, issued by S1 to America Online, Inc. 10.17 Security First Technologies Corporation Amended and Restated 1995 Stock Option Plan (filed as Appendix B to S1's definitive proxy statement for S1's 1999 annual meeting of shareholders and incorporated herein by reference).*
89
EXHIBIT NO. EXHIBIT DESCRIPTION - - ------- ------------------- 10.18 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).* 10.19 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).* 10.20 Letter Agreement, dated as of September 23, 1999, by and between S1 and Gregg Freishtat.* 10.21 Management Agreement, dated as of December 4, 1998, by and among FICS, Michel Akkermans and Pamica N.V.* 21 Subsidiaries of S1. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of KPMG LLP. 27 Financial Data Schedule.
- - ------------------ * Management contract or compensatory plan. EX-3.3 2 AMENDED AND RESTATED CERTIFICATE OF INCORPRATION 1 Exhibit 3.3 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SECURITY FIRST TECHNOLOGIES CORPORATION It is hereby certified that: FIRST: The name of the Corporation is Security First Technologies Corporation (the "Corporation"). SECOND: Section 1 of the Amended and Restated Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety as follows: "1. NAME The name of this corporation is S1 Corporation (the "Corporation")." THIRD: The foregoing amendment to the Amended and Restated Certificate of Incorporation has been adopted by the stockholders of the Corporation at a special meeting duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. FOURTH: The foregoing amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation law of the State of Delaware. FIFTH: The effective time of this Certificate of Amendment shall be 5:00 p.m. Eastern Standard Time on November 10, 1999. - 13 - EX-3.6 3 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.6 SECURITY FIRST TECHNOLOGIES CORPORATION AMENDED AND RESTATED BYLAWS ---------------------------------- ADOPTED AS OF SEPTEMBER 25, 1998 AND AMENDED AS OF NOVEMBER 8, 1999 AND FEBRUARY 23, 2000 ---------------------------------- 2 TABLE OF CONTENTS
Page ---- 1. OFFICES.........................................................................1 1.1. Registered Office........................................................1 1.2. Other Offices............................................................1 2. MEETINGS OF SHAREHOLDERS........................................................1 2.1. Place of Meetings........................................................1 2.2. Annual Meetings..........................................................1 2.3. Special Meetings.........................................................2 2.4. Notice of Meetings.......................................................2 2.5. Waivers of Notice........................................................3 2.6. Business at Special Meetings.............................................3 2.7. List of Shareholders.....................................................3 2.8. Quorum at Meetings.......................................................3 2.9. Voting and Proxies.......................................................4 2.10. Required Vote...........................................................4 2.11. Action Without a Meeting................................................4 3. DIRECTORS.......................................................................5 3.1. Powers...................................................................5 3.2. Number and Election......................................................5 3.3. Nomination of Directors..................................................5 3.4. Vacancies................................................................6 3.5. Meetings.................................................................7 3.5.1. Regular Meetings................................................7 3.5.2. Special Meetings................................................7 3.5.3. Telephone Meetings..............................................7 3.5.4. Action Without Meeting..........................................7 3.5.5. Waiver of Notice of Meeting.....................................7 3.6. Quorum and Vote at Meetings..............................................8 3.7. Committees of Directors..................................................8 3.8. Compensation of Directors................................................8 4. OFFICERS........................................................................8 4.1. Positions................................................................8 4.2. Chairman.................................................................9 4.3. Chief Executive Officer..................................................9 4.4. President................................................................9 4.5. Vice President...........................................................9 4.6. Secretary................................................................9 4.7. Assistant Secretary......................................................10
-i- 3 4.8. Treasurer................................................................10 4.9. Assistant Treasurer......................................................10 4.10. Term of Office..........................................................10 4.11. Compensation............................................................10 4.12. Fidelity Bonds..........................................................10 5. CAPITAL STOCK...................................................................11 5.1. Certificates of Stock; Uncertificated Shares.............................11 5.2. Lost Certificates........................................................11 5.3. Record Date..............................................................11 5.3.1. Actions by Shareholders.........................................11 5.3.2. Payments........................................................12 5.4. Shareholders of Record...................................................12 6. INSURANCE.......................................................................13 7. GENERAL PROVISIONS..............................................................13 7.1. Inspection of Books and Records..........................................13 7.2. Dividends................................................................13 7.3. Reserves.................................................................13 7.4. Execution of Instruments.................................................13 7.5. Fiscal Year..............................................................14 7.6. Seal.....................................................................14

-ii- 4 AMENDED AND RESTATED BYLAWS OF SECURITY FIRST TECHNOLOGIES CORPORATION 1. OFFICES 1.1. REGISTERED OFFICE The initial registered office of the Corporation shall be in Wilmington, Delaware, and the initial registered agent in charge thereof shall be Corporation Service Company. 1.2. OTHER OFFICES The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as may be necessary or useful in connection with the business of the Corporation. 2. MEETINGS OF SHAREHOLDERS 2.1. PLACE OF MEETINGS All meetings of the shareholders shall be held at such place as may be fixed from time to time by or upon the authority of the Board of Directors. 2.2. ANNUAL MEETINGS The Corporation shall hold annual meetings of shareholders, commencing with the year 1999, on such date and at such time as shall be designated from time to time by the Board of Directors, at which shareholders shall elect a Board of Directors and transact only such other business as may properly be brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the 5 Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 45 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the annual meeting that a matter of business was not properly brought before the meeting in accordance with the provisions of this Section 2.2, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.3. SPECIAL MEETINGS Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by statute may be called at any time by the Chairman of the Board of Directors, the President, or a majority of the Board of Directors, and shall be called by the Chairman of the Board of Directors, the President, or the Secretary upon the written request of the holders of not less than one tenth of all of the outstanding capital stock of the Corporation entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the principal office of the Corporation addressed to the Chairman of the Board, the President, or the Secretary. 2.4. NOTICE OF MEETINGS Notice of any meeting of shareholders, stating the place, date and hour of the meeting, and (if it is a special meeting) the purpose or purposes for which the meeting is called, shall be given to each shareholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting (except to the extent that such notice is waived or is not required as provided in the General Corporation Law of the State of Delaware (the "Delaware General Corporation Law") or these Bylaws). Such notice shall be given in accordance with, -2- 6 and shall be deemed effective as set forth in, Section 222 (or any successor section) of the Delaware General Corporation Law. 2.5. WAIVERS OF NOTICE Whenever the giving of any notice is required by statute, the Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and delivered to the Corporation, signed by the person or persons entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance of a shareholder at a meeting shall constitute a waiver of notice (1) of such meeting, except when the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (2) (if it is a special meeting) of consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter at the beginning of the meeting. 2.6. BUSINESS AT SPECIAL MEETINGS Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice (except to the extent that such notice is waived or is not required as provided in the Delaware General Corporation Law or these Bylaws). 2.7. LIST OF SHAREHOLDERS After the record date for a meeting of shareholders has been fixed, at least ten days before such meeting, the officer who has charge of the stock ledger of the Corporation shall make a list of all shareholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place in the city where the meeting is to be held, which place is to be specified in the notice of the meeting, or at the place where the meeting is to be held. Such list shall also, for the duration of the meeting, be produced and kept open to the examination of any shareholder who is present at the time and place of the meeting. 2.8. QUORUM AT MEETINGS Shareholders may take action on a matter at a meeting only if a quorum exists with respect to that matter. Except as otherwise provided by statute or by the Certificate of Incorporation, the holders of one-third of the shares issued and outstanding and entitled to vote at the meeting, and who are present in person -3- 7 or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business. Once a share is represented for any purpose at a meeting (other than solely to object (1) to holding the meeting or transacting business at the meeting, or (2) (if it is a special meeting) to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice), it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time. 2.9. VOTING AND PROXIES Unless otherwise provided in the Delaware General Corporation Law or in the Corporation's Certificate of Incorporation, and subject to the other provisions of these Bylaws, each shareholder shall be entitled to one vote on each matter, in person or by proxy, for each share of the Corporation's capital stock that has voting power and that is held by such shareholder. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed appointment of proxy shall be irrevocable if the appointment form states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. 2.10. REQUIRED VOTE If a quorum exists, action on a matter (other than the election of directors) is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the Certificate of Incorporation or applicable law requires a greater number of affirmative votes (in which case such different requirement shall apply). Directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election (provided a quorum exists), and the election of directors need not be by written ballot. 2.11. ACTION WITHOUT A MEETING Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if the action is taken by persons who would be entitled to vote at a meeting and who hold shares having voting power to cast not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shareholders entitled to vote were present and voted. The action must be evidenced by one or more written consents describing the action taken, signed by the shareholders entitled to take action without a meeting, and delivered to the Corporation for inclusion in the minute book. No consent shall be effective to take the corporate action specified unless the number of consents required to take such action are delivered to the -4- 8 Corporation within sixty days of the delivery of the earliest-dated consent. All shareholders entitled to vote on the record date of such written consent who do not participate in taking the action shall be given written notice thereof in accordance with the Delaware General Corporation Law. 3. DIRECTORS 3.1. POWERS The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things, subject to any limitation set forth in the Certificate of Incorporation, these Bylaws, or agreements among shareholders which are otherwise lawful. 3.2. NUMBER AND ELECTION The number of directors which shall constitute the whole Board shall not be fewer than four nor more than fifteen. The first Board shall consist of four. Thereafter, within the limits above specified, the number of directors shall be determined by resolution of the Board of Directors. 3.3. NOMINATION OF DIRECTORS (a) The Board of Directors shall nominate candidates to stand for election as directors; and other candidates also may be nominated by any Corporation shareholder as provided in Section 3.3(b) below. The directors shall be elected at the annual meeting of the shareholders, except as provided in Section 3.4 hereof, and each director elected shall hold office until such director's successor is elected and qualified or until the director's earlier resignation or removal. Directors need not be shareholders. (b) Only persons who are nominated in accordance with the procedures set forth in this Section 3.3 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.3(b). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 45 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely -5- 9 must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving notice (i) the name and address, as they appear in the Corporation's books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.3. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 3.4. VACANCIES Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by the shareholders or by a majority of the directors then in office, although fewer than a quorum, or by a sole remaining director. Each director so chosen shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor is elected and qualified, or until the director's earlier resignation or removal. In the event that one or more directors resigns from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office until the next election of directors, and until such director's successor is elected and qualified, or until the director's earlier resignation or removal. -6- 10 3.5. MEETINGS 3.5.1. REGULAR MEETINGS Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. 3.5.2. SPECIAL MEETINGS Special meetings of the Board may be called by a majority of the Board of Directors on one day's notice to each director, either personally or by telephone, express delivery service (so that the scheduled delivery date of the notice is at least one day in advance of the meeting), telegram or facsimile transmission, and on five days' notice by mail (effective upon deposit of such notice in the mail). The notice need not describe the purpose of a special meeting. 3.5.3. TELEPHONE MEETINGS Members of the Board of Directors may participate in a meeting of the Board by any communication by means of which all participating directors can simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. 3.5.4. ACTION WITHOUT MEETING Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if the action is taken by all members of the Board. The action must be evidenced by one or more written consents describing the action taken, signed by each director, and delivered to the Corporation for inclusion in the minute book. 3.5.5. WAIVER OF NOTICE OF MEETING A director may waive any notice required by statute, the Certificate of Incorporation or these Bylaws before or after the date and time stated in the notice. Except as set forth below, the waiver must be in writing, signed by the director entitled to the notice, and delivered to the Corporation for inclusion in the minute book. Notwithstanding the foregoing, a director's attendance at or participation in a meeting waives any required notice to the director of the meeting unless the director at the beginning of the meeting objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. -7- 11 3.6. QUORUM AND VOTE AT MEETINGS At all meetings of the Board, a quorum of the Board of Directors consists of a majority of the total number of directors prescribed pursuant to Section 3.2 of these Bylaws (or, if no number is prescribed, the number in office immediately before the meeting begins). The vote of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation or by these Bylaws. 3.7. COMMITTEES OF DIRECTORS The Board of Directors may by resolution create one or more committees and appoint members of the Board of Directors to serve on the committees at the pleasure of the Board of Directors. To the extent specified in a resolution adopted by the Board of Directors, each committee may exercise the full authority of the Board of Directors, except as limited by Section 141 (or any successor section) of the Delaware General Corporation Law. All provisions of the Delaware General Corporation Law and these Bylaws relating to meetings, action without meetings, notice (and waiver thereof), and quorum and voting requirements of the Board of Directors apply, as well, to such committees and their members. 3.8. COMPENSATION OF DIRECTORS The Board of Directors shall have the authority to fix the compensation of directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 4. OFFICERS 4.1. POSITIONS The officers of the Corporation shall be a Chairman, a Chief Executive Officer, a President, a Secretary and a Treasurer, and such other officers as the Board of Directors (or an officer authorized by the Board of Directors) from time to time may appoint, including one or more Vice Chairmen, Executive Vice Presidents, Vice Presidents, Assistant Secretaries and Assistant Treasurers. Each such officer shall exercise such powers and perform such duties as shall be set forth below and such other powers and duties as from time to time may be specified by the Board of Directors or by any officer(s) authorized by the Board of Directors to prescribe the duties of such other officers. Any number of offices may be held by the same person, except that in no event shall the President and the Secretary be the same person. Each of the Chairman, the Chief Executive Officer, the President, the Chief Financial Officer and/or any Vice President may execute bonds, mortgages and other documents under the seal of the Corporation, except where required or -8- 12 permitted by law to be otherwise executed and except where the execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. 4.2. CHAIRMAN The Chairman shall (when present) preside at all meetings of the Board of Directors and shareholders, and shall ensure that all orders and resolutions of the Board of Directors and shareholders are carried into effect. The Chairman may be the Chief Executive Officer of the Corporation. 4.3. CHIEF EXECUTIVE OFFICER The Chief Executive Officer shall have overall responsibility and authority for management of the operations of the Corporation (subject to the authority of the Board of Directors), shall (in the absence of the Chairman and the Vice Chairman) preside at all meetings of the Board of Directors and shareholders, and shall ensure that all orders and resolutions of the Board of Directors and shareholders are carried into effect. 4.4. PRESIDENT The President may be the chief operating officer of the Corporation and shall have full responsibility and authority for management of the day-to-day operations of the Corporation, subject to the authority of the Board of Directors and the Chairman. 4.5. VICE PRESIDENT In the absence of the President or in the event of the President's inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. 4.6. SECRETARY The Secretary shall have responsibility for preparation of minutes of meetings of the Board of Directors and of the shareholders and for authenticating records of the Corporation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors. The Secretary or an Assistant Secretary may also attest and apply the seal to all instruments signed by any other officer of the Corporation. -9- 13 4.7. ASSISTANT SECRETARY The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary. 4.8. TREASURER The Treasurer may be the chief financial officer of the Corporation and shall have responsibility for the custody of the corporate funds and securities and shall see to it that full and accurate accounts of receipts and disbursements are kept in books belonging to the Corporation. The Treasurer shall render to the Chairman, the Chief Executive Officer, the President, and the Board of Directors, upon request, an account of all financial transactions and of the financial condition of the Corporation. 4.9. ASSISTANT TREASURER The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer. 4.10. TERM OF OFFICE The officers of the Corporation shall hold office until their successors are chosen and qualify or until their earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the Board of Directors. 4.11. COMPENSATION The compensation of officers of the Corporation shall be fixed by the Board of Directors or by any officer(s) authorized by the Board of Directors to prescribe the compensation of such other officers. 4.12. FIDELITY BONDS The Corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. -10- 14 5. CAPITAL STOCK 5.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of the Corporation's stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates, and upon request every holder of uncertificated shares, shall be entitled to have a certificate (representing the number of shares registered in certificate form) signed in the name of the Corporation by the Chairman, President or any Vice President, and by the Treasurer, Secretary or any Assistant Treasurer or Assistant Secretary of the Corporation. Any or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar whose signature or facsimile signature appears on a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 5.2. LOST CERTIFICATES The Board of Directors, Chairman, President or Secretary may direct a new certificate of stock to be issued in place of any certificate theretofore issued by the Corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming that the certificate of stock has been lost, stolen or destroyed. When authorizing such issuance of a new certificate, the Board or any such officer may, as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as the Board or such officer shall require and/or to give the Corporation a bond, in such sum as the Board or such officer may direct, as indemnity against any claim that may be made against the Corporation on account of the certificate alleged to have been lost, stolen or destroyed or on account of the issuance of such new certificate or uncertificated shares. 5.3. RECORD DATE 5.3.1. ACTIONS BY SHAREHOLDERS In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders (or to take any other action), the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of -11- 15 Directors and shall not be less than 10 nor more than 60 days before the meeting or action requiring a determination of shareholders. In order that the Corporation may determine the shareholders entitled to consent to corporate action without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date. If no record date is fixed by the Board of Directors, the record date shall be at the close of business on the day next preceding the day on which notice is given, or if notice is not required or is waived, at the close of business on the day next preceding the day on which the meeting is held or such other action is taken, except that (if no record date is established by the Board of Directors) the record date for determining shareholders entitled to consent to corporate action without a meeting is the first date on which a shareholder delivers a signed written consent to the Corporation for inclusion in the minute book. 5.3.2. PAYMENTS In order that the Corporation may determine the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 5.4. SHAREHOLDERS OF RECORD The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, to receive notifications, to vote as such owner, and to exercise all the rights and powers of an owner. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise may be provided by the Delaware General Corporation Law. -12- 16 6. INSURANCE The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation (or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) against liability asserted against or incurred by such person in such capacity or arising from such person's status as such (whether or not the Corporation would have the power to indemnify such person against the same liability). 7. GENERAL PROVISIONS 7.1. INSPECTION OF BOOKS AND RECORDS Any shareholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its shareholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a shareholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the shareholder. The demand under oath shall be directed to the Corporation at its registered office or at its principal place of business. 7.2. DIVIDENDS The Board of Directors may declare dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation and the laws of the State of Delaware. 7.3. RESERVES The directors of the Corporation may set apart, out of the funds of the Corporation available for dividends, a reserve or reserves for any proper purpose and may abolish any such reserve. 7.4. EXECUTION OF INSTRUMENTS All checks, drafts or other orders for the payment of money, and promissory notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. -13- 17 7.5. FISCAL YEAR The fiscal year of the Corporation shall be December 31 of each year. 7.6. SEAL The corporate seal shall be in such form as the Board of Directors shall approve. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. -14- EX-10.16 4 STOCK SUBSCRIPTION WARRANT 1 EXHIBIT 10.16 THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NEITHER SUCH WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. NONE OF SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. S1 CORPORATION STOCK SUBSCRIPTION WARRANT December 23, 1999 1. GENERAL. THIS CERTIFIES that, for value received, AMERICA ONLINE, INC. ( "AOL"), or permitted assigns, is entitled to subscribe for and purchase from S1 CORPORATION, a Delaware corporation (the "Corporation"), at any time or from time to time during the period (the "Exercise Period") commencing with the date hereof and ending on the fifth anniversary of the date hereof, on the terms and subject to the provisions hereinafter set forth, up to 84,994 of shares (subject to adjustment as provided herein) of fully paid and non-assessable shares of Common Stock, $0.01 par value (the "Common Stock"), of the Corporation, at a price per share (the "Warrant Price") of $80.00. The shares of capital stock of the Corporation issuable upon exercise or exchange of this Warrant are sometimes hereinafter referred to as the "Warrant Shares". 2. EXERCISE OF WARRANT. The rights represented by this Warrant may be exercised by the holder hereof in whole or in part, at any time or from time to time during the Exercise Period, by the surrender of this Warrant (properly endorsed) at the office of the Corporation at 3390 Peachtree Road NE, Suite 1700, Atlanta, Georgia 30326, or at such other agency or office of the Corporation in the United States of America as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Corporation, and by payment (either in cash, by check, or by wire transfer of immediately available funds) to the Corporation of the - - ------------------- 2 Warrant Price for each Warrant Share being purchased together with any applicable taxes. In the event of the exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Shares so purchased, registered in the name of the holder, and if this Warrant shall not have been exercised for all of the Warrant Shares, a new Warrant, registered in the name of the holder hereof, of like tenor to this Warrant, shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised. The person in whose name any certificate for Warrant Shares is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which the Warrant was surrendered and payment of the Warrant Price and any applicable taxes was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Corporation are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 3. EXCHANGE OF WARRANT. (a) In addition to, and independent of, the rights of the holder of this Warrant set forth in Section 2 hereof, the holder hereof may at any time or from time to time elect to receive, without the payment by the holder of any additional consideration, that number of Warrant Shares determined as hereinafter provided in this Section 3 by the surrender of this Warrant or any portion hereof to the Corporation, accompanied by an executed Notice of Exchange in substantially the form thereof attached hereto (the "Net Issue Election"). Thereupon, the Corporation shall issue to the holder hereof such number of fully paid and nonassessable Warrant Shares as is computed using the following formula: X = Y (A-B) ------- A where X = the number of Warrant Shares to be issued to the holder pursuant to this Section 3. Y = the number of Warrant Shares covered by this Warrant in respect of which the Net Issue Election is made pursuant to this Section 3. A = the Fair Market Value (as hereinafter defined) of one Warrant Share determined at the time the Net Issue Election is made pursuant to this Section 3 (the "Determination Date"). B = the Warrant Price in effect under this Warrant at the time the Net Issue Election is made pursuant to this Section 3. For purposes of the above calculation, "Fair Market Value" of one Warrant Share as of the Determination Date shall mean: (i) (A) if the Common Stock is not then traded on a national securities exchange, the average of the closing prices quoted on the National Association of Securities Dealers, Inc. Automated Quotation National Market System, if applicable, or the average of the last bid and asked prices of the Common Stock quoted in the over-the-counter-market or (B) if the Common Stock is then traded on a national securities exchange, the average of the high and low prices of the Common Stock listed on the principal national securities exchange on which 2 3 the Common Stock is so traded, in each case for the twenty (20) trading days immediately preceding the Determination Date or, if such date is not a business day on which shares are traded, the next immediately preceding trading day; and (ii) in the event of a Warrant Exchange in connection with a Corporate Transaction, the value per share of Common Stock received or receivable by each holder thereof (assuming for purposes of this determination, in the case of a sale of assets, the Corporation is liquidated immediately following such sale and the consideration paid to the Corporation is immediately distributed to its stockholders); and (iii) in all other circumstances, the fair market value per share of Common Stock as determined by the Corporation's Board of Directors in good faith after taking into consideration all factors it deems appropriate, including, without limitation, recent sale and offer prices of the capital stock of the Corporation in private transactions negotiated at arm's length. The closing of any Warrant Exchange shall take place at the offices of the Corporation on the date specified in the Notice of Exchange (the "Exchange Date"), which shall be not less than five and not more than 30 days after the delivery of such Notice. At such closing, the Corporation shall issue and deliver to the holder or its designee a certificate or certificates for the Warrant Shares to be issued upon such Warrant Exchange, registered in the name of the holder or such designee, and if such Warrant Exchange shall not have been for all Warrant Shares, a new Warrant, registered in the name of the holder, of like tenor to this Warrant for the number of shares still subject to this Warrant following such Warrant Exchange. 3 4 4. ADJUSTMENT OF WARRANT PRICE. (a) The Warrant Price shall be subject to adjustment from time to time as follows: (i) If, at any time during the Exercise Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Warrant Price shall be appropriately decreased and the number of shares of Common Stock issuable upon exercise of this Warrant shall be appropriately increased, in each case in proportion to such increase in outstanding shares. (ii) If, at any time during the Exercise Period, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date for such combination, the Warrant Price shall be appropriately increased and the number of shares of Common Stock issuable upon exercise of this Warrant shall be appropriately decreased, in each case, in proportion to such decrease in outstanding shares. (iii) All calculations under this Section 4(a) shall be made to the nearest one tenth (1/10) of a cent or to the nearest one tenth (1/10) of a share, as the case may be. (b) Whenever the Warrant Price shall be adjusted as provided in this Section 4 the Corporation shall forthwith file, at the office of the Corporation or any transfer agent designated by the Corporation for the Common Stock, a statement, signed by its chief financial officer, showing in detail the facts requiring such adjustment and the adjusted Warrant Price. The Corporation shall also cause a copy of such statement to be sent by first-class certified mail, return receipt requested, postage prepaid, to each holder of a Warrant at his or its address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions set forth immediately below. (c) In the event the Corporation shall propose to take any action of the types described in Sections 4(a) or Section 9, the Corporation shall give notice to each holder of a Warrant in the manner set forth herein, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Warrant Price then in effect and the number, kind or class of shares or other securities or property which shall be delivered or purchasable upon the occurrence of such action or deliverable upon exercise of this Warrant. In the case of any action which would require the fixing of a record date, such notice shall be given at least 20 days prior to the date so fixed, and in case of all other action, such notice shall be given at least 30 days prior to the taking of such - - --------------------- 4 5 proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. 5. COVENANTS AS TO COMMON STOCK. The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and non-assessable and free from all liens and charges with respect to the issuance thereof. The Corporation further covenants and agrees that the Corporation will at all times have authorized and reserved, free from preemptive rights, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant and will in good faith and as expeditiously as possible endeavor to take all actions necessary to issue such shares in accordance herewith. If and so long as the Common Stock issuable upon the exercise of this Warrant is listed on any national securities exchange, the Corporation will, if permitted by the rules of such exchange, list and keep listed on such exchange, upon official notice of issuance, all shares of such capital stock. 6. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Corporation. 7. RESTRICTIONS ON TRANSFER. The holder of this Warrant acknowledges that neither this Warrant nor the Warrant Shares have been registered under the Securities Act of 1933, as amended (the "Securities Act") and the holder of this Warrant agrees that no sale, transfer, assignment, hypothecation or other disposition of this Warrant or the Warrant Shares shall be made in the absence of (a) current registration statement under the Securities Act as to this Warrant or the Warrant Shares and the registration or qualification of this Warrant or the Warrant Shares under any applicable state securities laws is then in effect or (ii) an opinion of counsel reasonably satisfactory to the Corporation to the effect that such registration or qualification is not required. Each certificate or other instrument for Warrant Shares issued upon exercise of this Warrant shall, if required under the Securities Act or the rules promulgated thereunder, be imprinted with a legend substantially to the foregoing effect. No holder of this Warrant shall sell, transfer, or assign this Warrant, except (i) to such holder's Affiliate or (ii) with the written consent of the Company. As used herein, an "Affiliate" of such holder means any person or entity that controls such holder, is controlled by such holder or is under common control with such holder. 8. TRANSFER OF WARRANT. Subject to the restrictions set forth in Section 7, this Warrant and all rights hereunder are transferable, in whole, or in part, at the agency or office of the Corporation referred to in Section 2, by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed, in blank, shall be deemed negotiable, and, when so endorsed the holder hereof may be treated by the Corporation and all other persons dealing with this Warrant as the absolute owner hereof for any purposes and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Corporation, any notice to the contrary notwithstanding; 5 6 but until each transfer on such books, the Corporation may treat the registered holder hereof as the owner hereof for all purposes. 9. REORGANIZATIONS, ETC. In case, at any time during the Exercise Period, of any capital reorganization, of any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another corporation (other than a consolidation or merger in which the Corporation is the continuing operation and which does not result in any change in the Common Stock) or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation, this Warrant shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which such holder would have been entitled if he had held the Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. In any such reorganization or other action or transaction described above, appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Corporation will not effect any such consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation or entity (if other than the Corporation) resulting from such transaction or the corporation or entity purchasing such assets shall assume by written instrument, executed and mailed or delivered to the registered holder hereof at the last address of such holder appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost, stolen, mutilated or destroyed, the Corporation may, on such terms as to indemnity or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Corporation, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. All notices, advices and communications to be given or otherwise made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered or certified mail, return receipt requested, postage prepaid, or by overnight courier, addressed to such party at the address set forth below or at such other address as may hereafter be designated in writing by the addressee to the addresser listing all parties: (a) If to the Corporation, to: 6 7 S1 Corporation 3390 Peachtree Road NE Suite 1700 Atlanta, Georgia 30326: Attention: Secretary (b) If to AOL as follows: America Online, Inc. 22000 AOL Way Dulles, Virginia 20166 Attention: General Counsel Or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance herewith. Any such notice or communication shall be deemed to have been delivered and received (i) in the case of personal delivery, on the date of such deliver, (ii) in the case of nationally-recognized overnight courier, on the next business day after the date when sent and (ii) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted. As used in this Section 12, "business day" shall mean any day other than a day on which banking institutions in the Commonwealth of Virginia are legally required to be closed for business. 13. BINDING EFFECT ON SUCCESSORS; SURVIVAL. This Warrant shall be binding upon any corporation succeeding the Corporation by merger, consolidation or acquisition of all or substantially all of the Corporation's assets. All of the obligations of the Corporation relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Corporation shall inure to the benefit of the successors and assigns of AOL. 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Virginia. 15. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of this Warrant. The Corporation shall, in lieu of issuing any fractional share, pay the holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then Fair Market Value of one Warrant Share. * * * 7 8 IN WITNESS WHEREOF, the undersigned have caused this Warrant and Warrant Agreement to be executed by their duly authorized officers on the date first above written. S1 CORPORATION By: /s/ ROBERT F. STOCKWELL ------------------------------- Name: Robert F. Stockwell Title: Chief Financial Officer ATTEST: /s/ NANCY K. KENLEY ----------------------- SECRETARY AMERICA ONLINE, INC. By: /s/ DAVID M. COLBURN ------------------------------- Name: David M. Colburn Title: President, Business Affairs 8 9 FORM OF SUBSCRIPTION [To be signed upon exercise of Warrant] The undersigned, the holder of the Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Warrant for, and to purchase thereunder, _________ shares of _________ of S1 Corporation and herewith makes payment of $_________ therefor, and requests that the certificates for such shares be issued in the name of and delivered to, _________________________________, whose address is _______________________________________________. Dated:_____________ --------------------------------- (Signature) --------------------------------- (Address) 9 10 NOTICE OF EXCHANGE (To be executed by the Holder in order to exchange the Warrant.) The undersigned hereby irrevocably elects to exchange this Warrant into __________ shares (the foregoing number constituting the number of Warrant Shares to be issued pursuant to Section 3 of this Warrant) of ________ of S1 Corporation, minus any shares to be deducted from the foregoing number in accordance with the terms of this Warrant, according to the conditions thereof. The undersigned desires to consummate such exchange on ________________. Dated: ----------------------------- Name of Holder: By: -------------------------- 10 11 FORM OF ASSIGNMENT [To be signed only upon transfer of Warrant subject to Section 7 thereof] For value received, the undersigned hereby sells, assigns and transfers unto the right represented by the Warrant to purchase _______ shares of _________ S1 Corporation, to which the Warrant relates, and appoints Attorney to transfer such right on the books of S1 Corporation, with full power of substitution in the premises. Dated:_____________ ---------------------------- (Signature) Signed in the presence of: - - ------------------------------ 11 EX-10.20 5 S1 AND GREGG FREISHTAT LETTER AGREEMENT 1 [SECURITY FIRST TECHNOLOGIES LETTERHEAD] September 23, 1999 Gregg Freishtat C/o VerticalOne Corporation Two Concourse Parkway Atlanta, GA 30328 This letter is written in contemplation of the proposed acquisition of your current employer, VerticalOne Corporation ("VerticalOne"), by Security First Technologies Corporation ("S1"). The proposed employment contemplated by this letter is conditioned upon, and will only take effect in the event that, S1 completes its acquisition of VerticalOne and you remain, at the time the acquisition is completed, an employee in good standing with VerticalOne. If either of those conditions does not exist, this letter will have no force or effect. It is my pleasure to advise you that if the conditions described above are met, on the closing date of the merger, S1 is prepared to continue your employment with VerticalOne on the same basis as your employment with VerticalOne on that date. Accordingly, upon consummation of the proposed acquisition, you will continue to have the same title and reporting structure that you have as of the date of closing, and your existing options to purchase shares of Common Stock of VerticalOne will be honored as options to purchase shares of S1 Common Stock (subject only to changes in the number of shares and option price based on the S1/VerticalOne exchange ratio set forth in the merger agreement). Your base salary (which is paid by S1 on a bimonthly basis on the 15th and 30th of each month) will also remain the same. Our present intention is to consolidate all of S1's employee benefit programs into a single parent company program on or about January 1, 2000. Accordingly, if we complete that effort on schedule and if the merger is consummated on or before January 1, 2000, at that time, you would be entitled to receive the same benefits afforded to all employees of S1. Until that time, your VerticalOne benefits would remain in effect. S1's benefits package is quite comprehensive and includes a variety of coverage (life insurance, medical and dental benefits, and 401K plan). In addition to retaining the options you have been granted to date by VerticalOne, based on the recommendation of Greg Freishtat, the CEO of VerticalOne, S1 will grant you stock options to purchase 300,000 shares of Common Stock of S1 at an exercise price equal to the lesser of the fair market value of a share of S1 Common Stock on the date of execution of the merger agreement or the date of closing. These options will vest 25% annually, with the first vesting date being the anniversary of the closing date of the merger. Consistent with your prior discussions with S1's management, the option agreement from S1 and the option agreement resulting from the conversion of VerticalOne options into S1 options will each reflect that 50% of your unvested options will accelerate and become exercisable as of the effective date of any "change of control" of S1. In consideration of this offer of employment, to the extent that you hold shares of VerticalOne Common Stock on the closing date, you hereby agree with S1 not to offer, sell, transfer or otherwise dispose of (collectively, "transfer") any shares of S1 Common Stock received upon conversion of such outstanding shares of VerticalOne Common Stock pursuant to the merger agreement except as follows: 33% of the S1 Common Stock received may be sold six months after the closing date of the merger; 66%, 12 months after the closing date; and 100%, 18 months after the closing date. These lock-up restrictions will lapse in the event your employment with VerticalOne is terminated after the merger with S1 "without cause," as defined below. In addition, by accepting this offer, you 2 acknowledge that the proposed draft Employment Agreement between you and VerticalOne ostensibly dated June 18, 1999, was never entered into, and you agree not to assert any rights thereunder against VerticalOne or S1 in the event the merger with S1 is consummated. For purposes of this agreement, the term "without cause" shall be defined to mean termination of your employment over the objection of VerticalOne's chief executive officer, as contemplated by Section 6.6(b) of the merger agreement. In the event of your termination without cause, in addition to the rights set forth above, you will be entitled to 90 days severance pay and accelerated vesting with respect to the unvested portion of your remaining options that vests within one year of the date of termination. As noted above, this agreement is contingent upon the successful completion of the merger and your status as an employee of VerticalOne in good standing at that time. S1 agrees not to revoke this offer for any reason while the merger is pending. We are excited at the prospect of having you and your colleagues at VerticalOne join the S1 family and become key members of our team! Our success as a Company hinges on the people who make up the team, and we believe you will add significant value to our efforts. We look forward to working with you. Our objective is to build and maintain an organization of exceptional people, and to create an environment that enables each individual to realize his/her maximum potential. Toward this end, your employment with S1 is voluntarily entered into, and you are free to resign at any time for any reason. Similarly, the Company reserves the right to terminate the employment relationship at any time for any reason. While we hope that our relationship will be long and beneficial, the Company can give no guarantee or contract, either expressed or implied, of continued employment. We are looking forward to working with you and having you begin your employment with us as soon as the merger is consummated. You may be required to attend an orientation session sometime during your first week with S1 to familiarize you with our benefits programs and finalize paperwork as part of the employment process. In the meantime, if you have any questions regarding benefits or employment issues, please don't hesitate to contact me directly at (404) 812-6200. I would be happy to address any issues or concerns you may have at any time. Sincerely, /s/ JAMES S. MAHAN James S. Mahan, III Chairman and CEO Security First Technologies Corporation Please indicate your acceptance of this offer, contingent upon consummation of the merger agreement, by signing below and returning the original to Human Resources. [SIG] Oct 99 - - --------------------------------- --------------------- Accepted Date EX-10.21 6 FICS, MICHEL AKKERMANS MANAGEMENT AGREEMENT 1 EXHIBIT 10.21 MANAGEMENT AGREEMENT BETWEEN: FINANCIAL INFORMATION CONSULTING SERVICES GROUP, a Belgian naamloze vennootschap with registered office at 87 Excelsiorlaan, 1930 Zaventern, Belgium and registered with the Registry of Commerce of Brussels under number 515.450, hereafter, the "Company"; AND: Michel Akkermans, residing at 3040 Huldenberg, Eygenstraat 33, and PAMICA NV with registered office at 3040 Huldenberg, Eygenstraat 33, Belgium and registered with the Registry of Commerce of Leuven under number 84.728, hereafter, the "Directors"; IT HAS BEEN AGREED AS FOLLOWS: Article 1. The Company has entrusted daily management of the Company to the Directors. The Company cannot entrust daily management to any other person during the Term of this Agreement without the agreement of the Directors. Article 2. For the services mentioned above, the Company pays to the Directors an on target remuneration of 15 Million BEF for 1999. This is split into a fixed part of 60%, 9 Million BEF and a variable part which amounts to 6 Million BEF on target. The criteria for the exact determination of this variable part will be established by the board of directors. The on target remuneration will be automatically adjusted for inflation on an annual basis. The total remuneration and other conditions of the management agreement can be reviewed by the board of directors. The split of the remuneration between the Directors, will be communicated to the company by the Directors. For 1998, a remuneration of 12 Million BEF is due. The Directors will benefit from the normal fringe benefits (e.g. a company car). All expenses which the Directors make on behalf of the company will be re-imbursed. Article 3. 3.1. The Directors agree during the term of this Agreement, and for a period of two years after its termination: (i) not be involved directly or indirectly in whatever capacity in any business which competes with the activities of the Company in the countries of the European Union and the United States of America; (ii) not to solicit or try to solicit customers for goods or services of a similar nature as those of the Company from any person, firm or corporation which was a customer of the EX-21 7 SUBSIDIARIES OF S1 1 Exhibit 21 SUBSIDIARIES
Name Jurisdiction of Organization Names under which - - ---- ---------------------------- it Does Business ---------------- S1, Inc. Kentucky S1 S1 Holdings, LLC Delaware S1 Europe Holdings C.V.A. Belgium Edify Corporation Delaware FICS Group N.V. Belgium VerticalOne Corporation Delaware Austin Acquisition Corporation Texas Delta Acquisitions Corporation Delaware Temple Acquisition Corporation Delaware S1 UK Ltd. United Kingdom
- 20 - EX-23.1 8 CONSENT OF PRICEWARERHOUSECOOPERS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-82369), Form S-8 (No. 333-82381), Form S-8 (No. 333-82383) and Form S-4 (No. 333-82711) of S1 Corporation of our report dated February 21, 2000, except as to Note 14 which is as of March 6, 2000, relating to the financial statements of S1 Corporation as of and for the year ended December 31, 1999 and the related financial statement schedule for the year ended December 31, 1999, which appear in this Form 10-K. PricewaterhouseCoopers LLP Atlanta, Georgia March 29, 2000 EX-23.2 9 CONSENT OF KPMG LLP 1 Exhibit 23.2 The Board of Directors S1 Corporation: We consent to the incorporation by reference in the registration statements (Nos. 333-82369, 333-82381, and 333-82383) on Form S-8, and the Post Effective Amendment No. 1 to Form S-4 (No. 333-82711) on Form S-8 of S1 Corporation of our reports dated February 4, 1999, relating to the consolidated balance sheet of S1 Corporation and subsidiary as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 1998, and the related financial statement schedule, which reports appear in the December 31, 1999, annual report on Form 10-K of S1 Corporation. /s/ KPMG LLP Atlanta, Georgia March 29, 2000 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF S1 CORPORATION FOR THE TWELVE MONTHS ENDED DECEMBER-31-1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 67,850 62,754 78,720 8,584 0 209,543 35,794 11,214 1,132,487 113,317 0 0 11,354 1,127,095 (147,642) 1,132,487 0 92,890 0 53,089 167,125 0 0 (125,087) 0 (125,087) 0 0 0 (125,087) (4.28) (4.28)

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