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S1 10-K 2006 Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 3
For the fiscal year ended December 31, 2005
OR
For
the transition period from
to
Commission file number: 000-24931
S1 CORPORATION
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (404) 923-3500
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share Title of Class Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated
filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
Aggregate market value of the common stock held by non-affiliates of the Registrant, computed
using the closing price for the Registrant’s common stock on June 30, 2005, was $330,470,617.
Shares of common stock outstanding as of March 1, 2006: 70,453,355
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:
None
EXPLANATORY NOTE
This
Amendment No. 3 to the Annual Report on Form 10-K of S1 Corporation (“Company”) amends
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, originally
filed on March 16, 2006 (the “Original Filing”), the Amended Annual Report of Form 10-K/A, filed
March 30, 2006 (“Amendment No. 1”) and the
Amended Annual Report on Form 10-K/A, filed May 1, 2006
(“Amendment No. 2”). The Company
is filing this Amendment to amend information
required by Items 11 and 13 of Part III. Specifically, the
Compensation Committee Report on Executive Compensation in Item 11
has been revised to include additional information and Item 13 has
been revised to include additional information regarding the
Company’s relationship with State Farm Mutual Automobile Insurance Company. Additionally, the Company is
filing a copy of the Master Software Development and Consulting Services
Agreement (“Agreement”) between the Company and State Farm Mutual Automobile
Insurance Company as exhibit 10.18 hereto. The index set forth in
Part IV, Item 15(a)(3) and (b) has also been amended and restated in its entirety to reflect the filing of the Agreement and to include the additional certifications referenced below.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), also included in this Form 10-K/A are the certifications required by Rule
13a-14(a) of the Exchange Act, which have been re-executed and re-filed as of the date of this Form
10-K/A as Exhibits 31.7 and 31.8, respectively.
Except as described above, no other changes
have been made to the Original Filing Amendment
No. 1. or Amendment No. 2. This Amendment continues to speak as of the date of the Original Filing, and the registrant
has not updated the disclosures contained therein to reflect any events that occurred at a date
subsequent to the filing of the Original Filing.
1
Table of Contents
2
ITEM 11. EXECUTIVE COMPENSATION
Executive and Director Compensation
The following table shows the cash compensation earned by our current Chief Executive
Officer, our former Chief Executive Officer and the next highest compensated executive officer
serving at December 31, 2005, whose total annual salary and bonus for the fiscal year ended
December 31, 2005 exceeded $100,000 (the “named executive officers”). These were the only
individuals who served as executive officers of S1 during the fiscal year ended December 31, 2005.
No stock appreciation rights have been granted by S1 or its predecessor, Security First Network
Bank.
Summary Compensation Table
3
In 2005, directors, who are not employed by us, earned an annual fee of $20,000 and an
attendance fee of $1,000 per meeting and received reimbursements for travel and other expenses
incurred in connection with attending meetings of our board of directors. Committee chairpersons
received $1,000 per committee meeting and committee members earned $500 per committee meeting.
Additionally, directors are eligible to receive stock option grants under our 2003 Stock Incentive
Plan. In August 2005, Mr. Gupta was awarded options to purchase 25,000 shares of S1 common stock
at an exercise price of $4.28 per share. In November 2005, Messrs. Ivester, Johnson, Owens and
Speigel were each awarded options to purchase 30,000 shares of S1 common stock at an exercise price
of $4.15 per share. Director stock option grants vest one year after the grant date.
Option Grants
The following table contains information concerning the grant of stock options to
the named executive officers during fiscal year 2005.
Option Grants in Last Fiscal Year
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(c) Mr. Ellertson was not an executive officer of the Company at December 31, 2005.
2005 Option Exercises and Values
The following table provides information on exercises of stock options during fiscal year
2005 by the named executive officers and the value of unexercised options at the end of the year.
Aggregated Option Exercises in 2005 and Fiscal Year-End Option Values
Employment Agreements
We entered into employment agreements with two of our executive officers listed below
(collectively referred to as “the executives”). Many unvested stock options held by the executives
vest upon a change in control, as defined. This table summarizes the compensation to be paid
pursuant to the terms of these agreements.
Each executive’s base salary must be reviewed no less frequently than annually and may be
increased at the discretion of S1. Executives will receive annual bonuses, payable no later than
the end of the first fiscal quarter following the end of each fiscal year of S1 based on the
attainment of specific S1 performance targets as may be agreed upon by each of
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them and S1. The
annual bonuses will be designed so that upon meeting specified minimum thresholds the executives
will be entitled to receive reduced bonus amounts if the agreed-upon targets are partially
attained. Executives will be eligible to participate in any retirement, deferred compensation,
fringe benefit or welfare benefit plan of S1, including any plan providing for employee stock
purchases, pension or retirement income, retirement savings, employee stock ownership, deferred
compensation or medical, prescription, dental, disability, employee life, group life, accidental
death or travel accident insurance benefits that S1 may adopt for the benefit of executive
employees. S1 agreed to pay or reimburse Mr. Hale for relocation expenses (including temporary
living expenses for up to five months) that he paid or incurred in moving to Atlanta, plus a “tax
gross-up” amount with respect to taxes imposed on such payment or reimbursement, including taxes
imposed on the gross-up amount. S1 has agreed to pay or reimburse Mr. Mahan for dues, including
initiation fees, incurred for country club memberships. The employment agreements with the
executives provide for an initial term of three years, with successive renewals for one additional
year on the first and each subsequent anniversary of the effective date, unless either the
executive or S1 gives notice to the other that such party is terminating the term of employment.
S1 may terminate each executive’s employment at any time during the term of his employment
agreement. If S1 terminates the executive other than for “cause” (as defined) or because of his
disability or death, the terminated executive would be entitled to (a) his base salary due through
the termination date, plus a pro rata portion of the annual bonus that would have been payable for
the year in which the termination occurs (based on actual results to date and budgeted results for
the remainder of the period), (b) continued salary and benefits for 24 months in the case of Mr.
Mahan or 12 months in the case of Mr. Hale, after such termination and (c) in the case of Mr.
Mahan, an annual bonus during such 24-month period equal to the average annual bonus paid to him
during the preceding 36 months. In addition, under the employment agreements for Mr. Mahan, if any
payment or distribution by S1 to an executive or for his benefit (including accelerated vesting of
stock options) would constitute an excess parachute payment under the Internal Revenue Code, as
amended, S1 will make a “gross-up” payment, in an amount, after taxes, sufficient to pay the excise
tax that is imposed on excess parachute payments so that, after paying the excise tax, the
executive would receive a net after-tax amount that is the same as the amount they would have
received if no excise tax had been imposed. Under each of the employment agreements, however, no
such “gross-up” payment would be made if the net after-tax benefit to the executive would be at
least $100,000 more than the maximum after-tax amount the executive could have received without
incurring the excise tax (in which case, the payments and distributions to the executive would be
capped at such maximum amount) and that the aggregate amount of “gross-up” payments that will be
paid by S1 for all employees who have employment agreements, including the executives, would not
exceed $10,000,000. If the executive terminates his employment for “good reason” (as defined in the
agreements), he would be entitled to the same compensation and benefits as if S1 had terminated his
employment without cause. If the employment of the executive terminates because of his death or
disability, S1 would pay him, or his beneficiaries, his base salary due through the date of
termination, plus a pro rata portion of his annual bonus, as described above.
Under the employment agreements, if the employment of Mr. Mahan or Mr. Hale is terminated by
S1 without “cause” or by him for “good reason” (as defined in the agreements) after a change in
control of S1, options held by that person would be 100% vested and exercisable. For Mr. Mahan,
upon the occurrence of a change in control of S1 (without regard to whether the employment of the
executive is terminated), the vesting schedule under options held by them would be changed so that
two-thirds of the shares as to which the options have not vested before the change in control would
vest on a monthly basis over the remaining vesting period set out in the option agreements, and the
remaining unvested shares would continue to vest on the original schedule.
Mr. Ellertson has not served as Chief Executive Officer since July 2005. At that time, his
employment agreement was terminated. Under his employment agreement, Mr. Ellertson was entitled to
the following as an employee:
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In connection with Mr. Ellertson’s termination, he is entitled to (a) his base salary due
through the termination date, plus a pro rata portion of the annual bonus that would have been
payable for the year in which the termination occurs (based on actual results to date and budgeted
results for the remainder of the period), (b) continued salary and benefits for 24 months after his
termination and (c) an annual bonus during such 24-month period equal to the average annual bonus
paid to him during the preceding 36 months. In addition, under the employment agreements for Mr.
Ellertson, if any payment or distribution by S1 to an executive or for his benefit (including
accelerated vesting of stock options) would constitute an excess parachute payment under the
Internal Revenue Code, as amended, S1 will make a “gross-up” payment, in an amount, after taxes,
sufficient to pay the excise tax that is imposed on excess parachute payments so that, after paying
the excise tax, Mr. Ellertson would receive a net after-tax amount that is the same as the amount
he would have received if no excise tax had been imposed. However, no such “gross-up” payment would
be made if the net after-tax benefit to Mr. Ellertson would be at least $100,000 more than the
maximum after-tax amount the executive could have received without incurring the excise tax (in
which case, the payments and distributions to the executive would be capped at such maximum amount)
and that the aggregate amount of “gross-up” payments that will be paid by S1 for all employees who
have employment agreements, including the executives, would not exceed $10,000,000. Additionally,
we accelerated vesting on 392,277 stock options previously granted to Mr. Ellertson. In order to
receive termination benefits, Mr. Ellertson is required to execute a settlement agreement with S1.
As of the date of this filing, this agreement has not been signed, therefore we have not paid Mr. Ellertson
any termination benefits.
All named executive officers, except Mr. Hale, are subject to confidentiality, non-disclosure
and non-competition agreements whereby they agreed that they would not reveal to anyone any of the
trade secrets or proprietary or confidential information of S1 or its subsidiaries and that they
would not make use of such information otherwise than for the benefit of S1. Each of the executives
also agreed that, while employed by S1 and for a period of 24 months after termination of his
employment for any reason other than because of non-renewal of his employment agreement by S1, he
would not do any of the following: (1) engage in any business activity that competes with S1; (2)
solicit, recruit or hire any S1 employee to work for a third party; and (3) solicit or induce any
customer of S1 to become a customer of any competing person or entity or to cease doing business
with S1.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
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.
The compensation committee is guided by the following four key
principles in determining the compensation of the Company’s
executive officers:
In addition, because the Company is facing a challenging
operating environment marked by a decline in revenues, an
increase in operating expenses and a decrease in share value, we
recognize the particular importance of management stability, and
we have tried to establish a compensation program that will help
retain our executives and reward them for managing the company
through this period.
Compensation paid to our executive officers in 2005 consisted of
the following components: base salary, long-term incentives
(awards of stock options) and participation in S1’s other
employee benefit plans. While the Company made progress in 2005
in developing and implementing programs designed to transform
the Company to better meet the product and service needs of our
customers and improve profitability, our results were not
satisfactory, and therefore no bonuses were awarded to executive
officers in 2005. Our executive officers have significant equity
interests in S1’s success by virtue of stock-based
compensation.
7
Base Salary. Base salary is intended to signal the
internal value of the position. In establishing the 2005 salary
for each executive officer, the compensation committee
considered, as appropriate, the nature and scope of each
executive’s responsibilities, the executive’s prior
compensation and performance in his or her job, the pay levels
of similarly situated executives within the Company, the terms
of any employment agreements, and comparative market
compensation levels. We do not apply formulas or assign these
factors specific mathematical weights; instead we exercise
judgment and discretion.
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
stockholders’ interests in the enhancement of stockholder
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 2003 Stock
Incentive Plan. During 2005, stock options to
purchase 600,000 shares of common stock were granted
to our named executive officers. The increase in the size of the
grant to Mr. Hale relative to his 2004 grant is based in
part on his promotion to the position of President of North
America Retail Banking, Global Wholesale Banking and Insurance
Markets in October 2005. The increase in the size of the grant
to Mr. Mahan relative to his 2004 grant is discussed below.
Other. In addition to the compensation paid to executive
officers described above, executive officers along with and on
the same terms as other employees, receive certain benefits such
as life and health insurance and participation in S1’s
401(k) Plan.
CEO Compensation. The compensation of Mr. Mahan, the
Company’s Chief Executive Officer, is based on the terms of
the employment agreement between Mr. Mahan and the Company
and is primarily cash compensation in form of a base salary and
stock-based compensation in the form of stock options. The terms
of Mr. Mahan’s employment agreement are described on
page 12 of this proxy statement. In 2005, the Company faced
a very challenging operating environment marked by a decline in
revenues, an increase in expenses, and a decrease in share
value. The board recognized that it would take significant
commitment, dedication and effort to work through a difficult
time for S1 with focus and speed. The board knew that it was
important to have the right leadership with knowledge and
capabilities required to execute our plan to deliver long-term
shareholder value with a sense of urgency. To that end,
Mr. Mahan, who first served as the Company’s Chief
Executive Officer from 1995-2000, was reappointed by the Board
of Directors as Chief Executive Officer in July 2005.
Mr. Mahan’s employment agreement provides that he will
received a fixed annual salary of $600,000. Effective 2001,
Mr. Mahan voluntarily reduced his base salary to $450,000.
However, in 2005, Mr. Mahan was paid an annual salary of
$512,500, which was paid as follows: (i) from January 2005
until July 2005, Mr. Mahan was paid at an annual base
salary rate of $450,000. Upon his appointment to the position of
Chief Executive Officer in July 2005, Mr. Mahan was paid at
an annual base salary rate of $600,000, as provided for in his
employment agreement. The Compensation Committee believed it
appropriate to pay Mr. Mahan at the higher rate provided
for in his employment agreement based on the increase in his
responsibilities as Chief Executive Officer. Effective
January 1, 2006, at Mr. Mahan’s request, his
employment agreement has been amended to decrease the base
salary from $600,000 to $450,000. For 2005, Mr. Mahan was
eligible to earn a cash bonus of up to $210,000 based on the
attainment of specific Company performance targets. As mentioned
above, the compensation committee considered the performance of
the Company and determined that performance goals were not met
for 2005 and no bonus was awarded to Mr. Mahan.
As discussed above, the Company believes that a portion of
executive compensation should be closely aligned to both the
Company’s and individual’s performance. In this
regard, the Company awarded Mr. Mahan stock options which
are designed to motivate Mr. Mahan to meet the
Company’s long-term performance goals. Specifically, in
2005 Mr. Mahan was awarded options to
purchase 400,000 shares of Company common stock at an
exercise price of $4.15 per share (the market value on the
grant date) which vest as follows: 200,000 vest annually in four
equal installments beginning November 8, 2006; 100,000 vest
if and when the Company’s stock price reaches
$8.00 per share; and 100,000 vest if and when the
Company’s stock price reaches $10.00 per share. These
options require the Company’s stock price to
8
appreciate in order for Mr. Mahan to realize any benefit,
thus directly linking the Company’s performance to part of
his overall compensation package.
We considered this level of pay and option grant appropriate for
several reasons, including: the difficult circumstances facing
the Company under which Mr. Mahan assumed the executive
leadership of the Company as its Chief Executive Officer; the
need to retain and motivate Mr. Mahan to lead the
Company’s plan for creating long-term shareholder value;
his prior track record of effective leadership and vision in
leading the Company; his strategic planning initiatives for
positioning the Company to realize its full potential to deliver
long-term value to our shareholders, customers and employees;
and comparable compensation information. In making this
determination, we did not apply formulas or assign any of these
factors specific mathematical weights; instead, we exercise
judgment and discretion.
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 INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the board of directors during fiscal year 2005 was composed of
Mr. Ivester, who is the Chairman, and Messrs. Owens and Johnson. No member of the Compensation
Committee was an officer or employee of the company or any subsidiary of the company during fiscal
year 2005. There are no interlock relationships as defined in the applicable SEC rules.
PERFORMANCE OF OUR COMMON STOCK
The following table sets forth comparative information regarding the cumulative stockholder
return on our common stock since December 31, 2001. Total stockholder 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 the date of
the initial public offering of Security First Network Bank, May 26, 1996, to December 31, 2005. Our
cumulative stockholder return over this period is based on an investment of $100 on December 31,
2001 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 December 31, 2001 to December 31, 2005 
9
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 2005, S1 owned approximately 23% of Yodlee, Inc.’s outstanding common and
preferred shares. The chairman of our board of directors is also a director of Yodlee. S1 entered
into a sales representation agreement and a data center agreement with Yodlee in 2001. Under the
terms of the sales representation agreement, as amended, S1 is a non-exclusive reseller of Yodlee’s
aggregation service. In connection with this arrangement, S1 made a nonrefundable prepayment of
$10.0 million to Yodlee. The agreement and the prepayment expired in July 2005, the agreement was
extended through January 2006 for current customers only. Through December 31, 2004, S1 had
recouped approximately $2.9 million from S1’s customers and Yodlee under this agreement. Under the
data center agreement, S1 agreed to provide Yodlee with certain data center services for a fee.
During 2004 and 2005, S1 provided data center services in the amounts of $0.4 million and $0.4
million, respectively, for Yodlee under this agreement. The data center agreement was terminated as
of December 31, 2005. At December 31, 2004 and 2005, S1 had receivables from Yodlee of $0.1 million
and $0.1 million, respectively, for services performed under this agreement. S1 and Yodlee signed
a new reseller agreement effective February 1, 2006 for Yodlee’s aggregation product. The new
reseller agreement has a three year term. Under the agreement, S1 paid Yodlee a non-refundable
upgrade fee of $50,000 and will pay Yodlee an annual maintenance fee of $20,000 during the term of
the agreement, as well certain other maintenance fees and license fees based in part on product
utilization. The new agreement expires on January 31, 2009.
In
2005, we generated revenues of approximately $45 million from
services provided to State Farm Mutual Automobile Insurance Company,
a customer and a beneficial owner of more than 5% of the Company's
Common Stock. Revenue
from State Farm is expected to be between $44 million to
$48 million in 2006.
We are party to a Master Software
Development and Consulting Services Agreement with State Farm Mutual Automobile Insurance Company. As is typical with most of our customers, the agreement acts as a framework to govern our primary relationship with
State Farm, does not stipulate that we are the preferred supplier to the customer and does not provide that we are
entitled to any minimum amount of work or revenues. Under this agreement, we provide State Farm
professional services and software development services. Each work assignment is separately
priced and negotiated by the parties, with the terms of each assignment specified in an
individual work order governing the assignment. The work orders provide for the services to
be performed by us for the project, the deliverables, the sequential order for delivery of
the deliverables, acceptance criteria specified for acceptance of a deliverable, and the fee to
be paid with an explanation for each fee being charged under the work order. Fees charged under
these work orders are comparable to those charged to other customers for similar services. The
Master Software Development and Consulting Services Agreement, as well as any work order placed
thereunder, is terminable by either party at any time on 90 day’s notice.
Pursuant to the Settlement Agreement, the Company agreed to reimburse the Ramius
Group up to $87,500 for its reasonable, documented out-of-pocket fees and expenses
incurred in connection with its dispute with the Company relative to the nomination of
directors to the Company’s Board at the 2006 annual meeting of stockholders. Director
Jeffrey C. Smith is a managing director of
Ramius Capital Group, L.L.C., one of the parties to the Settlement Agreement.
10
Item 15. Exhibits and Financial Statement Schedules.
(a) (3) The exhibits listed are filed as part of this report and incorporated in this report
by reference:
11
12
13
SIGNATURE
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
July 26, 2006.
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