##### Table of Contents



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, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From                 to
 Commission File Number: 000-24931
 S1 CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    58-2395199(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3500 Lenox Road, Suite 200Atlanta, Georgia
    
    30326(Address of principal executive
    
    (Zip Code)offices)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
  o þ o
 o þ




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##### 



S1 CORPORATION AND SUBSIDIARIES
 QUARTERLY PERIOD ENDED MARCH 31, 2006
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006
and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006
and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements as of March 31, 2006
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    25Signature
    
    
    27EX-3.6 AMENDED AND RESTATED BYLAWS OF S1EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 S1 CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE DATA)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    83,123
    
    
    $
    85,108Short-term investments
    
    
    31,971
    
    
    
    44,170Accounts receivable, net
    
    
    52,320
    
    
    
    48,659Prepaid expenses
    
    
    5,270
    
    
    
    4,885Other current assets
    
    
    4,683
    
    
    
    3,870Total current assets
    
    
    177,367
    
    
    
    186,692Property and equipment, net
    
    
    12,863
    
    
    
    11,351Intangible assets, net
    
    
    17,112
    
    
    
    18,375Goodwill, net
    
    
    126,863
    
    
    
    125,808Other assets
    
    
    2,120
    
    
    
    2,297Total assets
    
    $
    336,325
    
    
    $
    344,523LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,863
    
    
    $
    5,292Accrued compensation and benefits
    
    
    7,253
    
    
    
    8,267Accrued restructuring
    
    
    5,611
    
    
    
    7,675Accrued other expenses
    
    
    14,915
    
    
    
    17,587Accrued purchase price consideration
    
    
    
    
    
    
    12,900Deferred revenues
    
    
    36,552
    
    
    
    27,499Current portion of capital lease obligation
    
    
    1,202
    
    
    
    1,222Total current liabilities
    
    
    70,396
    
    
    
    80,442Capital lease obligation, excluding current portion
    
    
    509
    
    
    
    791Accrued restructuring, excluding current portion
    
    
    7,322
    
    
    
    7,810Other liabilities
    
    
    2,926
    
    
    
    3,094Total liabilities
    
    
    81,153
    
    
    
    92,137Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    749
    
    
    
    744Additional paid-in capital
    
    
    1,919,017
    
    
    
    1,915,617Common stock
held in treasury  at cost
    
    
    (25,000
    )
    
    
    (25,000
    )Accumulated deficit
    
    
    (1,647,648
    )
    
    
    (1,647,204
    )Accumulated other comprehensive income (loss):Net gain on derivative financial instruments, net of tax
    
    
    35
    
    
    
    104Cumulative foreign currency translation adjustment, net of tax
    
    
    (1,981
    )
    
    
    (1,875
    )Total stockholders equity
    
    
    255,172
    
    
    
    252,386Total liabilities and stockholders equity
    
    $
    336,325
    
    
    $
    344,523Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    74,921,241
    
    
    
    74,410,099Common stock held in treasury
    
    
    4,053,886
    
    
    
    4,053,886
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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 31,2006
    
    
    2005Revenues:Software licenses
    
    $
    7,595
    
    
    $
    11,602Support and maintenance
    
    
    12,593
    
    
    
    13,379Professional services
    
    
    16,191
    
    
    
    20,521Data center
    
    
    11,586
    
    
    
    9,664Other
    
    
    571
    
    
    
    312Total revenues
    
    
    48,536
    
    
    
    55,478Operating expenses:Cost of software licenses
    
    
    1,190
    
    
    
    1,631Cost of professional services, support and maintenance*
    
    
    16,812
    
    
    
    17,454Cost of data center*
    
    
    5,416
    
    
    
    4,849Cost of other revenue
    
    
    321
    
    
    
    169Selling and marketing*
    
    
    6,531
    
    
    
    7,512Product development*
    
    
    10,706
    
    
    
    12,283General and administrative*
    
    
    6,910
    
    
    
    7,866Restructuring costs
    
    
    333
    
    
    
    Depreciation
    
    
    1,858
    
    
    
    2,408Amortization of other intangible assets
    
    
    332
    
    
    
    329Total operating expenses
    
    
    50,409
    
    
    
    54,501Operating (loss) income
    
    
    (1,873
    )
    
    
    977Interest and other income, net
    
    
    1,222
    
    
    
    190(Loss) income before income tax expense
    
    
    (651
    )
    
    
    1,167Income tax expense
    
    
    (347
    )
    
    
    (437
    )(Loss) income from continuing operations
    
    
    (998
    )
    
    
    730Discontinued operations:Gain (loss) from operations of discontinued operations,
net of tax
    
    
    554
    
    
    
    (10
    )Net (loss) income
    
    $
    (444
    )
    
    $
    720Basic earnings per share:Continuing operations
    
    $
    (0.01
    )
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    Net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.01Diluted earnings per share:Continuing operations
    
    $
    (0.01
    )
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    Net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.01Weighted average common shares outstanding  basic
    
    
    70,422,757
    
    
    
    70,593,614Weighted
average common shares outstanding  fully diluted
    
    
    n/a
    
    
    
    72,494,535
 * Includes stock based compensation expense of:Professional services, support and maintenance
    
    $
    163
    
    
    $
    Data center
    
    
    35
    
    
    
    Selling and marketing
    
    
    411
    
    
    
    Product development
    
    
    404
    
    
    
    General and administrative
    
    
    563
    
    
    
    Total
    
    $
    1,576
    
    
    $
    
  4




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S1 CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net (loss) income
    
    $
    (444
    )
    
    $
    720Adjustments to reconcile net (loss) income to net cash used in
operating activities:Depreciation and amortization
    
    
    3,121
    
    
    
    3,793Gain on disposal of discontinued operations, net of tax
    
    
    (554
    )
    
    
    Provision for doubtful accounts receivable and billing adjustments
    
    
    570
    
    
    
    1,150Stock based compensation expense
    
    
    1,576
    
    
    
    Changes in assets and liabilities, excluding effects of acquisitions:Increase in accounts receivable
    
    
    (4,330
    )
    
    
    (9,233
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (1,090
    )
    
    
    1,804Decrease in accounts payable
    
    
    (528
    )
    
    
    (879
    )Decrease in accrued expenses and other liabilities
    
    
    (6,344
    )
    
    
    (10,631
    )Increase in deferred revenues
    
    
    9,036
    
    
    
    8,227Net cash provided by (used in) operating activities
    
    
    1,013
    
    
    
    (5,049
    )Cash flows from investing activities:Cash paid in connection with acquisition of businesses
    
    
    (14,000
    )
    
    
    Maturities of short-term investment securities
    
    
    20,900
    
    
    
    12,000Purchases of short-term investment securities
    
    
    (8,701
    )
    
    
    (5,665
    )Proceeds from sale of subsidiary
    
    
    554
    
    
    
    Purchases of property, equipment and technology
    
    
    (3,370
    )
    
    
    (2,043
    )Net cash (used in) provided by investing activities
    
    
    (4,617
    )
    
    
    4,292Cash flows from financing activities:Proceeds from employee stock option plans
    
    
    1,829
    
    
    
    277Payments on capital lease obligations
    
    
    (302
    )
    
    
    (367
    )Repurchase of common stock held in treasury
    
    
    
    
    
    
    (1,641
    )Net cash provided by (used in) financing activities
    
    
    1,527
    
    
    
    (1,731
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    92
    
    
    
    (204
    )Net decrease in cash and cash equivalents
    
    
    (1,985
    )
    
    
    (2,692
    )Cash and cash equivalents at beginning of period
    
    
    85,108
    
    
    
    43,223Cash and cash equivalents at end of period
    
    $
    83,123
    
    
    $
    40,531
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S1 CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
     6




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2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Recent accounting pronouncements
     Stock-based compensation
   7




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Three Months Ended March 31,2005
    
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    88.7
    %
    
    
    61.3
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    4.6
    %Expected life
    
    4.0 years
    
    4.0 years
  8




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Three Months EndedMarch 31,2005Net income, as reported
    
    $
    720Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (3,240
    )Pro forma net loss
    
    $
    (2,520
    )Basic and diluted net (loss) income per share:As reported  basic
    
    $
    0.01As reported  diluted
    
    
    0.01Pro forma  basic and diluted
    
    
    (0.04
    )
    Three Months EndedMarch 31,2006Costs and expenses:Cost of professional services, support and maintenance
    
    $
    163Cost of data center
    
    
    35Selling and marketing
    
    
    411Product development
    
    
    404General and administrative
    
    
    563Total stock-based compensation expense
    
    $
    1,576
    9




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##### Table of Contents



3. ACQUISITIONS
  4. DISCONTINUED OPERATIONS
   Three Months EndedMarch 31,2005
    
    
    2006Revenues
    
    $
    7,516
    
    
    $
    Income from discontinued
operations
    
    $
    32
    
    
    $
    Gain on disposal of Edify
    
    
    
    
    
    
    554Income tax expense
    
    
    (42
    )
    
    
    (Loss) income from discontinued
operations
    
    $
    (10
    )
    
    $
    554
 10




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5. GOODWILL AND OTHER INTANGIBLE ASSETS
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,989
    
    
    $
    (10,911
    )Customer relationships
    
    
    12,100
    
    
    
    (4,066
    )Total
    
    $
    32,089
    
    
    $
    (14,977
    )
  2006
    
    2007
    
    2008
    
    2009
    
    2010Enterprise
    
    $
    2,199
    
    
    $
    1,780
    
    
    $
    1,057
    
    
    $
    303
    
    
    $
    210Postilion
    
    $
    2,733
    
    
    $
    2,210
    
    
    $
    2,108
    
    
    $
    1,897
    
    
    $
    880Risk and compliance
    
    $
    120
    
    
    $
    120
    
    
    $
    120
    
    
    $
    120
    
    
    $
    60
  Enterprise
    
    
    Postilion
    
    
    Risk and Compliance
    
    
    Total(In thousands)Balance, January 1, 2006
    
    $
    66,064
    
    
    $
    58,186
    
    
    $
    1,558
    
    
    $
    125,809Additional consideration
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    1,100Utilization of acquisition related
income tax benefits
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )Balance, March 31, 2006
    
    $
    66,018
    
    
    $
    59,286
    
    
    $
    1,558
    
    
    $
    126,863
 6. STOCK OPTION PLANS
   Weighted-Weighted-
    
    
    average
    
    
    Aggregateaverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    Value(000)
    
    
    Price
    
    
    Life
    
    
    ($000)Outstanding at beginning of quarter
    
    
    14,932
    
    
    $
    9.40Granted
    
    
    250
    
    
    
    4.14Exercised
    
    
    (511
    )
    
    
    3.58
    
    
    
    
    
    
    $
    459Forfeited/canceled
    
    
    (586
    )
    
    
    10.05Outstanding at end of quarter
    
    
    14,085
    
    
    $
    9.49
    
    
    
    6.48
    
    
    $
    4,411Exercisable at end of quarter
    
    
    10,085
    
    
    $
    11.26
    
    
    
    5.47
    
    
    $
    1,537
 11




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Non-Vested
    
    
    Weighted-Number of
    
    
    averageShares
    
    
    Grant-Date(000)
    
    
    Fair ValueNon-vested balance at December 31, 2005
    
    
    4,339
    
    
    $
    3.73Granted
    
    
    250
    
    
    $
    2.14Cancelled
    
    
    (182
    )
    
    $
    3.58Vested
    
    
    (407
    )
    
    $
    7.10Non-vested balance at March 31, 2006
    
    
    4,000
    
    
    $
    3.29
   Options OutstandingWeighted-
    
    
    
    
    
    
    Options Exercisableaverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Remaining
    
    
    average
    
    
    Number
    
    
    averageOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseRange of Exercise Price
    
    (000)
    
    
    Life
    
    
    Price
    
    
    (000)
    
    
    Price$       0.95  4.00
    
    
    1,310
    
    
    
    7.0
    
    
    $
    3.57
    
    
    
    884
    
    
    $
    3.554.01  5.00
    
    
    3,018
    
    
    
    9.2
    
    
    
    4.21
    
    
    
    433
    
    
    
    4.535.01  7.00
    
    
    2,449
    
    
    
    5.2
    
    
    
    6.42
    
    
    
    2,348
    
    
    
    6.447.01  8.50
    
    
    2,992
    
    
    
    6.6
    
    
    
    8.04
    
    
    
    2,269
    
    
    
    8.078.51  11.00
    
    
    660
    
    
    
    6.1
    
    
    
    9.34
    
    
    
    498
    
    
    
    9.3911.01  15.00
    
    
    703
    
    
    
    5.4
    
    
    
    13.08
    
    
    
    700
    
    
    
    13.0815.01  20.00
    
    
    2,528
    
    
    
    5.0
    
    
    
    16.74
    
    
    
    2,528
    
    
    
    16.7420.01  97.44
    
    
    425
    
    
    
    3.9
    
    
    
    44.36
    
    
    
    425
    
    
    
    44.360.95  97.44
    
    
    14,085
    
    
    
    6.5
    
    
    $
    9.49
    
    
    
    10,085
    
    
    $
    11.26
  7. COMPREHENSIVE INCOME
  Three Months EndedMarch 31,2006
    
    
    2005Net (loss) income
    
    $
    (444
    )
    
    $
    720Foreign currency translation adjustment
    
    
    (106
    )
    
    
    (686
    )Unrealized loss on cash flow hedges
    
    
    (65
    )
    
    
    (34
    )Comprehensive loss
    
    $
    (615
    )
    
    $
    
 12




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8. DERIVATIVE FINANCIAL INSTRUMENTS
      Three Months EndedMarch 31, 2006Accumulated derivative net gain as of December 31, 2005
    
    $
    104Net change in fair value of derivatives
    
    
    (65
    )Net gains reclassified from AOCI into earnings
    
    
    (4
    )Accumulated derivative net gain as of March 31, 2006
    
    $
    35
  9. RESTRUCTURING CHARGES
  Lease CostsBalance, December 31, 2005
    
    $
    5,800Amounts utilized through March 31, 2006
    
    
    21
    (1)Balance, March 31, 2006
    
    $
    5,821
 
 (1)
    
    This amount includes a prepayment received from a sub lessee. 13




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Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2005
    
    $
    4,635
    
    
    $
    5,050
    
    
    $
    9,6852006 restructuring charge
    
    $
    333
    
    
    $
    
    
    
    $
    333Amounts utilized
    
    
    (2,173
    )
    
    
    (733
    )
    
    
    (2,906
    )Balance, March 31, 2006
    
    $
    2,795
    
    
    $
    4,317
    
    
    $
    7,112
  10. CONTINGENCIES
   Guarantees
  11. SEGMENT REPORTING AND MAJOR CUSTOMERS
  14




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Software
    
    
    Support and
    
    
    ProfessionalLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Data Center
    
    
    Other
    
    
    TotalQuarter Ended March
31, 2006:Enterprise
    
    $
    2,870
    
    
    $
    5,522
    
    
    $
    12,123
    
    
    $
    5,211
    
    
    $
    165
    
    
    $
    25,891Postilion
    
    
    3,173
    
    
    
    5,135
    
    
    
    2,498
    
    
    
    6,375
    
    
    
    368
    
    
    
    17,549Risk and Compliance
    
    
    1,552
    
    
    
    1,936
    
    
    
    1,570
    
    
    
    
    
    
    
    38
    
    
    
    5,096Total
    
    $
    7,595
    
    
    $
    12,593
    
    
    $
    16,191
    
    
    $
    11,586
    
    
    $
    571
    
    
    $
    48,536Quarter Ended March 31,
2005:Enterprise
    
    $
    3,497
    
    
    $
    6,391
    
    
    $
    16,225
    
    
    $
    4,306
    
    
    $
    249
    
    
    $
    30,668Postilion
    
    
    6,081
    
    
    
    5,209
    
    
    
    2,156
    
    
    
    5,358
    
    
    
    54
    
    
    
    18,858Risk and Compliance
    
    
    2,024
    
    
    
    1,779
    
    
    
    2,140
    
    
    
    
    
    
    
    9
    
    
    
    5,952Total
    
    $
    11,602
    
    
    $
    13,379
    
    
    $
    20,521
    
    
    $
    9,664
    
    
    $
    312
    
    
    $
    55,478
  Three Months Ended March 31, 2006Risk andEnterprise
    
    
    Postilion
    
    
    Compliance
    
    
    TotalRevenues
    
    $
    25,891
    
    
    $
    17,549
    
    
    $
    5,096
    
    
    $
    48,536Operating expenses:Direct costs
    
    
    12,995
    
    
    
    8,457
    
    
    
    2,287
    
    
    
    23,739Selling and marketing
    
    
    2,639
    
    
    
    3,236
    
    
    
    656
    
    
    
    6,531Product development
    
    
    7,859
    
    
    
    1,748
    
    
    
    1,099
    
    
    
    10,706General and administrative
    
    
    2,911
    
    
    
    2,805
    
    
    
    1,194
    
    
    
    6,910Restructuring costs
    
    
    307
    
    
    
    26
    
    
    
    
    
    
    
    333Depreciation
    
    
    1,089
    
    
    
    663
    
    
    
    106
    
    
    
    1,858Amortization of other intangible assets
    
    
    103
    
    
    
    224
    
    
    
    5
    
    
    
    332Total operating expenses
    
    
    27,903
    
    
    
    17,159
    
    
    
    5,347
    
    
    
    50,409Segment operating (loss) income
    
    $
    (2,012
    )
    
    $
    390
    
    
    $
    (251
    )
    
    $
    (1,873
    )
 Three Months Ended March 31, 2005Risk andEnterprise
    
    
    Postilion
    
    
    Compliance
    
    
    TotalRevenues
    
    $
    30,668
    
    
    $
    18,858
    
    
    $
    5,952
    
    
    $
    55,478Operating expenses:Direct costs
    
    
    14,126
    
    
    
    7,540
    
    
    
    2,437
    
    
    
    24,103Selling and marketing
    
    
    3,687
    
    
    
    3,247
    
    
    
    578
    
    
    
    7,512Product development
    
    
    9,185
    
    
    
    1,979
    
    
    
    1,119
    
    
    
    12,283General and administrative
    
    
    3,031
    
    
    
    3,600
    
    
    
    1,235
    
    
    
    7,866Depreciation
    
    
    1,482
    
    
    
    836
    
    
    
    90
    
    
    
    2,408Amortization of other intangible assets
    
    
    104
    
    
    
    225
    
    
    
    
    
    
    
    329Total operating expenses
    
    
    31,615
    
    
    
    17,427
    
    
    
    5,459
    
    
    
    54,501Segment operating (loss) income
    
    $
    (947
    )
    
    $
    1,431
    
    
    $
    493
    
    
    $
    977
 15




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##### Table of Contents



12. NET (LOSS) INCOME PER SHARE
    Three Months EndedMarch 31,2006
    
    
    2005(in thousands, except per share data)Basic earnings per share:(Loss) income from continuing operations
    
    $
    (998
    )
    
    $
    730Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    (11
    )(Loss) income from continuing operations
available to common stockholders  basic
    
    $
    (998
    )
    
    $
    719Weighted average common shares outstanding
    
    
    70,423
    
    
    
    70,594Basic (loss) earnings from continuing operations per share
    
    $
    (0.01
    )
    
    $
    0.01Diluted earnings per share:(Loss) income from continuing operations
    
    $
    (998
    )
    
    $
    730Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    (11
    )(Loss) income from continuing operations
available to common stockholders  diluted
    
    $
    (998
    )
    
    $
    719Weighted average common shares outstanding
    
    
    70,423
    
    
    
    70,594Weighted average effect of common stock equivalents:Stock options
    
    
    156
    
    
    
    1,901Convertible preferred stock
    
    
    1,070
    
    
    
    Weighted average diluted shares outstanding
    
    
    71,649
    
    
    
    72,495Diluted (loss) earnings from continuing operations per share
    
    $
    (0.01
    )
    
    $
    0.01
 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
     17




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##### Table of Contents



Recent Accounting Pronouncements
   Critical Accounting Policies and Estimates
  Determination of the fair value of employee stock options.
 18




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##### Table of Contents



Comparison of the Three Months Ended March 31, 2006 and 2005
  Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalQuarter Ended March
31, 2006:Enterprise
    
    $
    2,870
    
    
    $
    5,522
    
    
    $
    12,123
    
    
    $
    5,211
    
    
    $
    165
    
    
    $
    25,891Postilion
    
    
    3,173
    
    
    
    5,135
    
    
    
    2,498
    
    
    
    6,375
    
    
    
    368
    
    
    
    17,549Risk and Compliance
    
    
    1,552
    
    
    
    1,936
    
    
    
    1,570
    
    
    
    
    
    
    
    38
    
    
    
    5,096Total
    
    $
    7,595
    
    
    $
    12,593
    
    
    $
    16,191
    
    
    $
    11,586
    
    
    $
    571
    
    
    $
    48,536Quarter Ended March 31,
2005:Enterprise
    
    $
    3,497
    
    
    $
    6,391
    
    
    $
    16,225
    
    
    $
    4,306
    
    
    $
    249
    
    
    $
    30,668Postilion
    
    
    6,081
    
    
    
    5,209
    
    
    
    2,156
    
    
    
    5,358
    
    
    
    54
    
    
    
    18,858Risk and Compliance
    
    
    2,024
    
    
    
    1,779
    
    
    
    2,140
    
    
    
    
    
    
    
    9
    
    
    
    5,952Total
    
    $
    11,602
    
    
    $
    13,379
    
    
    $
    20,521
    
    
    $
    9,664
    
    
    $
    312
    
    
    $
    55,478
     19




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##### Table of Contents



Direct Costs.
     Selling and Marketing Expenses.
 20




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##### Table of Contents



Product Development Expenses.
  General and Administrative Expenses.
 Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
  
    
    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 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.
   21




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Gain (loss) from discontinued operations.
 Liquidity and Capital Resources
  Three Months Ended March 31,2006
    
    
    2005(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    4,269
    
    
    $
    5,663Change in operating assets and liabilities
    
    
    (3,256
    )
    
    
    (10,712
    )Net cash provided by (used in) operating activities
    
    
    1,013
    
    
    
    (5,049
    )Net cash (used in) provided by investing activities
    
    
    (4,617
    )
    
    
    4,292Net cash used in financing activities
    
    
    1,527
    
    
    
    (1,731
    )Effect of exchange rates on cash and cash equivalents
    
    
    92
    
    
    
    (204
    )Net decrease in cash and cash equivalents
    
    $
    (1,985
    )
    
    $
    (2,692
    )
 As ofMarch 31, 2006
    
    December 31, 2005(In thousands)Cash and cash equivalents
    
    $
    83,123
    
    
    $
    85,108Short term investments
    
    
    31,971
    
    
    
    44,170Working capital
    
    
    106,971
    
    
    
    106,250Total assets
    
    
    336,325
    
    
    
    344,523Total stockholders equity
    
    
    255,172
    
    
    
    252,386
 Operating Activities.
  
    
    our net loss of $0.4 million;
    
    depreciation and amortization expense of $3.1 million;
    
    gain on the disposal of Edify of $0.6 million;
    
    provision of doubtful accounts receivable and billing adjustments of $0.6 million;
    
    stock based compensation expense of $1.6 million;
 22




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##### Table of Contents




    
    a decrease in accrued expenses and other liabilities of $6.3 million;
    
    an increase of $4.3 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
    
    a $9.0 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
    
    changes in other operating assets and liabilities of $1.6 million.
  
    
    our net income of $0.7 million;
    
    depreciation and amortization expense of $3.8 million;
    
    provision of doubtful accounts receivable and billing adjustments of $1.2 million;
    
    a decrease in accrued expenses and other liabilities of $10.6 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
    
    a $8.2 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
    
    changes in other operating assets and liabilities of $0.9 million.
 Investing Activities.
  
    
    paid $14.0 million to the sellers of Mosaic in settlement of the earn-out;
    
    converted $12.2 million, net, from short-term investments to cash and cash equivalents;
    
    received $0.6 million working capital adjustment from the sale of Edify; and
    
    purchased $3.4 million of property and equipment.
  
    
    converted $6.3 million, net, from cash and cash equivalents to short-term investments; and
    
    purchased $2.0 million of property and equipment.
 Financing Activities.
  
    
    received $1.8 million from the sale of common stock under our employee stock option plans; and
    
    paid $0.3 million for capital lease obligations.
  
    
    received $0.3 million from the sale of common stock under our employee stock option plans; and
    
    repurchased $1.6 million of our common stock; and
    
    paid $0.4 million for capital lease obligations.
  23




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls.
 Changes in Internal Control over Financial Reporting.
 24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors
  Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price
of our common stock
  
    
    we cannot accurately predict the number and timing of contracts we will sign in a period, in part because the budget
constraints and internal review processes of existing and potential customers are not within our control;
 
    
    as we transition from selling our financial institutions products on a perpetual license to a term or subscription
license, we cannot accurately predict how long it will take to complete this transition or the mix of perpetual
licenses to term licenses sold in any one quarter. Term licenses significantly reduce the amount of revenue recognized
in the first year of the contract, but is intended to increase the overall revenue earned from the customer during the
typical customer life cycle;
 
    
    the length of our sales cycle to large financial organizations generally lasts from six to eighteen months, which adds
an element of uncertainty to our ability to forecast revenues;
 
    
    if we fail to introduce new or enhanced products, or if our competitors introduce new or enhanced products, sales of
our products and services may not achieve expected levels and/or may decline;
 
    
    our ability to expand the mix of distribution channels through which our products are sold may be limited;
 
    
    our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower than expected;
 
    
    we have had significant contracts with legacy customers that have decreased or terminated their services and we may not
be able to replace this revenue and / or the gross margins associated with this revenue;
 
    
    our sales may be constrained by the timing of releases of third-party software that works with our products;
 
    
    a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term
if revenues decrease; and
 
    
    the migration of our license sales model to be more focused on recurring revenue contracts may result in less
predictable revenue due to an inability to predict the rate at which it is adopted by our customers, or the rate at
which it may be deferred.
 In 2006, we will depend on one customer, State Farm, for a significant portion of our revenue and if that
customer terminates its contract with us, our revenues and financial performance would decline
  Our Exploration of Strategic Alternatives May Create Uncertainties That Could Affect Our Business
    System failures or performance problems with our products could cause demand for these products to
decrease, require us to make significant capital expenditures or impair customer relations
  
    
    delays in completing and/or testing new products, resulting in significant delays;
 
    
    extraordinary end-user volumes or other events could cause systems to fail;
 
    
    our products could contain errors, or bugs, which could impair the services we provide;
 
    
    during the initial implementation of some products, we have experienced significant delays in implementing and
integrating software, and we may experience similar difficulties or delays in connection with future implementations
and upgrades to new versions; and
 
    
    many of our products require integration with third-party products and systems, and we may not be able to integrate
these products with new or existing products.
 We have experienced substantial losses in the past and may not achieve or maintain profitable
operations in the future
  We are engaged in offshore software development activities, which may not be successful and which
may put our intellectual property at risk
  
    
    communications and information flow may be less efficient and
accurate as a consequence of the time, distance and language
differences between our primary development organization and the
foreign based activities, resulting in delays in development or
errors in the software developed;
 
    
    potential disruption from the involvement of the United States in
political and military conflicts around the world;
 
    
    the quality of the development efforts undertaken offshore may not
meet our requirements because of language, cultural and
experiential differences, resulting in potential product errors
and/or delays;
 
    
    we have experienced a greater level of voluntary turnover of
personnel in India than in other development centers which could
have an adverse impact on efficiency and timeliness of development
as well as the opportunity for misappropriation of our
intellectual property;
 
    
    in addition to the risk of misappropriation of intellectual
property from departing personnel, there is a general risk of the
potential for misappropriation of our intellectual property that
might not be readily discoverable; and
 
    
    currency exchange rates could fluctuate and adversely impact the
cost advantages intended from maintaining these facilities.
 25




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##### Table of Contents



We are involved in litigation over proprietary rights, which may be costly and time consuming
  
    
    be time-consuming to investigate and defend;
 
    
    result in costly litigation;
 
    
    cause product shipment delays;
 
    
    require us to enter into royalty or licensing agreements; or
 
    
    result in an injunction being issued against the use of our products.
  
    
    pay substantial damages;
 
    
    discontinue the use and sale of infringing products;
 
    
    expend significant resources to develop non-infringing technology; or
 
    
    obtain licenses to infringing technology.
  Our operating results would suffer if we were subject to a protracted infringement claim or a
significant damage award.
    
    
    costly litigation and damage awards;
    
    diversion of management attention and resources;
    
    product shipment delays or suspensions;
    
    injunction prohibiting us from selling our products; and
    
    the need to enter into royalty or licensing agreements, which may not be available on
terms acceptable to us, if at all.
 26




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##### Table of Contents



Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management
resources or dilute stockholder value
  
    
    potential incompatibility of business cultures;
 
    
    potential delays in rationalizing diverse technology platforms;
 
    
    potential difficulties in coordinating geographically separated organizations;
 
    
    potential difficulties in re-training sales forces to market all of our products across all of our intended markets;
 
    
    potential difficulties implementing common internal business systems and processes;
 
    
    potential conflicts in third-party relationships; and
 
    
    the loss of key employees and diversion of the attention of management from other ongoing business concerns.
 A significant portion of our customers are in a consolidating financial services industry, which is
subject to economic changes that could reduce demand for our products and services
  Market volatility may affect the price of our common stock
  
    
    actual or anticipated variations in our quarterly operating results;
 
    
    21% of our common stock is owned by 5 institutions, a rapid change in position of any one
of these holders could cause a significant drop in our stock price if market demand is
insufficient to meet sales demand;
 
    
    announcements of new products, product enhancements, technological innovations or new services by us or our competitors;
 
    
    changes in financial estimates by securities analysts;
 
    
    conditions or trends in the computer software, electronic commerce and Internet industries;
 
    
    changes in the market valuations of other technology companies;
 
    
    developments in Internet regulations;
 
    
    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital
commitments;
 
    
    unscheduled system downtime of our products in either a hosted or in-house environment;
 
    
    additions or departures of key personnel; and
 
    
    sales of our common stock or other securities in the open market.
 27




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##### Table of Contents



Future sales of our common stock in the public market could negatively affect our stock price
  Our market is highly competitive and if we are unable to keep pace with evolving technology our
revenue and future prospects may decline
  International operations may adversely affect us
  
    
    fluctuations in currency exchange rates;
 
    
    governmental currency controls;
 
    
    changes in various regulatory requirements;
 
    
    political and economic changes and disruptions;
 
    
    difficulties in enforcing our contracts in foreign jurisdictions;
 
    
    export/import controls;
 
    
    tariff regulations;
 
    
    difficulties in staffing and managing foreign sales and support operations;
 
    
    greater difficulties in trade accounts receivable collection; and
 
    
    possible adverse tax consequences.
   Infringement of our proprietary technology could hurt our competitive position and income potential
  28




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##### Table of Contents



If we are unable to attract and retain highly skilled technical employees, we may not be able to
compete
  We are subject to government regulation
  The adoption or modification of laws or regulations relating to the Internet, or interpretations of
existing law, could adversely affect our business
  
 Item 5. Other Information.
  
 Item 6. Exhibits
 ExhibitNo.
    
    Exhibit Description3.1
    
    Amended and Restated Certificate of Incorporation of S1 Corporation (S1) (filed as Exhibit
1 to S1s Registration Statement on Form 8-A filed with the Securities and Exchange Commission
(the SEC) on September 30, 1998 and incorporated herein by reference).3.2
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File No.
333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference).3.3
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and incorporated herein by reference).
 29




---



##### Table of Contents



ExhibitNo.
    
    Exhibit Description3.4
    
    Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 2 to S1s Registration Statement on Form 8-A filed with the SEC on September 30, 1998
and incorporated herein by reference).3.5
    
    Certificate of Designations for S1s Series E Convertible Preferred Stock (filed as Exhibit 3
to S1s Registration Statement on Form S-8 (File No. 333-72250) filed with the SEC on October
26, 2001 and incorporated herein by reference).3.6
    
    Amended and Restated Bylaws of S1.4.1
    
    Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference).4.2
    
    Specimen certificate for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 4.3 to S1s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).4.3
    
    Specimen certificate for S1s Series E Convertible Preferred Stock (filed as Exhibit 4.2 to
S1s Registration Statement on Form S-3 (File No. 333-75178) filed with the SEC on December
14, 2001 and incorporated herein by reference).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
 30




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##### Table of Contents



SIGNATURE
  S1 CORPORATIONBy:
    /s/ JOHN A. STONEJohn A. StoneChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 31




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##### Table of Contents



Exhibit Index
 ExhibitNo.
    
    Exhibit Description3.1
    
    Amended and Restated Certificate of Incorporation of S1 Corporation (S1) (filed as Exhibit
1 to S1s Registration Statement on Form 8-A filed with the Securities and Exchange Commission
(the SEC) on September 30, 1998 and incorporated herein by reference).3.2
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File No.
333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference).3.3
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and incorporated herein by reference).3.4
    
    Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 2 to S1s Registration Statement on Form 8-A filed with the SEC on September 30, 1998
and incorporated herein by reference).3.5
    
    Certificate of Designations for S1s Series E Convertible Preferred Stock (filed as Exhibit 3
to S1s Registration Statement on Form S-8 (File No. 333-72250) filed with the SEC on October
26, 2001 and incorporated herein by reference).3.6
    
    Amended and Restated Bylaws of S1.4.1
    
    Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference).4.2
    
    Specimen certificate for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 4.3 to S1s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).4.3
    
    Specimen certificate for S1s Series E Convertible Preferred Stock (filed as Exhibit 4.2 to
S1s Registration Statement on Form S-3 (File No. 333-75178) filed with the SEC on December
14, 2001 and incorporated herein by reference).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
 32