S1 10-K 2006
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
For the fiscal year ended December 31, 2005
For the transition period from to
Commission file number: 000-24931
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (404) 923-3500
Securities registered pursuant to Section 12(b) of the Act:
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 registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 Registrants 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:
This Amendment No. 3 to the Annual Report on Form 10-K of S1 Corporation (Company) amends the Companys 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 Companys 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.
Table of Contents
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
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.
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
(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
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 executives 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
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 executives 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:
In connection with Mr. Ellertsons 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
S1s 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 Companys 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 S1s 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 S1s success by virtue of stock-based compensation.
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 executives responsibilities, the executives 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 managements 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 S1s 401(k) Plan.
CEO Compensation. The compensation of Mr. Mahan, the Companys 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. Mahans 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 Companys Chief Executive Officer from 1995-2000, was reappointed by the Board of Directors as Chief Executive Officer in July 2005. Mr. Mahans 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. Mahans 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 Companys and individuals performance. In this regard, the Company awarded Mr. Mahan stock options which are designed to motivate Mr. Mahan to meet the Companys 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 Companys stock price reaches $8.00 per share; and 100,000 vest if and when the Companys stock price reaches $10.00 per share. These options require the Companys stock price to
appreciate in order for Mr. Mahan to realize any benefit, thus directly linking the Companys 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 Companys 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
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 Yodlees 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 S1s 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 Yodlees 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 days 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 Companys 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.
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:
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.