S1 (SONE) 10-Q 2001 Q1 Quarterly report

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

_______________

FORM 10-Q

[X]                         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                               SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2001

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

Not applicable
(Former name if changed since last report.)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

      Yes   X   No____

      Shares of common stock outstanding as of May 9, 2001: 58,638,230

Part 1 – Financial Information
Item 1 – Financial Statements

S1 CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)

					March 31,			December 31,
					2001			2000
				Assets		(Unaudited	)		(Audited	)
Current assets:
	Cash and cash equivalents				$	139,887		$	173,266
	Investment securities available for sale (cost of $31 at
		March 31, 2001 and $143 at December 31, 2000)				232			1,521
	Accounts receivable, net of allowance for doubtful accounts and billing
		adjustments of $8,478 at March 31, 2001 and $10,009 at December 31, 2000				80,140			97,134
	Prepaid expenses					7,792			5,905
	Other current assets					2,025			5,139
				Total current assets		230,076			282,965
	Property and equipment, net					52,500			63,244
	Investment in equity interest of affiliate					57,871			—
	Intangible assets, net					39,740			57,798
	Goodwill, net					101,322			195,428
	Other assets					7,241			7,269
				Total assets	$	488,750		$	606,704
				Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable				$	17,594		$	15,869
	Accrued salaries and benefits					11,652			12,766
	Accrued restructuring					6,954			10,561
	Accrued other expenses					23,317			41,870
	Deferred revenues					28,431			27,471
	Notes payable					3,496			3,822
	Current portion of capital lease obligation					5,601			8,283
				Total current liabilities		97,045			120,642
	Deferred revenues					893			1,016
	Capital lease obligation, excluding current portion					6,947			6,226
	Deferred tax liability					8,930			10,380
	Other liabilities					359			695
				Total liabilities		114,174			138,959
Stockholders’ equity:
			Preferred stock, $0.01 par value. Authorized 25,000,000 shares
				Issued and outstanding 1,186,564 shares at
				March 31, 2001 and December 31, 2000		252,781			252,781
		Common stock, $0.01 par value. Authorized 350,000,000
				shares. Issued and outstanding 58,414,190 and 57,965,770
				shares at March 31, 2001 and December 31, 2000, respectively		584			580
		Additional paid-in capital				1,612,363			1,610,096
		Receivable from the sale of stock				(11,683	)		(11,454	)
		Accumulated deficit				(1,477,668	)		(1,385,605	)
		Accumulated other comprehensive income (loss):
				Net unrealized gains on investment securities available for sale, net of taxes		123			840
				Cumulative foreign currency translation adjustment		(1,924	)		507
				Total stockholders’ equity		374,576			467,745
				Total liabilities and stockholders’ equity	$	488,750		$	606,704

See accompanying notes to unaudited consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)

				Three Months Ended
				March 31,
				2001			2000
Revenues:
	Software licenses			$	13,806		$	10,719
	Professional services				38,606			34,382
	Data center				10,238			3,507
	Other				455			1,761
		Total revenues			63,105			50,369
Operating expenses:
	Cost of software licenses				1,377			1,521
	Cost of professional services, including stock compensation expense of $5 in 2000				26,246			25,889
	Cost of data center				6,750			3,352
	Cost of other revenue				360			1,594
	Selling and marketing, including stock compensation expense of $157 in 2000				11,822			11,563
	Product development, including stock compensation expense of $353 in 2000				13,517			15,345
	General and administrative, including stock compensation expense of $245 in 2001 and $610 in 2000, respectively				12,833			9,961
	Depreciation and amortization				7,373			3,404
	Marketing cost from warrant issued				—			4,600
	Merger related costs				—			6,814
	Amortization of acquisition intangibles				20,406			77,127
			Total operating expenses		100,684			161,170
			Operating loss		(37,579	)		(110,801	)
Interest and investment income					2,646			35,593
Loss on sale of subsidiary					(52,302	)		—
Equity interest in net loss of affiliate					(5,029	)		—
					(92,264	)		(75,208	)
Income tax benefit					202			—
Net loss				$	(92,062	)	$	(75,208	)
Basic and diluted net loss per common share				$	(1.58	)	$	(1.49	)
Weighted average common shares outstanding					58,176,056			50,456,210

See accompanying notes to unaudited consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

				Three months ended
				March 31,
				2001			2000
				(In thousands)
Cash flows from operating activities:
	Net loss			$	(92,062	)	$	(75,208	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization including acquisition charges			27,779			80,531
		Loss on sale of subsidiary			52,302			—
		Equity interest in net loss of affiliate			5,029			—
		Compensation and marketing expense for stock options and warrants			245			5,725
		Provision for doubtful accounts receivable and billing adjustments			1,035			923
		Gain on the sale of investment securities available for sale			(931	)		(34,818	)
	Changes in assets and liabilities, excluding effects of divestiture:
		Decrease in accounts receivable			13,582			5,551
		Decrease (increase) in prepaid expenses and other assets			846			(1,496	)
		Increase (decrease) in accounts payable			1,943			(11,050	)
		(Decrease) increase in accrued expenses and other liabilities			(28,034	)		10,560
		Increase (decrease) in deferred revenue			2,370			(2,108	)
			Net cash used in operating activities		(15,896	)		(21,390	)
Cash flows from investing activities:
	Net cash transferred with subsidiary sold				(15,000	)		—
	Proceeds from sales of investment securities available for sale				1,044			36,546
	Investments in and advances to unconsolidated companies				—			(5,538	)
	Purchases of property and equipment and purchased technology				(2,637	)		(8,933	)
			Net cash (used in) provided by investing activities		(16,593	)		22,075
Cash flows from financing activities:
	Proceeds from payment on subscription receivable				—			240
	Proceeds from sale of common stock under employee stock purchase and option plans				1,619			9,170
	Payments on capital lease obligations				(1,961	)		(315	)
	Payments on borrowings				(326	)		(2,432	)
			Net cash (used in) provided by financing activities		(668	)		6,663
Effect of exchange rate changes on cash					(222	)		(89	)
Net (decrease) increase in cash and cash equivalents					(33,379	)		7,259
Cash and cash equivalents at beginning of period					173,266			67,850
Cash and cash equivalents at end of period				$	139,887		$	75,109
Noncash investing and financing activities:
	Equity interest in affiliate received in connection with subsidiary sold			$	62,900			—
	Conversion of preferred stock to common stock				—		$	414

See accompanying notes to unaudited consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

1. Background and Basis of Presentation

      S1 Corporation (“S1” or the “Company”) is a leading global provider of innovative eFinance solutions and services that are centered on banking, brokerage and insurance. S1 is enabling financial service providers to create a complete Integrated eFinance Experience™ by delivering the tools necessary to meet the evolving demands of their customers across various lines of businesses, market segments and delivery channels. Through its Open eFinance Architecture™, S1 offers a broad range of applications that empower financial institutions to increase revenue, strengthen customer relationships and gain competitive advantage. Additionally, through the Company’s professional services organization, S1 applications can be implemented in-house or hosted in an S1 Data Center.

      The consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries. Investments in affiliated entities, which the Company does not manage and of which it owns between 20% and 50% are accounted for under the equity method. Significant inter-company accounts and transactions have been eliminated in consolidation.

      The December 31, 2000 data in the Consolidated Balance Sheet is derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes in the Company’s 2000 Annual Report on Form 10-K. The interim financial statements include all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly the Company’s consolidated financial statements. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the expected results for the year ending December 31, 2001.

      In November 1999, the Company completed the acquisition of FICS Group, N.V. (“FICS”) which included the Financial Reporting Systems (“FRS”) business unit, which was held for sale. During 2001, the Company determined that a reasonable market for the sale of FRS did not exist and determined to continue operating these activities for the foreseeable future. Accordingly, the results of operations, which are not considered to be material, have been included in the Company’s first quarter 2001 results in the Financial Institutions segment. The results of operations were not included in the Company’s 2000 operating results and are considered to be immaterial.

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2. 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 (“SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company adopted this statement effective January 1, 2001 and it did not have a material impact on the consolidated financial statements. To date, the Company has not been engaged in any derivative or hedging activities.

      In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This statement replaces Statement of Financial Accounting Standards No. 125 and is effective for transfers and servicing occurring after March 31, 2001 and, for certain provisions, fiscal years ending after December 15, 2000. The Company believes the adoption of this pronouncement will not have a material impact on its consolidated financial position or results of operations. To date, the Company has not been engaged in activities covered by this pronouncement.

3. Loss on Sale of Subsidiary and Equity Interest in Net Loss of Affiliate

      On January 16, 2001, the Company merged its VerticalOne subsidiary withYodlee.com, Inc. (“Yodlee”) in a stock-for-stock transaction. Under the terms of the transaction, the Company received an approximate 33% ownership interest in Yodlee. Upon the merger, the Company recorded a loss on sale of $52.3 million, which represented the difference between the carrying value of VerticalOne and the appraised value of the Company’s interest in Yodlee. The investment in Yodlee is being accounted for on the equity basis. The Company is a reseller of account aggregation services through its relationship with Yodlee. During the first quarter of 2001, the Company recorded a non-cash charge of $5.0 million based on its equity interest in the net loss of the affiliate.

4. Commitments and Contingencies

      In the second quarter of 2000, the Company was named in a number of shareholder lawsuits, all of which subsequently were consolidated into a single complaint. While the ultimate results and outcomes of these actions and claims cannot be determined, management does not expect that they will have a material adverse effect on the Company’s results of operations or financial position.

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5. Comprehensive Loss

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

		Three Months Ended
		March 31,
		2001			2000
Net loss		$	(92,062	)	$	(75,208	)
Foreign currency translation adjustment			(2,431	)		192
Unrealized gain (loss) on investment securities available for sale,   net of taxes			213			(243	)
	Comprehensive loss	$	(94,280	)	$	(75,259	)

6. Restructuring Charge

      In November 2000, the Company approved a restructuring plan related to the streamlining of its worldwide operations. During the fourth quarter of 2000, the Company recorded approximately a $14.7 million charge for the costs associated with the restructuring plan and utilized approximately $4.2 million of the charge during the fourth quarter. The table below reflects the activity in accrued restructuring during the first quarter of 2001 (in thousands):

	Reserve					Reserve
	Balance at					Balance at
	December 31,		Amounts			March 31,
	2000		Utilized			2001
Severance and other employee temination   costs	$	3,170	$	(2,506	)	$	664
Lease termination costs		6,762		(838	)		5,924
Other		629		(263	)		366
	$	10,561	$	(3,607	)	$	6,954

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7. Segment Reporting

      During 2001, we are operating and managing the Company in two business segments: Financial Institutions and Call Center Technology. The Financial Institutions segment builds, delivers and operates integrated, transactional and brandable Internet applications for financial institutions worldwide, available as an in-house solution or outsourced to the S1 Data Centers. Through the Call Center Technology segment, we offer interactive voice response and voice e-commerce technology. In 2000, through our VerticalOne subsidiary we operated a third segment, the Internet Aggregation Services segment, which provided technology that enables consumers to aggregate personal account information from multiple sources. In January 2001, we merged our VerticalOne subsidiary with Yodlee, and accordingly, in 2001 we no longer operate this segment.

      We evaluate the performance of the operating segments based on revenues, direct costs and operating income, excluding depreciation and amortization, marketing cost from warrant issued, merger related costs and amortization of acquisition intangibles. In addition, the Company provides general and administrative services to the operating segments on a shared service basis and therefore, the general and administrative costs are included in the other category. The Company does not produce reports that measure the performance according to any asset-based metrics.

				Three Months Ended March 31, 2001 (Unaudited)
						(in thousands)
				Call		Internet
		Financial		Center		Aggre-
		Institutions		Technology		gation		Other			Total
Revenues		$	52,398	$	10,707	$	—	$	—		$	63,105
Operating expenses:
	Cost of revenue		31,672		3,061		—		—			34,733
	Selling and marketing		6,700		5,122		—		—			11,822
	Product development		11,046		2,471		—		—			13,517
	General and administrative		—		—		—		12,833			12,833
Total operating expense			49,418		10,654		—		12,833			72,905
Operating income (loss)		$	2,980	$	53	$	—	$	(12,833	)	$	(9,800	)

					Three Months Ended March 31, 2000 (Unaudited)
							(in thousands)
					Call		Internet
		Financial			Center		Aggre-
		Institutions			Technology		gation			Other			Total
Revenues		$	39,589		$	10,466	$	314		$	—		$	50,369
Operating expenses:
	Cost of revenue		28,123			4,030		203			—			32,356
	Selling and marketing		6,871			3,538		1,154			—			11,563
	Product development		11,263			1,556		2,526			—			15,345
	General and administrative		—			—		—			9,961			9,961
Total operating expense			46,257			9,124		3,883			9,961			69,225
Operating income (loss)		$	(6,668	)	$	1,342	$	(3,569	)	$	(9,961	)	$	(18,856	)

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8. Stockholders’ Equity

      Basic net 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 earnings per share is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common stock that would share in the earnings of the Company. Because of the Company’s 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 the Company’s computation of diluted earnings per share for the three month period ended March 31, 2001 and 2000 was 69,435,649 and 66,757,024, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

      This quarterly report contains forward-looking statements and information relating to our subsidiaries and us. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on the beliefs of management as well as assumptions made using information currently available to management. Because these statements reflect the current views of management concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. You are urged to read the risk factors described in our Form 10-K, as amended for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on April 2, 2001. Except as required by law, we undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

      The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes appearing elsewhere herein and in our Form 10-K, as amended for the year ended December 31, 2000.

General

      During 2000, we operated and managed our Company in three business segments: Financial Institutions, Call Center Technology and Internet Aggregation. In January 2001, we merged our VerticalOne subsidiary, which comprised the Internet Aggregation segment, with Yodlee. Accordingly, in 2001 the Internet Aggregation segment has been eliminated.

      During the fourth quarter of 2000, the Company approved a restructuring plan related to the streamlining of its worldwide operations. The Company continues to review its cost structure on a worldwide basis and continues to look for additional ways to streamline its operations. As a result of this review, the Company may implement additional restructuring plans in future periods.

Financial Institutions Segment

      The Financial Institutions segment builds, delivers and operates integrated, transactional and brandable Internet applications for financial institutions worldwide, available as an in-house solution or outsourced to an S1 Data Center. The Financial Institutions segment provides highly customized solutions to large global and national financial institutions, as well as solutions that require little or no customization and are primarily sold to community and regional banks.

      In August 1999, we opened a new Data Center in the U.S. to accommodate our clients’ increasing outsourcing needs. In 2000, we established a Data Center in the U.K. for our European operations and a Data Center in Singapore for our Asia/Pacific regional operations. We generally earn recurring revenues for end users processed for our clients through our Data Centers.

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Call Center Technology Segment

      Through our Edify subsidiary, our Call Center Technology segment offers interactive voice response and voice e-commerce 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.

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S1 Corporation and Subsidiaries
Selected Financial Data
(Dollars in thousands)

				Three Months Ended
				March 31,
				3/31/01			3/31/00
Revenues:
		Software licenses		$	13,806		$	10,719
		Professional services			38,606			34,382
		Data center			10,238			3,507
		Other			455			1,761
			Total revenues		63,105			50,369
Direct costs:
		Software licenses			1,377			1,521
		Professional services			26,246			25,889
		Data center			6,750			3,352
		Other			360			1,594
			Total direct costs		34,733			32,356
			Gross margin		28,372			18,013
Operating expenses:
		Selling and marketing			11,822			11,563
		Product development			13,517			15,345
		General and adminstrative			12,833			9,961
					38,172			36,869
					(9,800	)		(18,856	)
Depreciation and amortization					7,373			3,404
Marketing cost from warrant issued					—			4,600
Merger related costs					—			6,814
Amortization of intangibles					20,406			77,127
Net loss from operations					(37,579	)		(110,801	)
Loss on sale of subsidiary					(52,302	)		—
Equity in net loss of affiliate					(5,029	)		—
Interest & investment income					2,646			35,593
					(92,264	)		(75,208	)
Income tax benefit					202			—
				$	(92,062	)	$	(75,208	)
Gross margin %:
		Software licenses			90	%		86	%
		Professional services			32	%		25	%
		Data center			34	%		4	%
		Other			21	%		9	%
					45	%		36	%
% of total revenues:
	Operating expenses:
		Selling and marketing			19	%		23	%
		Product development			21	%		30	%
		General and adminstrative			20	%		20	%
					60	%		73	%

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Comparison of the three months ended March 31, 2001 and March 31, 2000

      In 2001, we operate and manage our business in two segments: Financial Institutions and Call Center Technology. The following is a discussion of the results of the Company for 2001 as compared to 2000. The discussion includes an analysis of costs that are not allocated to segments, including depreciation and amortization, marketing cost from warrants issued, merger related and restructuring costs and amortization and impairment of acquisition intangibles. In addition, we provide general and administrative services to the operating segments and we do not allocate these costs to the individual segments. A discussion of the operating segments, including revenues, direct costs, gross margins, sales and marketing costs and product development costs follows the consolidated operations discussion.

Consolidated Operations

      Revenues, Direct Costs and Gross Margins. Total revenues increased by $12.7 million to $63.1 million for the three months ended March 31, 2001 from $50.4 million for the three months ended March 31, 2000, an increase of 25%. Approximately $7.1 million of the increase in total revenues is attributable to the two acquisitions completed in the second quarter of 2000 and the inclusion in the current period of the results of operation of certain activities related to financial reporting that had previously been held for sale. The primary components of revenue for the three months ended March 31, 2001 were $13.8 million in software license fees, $38.6 million in professional services fees, $10.2 million in data center fees and $0.5 million in other revenue. Direct costs increased by $2.4 million to $34.7 million for the three months ended March 31, 2001 from $32.4 million for the three months ended March 31, 2000, and increase of 7%. Approximately $2.4 million of the increase in direct costs is attributed to the two acquisitions completed in the second quarter of 2000. Gross margins were 45% and 36% of total revenues for the first quarter of 2001 and 2000, respectively.

      Selling and Marketing and Product Development Expenses.Total selling and marketing and product development expenses decreased by $1.6 million to $25.3 million for the three months ended March 31, 2001 from $26.9 million for the three months ended March 31, 2000. These expenses are discussed further in the Segment Analysis section.

      General and Administrative Expenses. General and administrative expenses increased by $2.9 million to $12.8 million for the three months ended March 31, 2001 from $10.0 million for the three months ended March 31, 2000. General and administrative expenses represented 20% and 20% of total revenues for the first quarter of 2001 and 2000, respectively. The increase in general and administrative expenses resulted from expenses to increase personnel required to manage the growth of our business as well as to establish a global infrastructure.

      Depreciation and Amortization.Depreciation and amortization expenses increased by $4.0 million to $7.4 million for the three months ended March 31, 2001 from $3.4 million for the three months ended March 31, 2000, an increase of 117%. Depreciation and amortization expenses were 12% and 7% of total revenues for the three months ended March 31, 2001 and 2000, respectively. The increase is primarily the result of the acquisition of additional equipment

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for data center customers and the build out of the new data centers in Singapore and the UK. We anticipate that the depreciation and amortization related to the new data centers will continue to increase as the new UK data center went into full production during the fourth quarter of 2000 and as new and existing customers expand their activities in the data centers.

      Marketing Cost for Warrant Issued. The Company recorded $4.6 million of marketing costs for the three months ended March 31, 2000 for a warrant issued in connection with a pilot project and distribution agreement between a third-party and one of our subsidiaries. The fair value of the warrant was determined based on the Black-Scholes option-pricing model.

      Merger Related and Restructuring Costs. During the first quarter of 2000 the Company incurred merger-related costs of $6.8 million. The merger related costs were related to the three acquisitions completed in the fourth quarter of 1999. These costs were incurred to integrate the products and platforms of the acquired companies, to train personnel on the new products acquired, and to build the infrastructure necessary to support a global operation.

      Amortization of Acquisition Intangible Assets. Amortization of acquisition intangible assets decreased $56.7 million to $20.4 million for the three months ended March 31, 2001 from $77.1 million for the three months ended March 31, 2000. The decrease in amortization of goodwill and other identifiable intangible assets resulted from an impairment charge taken in the fourth quarter of 2000. We continually monitor the results of operations and other developments within the industry to adjust cash flow forecasts, as necessary, to determine if any adjustment is necessary to the carrying value of the our intangible assets. Management determined that no such charge was required in the first quarter of 2001.

      Loss on Sale of Subsidiary and Equity Interest in Net Loss of Affiliate. On January 16, 2001, the Company merged its VerticalOne subsidiary with Yodlee.com, Inc. in a stock-for-stock merger. Under the terms of the transaction, the Company received an approximate 33% ownership interest in Yodlee. Upon the sale, the Company recorded a loss on sale of $52.3 million, which represented the difference between the carrying value of VerticalOne and the appraised value of the Company’s interest in Yodlee. The investment in Yodlee is being accounted for on the equity basis. The Company is a reseller of account aggregation services through its relationship with Yodlee. During the first quarter of 2001, the Company recorded a non-cash charge of $5.0 million based on its equity interest in the net loss of the affiliate.

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Financial Institutions Segment

					Three Months Ended
					March 31,
					3/31/01			3/31/00
					(in thousands)
Revenues:
			Software licenses		$	8,101		$	3,666
			Professional services			33,604			30,969
			Data center			10,238			3,193
			Other			455			1,761
				Total revenues		52,398			39,589
Direct costs:
			Software licenses			67			24
			Professional services			24,495			23,351
			Data center			6,750			3,154
			Other			360			1,594
				Total direct costs		31,672			28,123
				Gross margin		20,726			11,466
Operating expenses:
			Selling and marketing			6,700			6,871
			Product development			11,046			11,263
						17,746			18,134
Segment operating income (loss)					$	2,980		$	(6,668	)
Gross margin %:
		Software licenses				99	%		99	%
		Professional services				27	%		25	%
		Data center				34	%		1	%
		Other				21	%		9	%
						40	%		29	%
% of segment revenues:
	Operating expenses:
			Selling and marketing			13	%		17	%
			Product development			21	%		28	%
						34	%		45	%

      General. In the second quarter of 2000, we completed the acquisitions of Q-Up and Davidge whose results are included in the Financial Institutions segment. Approximately $7.1 million of $12.8 million increase segment revenues is attributable to these acquisitions and the inclusion in the current period of the results of operations of FRS that had previously been held for sale.

      Revenues, Direct Costs and Gross Margins. Total revenues increased by $12.8 million to $52.4 million for the three months ended March 31, 2001 from $39.6 million for the three months ended March 31, 2000, an increase of 32%. The primary components of revenue in the first quarter of 2001 were $8.1 million in software license fees, $33.6 million in professional service fees, $10.2 million in data center fees and $0.5 million of other revenue. Direct costs

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increased by $3.5 million to $31.7 million for the three months ended March 31, 2001 from $28.1 million for the three months ended March 31, 2000, an increase of 13%. The gross margin for the first quarter of 2001 was 40% compared to 29% of total revenues in the first quarter of 2000.

      Software licenses. Software license fees increased by $4.4 million to $8.1 million for the three months ended March 31, 2001 from $3.7 million for the three months ended March 31, 2000, an increase of 121%. Software license fees represented 15% of total segment revenues for the three months ended March 31, 2001 as compared to 9% of total segment revenues for the three months ended March 31, 2000. Substantially all of the increase in license revenue relates to the acquisitions of Q-Up and Davidge in the second quarter of 2000.

      Direct software license costs are minimal as the segment builds most of the components of its software products. The gross margin on software licenses was 99% for the three months ended March 31, 2001 and 2000.

      Professional services. Professional services revenues increased by $2.6 million to $33.6 million for the three months ended March 31, 2001 from $31.0 million for the three months ended March 31, 2000, an increase of 9%. Professional services revenues represented 64% of total revenues for the three months ended March 31, 2001 compared to 78% of total revenues for the three months ended March 31, 2000.

      Direct professional services costs consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services increased by $1.1 million to $24.5 million for the three months ended March 31, 2001 from $23.4 million for the three months ended March 31, 2000, an increase of 5%. Gross margin on professional services for the first quarter of 2001 and 2000 was 27% and 25%, respectively.

      Data Center. Data Center revenues increased by $7.0 million to $10.2 million for the three months ended March 31, 2001 from $3.2 million for the three months ended March 31, 2000, an increase of 221%. Data Center revenues represented 20% of total segment revenues for the three months ended March 31, 2001 compared to 8% of total segment revenues for the three months ended March 31, 2000. We anticipate that data center revenues will continue to grow both domestically and internationally as a result of the new data centers in the UK and Singapore, which were opened in 2000.

      Direct data center costs consist of personnel and infrastructure to support customer installations. Direct costs associated with data center services increased by $3.6 million to $6.8 million for the three months ended March 31, 2001 from $3.2 million for the three months ended March 31, 2000, an increase of 114%. The increase in cost is primarily attributed to additional personnel and infrastructure necessary to support new customers, to add new applications for our existing customers and to operate our new data centers in the UK and Singapore. The gross margin for the data centers was 34% for the three months ended March 31, 2001, compared to 1% for the three months ended March 31, 2000.

      Other. Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenues decreased by $1.3 million to

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$0.5 million for the three months ended March 31, 2001 from $1.8 million for the three months ended March 31, 2000, a decrease of 74%. Other revenues represented 1% and 4% of total segment revenues for the three months ended March 31, 2001 and 2000, respectively.

Operating Expenses. Operating expenses, which includes selling and marketing and product development expenses remained stable for the three months ended March 31, 2001 and 2000. Selling and marketing expenses were 13% and 17% of total revenues for the three months ended March 31, 2001 and 2000, respectively. Product development expenses were 21% and 28% of total revenues for the three months ended March 31, 2001 and 2000, respectively.

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Call Center Technology Segment

					Three Months Ended
					March 31,
					3/31/01			3/31/00
					(in thousands)
Revenues:
			Software licenses		$	5,705		$	7,053
			Professional services			5,002			3,413
				Total revenues		10,707			10,466
Direct costs:
			Software licenses			1,310			1,497
			Professional services			1,751			2,533
				Total direct costs		3,061			4,030
				Gross margin		7,646			6,436
Operating expenses:
			Selling and marketing			5,122			3,538
			Product development			2,471			1,556
						7,593			5,094
Segment operating income					$	53		$	1,342
Gross margin %:
		Software licenses				77	%		79	%
		Professional services				65	%		26	%
						71	%		61	%
As a percent of revenue:
	Operating expenses:
			Selling and marketing			48	%		34	%
			Product development			23	%		15	%
						71	%		49	%

      Revenues, Direct Costs and Gross Margins. Total revenues increased by $0.2 million to $10.7 million for the three months ended March 31, 2001 from $10.5 million for the three months ended March 31, 2000, an increase of 2%. The primary components of revenue were $5.7 million in software license fees and $5.0 million in professional service fees. Direct costs decreased by $1.0 million to $3.1 million for the three months ended March 31, 2001 from $4.1 million for the three months ended March 31, 2000, a decrease of 24%. As a result of the decrease in direct costs, the gross margin for 2001 was 71% as compared to 61% of total segment revenues in 2000.

      Software licenses. Software license fees decreased by $1.3 million to $5.7 million for the three months ended March 31, 2001 from $7.1 million for the three months ended March 31, 2001, a decrease of 19%. Software license fees represented 53% of total segment revenues for the three months ended March 31, 2001 as compared to 67% of total segment revenues for the three months ended March 31, 2000.

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      Direct software license costs consist primarily of the cost of third-party software used in the Call Center products. Direct costs associated with software licenses decreased by $0.2 million to $1.3 million for the three months ended March 31, 2001 from $1.5 million for the three months ended March 31, 2000. Gross margins of software licenses were 77% and 79% for the first quarter of 2001 and 2000, respectively. The decrease in gross margins of software licenses is the result of selling more products that include third-party software in 2001 as compared to 2000.

      Professional services. Professional services revenues increased by $1.6 million to $5.0 million for the three months ended March 31, 2001 from $3.4 million for the three months ended March 31, 2000, an increase of 47%. Professional services revenues represented 47% of total revenues for the three months ended March 31, 2001 compared to 33% of total segment revenues for the three months ended March 31, 2000.The growth in professional services revenues is primarily attributable to the growth in support and maintenance fees charged to existing holders of software licenses.

      Direct professional services costs consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services decreased by $0.8 million to $1.8 million for the three months ended March 31, 2001 from $2.5 million for the three months ended March 31, 2000, a decrease of 31%. As a result of the increasing professional services revenue and declining direct costs due to a reduction in the use of outside contractors, the gross margin on professional services for the first quarter of 2001 and 2000 were 65% and 26%, respectively.

      Operating Expenses. Total operating expenses, which includes sales and marketing and product development expenses, increased by $2.5 million to $7.6 million for the three months ended March 31, 2001 from $5.1 million for the three months ended March 31, 2000. Selling and marketing expenses increased by $1.6 million to $5.1 million for the three months ended March 31, 2001 from $3.5 million for the three months ended March 31, 2000, an increase of 45%. Selling and marketing expenses were 48% and 34% of total segment revenues for the first quarter of 2001 and 2000, respectively. Product development expenses increased by $0.9 million to $2.5 million for the three months ended March 31, 2001 from $1.6 million for the three months ended March 31, 2000, an increase of 59%. Product development expenses were 23% and 15% of total revenues for the first quarter of 2001 and 2000, respectively. Both marketing and product development expenses increased primarily as a result of new product development efforts that were started in the latter half of 2000 and of marketing campaigns that started in the first quarter of 2001.

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Liquidity and Capital Resources

      Total stockholders’ equity decreased to $374.6 million as of March 31, 2001 from $467.7 million at December 31, 2000. The decrease in stockholders’ equity is primarily attributable to a net loss of $92.1 million for the three months ended March 31, 2001.

      As of March 31, 2001, we had cash and cash equivalents of $139.9 million compared to $173.3 million at December 31, 2000.

      During the three months ended March 31, 2001, cash used in operations was $16.0 million compared to cash used in operations of $21.4 million for the three months ended March 31, 2000. The decrease in cash used in operations between the first quarter of 2001 and 2000 is primarily the result of the net loss of $92.1 million for the period offset by non-cash charges of $85.3 million. In addition, accounts payable and accrued expenses declined by of $26.1 million and accounts receivable increased by $13.6 million.

      Cash used in investing activities was $16.6 million for the three months ended March 31, 2001 compared to net cash provided by investing activities of $22.1 million in the comparable period of 2000. During the first quarter of 2001, the Company sold its VerticalOne subsidiary, which had $15.0 million in cash on its balance sheet, to Yodlee. During the first quarter of 2000, the Company sold $36.5 million of investment securities held for sale. During the three months ended March 31, 2000 a total of $5.5 million of investments were made in companies that are considered to have technology or products that complement our product and services offerings. No such investments were made in 2001. In the first quarter of 2001, the Company purchased $2.6 million of property and equipment as compared to $8.9 million in the prior year quarter. The purchases of property and equipment made in 2000 were primarily related to the purchase of equipment required for the US Data Center.

      Cash used by financing activities was $0.7 million for the three months ended March 31, 2001 compared to cash provided by financing activities of $6.7 million in the comparable period of 2000. The primary difference between the two periods is the receipt of $9.2 million in proceeds from common stock sold under the Employee Stock Purchase and Option Plans during the three months ended March 31, 2000.

      At March 31, 2001, we had approximately $3.5 million borrowings outstanding and approximately $0.2 million available under various line of credit facilities.

      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 addition of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

      Quantitative and qualitative disclosures about market risk were included in Item 7A of the Company’s 2000 Annual Report on Form 10-K. There have been no significant changes in the Company’s market risk from December 31, 2000.

PART II — OTHER INFORMATION

Item 1. Legal proceedings.

      Not applicable.

Item 2. Changes in Securities and Use of Proceeds.

      (a) Not applicable.

      (b) Not applicable.

      (c) Not applicable.

      (d) Not applicable.

Item 3. Defaults Upon Senior Securities.

      Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

      Not applicable.

Item 5. Other Information.

      None.

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Item 6. Exhibits and Reports on Form 8-K.

      (a) Exhibits.

      (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 March 31, 2001:

      Current Report on Form 8-K filed with the SEC on January 18, 2001 (date of report January 18, 2001) (regarding a press release and an analyst conference call related to fourth quarter 2000 results and S1 and its operations).

      Current Report on Form 8-K filed with the SEC on February 14, 2001 (date of report February 13, 2001) (regarding a press release and an analyst conference call related to fourth quarter 2000 results and S1 and its operations).

      Current Report on Form 8-K filed with the SEC on April 9, 2001 (date of report April 6, 2001) (regarding date of S1’s 2001 annual meeting of shareholders).

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SIGNATURES

      Pursuant to the requirements 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 May 14, 2001.

S1 CORPORATION
By: /s/ Robert F. Stockwell
	Robert F. Stockwell
	Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)

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