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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2005 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For 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. Employerincorporation or organization)
    
    Identification No.)3500 Lenox Road, Suite 200Atlanta, Georgia
    
    30326(Address of principal executive
    
    (Zip Code)offices)
 Registrants Telephone Number, Including Area Code: (404) 923-3500 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 þ No o Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Shares
of common stock outstanding as of May 5, 2005:
70,163,613




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S1 CORPORATION AND SUBSIDIARIES QUARTERLY PERIOD ENDED MARCH 31, 2005 TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005
and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005
and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements as of March 31, 2005
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    20Item 6. Exhibits and Reports on Form 8-K
    
    
    20Signature
    
    
    21EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-31.2 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
 2




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PART 1  FINANCIAL INFORMATION 
 Item 1 Financial Statements S1 CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE DATA)
 (Unaudited)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    40,531
    
    
    $
    43,223Short-term investments
    
    
    58,913
    
    
    
    65,248Accounts receivable, net
    
    
    68,817
    
    
    
    61,216Prepaid expenses
    
    
    5,967
    
    
    
    6,113Other current assets
    
    
    4,841
    
    
    
    5,485Total current assets
    
    
    179,069
    
    
    
    181,285Property and equipment, net
    
    
    14,633
    
    
    
    15,150Intangible assets, net
    
    
    21,533
    
    
    
    22,766Goodwill, net
    
    
    117,786
    
    
    
    117,699Other assets
    
    
    3,416
    
    
    
    3,981Total assets
    
    $
    336,437
    
    
    $
    340,881LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,374
    
    
    $
    6,253Accrued compensation and benefits
    
    
    8,893
    
    
    
    14,269Accrued restructuring
    
    
    3,001
    
    
    
    3,337Accrued other expenses
    
    
    13,603
    
    
    
    17,369Deferred revenues
    
    
    41,687
    
    
    
    33,302Current portion of capital lease obligation
    
    
    1,459
    
    
    
    1,523Total current liabilities
    
    
    74,017
    
    
    
    76,053Capital lease obligation, excluding current portion
    
    
    1,269
    
    
    
    1,572Accrued restructuring, excluding current portion
    
    
    4,315
    
    
    
    4,789Other liabilities
    
    
    3,204
    
    
    
    3,471Total liabilities
    
    
    82,805
    
    
    
    85,885Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    742
    
    
    
    742Additional paid-in capital
    
    
    1,914,190
    
    
    
    1,913,913Common stock held in treasury  at cost
    
    
    (23,234
    )
    
    
    (21,593
    )Accumulated deficit
    
    
    (1,645,427
    )
    
    
    (1,646,147
    )Accumulated other comprehensive loss
    
    
    (2,639
    )
    
    
    (1,919
    )Total stockholders equity
    
    
    253,632
    
    
    
    254,996Total liabilities and stockholders equity
    
    $
    336,437
    
    
    $
    340,881Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    74,207,073
    
    
    
    74,152,529Common stock held in treasury
    
    
    3,774,021
    
    
    
    3,544,111
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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S1 CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Revenues:Software licenses
    
    $
    13,246
    
    
    $
    11,601Support and maintenance
    
    
    17,875
    
    
    
    15,064Professional services
    
    
    21,317
    
    
    
    19,349Data center
    
    
    9,664
    
    
    
    9,110Other
    
    
    312
    
    
    
    990Total revenues
    
    
    62,414
    
    
    
    56,114Operating expenses:Cost of software licenses
    
    
    801
    
    
    
    1,365Cost of professional services, support and maintenance
    
    
    19,980
    
    
    
    16,901Cost of data center
    
    
    4,203
    
    
    
    4,374Cost of other revenue
    
    
    169
    
    
    
    900Selling and marketing
    
    
    9,795
    
    
    
    8,064Product development
    
    
    13,801
    
    
    
    13,664General and administrative
    
    
    8,808
    
    
    
    5,905Depreciation
    
    
    2,560
    
    
    
    2,621Amortization of other intangible assets
    
    
    1,234
    
    
    
    836Total operating expenses
    
    
    61,351
    
    
    
    54,630Operating income
    
    
    1,063
    
    
    
    1,484Interest and other income, net
    
    
    136
    
    
    
    47Income before income tax expense
    
    
    1,199
    
    
    
    1,531Income tax expense
    
    
    (479
    )
    
    
    (460
    )Income from continuing operations
    
    
    720
    
    
    
    1,071Discontinued operations:Loss from operations of discontinued operations, net of tax
    
    
    
    
    
    
    (627
    )Net income
    
    $
    720
    
    
    $
    444Basic earnings per share:Continuing operations
    
    $
    0.01
    
    
    $
    0.02Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Net income per share
    
    $
    0.01
    
    
    $
    0.01Diluted earnings per share:Continuing operations
    
    $
    0.01
    
    
    $
    0.01Discontinued operations
    
    
    0.00
    
    
    
    0.00Net income per share
    
    $
    0.01
    
    
    $
    0.01Weighted
average common shares outstanding  basic
    
    
    70,593,614
    
    
    
    70,983,164Weighted average common shares outstanding  fully diluted
    
    
    72,494,535
    
    
    
    73,073,801
 See accompanying notes to unaudited condensed consolidated financial statements. 4




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S1 CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    720
    
    
    $
    444Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    3,794
    
    
    
    3,546Provision for doubtful accounts receivable and billing adjustments
    
    
    1,150
    
    
    
    605Changes in assets and liabilities, excluding effects of acquisitions:Increase in accounts receivable
    
    
    (9,233
    )
    
    
    (9,050
    )Decrease (increase) in prepaid expenses and other assets
    
    
    1,320
    
    
    
    (969
    )Decrease in accounts payable
    
    
    (879
    )
    
    
    (186
    )Decrease in accrued expenses and other liabilities
    
    
    (10,148
    )
    
    
    (10,258
    )Increase in deferred revenues
    
    
    8,227
    
    
    
    3,606Net cash used in operating activities
    
    
    (5,049
    )
    
    
    (12,262
    )Cash flows from investing activities:Maturities of short-term investment securities
    
    
    12,000
    
    
    
    18,688Purchases of short-term investment securities
    
    
    (5,665
    )
    
    
    (20,586
    )Purchases of property, equipment and technology
    
    
    (2,043
    )
    
    
    (2,093
    )Net cash provided by (used in) investing activities
    
    
    4,292
    
    
    
    (3,991
    )Cash flows from financing activities:Proceeds from sale of common stock under employee stock purchase and
option plans
    
    
    277
    
    
    
    269Payments on capital lease obligations
    
    
    (367
    )
    
    
    (263
    )Repurchase of common stock held in treasury
    
    
    (1,641
    )
    
    
    (4,541
    )Net cash used in financing activities
    
    
    (1,731
    )
    
    
    (4,535
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (204
    )
    
    
    (58
    )Net decrease in cash and cash equivalents
    
    
    (2,692
    )
    
    
    (20,846
    )Cash and cash equivalents at beginning of period
    
    
    43,223
    
    
    
    76,713Cash and cash equivalents at end of period
    
    $
    40,531
    
    
    $
    55,867Noncash investing and financing activities:Property and equipment acquired through leases
    
    $
    
    
    
    $
    615
 See accompanying notes to unaudited condensed consolidated financial statements. 5




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S1 CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION S1 Corporation is a global provider of enterprise software solutions for financial
organizations including banks, credit unions, investment firms and insurance companies. We operate
and manage S1 in two business segments: financial institutions, which is our core business
segment, and the Edify business. Our financial institution solutions automate transactions and
integrate the channels by which financial institutions interact with their customers. Our objective
is to be the leading global provider of integrated enterprise solutions that enable financial
institutions to improve the way they service their customers by integrating all delivery channels,
expanding the total financial relationship and increasing profits. We sell our solutions to small,
mid-sized and large financial organizations in two geographic regions: (i) the Americas region, and
(ii) the International region, consisting of Europe, Middle East and Africa (EMEA) and Asia-Pacific
and Japan (APJ). Through our Edify business segment, we deliver voice and speech solutions for the enterprise.
Edifys solutions help companies automate their customer service facilities, improve customer
satisfaction and create new revenue generating opportunities, while reducing operational costs.
Edifys voice and speech applications are scalable, multilingual and flexible, allowing companies
to easily integrate multiple back-end systems with a variety of contact interfaces. Edifys voice
and speech solutions combine speech recognition, speaker verification, text-to-speech, fax, and
touch-tone automation with a powerful application development environment and natural language
capabilities to help organizations optimize customer service while lowering costs. Edifys
products are sold across multiple vertical markets including financial services, travel, retail and
telecommunications. We derive a significant portion of our revenues from licensing our solutions and providing
professional services. We generate recurring data center revenues by charging our data center
customers a monthly fixed fee or a fee based on the number of their end users who use the solutions
we provide and the level of use of the solutions, subject to a minimum charge. We also generate
recurring revenues by charging our customers a periodic fee for maintenance. We also generate
recurring revenues by charging our customers a periodic fee for term licenses including the
right-to-use software and receive maintenance and support for a specified period of time. S1 is headquartered in Atlanta, Georgia, USA, with additional domestic offices in Boston,
Massachusetts; Charlotte, North Carolina; Austin, Texas; Deerfield Beach, Florida; Rochester, New
York; West Hills, California and Santa Clara, California; and international offices in Brussels,
Beijing, Capetown, Dublin, Hong Kong, Lisbon, London, Luxembourg, Madrid, Melbourne, Munich, Paris,
Pune, Rotterdam and Singapore. S1 is incorporated in Delaware. We have prepared the accompanying unaudited condensed consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not contain all of the information and footnotes required
by accounting principles generally accepted in the United States of America for complete financial
statements and should be read in conjunction with the consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. In our
opinion, the accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered necessary for a fair
presentation of our financial condition as of March 31, 2005 and our results of operations for the
three months ended March 31, 2005 and cash flows for the three months ended March 31, 2005. The
data in the condensed consolidated balance sheet as of December 31, 2004 was derived from our
audited consolidated balance sheet as of December 31, 2004, as presented in our Annual Report on
Form 10-K for the year ended December 31, 2004. The condensed consolidated financial statements
include the accounts of S1 and its wholly owned subsidiaries after the elimination of all
significant intercompany accounts and transactions. We reclassified certain amounts in the prior
years consolidated financial statements to conform to the current year presentation. Our
operating results for the three months ended March 31, 2005 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 2005. 6




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2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies are included in the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended December 31, 2004. Recent accounting pronouncements On December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (SFAS 123R)
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Statement 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. SFAS 123R requires all share-based payments to employees to be
recognized in the income statement based on their grant date fair values over the corresponding
service period and also requires an estimation of forfeitures when calculating compensation
expense. We will adopt SFAS No. 123R on January 1, 2006 using the modified prospective method. Stockbased compensation We account for our stock option plans in accordance with the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations and comply with the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148.
As such, we record compensation expense on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. Additionally, if a modification is made to an
existing grant, any related compensation expense is calculated on the date both parties accept the
modification and recorded on the date the modification becomes effective. Otherwise, we do not
record stock compensation expense when we grant stock options to S1 employees. In the three months ended March 31, 2004 and 2005, we did not recognize any compensation
expense relating to stock options. Had we determined compensation expense based on the fair value
at the grant date for our stock options and stock purchase rights under SFAS No. 123, our net
income would have changed to the unaudited pro forma amounts indicated below: Three Months Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    720
    
    
    $
    444Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (3,240
    )
    
    
    (6,263
    )Pro forma net loss
    
    $
    (2,520
    )
    
    $
    (5,819
    )Basic and diluted net income (loss) per common share:As reported
 basic
    
    $
    0.01
    
    
    $
    0.01As reported  diluted
    
    
    0.01
    
    
    
    0.01Pro forma
    
    
    (0.04
    )
    
    
    (0.08
    )
 The effect of applying SFAS No. 123 for providing these pro forma disclosures is not
necessarily representative of the effects on reported net income (loss) in future periods. 7




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The fair value of our stock-based option awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions: 2005
    
    
    2004Expected volatility
    
    
    88.7
    %
    
    
    108.4
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    3.0
    %Expected life
    
    3.8 years
    
    
    4.0 years
 3. DISCONTINUED OPERATIONS On November 1, 2004, we completed the sale of our wholly owned subsidiary, Davidge Data
Systems, Inc., a component of our financial institutions segment. We have accounted for the
disposal of Davidge as discontinued operations in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. As such, Davidge results for prior year periods are
presented in the discontinued operations section of the consolidated statement of operations. Revenues and loss from discontinued operations are as follows (in thousands): Three Months EndedMarch 31,2004Revenues
    
    $
    1,794Loss from discontinued operations
    
    $
    (627
    )
 4. GOODWILL AND OTHER INTANGIBLE ASSETS At March 31, 2005, our other intangible assets consisted of the following: Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,489
    
    
    $
    (7,215
    )Customer relationships
    
    
    12,600
    
    
    
    (3,341
    )Total
    
    $
    32,089
    
    
    $
    (10,556
    )
 We recorded amortization expense of $0.8 million and $1.2 million during the three months
ended March 31, 2004 and 2005, respectively. We estimate aggregate amortization expense for 2005
and the next four calendar years to be as follows (in thousands): 2005
    
    2006
    
    2007
    
    2008
    
    2009Financial institutions business segment
    
    $4,931
    
    $4,931
    
    $3,990
    
    $3,165
    
    $2,200
 The changes in the carrying value of our goodwill for the three months ended March 31, 2005 are as follows: FinancialInstitutions
    
    
    Edify
    
    
    Total(In thousands)Balance, January 1, 2005
    
    $
    112,813
    
    
    $
    4,886
    
    
    $
    117,699Purchase price adjustment
    
    
    178
    
    
    
    
    
    
    
    178Utilization of acquisition related
income tax benefits
    
    
    (91
    )
    
    
    
    
    
    
    (91
    )Balance, March 31, 2005
    
    $
    112,900
    
    
    $
    4,886
    
    
    $
    117,786
 8




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5. STOCKHOLDERS EQUITY In July 2002, our board of directors approved a $10.0 million stock repurchase program to
enhance long-term shareholder value. We completed this program in January 2003. Under this
program, we repurchased 2,051,862 shares of our common stock at a cost of $10.0 million and at an
average price of $4.87 per share. In October 2003, our board of directors approved another $15.0 million stock repurchase
program to offset the dilution of our common stock from shares granted under our employee stock
option plans. This program was funded from available cash and short-term investments. During the
first quarter of 2005, we repurchased 229,910 shares at a cost of $1.6 million. As of March 31,
2005, we had repurchased 1,722,159 shares of our common stock at a cost of $13.2 million under this
program and at an average price of $7.69 per share. As of March 31, 2005, we are authorized to
purchase an additional $1.8 million of our common stock at market prices. As of March 31, 2005, we hold 3,774,021 shares of our common stock in treasury at a cost of
$23.2 million. 6. COMPREHENSIVE INCOME The components of comprehensive income are as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    720
    
    
    $
    444Foreign currency translation adjustment
    
    
    (686
    )
    
    
    182Unrealized loss on cash flow hedges
    
    
    (34
    )
    
    
    Comprehensive income
    
    $
    
    
    
    $
    626
 7. DERIVATIVE FINANCIAL INSTRUMENTS We use derivative financial instruments to manage certain exposures to fluctuations in foreign
currency to mitigate the risk that changes in exchange rates will adversely affect the eventual
dollar cash flows resulting from the hedged transactions with a series of foreign currency options.
Designation is performed on a specific exposure basis to support hedge accounting. The changes in
fair value of these hedging instruments will be offset in part or in whole by corresponding changes
in the cash flows of the underlying exposures being hedged. We do not hold or issue derivative
financial instruments for trading purposes. We entered into a long-term hosting agreement with a customer wherein S1 will provide the
customer with hosting services for a period of approximately four years. Our costs associated with
those services are denominated in United States Dollars (USD) and the customer will pay us in
British Pounds Sterling (GBP). In this arrangement, ordinary fluctuations in currency exchange
rates could adversely impact our profit margin on the hosting agreement. Consequently, during the
quarter ended March 31, 2005, we purchased a series of options to exchange USD for GBP at dates
throughout the term of the agreement for amounts proportional to the minimum fees under the
contract. The foreign currency options are designated as cash flow hedges and are deemed effective in
the period ended March 31, 2005. Any mark-to-market gains or losses on these currency options are
included in accumulated other comprehensive income (loss) to the extent effective, and reclassified
into sales in the period during which a specific hedged transaction affects earnings. 9




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For the quarter ended March 31, 2005, we recorded a decrease in Accumulated Other
Comprehensive Income (AOCI) of approximately $34,000 related to losses on the foreign currency cash
flow hedge. The following table summarizes activity in AOCI related to derivatives designated as cash flow hedges held by S1
during the applicable periods (in thousands): Three MonthsEndedMarch 31, 2005Accumulated derivative net loss as of January 1, 2005
    
    $
    Net change in fair value of derivatives
    
    
    (34
    )Net losses reclassified from AOCI into earnings
    
    
    Accumulated derivative net losses as of March 31, 2005
    
    $
    (34
    )
 Financial instruments held as part of the hedging transaction discussed above are recorded at
fair value based upon comparable market transactions as quoted by the broker. The fair value and
carrying amount of the options totaled $245,000 as of March 31, 2005. The options have various
maturity dates ranging from June 30, 2005 to March 31, 2009. Deferred currency option premiums are
included in other assets. 8. RESTRUCTURING CHARGES The restructuring reserves as of December 31, 2004 and March 31, 2005 and their utilization
for the three months ended March 31, 2005 are summarized as follows: Lease Costs(In thousands)Balance, December 31, 2004
    
    $
    8,126Amounts paid
    
    
    (810
    )Balance, March 31, 2005
    
    $
    7,316
 We expect to make future cash expenditures, net of anticipated sublease income, related to
these restructuring activities of approximately $7.3 million, of which we anticipate to pay
approximately $3.0 million within the next twelve months. 9. CONTINGENCIES Litigation Except as noted below, there are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which S1, or any of its subsidiaries is a party
or which their property is subject. As previously reported, S1 Corporation is involved in litigation with Tradecard, Inc. relating
to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the
Southern District of New York. The action was filed in March 2003 against S1 Corporation, Bank of
America Corporation and Bank of America National Association. We believe that the plaintiffs
claims are not meritorious and intend to vigorously defend the suit. There can be no assurance on
the ultimate outcome of this matter. An adverse judgment could be material to our financial
position and results of operations. Warranties We typically warrant to our customers that our product will substantially conform to our
current specifications for 90 days from the delivery date. We also defend our customers from third
party actions claiming of intellectual property infringement relating to the use of our products.
Historically, costs related to these guarantees have not been significant and we are unable to
estimate the potential impact of these guarantees on our future results of operations. 10




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10. SEGMENT REPORTING AND MAJOR CUSTOMERS We operate and manage S1 in two business segments: financial institutions, our core business
segment, and the Edify business. The financial institutions segment develops, markets and
implements integrated, transactional and brandable enterprise applications for small, mid-sized and
large financial institutions and businesses interacting with these
institutions worldwide, available as in-house or hosted solutions. The Edify
business segment provides a variety of voice and speech recognition applications that help
organizations globally in a wide range of industries (including retail, telecommunications and
travel) increase customer retention through automation and improved operational effectiveness. We evaluate the performance of our operating segments based on their contribution before
interest, other income and income taxes, as reflected in the tables presented below for the three
months ended March 31, 2005 and 2004. We do not use any asset-based metrics to measure the
operating performance of our segments. We have entered into reseller arrangements between our operating segments to sell the Edify
IVR product to financial institutions and the S1 CRM application to non-financial institutions.
Under these arrangements, intercompany revenues and intercompany expenses are recorded in each
operating segment. These revenues and expenses are eliminated in consolidation. The table below
represents intercompany revenues recorded in each business segment. Three Months EndedMarch 31,2005
    
    
    2004Financial institutions
    
    $
    43
    
    
    $
    56Edify
    
    
    537
    
    
    
    600
 The following table shows revenues by revenue type for our operating segments: Three Months Ended March 31, 2005FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    55,478
    
    
    $
    7,516
    
    
    $
    (580
    )
    
    $
    62,414Operating expenses:Direct costs
    
    
    23,198
    
    
    
    2,535
    
    
    
    (580
    )
    
    
    25,153Selling and marketing
    
    
    7,512
    
    
    
    2,283
    
    
    
    
    
    
    
    9,795Product development
    
    
    12,283
    
    
    
    1,518
    
    
    
    
    
    
    
    13,801General and administrative
    
    
    7,866
    
    
    
    942
    
    
    
    
    
    
    
    8,808Depreciation
    
    
    2,408
    
    
    
    152
    
    
    
    
    
    
    
    2,560Amortization of other intangible assets
    
    
    1,234
    
    
    
    
    
    
    
    
    
    
    
    1,234Total operating expenses
    
    
    54,501
    
    
    
    7,430
    
    
    
    (580
    )
    
    
    61,351Segment operating income
    
    $
    977
    
    
    $
    86
    
    
    $
    
    
    
    $
    1,063
 Three Months Ended March 31, 2004FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    47,365
    
    
    $
    9,405
    
    
    $
    (656
    )
    
    $
    56,114Operating expenses:Direct costs
    
    
    20,548
    
    
    
    3,648
    
    
    
    (656
    )
    
    
    23,540Selling and marketing
    
    
    5,259
    
    
    
    2,805
    
    
    
    
    
    
    
    8,064Product development
    
    
    12,108
    
    
    
    1,556
    
    
    
    
    
    
    
    13,664General and administrative
    
    
    4,930
    
    
    
    975
    
    
    
    
    
    
    
    5,905Depreciation
    
    
    2,405
    
    
    
    216
    
    
    
    
    
    
    
    2,621Amortization of other intangible assets
    
    
    761
    
    
    
    75
    
    
    
    
    
    
    
    836Total operating expenses
    
    
    46,011
    
    
    
    9,275
    
    
    
    (656
    )
    
    
    54,630Segment operating income
    
    $
    1,354
    
    
    $
    130
    
    
    $
    
    
    
    $
    1,484
 11




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##### Table of Contents



Currently, we have one major customer in the financial institutions segment (defined as
any customer who individually contributes more than 10% of total revenues). We derived 20% and 23%
of our financial institutions segment revenues from State Farm Mutual Automobile Insurance Company
during the three months ended March 31, 2004 and 2005, respectively. 11. NET INCOME PER COMMON SHARE Net income has been allocated to the common and preferred stock based on their respective
rights to share in dividends. Net losses are not allocated to preferred stock, as there is no
contractual obligation for the holders of the participating preferred stock to share in our losses.
We excluded the preferred convertible stock from diluted earnings per share under the if-converted
method because the effect is anti-dilutive. 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 S1. Three Months EndedMarch 31,2005
    
    
    2004(in thousands, except per share data)Basic earnings per share:Income from continuing operations
    
    $
    720
    
    
    $
    1,071Amount allocated to participating preferred stockholders
    
    
    (11
    )
    
    
    (16
    )Income from continuing operations
available to common stockholders  basic
    
    $
    709
    
    
    $
    1,055Weighted average common shares outstanding
    
    
    70,594
    
    
    
    70,983Basic earnings per share
    
    $
    0.01
    
    
    $
    0.02Diluted earnings per share:Income from continuing operations
    
    $
    720
    
    
    $
    1,071Amount allocated to participating preferred stockholders
    
    
    (11
    )
    
    
    (16
    )Income from continuing operations
available to common stockholders  diluted
    
    $
    709
    
    
    $
    1,055Weighted average common shares outstanding
    
    
    70,594
    
    
    
    70,983Weighted average effect of common stock equivalents:Stock options
    
    
    1,901
    
    
    
    2,091Convertible preferred stock
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    72,495
    
    
    
    73,074Diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
 12




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##### Table of Contents



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 Annual
Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission. 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 condensed
consolidated financial statements and notes appearing elsewhere herein and in our Annual Report on
Form 10-K for the year ended December 31, 2004. Overview We operate and manage S1 in two business segments: our core business in financial services
and the Edify business in the voice/speech solutions market. We sell our solutions primarily to
traditional financial services providers, such as banks and insurance companies, as well as
non-traditional financial providers, such as retailers. Our solutions address the needs of small,
mid-sized and large financial organizations. We derive a significant portion of our revenues from
licensing our solutions and providing professional services. We generate recurring revenue from
support and maintenance as well as from hosting revenue related to hosting applications sold to
customers in our data center. We also generate recurring revenues by charging our customers a
periodic fee for term licenses including the right-to-use software and receive maintenance and
support for a specified period of time. In discussions with our customers and investors, we use
the term subscription as being synonymous with a term license. We intend to license Enterprise
Platform Version 3, Lending, Foreign Exchange, Financial Reporting and Analytics and our suite of
Community and Regional products and future versions as well as certain other applications primarily
on a subscription basis wherein revenue will be recognized evenly over the term of the contract. We sell our solutions to small, mid-sized and large financial organizations in two geographic
regions: (i) the Americas region and (ii) the International region, consisting primarily of Europe,
the Middle East region and Africa (EMEA) and the Asia-Pacific region and Japan (APJ). Our S1
Enterprise solutions target banks, credit unions and insurance companies. We have over 4,000
financial institution customers, the majority of which are located in the United States. Through our Edify business segment, we deliver voice and speech solutions for companies in a
wide range of industries. Edifys products help companies automate their customer service
facilities, improve customer satisfaction and create new revenue generating opportunities, while
reducing operational costs. Edifys voice and speech applications are scalable, multilingual and
flexible, allowing companies to easily integrate multiple back-end systems with a variety of
customer contact center applications interfaces. Edifys voice and speech solutions combine speech
recognition, speaker verification, text-to-speech, fax, and touch-tone automation with a powerful
application development environment and natural language capabilities to help organizations
optimize customer service while lowering costs. Throughout 2004 and the first quarter of 2005, we continued to invest in the development of
the integrated S1 Enterprise Platform as the technology foundation for the S1 Enterprise family of
products. In 2003, we released for general availability additional applications for the S1
Enterprise Platform including: retail Internet banking, small business Internet banking and
corporate cash management. The third major release of S1 Enterprise, in August 2004, added a
number of new applications to the S1 Enterprise Platform, including S1 Enterprise Teller, S1
Enterprise Sales and Service Platform, S1 Enterprise Call Center, S1 Enterprise Voice (powered by
Edify) and S1 Enterprise Analytics and for the first time, all the S1 Enterprise applications can
be sold and delivered as an integrated product set. As of March 31, 2005, over 190 financial
institutions have purchased one or more of our Enterprise applications. In the fourth quarter of 2004, we acquired Mosaic Software Holdings, Limited, a United Kingdom
based provider of solutions that drive ATM/ point-of-sale and electronic payment networks. We
believe the acquisition will add a leading financial transaction solution to S1s suite of products
and will enable S1 to offer financial services providers an ATM channel solution along with the S1
Enterprise integrated front-office suite. We paid cash consideration of $37.0 million upon the
closing of the transaction and committed to pay up to an additional $15.0 million in cash for
earn-out payments upon Mosaic 13




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##### Table of Contents



achieving certain financial metrics during its fiscal year ending May 31, 2005. Any
additional consideration will be accounted for as additional purchase price and will increase the
amount of goodwill associated with Mosaic in the period in which such payment becomes issued or
issuable. In the third quarter of 2004, we acquired X/Net Associates, Inc., a Rochester, New York based
provider of lending solutions. We believe this acquisition will strengthen our product offering
around lending solutions and accelerate the development of additional lending functionality. In
September 2004, we announced general availability of our S1 Lending Solutions product. We paid
cash consideration of $4.0 million for this business. Under the agreement, additional
consideration may be paid to one shareholder of X/Net, who is also an S1 employee, if certain
financial metrics are achieved. There is a maximum of $1.0 million that can be earned in the period
from August 1, 2004 through July 31, 2005 and $2.0 million that can be earned in the period from
August 1, 2005 through July 31, 2006. We will record any such contingent consideration as
compensation expense in the period it becomes issued or issuable. In the second quarter of 2004, we purchased a business unit from vMoksha Technologies, Private
Limited in order to establish a wholly owned software development center in Pune, India.
Previously, this business unit provided software development, programming and other related
services for S1. We believe this acquisition will reduce our costs and provide greater flexibility
and control over the quality of the development and professional services efforts from this center.
We paid cash consideration of approximately $1.2 million for the business unit. Comparison of the Three Months Ended March 31, 2005 and 2004 Our results of operations for the three months ended March 31, 2005 included the acquired
Mosaic business which was purchased during the fourth quarter of 2004 and the X/Net business which
was purchased during the third quarter of 2004. Revenues.The following table sets forth our revenue data for the three months ended March
31, 2005 and 2004. Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalQuarter Ended
March 31, 2005:Core FI business
    
    $
    11,415
    
    
    $
    13,566
    
    
    $
    20,521
    
    
    $
    9,664
    
    
    $
    312
    
    
    $
    55,478Edify
    
    
    2,050
    
    
    
    4,670
    
    
    
    796
    
    
    
    
    
    
    
    
    
    
    
    7,516Eliminations
    
    
    (219
    )
    
    
    (361
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )Total
    
    $
    13,246
    
    
    $
    17,875
    
    
    $
    21,317
    
    
    $
    9,664
    
    
    $
    312
    
    
    $
    62,414Quarter Ended March
31, 2004:Core FI business
    
    $
    8,603
    
    
    $
    10,921
    
    
    $
    17,741
    
    
    $
    9,110
    
    
    $
    990
    
    
    $
    47,364Edify
    
    
    3,306
    
    
    
    4,431
    
    
    
    1,668
    
    
    
    
    
    
    
    
    
    
    
    9,406Eliminations
    
    
    (308
    )
    
    
    (288
    )
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (656
    )Total
    
    $
    11,601
    
    
    $
    15,064
    
    
    $
    19,349
    
    
    $
    9,110
    
    
    $
    990
    
    
    $
    56,114
 Total revenues increased by $6.3 million, or 11%, to $62.4 million for the three months
ended March 31, 2005 compared to $56.1 million for the same period in 2004. Our financial
institutions segment generated revenues of $55.5 million for the quarter ended March 31, 2005
compared with $47.4 million for the same period in 2004. Revenues for our Edify business were $7.5
million for the three months ended March 31, 2005 compared with $9.4 million for the same period in
2004. The overall increase in revenues is primarily attributable to the revenues earned by the
acquired Mosaic business, offset in part by a decline in revenues from our Edify business. Software license revenues for our financial institutions segment were $11.4 million for the
three months ended March 31, 2005, an increase of $1.6 million from the same period in 2004 due to
license revenues earned from the acquired Mosaic business, offset in part by a decline in perpetual
license revenues in the existing business. In 2005, we intend to license Enterprise Platform
Version 3, Lending, Foreign Exchange, Financial Reporting and Analytics and our suite of Community
and Regional products and future versions as well as certain other applications primarily on a
subscription basis.  Subscription license revenue is recognized
evenly over the term of the contract which is typically between 12
and 48 months whereas perpetual license revenue is generally
recognized upon execution of the contract and delivery or on a
percentage of completion basis over the installation period.
Subscription license revenues recorded in the first quarter of 2005
and 2004 were $0.9 million and
$0.3 million, respectively. These subscription, or term, licenses combine the right to use the
licensed software and the right to receive support and maintenance and unspecified enhancements
into one periodic fee and typically do not transfer the right to use at the end of its initial
term. During 2005, we expect to continue to 14




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recognize perpetual license revenue through sales of our legacy products, including add-on
sales to customers with existing perpetual licenses, as well as
through our reseller channels. As the ratio of subscription license
sold increases, the amount of license revenue for any given period
could decrease which could also decrease earnings. We believe the
long term benefits of recurring subscription revenue outweigh any
temporary impact on license revenue and earnings. Software license revenue of $2.1 million for our Edify business for the three months ended
March 31, 2005 decreased $1.3 million from the same period in 2004. This decrease primarily
resulted from lower volumes of direct sales due to turnover in the sales force. While we expect
this decrease to be temporary, we expect Edifys license revenues in 2005 to be lower than 2004 as
the sales force rebuilds. Edifys products are sold on a perpetual license model. Support and maintenance revenues for our financial institutions segment were $13.6 million for
the three months ended March 31, 2005 as compared to $10.9 million for the same period in 2004.
The increase is primarily attributable to support and maintenance fees earned from customers who
purchased licenses during 2004 and support and maintenance fees earned from the acquired Mosaic
business. We believe that support and maintenance revenues from our financial institutions segment
will grow sequentially each quarter. However, as subscription licenses include the right to
receive support and maintenance, growth in subscription licenses will tend to diminish support and
maintenance revenues over time. Support and maintenance revenues for the Edify business were $4.7 million for the three months
ended March 31, 2005, an increase of $0.2 million from the same period in 2004. Professional services revenues for our financial institutions segment were $20.5 million for
the three months ended March 31, 2005, an increase of $2.8 million from the same period in 2004.
This increase is principally attributable to the increase in professional services revenues from
our largest customer and revenues from the acquired Mosaic business. Services revenue in any one
quarter can be impacted by one or two large customer projects and therefore can increase or
decrease based on the projects. The Edify business recorded $0.8 million for professional services revenues during the first
quarter of 2005, a decrease of $0.9 million from $1.7 million for the first quarter of 2004. This
decrease is attributable to the increase in sales through partners where the partners provide the
professional services to the customer. Data center revenues were $9.7 million for the three months ended March 31, 2005, an increase
of $0.6 million from the same period in 2004. The increase resulted from increases in the number of
hosted customers. As we add hosted customers on our S1 Enterprise products and our existing
customer base grows, we expect data center revenues to increase on a sequential quarter basis
throughout 2005. Other revenues are primarily related to the sale of third party hardware and software that is
used in connection with our products. Other revenue fluctuates based on the mix of products and
services sold and is not typical in our sales arrangements. In the first quarter of 2004, we
recorded $0.8 million in other revenue for third-party hardware delivered from inventory to one
financial institution customer. The related cost of the hardware sold is included in cost of other
revenue as the hardware is delivered. There is only minimal gross margin associated with other
revenue. Direct Costs and Gross Margins.Direct costs increased by $1.6 million to $25.2 million for
the three months ended March 31, 2005 from the same period in 2004. Overall gross margins were 60%
and 58% for the three months ended March 31, 2005 and 2004, respectively. The overall increase in
direct costs and gross margins is a result of revenues growing at a rate higher than direct costs. Direct costs exclude charges for depreciation of property and equipment and the amortization
of purchased technology. Cost of software licenses for our products sold in our financial institution segment are
generally minimal because we internally develop most of the software components, the cost of which
is reflected in product development expense as it is incurred. The cost of software licenses could
increase in future periods as we license and install more of our new S1 Enterprise products. These
products include software components that we license from third parties. However, cost of software
licenses will continue to vary with the mix of products sold. Software license costs for the Edify business decreased $0.4 million for the three month
period ended March 31, 15




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##### Table of Contents



2005 versus the prior year period due to a reduction in license revenues and the associated
cost. Costs of professional services, support and maintenance consist primarily of personnel and
related infrastructure costs. Direct costs associated with professional services, support and
maintenance were $20.0 million for the three months ended March 31, 2005, an increase of $3.1
million from $16.9 million for the same period in 2004. Costs associated with certain services
projects that were accrued in 2003 were released in the first quarter of 2004 resulting in a $2.1
million reduction of expenses. Additionally, a portion of the first quarter 2005 increase was
attributable to the acquired Mosaic business. Costs of data center consist of personnel costs, facility costs and related infrastructure
costs to support our data center business. Direct data center costs decreased $0.2 million to $4.2
million for the three months ended March 31, 2005 from $4.4 million for same period in 2004. Gross
margins for the data center increased from 52% in 2004 to 57% in 2005. Data center margins are
expected to be between 55% and 58% for the remainder of 2005. Selling and Marketing Expenses.Total selling and marketing expenses increased by $1.7 million
to $9.8 million for the three months ended March 31, 2005 from $8.1 million for the same period in
2004. This increase is primarily attributable to expenses related to the acquired Mosaic business. Product Development Expenses.Total product development expenses increased by $0.1 million to
$13.8 million for the three months ended March 31, 2005 from $13.7 million for the same period in
2004. This increase is primarily attributable to an increase in product development headcount and
the expenses related to the acquired Mosaic business, offset in part by a decrease in the use of
outside contractors. As a percentage of revenues, product development expenses were 22% and 24% in
the first quarter of 2005 and 2004, respectively. We expect this percentage to decrease in 2005. Historically we have not capitalized software development costs because of the insignificant
amount of costs incurred between technological feasibility and general customer release. However,
if the amount of time between the completion of beta testing and general customer release
lengthens, we may be required to capitalize certain software development costs in the future. General and Administrative Expenses.General and administrative expenses increased by $2.9
million to $8.8 million for the three months ended March 31, 2005 from $5.9 million for the same
period in 2004. As a percentage of revenues, general and administrative expenses were 14% and 11%
for the three months ended March 31, 2005 and 2004, respectively. The increase in general and
administrative expenses is attributable to an increase in headcount and professional accounting
fees related to compliance with the Sarbanes-Oxley Act of 2002, offset in part by a decrease in
legal fees related to corporate development activities and litigation matters in which we were
involved in 2004. Depreciation.Depreciation was $2.6 million for the each of the three month periods ended
March 31, 2005 and 2004. We expect depreciation expense to be approximately $2.6 million each
quarter for the remainder of 2005. Amortization of Other Intangible Assets.Amortization of other intangible assets increased
$0.4 million to $1.2 million for the three months ended March 31, 2005 from $0.8 million for same
period in 2004. Amortization expense is expected to be approximately $1.2 million each quarter for
the remainder of 2005. Interest and Other Income, Net.Interest and other income net was $135,000 and $47,000 for the
three months ended March 31, 2005 and 2004, respectively. Income Tax Expense.We recorded income tax expense of $0.5 million during each of the three
month periods ended March 31, 2005 and 2004. Although we have fully reserved net deferred tax assets of approximately $206.2 million as of
December 31, 2004 primarily related to our net operating loss carryforwards (NOLs) and tax credit
carryforwards, from time-to-time we are required to record an income tax provision in periods:  
    for tax expense in certain subsidiaries or jurisdictions for which do not have
NOLs to utilize;
    in the United States due to limitations on the use of our federal NOLs for
alternative minimum tax purposes 16




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which will be paid in cash; or
    if there are NOLs that were acquired as part of a business combination, upon
which we placed a valuation allowance at acquisition date. This results in non-cash
income tax expense as goodwill is reduced and the valuation allowance is released. We incurred foreign income tax expense in certain European countries in the first quarter of
2005 and 2004. In 2005 and 2004, we recorded alternative minimum tax expense for components of our
domestic operations as a result of limitations on the use of our federal NOLs. In 2005, some
components of our domestic operations incurred income tax expense at regular statutory rates
because they are not included in our consolidated federal income tax return and therefore do not
benefit from our federal NOLs. Approximately $0.1 million of our income tax expense in 2005
resulted from the release of the valuation allowance against pre-acquisition NOLs and does not
represent anticipated cash taxes to be paid. At December 31, 2004, we had a valuation allowance of $206.2 million on our deferred tax
assets. If we continue to sustain profitability during 2005, we may make a determination to
reverse the valuation allowance related to domestic net operating loss carryforwards in the latter
part of 2005 or early 2006. A portion of this reversal could have a positive impact on our income
tax benefit and our earnings in the period in which it is reversed. Loss from discontinued operations.We recorded a loss from discontinued operations of $0.6
million in the first quarter of 2004 related to our Davidge operations which was sold in November
2004. Liquidity and Capital Resources The following tables show information about our cash flows during the three months ended March
31, 2005 and 2004 and selected balance sheet data as of March 31, 2005 and December 31, 2004: Three Months Ended March 31,2005
    
    
    2004(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    5,664
    
    
    $
    4,595Change in operating assets and liabilities
    
    
    (10,713
    )
    
    
    (16,857
    )Net cash used in operating activities
    
    
    (5,049
    )
    
    
    (12,262
    )Net cash provided by (used in) investing activities
    
    
    4,292
    
    
    
    (3,991
    )Net cash used in financing activities
    
    
    (1,731
    )
    
    
    (4,535
    )Effect of exchange rates on cash and cash equivalents
    
    
    (204
    )
    
    
    (58
    )Net decrease in cash and cash equivalents
    
    $
    (2,692
    )
    
    $
    (20,846
    )
 As ofMarch 31, 2005
    
    
    December 31, 2004(In thousands)Cash and cash equivalents
    
    $
    40,531
    
    
    $
    43,223Short term investments
    
    
    58,913
    
    
    
    65,248Working capital
    
    
    105,052
    
    
    
    105,232Total assets
    
    
    336,437
    
    
    
    340,881Total stockholders equity
    
    
    253,632
    
    
    
    254,996
 Operating Activities.During the three months ended March 31, 2005, cash used in operations
was $5.0 million compared to $12.3 million for same period in 2004. The improvement in net cash
flows from operating activities generally reflects the effects of changes in operating assets and
liabilities and our improved operating results. Changes in operating assets and liabilities,
especially trade accounts receivable, trade accounts payable and accrued expenses, are generally
the result of timing differences between the collection of fees billed and payment of operating
expenses. Cash used in operations for the three months ended March 31, 2005 included the effects of:  
    our net income of $0.7 million; 17




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
    non-cash charges of $3.8 million of depreciation and amortization;
    provision of doubtful accounts receivable and billing adjustments of $1.2 million;
    a decrease in accrued expenses and other liabilities of $10.1 million, approximately
$4.7 million related to the payment of annual expenses, including annual employee
bonuses and incentive pay;
    an increase of $9.2 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
and
    changes in other operating assets and liabilities of $8.7 million. Cash used in operations for the three months ended March 31, 2004 included the effects of:  
    our net income of $0.4 million;
    non-cash charges of $3.5 million of depreciation and amortization;
    provision of doubtful accounts receivable and billing adjustments of $0.6 million;
    a decrease in accrued expenses and other liabilities of $10.3 million, including a
$4.5 million payment for a settlement and approximately $3.0 million related to the
payment of annual expenses, including annual employee bonuses and incentive pay;
    an increase of $9.1 million in accounts receivable due to the timing of billings and
receipts of payment during the quarter; and changes in other operating assets and
liabilities of $2.5 million Investing Activities.Cash provided investing activities was $4.3 million for the three months
ended March 31, 2005 compared to cash used in investing activities of $4.0 million in the same
period in 2004. In the first three months of 2005, we:  
    converted $6.3 million, net, from short-term investments to cash and cash equivalents; and
    purchased $2.0 million of property and equipment. In the first three months of 2004, we:  
    converted $1.9 million, net, from cash and cash equivalents to short-term investments; and
    purchased $2.1 million of property and equipment. In connection with the acquisition of Mosaic, we agreed to pay additional consideration of
$15.0 million if certain financial metrics were achieved. At March 31, 2005, the achievement of
these metrics is likely and we expect to make this payment in the third quarter of 2005. Financing Activities.Cash used in financing activities was $1.7 million for the three months
ended March 31, 2005 compared to $4.5 million in same period in 2004. In the first three months of 2005 and 2004, we received $0.3 million from the sale of common
stock under our employee stock option plans. We paid $0.4 million and $0.3 million, respectively,
for capital lease obligations in the three months ended March 31, 2005 and 2004. In the first
quarter of 2005 and 2004, we repurchased $1.6 million and $4.5 million, respectively, of our common
stock. In October 2003, our board of directors approved a $15.0 million stock repurchase program.
Purchases under this program have been funded from available cash and cash equivalents. Through
March 31, 2005, we had repurchased 1.7 million shares of our common stock for $13.2 million under
this program. We completed this stock repurchase program in the second quarter of 2005. We believe that our expected cash flows from operations together with our existing cash and
short term investments 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 issue
debt securities or establish a 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 that financing will be available in amounts or on terms
acceptable to us, if at all. 18




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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 2004 Annual Report on Form 10-K. With the exception of the long term contract described
below, there have been no significant changes in our market risk from December 31, 2004. In general we do not use financial instruments to hedge our foreign exchange exposure because
the effect of the foreign exchange rate fluctuations are not material. We entered into a long-term
hosting agreement with a customer wherein S1 will provide the customer with hosting services for a
period of approximately four years. Our costs associated with those services are denominated in
United States Dollars (USD) and the customer will pay us in British Pounds Sterling (GBP). In this
arrangement, ordinary fluctuations in currency exchange rates could adversely impact our profit
margin on the hosting agreement. Consequently, during the quarter ended March 31, 2005, we
purchased a series of options to exchange USD for GBP at dates throughout the term of the agreement
for amounts proportional to the minimum fees under the contract. As of March 31, 2005, the fair
value of these options was $0.2 million. 
 Item 4.Controls and Procedures Evaluation of Disclosure Controls. Based on their evaluation as of the end of the period
covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial
Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported in within the time periods specified in
Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and
procedures were also effective in ensuring that information required to be disclosed in our
Exchange Act reports is accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer to allow timely decisions regarding required
disclosures. Changes in Internal Control over Financial Reporting. There have not been any changes in
the Companys internal control over financial reporting during the quarter ended March 31, 2005,
which have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting. 19




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PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings. Except as noted below, there are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which S1, or any of its subsidiaries is a party
or which their property is subject. As previously reported, S1 Corporation is involved in litigation with Tradecard, Inc. relating
to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the
Southern District of New York. The action was filed in March 2004 against S1 Corporation, Bank of
America Corporation and Bank of America National Association. We believe that the plaintiffs
claims are not meritorious and intend to vigorously defend the suit. There can be no assurance on
the ultimate outcome of this matter. An adverse judgment could be material to our financial
position and results of operations. 
 Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. Issuer Purchases of Equity Securities Total
    
    
    
    
    
    
    Total Number of Shares
    
    
    Approximate Dollar ValueNumber of
    
    
    
    
    
    
    Purchased as Part of
    
    
    of Shares that May Yet BeShares
    
    
    Average Price
    
    
    Publicly Announced Plans
    
    
    Purchased Under thePurchased
    
    
    Paid per Share
    
    
    or Programs
    
    
    Plans or ProgramsJanuary 1, 2005 to January 31, 2005
    
    
    5,910
    
    
    $
    8.02
    
    
    
    5,910
    
    
    $
    3,359,157February 1, 2005 to February 28, 2005
    
    
    10,000
    
    
    $
    7.95
    
    
    
    10,000
    
    
    $
    3,279,682March 1, 2005 to March 31, 2005
    
    
    214,000
    
    
    $
    7.08
    
    
    
    214,000
    
    
    $
    1,765,726Total
    
    
    229,910
    
    
    $
    7.14
    
    
    
    229,910
    
    
    $
    1,765,726
 In October 2004, our board of directors approved a $15.0 million stock repurchase program.
This program authorizes the repurchase of up to $15.0 million of our common stock to be purchased
on the open-market subject to pre-defined purchase guidelines. There is no expiration date for
this program. 
 Item 6.Exhibits and Reports on Form 8-K. (a) Exhibits  31.1
    Certification of Chief Executive Officer31.2
    Certification of Chief Financial Officer32.1
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley Act of 200232.2
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002 (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, 2005: Current Report on Form 8-K filed with the SEC on March 3, 2005 and amended March
4, 2005 (date of report March 3, 2005) (regarding a press release and an analyst
conference call related to fourth quarter of 2004 results and S1 and its operations). 20




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SIGNATURE 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 9, 2005. S1 CORPORATIONBy:
    
    /s/ Matthew HaleMatthew HaleChief Financial Officer(Principal Financial Officer and
Principal Accounting Officer)
 21