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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, 2004 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(State or other jurisdiction of
incorporation or organization)
    
    58-2395199(I.R.S. Employer
Identification No.)3500 Lenox Road, Suite 200
Atlanta, Georgia(Address of principal executive
offices)
    
    30326(Zip Code)
 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 x   No o Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes x   No o Shares of common stock outstanding as of May 5, 2004: 70,540,605




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S1 CORPORATION AND SUBSIDIARIES QUARTERLY PERIOD ENDED MARCH 31, 2004  
 TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements as of March 31, 2004
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    19Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    19Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    19Signature
    
    
    20EX-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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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 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    123,250
    
    
    $
    150,064Short-term investments
    
    
    21,992
    
    
    
    14,126Accounts receivable, net
    
    
    45,873
    
    
    
    37,188Prepaid expenses
    
    
    7,213
    
    
    
    5,745Other current assets
    
    
    2,751
    
    
    
    3,218Total current assets
    
    
    201,079
    
    
    
    210,341Property and equipment, net
    
    
    15,277
    
    
    
    15,661Intangible assets, net
    
    
    13,619
    
    
    
    14,073Goodwill, net
    
    
    93,309
    
    
    
    93,462Other assets
    
    
    3,519
    
    
    
    3,551Total assets
    
    $
    326,803
    
    
    $
    337,088LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,980
    
    
    $
    6,166Accrued compensation and benefits
    
    
    8,030
    
    
    
    11,500Accrued restructuring
    
    
    3,991
    
    
    
    4,711Accrued other expenses
    
    
    17,094
    
    
    
    22,726Deferred revenues
    
    
    41,361
    
    
    
    38,536Current portion of capital lease obligation
    
    
    852
    
    
    
    762Total current liabilities
    
    
    77,308
    
    
    
    84,401Capital lease obligation, excluding current portion
    
    
    785
    
    
    
    523Accrued restructuring, excluding current portion
    
    
    6,442
    
    
    
    7,063Other liabilities
    
    
    2,100
    
    
    
    1,287Total liabilities
    
    
    86,635
    
    
    
    93,274Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    733
    
    
    
    732Additional paid-in capital
    
    
    1,908,186
    
    
    
    1,907,918Common stock held in treasury  at cost
    
    
    (14,979
    )
    
    
    (10,438
    )Accumulated deficit
    
    
    (1,661,273
    )
    
    
    (1,661,717
    )Accumulated other comprehensive loss
    
    
    (2,499
    )
    
    
    (2,681
    )Total stockholders equity
    
    
    240,168
    
    
    
    243,814Total liabilities and stockholders equity
    
    $
    326,803
    
    
    $
    337,088Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    73,289,123
    
    
    
    73,230,760Common stock held in treasury
    
    
    2,717,862
    
    
    
    2,105,862
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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S1 CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 Three Months EndedMarch 31,2004
    
    2003Revenues:Software licenses
    
    $
    11,628
    
    
    $
    14,966Support and maintenance
    
    
    15,301
    
    
    
    15,442Professional services
    
    
    20,067
    
    
    
    23,278Data center
    
    
    9,926
    
    
    
    11,761Other
    
    
    986
    
    
    
    215Total revenues
    
    
    57,908
    
    
    
    65,662Operating expenses:Cost of software licenses
    
    
    1,365
    
    
    
    844Cost of professional services, support and maintenance
    
    
    17,660
    
    
    
    25,392Cost of data center
    
    
    4,837
    
    
    
    6,726Cost of other revenue
    
    
    919
    
    
    
    156Selling and marketing
    
    
    8,345
    
    
    
    11,530Product development
    
    
    13,664
    
    
    
    12,305General and administrative, including stock compensation
expense of $211 in 2003
    
    
    6,713
    
    
    
    9,227Depreciation
    
    
    2,710
    
    
    
    5,735Merger related costs and restructuring charges
    
    
    
    
    
    
    8,094Amortization of other intangible assets and goodwill
impairment
    
    
    836
    
    
    
    15,069Total operating expenses
    
    
    57,049
    
    
    
    95,078Operating income (loss)
    
    
    859
    
    
    
    (29,416
    )Interest and other income, net
    
    
    47
    
    
    
    246Income (loss) before income tax expense
    
    
    906
    
    
    
    (29,170
    )Income tax expense
    
    
    (462
    )
    
    
    (119
    )Net income (loss)
    
    $
    444
    
    
    $
    (29,289
    )Basic net income (loss) per common share
    
    $
    0.01
    
    
    $
    (0.42
    )Diluted net income per common share
    
    $
    0.01
    
    
    
    n/aWeighted average common shares outstanding  basic
    
    
    70,983,164
    
    
    
    69,247,674Weighted average common shares outstanding  diluted
    
    
    74,143,891
    
    
    
    n/a
 See accompanying notes to unaudited condensed consolidated financial statements. 4




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S1 CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
(IN THOUSANDS)
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    444
    
    
    $
    (29,289
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation, amortization and goodwill impairment charge
    
    
    3,546
    
    
    
    20,804Loss on disposal of property and equipment
    
    
    
    
    
    
    1,535Compensation expense for stock options
    
    
    
    
    
    
    211Provision for doubtful accounts receivable and billing adjustments
    
    
    605
    
    
    
    2,576Other
    
    
    
    
    
    
    410Changes in assets and liabilities, excluding effects of acquisitions:Increase in accounts receivable
    
    
    (9,050
    )
    
    
    (9,818
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (969
    )
    
    
    393Decrease in accounts payable
    
    
    (186
    )
    
    
    (3,929
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (10,258
    )
    
    
    5,580Increase in deferred revenues
    
    
    3,606
    
    
    
    1,647Net cash used in operating activities
    
    
    (12,262
    )
    
    
    (9,880
    )Cash flows from investing activities:Maturities of short-term investment securities
    
    
    7,388
    
    
    
    12,343Purchases of short-term investment securities
    
    
    (15,254
    )
    
    
    (2,004
    )Purchases of property, equipment and technology
    
    
    (2,093
    )
    
    
    (655
    )Net cash (used in) provided by investing activities
    
    
    (9,959
    )
    
    
    9,684Cash flows from financing activities:Proceeds from sale of common stock under employee stock purchase and
option plans
    
    
    269
    
    
    
    374Payments on capital lease obligations
    
    
    (263
    )
    
    
    (1,939
    )Repurchase of common stock held in treasury
    
    
    (4,541
    )
    
    
    (750
    )Net cash used in financing activities
    
    
    (4,535
    )
    
    
    (2,315
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (58
    )
    
    
    441Net decrease in cash and cash equivalents
    
    
    (26,814
    )
    
    
    (2,070
    )Cash and cash equivalents at beginning of period
    
    
    150,064
    
    
    
    127,842Cash and cash equivalents at end of period
    
    $
    123,250
    
    
    $
    125,772Noncash investing and financing activities:Property and equipment acquired through leases
    
    $
    615
    
    
    $
    569
 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 provider of global enterprise software solutions for
more than 4,000 financial organizations including banks, credit unions,
investment firms and insurance companies. Our solutions automate 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 primarily of Europe, the Middle East
region and Africa (EMEA) and the Asia-Pacific region and Japan (APJ) region. We
refer to our core business segment as the Financial Institutions business. Through Edify Corporation and its subsidiaries, we provide a variety of
customer relationship management (CRM) applications that allow organizations in
various industries to automate, integrate, personalize and analyze interactions
with customers across touch points such as phone, web, wireless, email, fax and
kiosk. S1 is headquartered in Atlanta, Georgia, USA, with additional domestic
offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New
York, New York; West Hills, California and Santa Clara, California; and
additional international offices in Brussels, Dublin, Hong Kong, Lisbon,
London, Luxembourg, Madrid, Munich, Paris and Rotterdam. 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 generally
accepted accounting principles 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, 2003. 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, 2004 and our results of operations for the
three months ended March 31, 2004 and cash flows for the three months ended
March 31, 2004. The data in the condensed consolidated balance sheet as of
December 31, 2003 was derived from our audited consolidated balance sheet as of
December 31, 2003, as presented in our Annual Report on Form 10-K for the year
ended December 31, 2003. 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. Our
operating results for the three months ended March 31, 2004 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2004. 2.     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, 2003. 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. 6




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In the three months ended March 31, 2003, we recognized compensation
expense of approximately $0.2 million relating to stock options granted with
exercise prices less than the market price on the date of grant. 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
(loss) would have changed to the unaudited pro forma amounts indicated below: Three Months Ended March 31,2004
    
    2003Net income (loss), as reported
    
    $
    444
    
    
    $
    (29,289
    )Add: Stock-based employee compensation
expense included in reported net loss,
nets of related tax effects
    
    
    
    
    
    
    211Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (9,308
    )
    
    
    (27,359
    )Pro forma net loss
    
    $
    (8,864
    )
    
    $
    (56,437
    )Basic and diluted net income (loss) per common share:As reported
    
    $
    0.01
    
    
    $
    (0.42
    )Pro forma
    
    
    (0.12
    )
    
    
    (0.81
    )
 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. The fair value of our stock-based option awards to employees was estimated
assuming no expected dividends and the following weighted-average assumptions: 2004
    
    2003Expected volatility
    
    
    108.4
    %
    
    
    114.4
    %Risk-free interest rate
    
    
    3.0
    %
    
    
    2.9
    %Expected life
    
    4.0 years
    
    4.6 years
 3.     GOODWILL AND OTHER INTANGIBLE ASSETS At March 31, 2004, our other intangible assets consisted of the following: Gross
    
    AccumulatedCarrying Value
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    12,794
    
    
    $
    (4,345
    )Customer relationships
    
    
    7,500
    
    
    
    (2,330
    )Total
    
    $
    20,294
    
    
    $
    (6,675
    )
 We recorded amortization expense of $3.4 million and $0.8 million during
the three months ended March 31, 2003 and 2004, respectively. We estimate
aggregate amortization expense for 2004 and the next four calendar years to be
as follows (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008Financial institutions business segment
    
    $
    3,057
    
    
    $
    3,061
    
    
    $
    3,061
    
    
    $
    2,120
    
    
    $
    1,295Edify business segment
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 7




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The changes in the carrying value of our goodwill for the three months ended March 31, 2004 are as follows: FinancialInstitutions
    
    Edify
    
    Total(In thousands)Balance, January 1, 2004
    
    $
    88,576
    
    
    $
    4,886
    
    
    $
    93,462Utilization of acquisition related
income tax benefits
    
    
    (153
    )
    
    
    
    
    
    
    (153
    )Balance, March 31, 2004
    
    $
    88,423
    
    
    $
    4,886
    
    
    $
    93,309
 4.     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 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. As of March 31, 2004, we had
repurchased 666,000 shares of our common stock at a cost of $5.0 million under
this program. As of March 31, 2004, we hold 2,717,862 shares of our common stock in
treasury at a cost of $15.0 million. 5.     COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) are as follows (in
thousands): Three Months EndedMarch 31,2004
    
    2003Net income (loss)
    
    $
    444
    
    
    $
    (29,289
    )Foreign currency translation adjustment
    
    
    182
    
    
    
    210Unrealized loss on investment securities
available for sale, net of taxes
    
    
    
    
    
    
    (35
    )Comprehensive income (loss)
    
    $
    626
    
    
    $
    (29,114
    )
 6.     MERGER RELATED COSTS AND RESTRUCTURING CHARGES Components of merger related and restructuring costs are as follows (in
thousands): Three Months EndedMarch 31,2004
    
    2003Merger related costs
    
    $
    
    
    
    $
    (483
    )Restructuring charges
    
    
    
    
    
    
    8,577$
    
    
    
    $
    8,094
 During the three months ended March 31, 2003, we began consolidating our
U.K. data center operations into our global hosting center in Atlanta,
resulting in restructuring charges of $2.3 million comprised of accelerated
depreciation of assets, severance costs and other related costs. In addition,
we provided $6.3 million for losses on unused office facilities vacated as a
result of cost alignment activities and recorded other restructuring charges
including severance associated with a work force reduction in our financial
institutions and Edify business operations as well as other corporate charges.
In total, we 8




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reduced our workforce by approximately 80 people. Additionally,
we decreased our reserve for legal claims by $0.5 million, which was
established in connection with our acquisition of FICS Group, N.V. in November
1999. We were able to resolve this legal matter during the first quarter of
2003 for less than previously estimated. The restructuring reserves as of December 31, 2003 and March 31, 2004 and
their utilization for the three months ended March 31, 2004 are summarized as
follows: Personnel
    
    LeaseCosts
    
    Costs
    
    Other
    
    Total(In thousands)Balance, December 31, 2003
    
    $
    944
    
    
    $
    10,312
    
    
    $
    518
    
    
    $
    11,774Amounts utilized
    
    
    (341
    )
    
    
    (930
    )
    
    
    (70
    )
    
    
    (1,341
    )Balance, March 31, 2004
    
    $
    603
    
    
    $
    9,382
    
    
    $
    448
    
    
    $
    10,433
 We expect to make future cash expenditures, net of anticipated sublease
income, related to these restructuring activities of approximately $10.1
million, of which we anticipate to pay approximately $3.7 million within the
next twelve months. 7.     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. Guarantees We typically grant our customers a warranty that guarantees that our
product will substantially conform to our current specifications for 90 days
from the delivery date. We also indemnify our customers from third party
claims 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. 8.     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 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, 2004 and 2003.
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 9




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revenues and intercompany expenses are recorded in each operating
segment. These revenues and expenses are eliminated in consolidation. Intercompany revenues recorded by the financial institutions segment were
$0.5 million and $0.1 million for the three months ended March 31, 2003 and
2004, respectively. Intercompany revenues recorded by the Edify segment were
$0.3 million and $0.6 million for three months ended March 31, 2003 and 2004,
respectively. The following table shows revenues by revenue type for our operating
segments: Three Months Ended March 31, 2004FinancialInstitutions
    
    Edify
    
    Eliminations
    
    TotalRevenues
    
    $
    49,159
    
    
    $
    9,405
    
    
    $
    (656
    )
    
    $
    57,908Operating expenses:Direct costs
    
    
    21,789
    
    
    
    3,648
    
    
    
    (656
    )
    
    
    24,781Selling and marketing
    
    
    5,540
    
    
    
    2,805
    
    
    
    
    
    
    
    8,345Product development
    
    
    12,108
    
    
    
    1,556
    
    
    
    
    
    
    
    13,664General and administrative
    
    
    5,738
    
    
    
    975
    
    
    
    
    
    
    
    6,713Depreciation
    
    
    2,494
    
    
    
    216
    
    
    
    
    
    
    
    2,710Amortization of other intangible assets and
goodwill impairment
    
    
    761
    
    
    
    75
    
    
    
    
    
    
    
    836Total operating expenses
    
    
    48,430
    
    
    
    9,275
    
    
    
    (656
    )
    
    
    57,049Segment operating income
    
    $
    729
    
    
    $
    130
    
    
    $
    
    
    
    $
    859
 Three Months Ended March 31, 2003FinancialInstitutions
    
    Edify
    
    Eliminations
    
    TotalRevenues
    
    $
    59,242
    
    
    $
    7,245
    
    
    $
    (825
    )
    
    $
    65,662Operating expenses:Direct costs
    
    
    29,004
    
    
    
    4,939
    
    
    
    (825
    )
    
    
    33,118Selling and marketing
    
    
    7,777
    
    
    
    3,753
    
    
    
    
    
    
    
    11,530Product development
    
    
    10,643
    
    
    
    1,662
    
    
    
    
    
    
    
    12,305General and administrative
    
    
    7,567
    
    
    
    1,660
    
    
    
    
    
    
    
    9,227Depreciation
    
    
    5,406
    
    
    
    329
    
    
    
    
    
    
    
    5,735Merger related costs and restructuring charges
    
    
    7,215
    
    
    
    879
    
    
    
    
    
    
    
    8,094Amortization of other intangible assets and
goodwill impairment
    
    
    1,631
    
    
    
    13,438
    
    
    
    
    
    
    
    15,069Total operating expenses
    
    
    69,243
    
    
    
    26,660
    
    
    
    (825
    )
    
    
    95,078Segment operating loss
    
    $
    (10,001
    )
    
    $
    (19,415
    )
    
    $
    
    
    
    $
    (29,416
    )
 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 24% and 20% of our financial institutions segment
revenues from State Farm Mutual Automobile Insurance Company during the three
months ended March 31, 2003 and 2004, respectively. In 2003, we had a second major customer, Zurich Insurance Company and
certain of its affiliates or subsidiaries, which accounted for 18% of our
revenues from the financial institutions segment during the three months ended
March 31, 2003. We did not earn any revenue from this customer during the
three months ended March 31, 2004, nor do we expect to earn any revenue from
Zurich in future periods. 10




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9.     NET INCOME (LOSS) PER COMMON SHARE We calculate basic net income (loss) per common share as the loss
available to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
calculated to reflect the potential dilution that would occur if stock options
or other contracts to issue common stock were exercised and resulted in
additional common stock that would share in the earnings of S1. Because of our
net losses in the quarter ended March 31, 2003, the issuance of additional
shares of common stock through the exercise of stock options or stock warrants
or upon the conversion of preferred stock would have an anti-dilutive effect on
our net loss per share for that period. The total number of common shares
included in our computation of diluted loss per share when they are dilutive is
as follows (in thousands): Three Months EndedMarch 31,2004
    
    2003Weighted average common shares outstanding
    
    
    70,983
    
    
    
    69,248Weighted average effect of common stock equivalents:Convertible preferred stock
    
    
    1,070
    
    
    
    1,719Stock options
    
    
    2,091
    
    
    
    951Weighted average diluted shares outstanding
    
    
    74,144
    
    
    
    71,918
 11




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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, 2003, 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,
2003. Overview We operate and manage S1 in two business segments: financial
institutions, which is our core business segment, and the Edify business. 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, subject to a
minimum charge. We also generate recurring revenues by charging our customers a
periodic fee for maintenance and software support. In 2003, within our financial institutions business, we generated
approximately 39% of our revenues from licenses and services provided to our
two major customers (State Farm Mutual Automobile Insurance Company and Zurich
Insurance Company). The remainder of the revenue was generated from the sale of
licenses and services in the global financial services market. In the fourth
quarter of 2003, we substantially completed a transition from our legacy
Internet-only business to an Enterprise software and services business. During
the transition, we experienced a loss or decrease of revenue from legacy
Internet-only customers. Zurich, whose contract with us expired on December
31, 2003, accounted for approximately $43 million in revenue in 2003, will not
generate any revenue for S1 in 2004. Revenue from State Farm of approximately
$46 million in 2003 is expected to be approximately $40 million in 2004. In
addition to these two customers, we had a number of other legacy Internet-only
customers that have cancelled their hosting contracts or moved to in house
implementations contributing to an anticipated loss of data center revenue from
2003 to 2004 of approximately $5 million. We believe the majority of these data
center revenue transitions were substantially completed during the third and
fourth quarters of 2003. 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. Throughout 2003 and the first quarter of 2004, we continued to invest in
the development of our new 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, corporate
cash management and branch automation. We expect to release a new version of
our S1 Enterprise Platform in the summer of 2004. As of the date of this
report, over sixty-five financial institutions are in production mode with a
hosted or on-premise S1 Enterprise solution. During the first quarter of 2004, we entered into long-term partnership
and distribution agreements with two international financial services solution
providers. We believe these agreements will expand our distribution and
delivery capacity in EMEA, Asia and Latin America regions. We did not record
any revenues from these agreements during the first quarter of 2004. These
relationships require time to train their personnel on our products and to
build a sales pipeline. We do not expect to record revenues from these
agreements until later in 2004. 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 12




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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. Comparison of the Three Months Ended March 31, 2004 and 2003 Revenues.The following table sets forth our revenue data for the three
months ended March 31, 2004 and 2003. Software
    
    Support and
    
    Professional
    
    DataLicenses
    
    Maintenance
    
    Services
    
    Center
    
    Other
    
    TotalQuarter Ended March 31, 2004:Core FI business
    
    $
    8,630
    
    
    $
    11,158
    
    
    $
    18,459
    
    
    $
    9,926
    
    
    $
    986
    
    
    $
    49,159Zurich
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial institutions segment
    
    
    8,630
    
    
    
    11,158
    
    
    
    18,459
    
    
    
    9,926
    
    
    
    986
    
    
    
    49,159Edify
    
    
    3,306
    
    
    
    4,431
    
    
    
    1,668
    
    
    
    
    
    
    
    
    
    
    
    9,405Eliminations
    
    
    (308
    )
    
    
    (288
    )
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (656
    )Total
    
    $
    11,628
    
    
    $
    15,301
    
    
    $
    20,067
    
    
    $
    9,926
    
    
    $
    986
    
    
    $
    57,908Quarter Ended March 31, 2003:Core FI business
    
    $
    6,196
    
    
    $
    11,640
    
    
    $
    21,254
    
    
    $
    9,009
    
    
    $
    215
    
    
    $
    48,314Zurich
    
    
    8,176
    
    
    
    
    
    
    
    
    
    
    
    2,752
    
    
    
    
    
    
    
    10,928Financial institutions segment
    
    
    14,372
    
    
    
    11,640
    
    
    
    21,254
    
    
    
    11,761
    
    
    
    215
    
    
    
    59,242Edify
    
    
    845
    
    
    
    4,322
    
    
    
    2,078
    
    
    
    
    
    
    
    
    
    
    
    7,245Eliminations
    
    
    (251
    )
    
    
    (520
    )
    
    
    (54
    )
    
    
    
    
    
    
    
    
    
    
    (825
    )Total
    
    $
    14,966
    
    
    $
    15,442
    
    
    $
    23,278
    
    
    $
    11,761
    
    
    $
    215
    
    
    $
    65,662
 Total revenues
decreased by $7.8 million to $57.9 million for the three
months ended March 31, 2004 compared to $65.7 million for the same period in
2003, a decrease of 12%. Our financial institutions segment earned revenues of
$49.2 million for the quarter ended March 31, 2004 compared with $59.2 million
for the same period in 2003. Revenues for our Edify business were $9.4 million
for the three months ended March 31, 2004 compared with $7.2 million for the
same period in 2003. In the first quarter of 2003, we recorded total revenue
from Zurich of approximately $10.9 million, including license revenue of $8.2
million and data center revenue of $2.8 million. We did not earn any revenue
from Zurich in the first quarter of 2004. We do not expect revenue growth from
our base financial institutions business to completely replace the lost Zurich
revenue during 2004. As a result, we expect revenues in 2004 to be lower than
2003. Software license revenues for our financial institutions segment were $8.6
million for the three months ended March 31, 2004, a decrease of $5.7 million
from the same period in 2003. This decrease is attributable to the loss of
license revenue earned from Zurich of $8.2 million during the three months
ended March 31, 2003, offset in part by license revenues earned from sales to
new customers and cross sales to existing customers. Excluding license
revenues from Zurich, license revenues increased $2.4 million or 39%. License
revenues can fluctuate from quarter to quarter. However, we generally expect
license revenues to grow sequentially on a quarterly basis in 2004. Software license revenue of $3.3 million for our Edify business increased
$2.5 million from the same period in 2003. This increase resulted from several
new large contracts signed this quarter, improved economic conditions in the
primary markets served by Edify (telecommunications, travel and retail) and the
stabilization of the business under new management. We expect quarterly
license revenues to be between $2.2 million and $4.0 million during 2004. Support and maintenance revenues for our financial institutions segment
were $11.2 million for the three months ended March 31, 2004 as compared to
$11.6 million for the same period in 2003. The decrease is primarily
attributable to the attrition of our legacy Internet-only customers; partially
offset by support and maintenance fees earned from customers who purchased
licenses during 2003. We believe that the attrition of legacy customers was
substantially complete at December 31, 2003 and that support and maintenance
revenues from our financial institutions segment will grow on a sequential
quarter basis. 13




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Support and maintenance revenues for the Edify business were $4.4 million
for the three months ended March 31, 2004, an increase of $0.1 million from the
same period in 2003. We expect support and maintenance revenues for our Edify
business to remain constant over the remainder of 2004. Professional services revenues for our financial institutions segment were
$18.5 million for the three months ended March 31, 2004, a decrease of $2.8
million from the same period in 2003. This decrease is principally attributable
to the decrease in professional services revenues from State Farm of $4.1
million, offset in part by revenues from new projects and a $0.4 million of
pass-through billings associated with third party services for one of our
customers. Services revenue in any one quarter can be impacted by one or two
large customer projects and therefore can be increase or decrease based on the
projects. However, we expect professional services revenue to increase for the
remainder of 2004 as revenues from new projects replace revenues lost to
completed projects. The Edify business recorded $1.7 million for professional services
revenues during the first quarter of 2004, which compares to $2.1 million for
the first quarter of 2003. We expect professional services revenues to be
between $1.4 and $2.0 million for the remainder of 2004. Data center revenues were $9.9 million for the three months ended March
31, 2004, a decrease of $1.8 million from the same period in 2003. The decrease
resulted from the loss of revenue from Zurich of $2.8 million, offset by
increases in the number of hosted customers. As we add hosted customers on our
S1 Enterprise products and our existing customers business grow, we expect data
center revenues to increase on a sequential quarter basis over the remainder of
2004. 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 decreased by $8.3 million to
$21.8 million for the three months ended March 31, 2004 from the same period in
2003. Overall gross margins were 57% and 50% for the three months ended March
31, 2004 and 2003, respectively. The overall decrease in direct costs and
corresponding increase in gross margins is a result of a lower cost base as
discussed below. Direct costs exclude charges for depreciation and amortization 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. The overall increase in cost of software licenses
was primarily related to increased license sales (excluding Zurich) in our
financial institutions business. Software
license costs for the Edify business decreased $0.2 million due
to a reduction in the cost of third party voice recognition software. 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 $17.7 million for the three
months ended March 31, 2004, a decrease of $7.7 million from $25.4 million for
the same period in 2003. $5.8 million of the decrease from 2003 was caused by
additional charges of $3.7 million on services projects that were accrued in
the first quarter of 2003 and released or reduced by $2.1 million in the first
quarter of 2004, as discussed below. We also benefited from cost savings
measures implemented during the second half of 2003, including reductions in
employee headcount and facilities costs. In the first and fourth quarters of 2003, we made accruals for losses on
three professional services contracts of $3.7 million and $1.0 million,
respectively. Further, in the fourth quarter of 2003, we deferred professional
services costs of $0.6 14




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million associated with one of these projects. These
loss accruals reflect the amounts by which our then anticipated future project
costs would exceed the remaining unrecognized contractual revenues for those
projects. In the first quarter of 2004, we reduced these loss accruals by
approximately $2.1 million, as a result of additional project funding from one
customer, and clarification of project scope and the resulting changes in cost
projections for the other loss projects. In addition, during the first quarter
of 2004, we recognized the professional services costs of $0.6 million that
were deferred in the fourth quarter of 2003. Remaining loss accruals at March
31, 2004 total $1.5 million. We may further reduce these loss accruals in the
second quarter of 2004, based on the resolution of certain project
uncertainties. 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 $1.9 million to $4.8 million for the three months ended
March 31, 2004 from $6.7 million for same period in 2003. The decrease is
primarily attributable to the cost savings realized from consolidation of the
U.K. data center into our global hosting center in Atlanta, Georgia during
2003. This was offset in part by $1.0 million of accelerated costs related to
the amendment of the Zurich contract in our U.K. data center during the first
quarter of 2003. Selling and Marketing Expenses.Total selling and marketing expenses
decreased by $3.2 million to $8.3 million for the three months ended March 31,
2004 from $11.5 million for the same period in 2003. This decrease is primarily
attributable to reduced sales and marketing headcount resulting in a decrease
in compensation expense, other payroll related costs and benefits and travel
and entertainment expenses, a decrease in bad debt expense and a decrease in
the cost of marketing programs. Product Development Expenses.Total product development expenses increased
by $1.4 million to $13.7 million for the three months ended March 31, 2004 from
$12.3 million for the same period in 2003. This increase is primarily
attributable to an increase in product development headcount and the increased
use of outside contractors to complete S1 Enterprise 3.0, which we expect to
release in the summer of 2004. General and Administrative Expenses.General and administrative expenses
decreased by $2.5 million to $6.7 million for the three months ended March 31,
2004 from $9.2 million for the same period in 2003. As a percentage of
revenues, general and administrative expenses were 12% and 14% for the three
months ended March 31, 2004 and 2003, respectively. The decrease in general and
administrative expenses was primarily attributable to a decrease in
compensation and benefits from lower headcount and lower discretionary spending
as a result of cost containment initiatives undertaken during the second half
of 2003, offset in part by an increase in professional fees related to
litigation matters in which we were involved in 2004. Depreciation.Depreciation decreased to $2.7 million for the three months
ended March 31, 2004 from $5.7 million for the same period in 2003, due to
reductions in capital expenditures during recent periods as compared with those
made in 2001 and 2002. A significant portion of those items that we purchased
in 2001 became fully depreciated by the end of 2003. We expect depreciation
expense to be approximately $3.0 million each quarter for the remainder of
2004. Merger Related Costs and Restructuring Charges.We did not record a
restructuring charge in the first quarter of 2004. We recorded restructuring
charges of $8.6 million during the quarter ended March 31, 2003 of which
approximately $0.9 million related to the Edify business. This charge was
partially offset by the release of a pre-merger liability of $0.5 million.
During the three months ended March 31, 2003, we began consolidating our U.K.
data center operations into our global hosting center in Atlanta, resulting in
restructuring charges of $2.3 million comprised of accelerated depreciation of
assets, severance costs and other related costs. In addition, we provided $6.3
million for losses on unused office facilities vacated as a result of cost
alignment activities and recorded other restructuring charges including
severance and other costs associated with a work force reduction in our
financial institution and Edify business operations as well as other corporate
charges. In total we terminated approximately 80 employees. Amortization of Other Intangible Assets and Goodwill Impairment.
Amortization of other intangible assets and goodwill impairment decreased $14.2
million to $0.8 million for the three months ended March 31, 2004 from $15.1
million for same period in 2003. The decrease was due to charges of $13.4
million in our Edify business in the first quarter of 2003, as explained below.
Amortization expense is expected to be approximately $0.8 million each quarter
for the remainder of 2004. 15




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In April 2003, we terminated our efforts to divest the Edify business. We
considered our inability to sell the Edify business on terms that were
acceptable to us a triggering event under SFAS No. 142 and No. 144 that
required us to perform a current assessment of the carrying value of the Edify
business. Based on our analysis of fair value for the Edify business,
including estimates we based on discounted future cash flows, market valuations
of comparable businesses and offers from potential buyers, we concluded that
the fair value of the Edify business was less than its carrying value.
Accordingly, we allocated our estimate of fair value for the unit to the
existing assets and liabilities of the Edify business as of March 31, 2003,
resulting in a goodwill impairment charge of $11.7 million and accelerated
amortization on other intangible assets and purchased software of $1.2 million
and $0.5 million, respectively. Interest and Other Income, Net.Interest and other income net was $47,000
and $0.2 million for the three months ended March 31, 2004 and 2003,
respectively. Income
Tax Expense.We recorded income tax expense of $0.5 million during
the three months ended March 31, 2004 compared to $0.1 million for the three
months ended March 31, 2003. We incurred foreign income tax expense in certain
European countries in 2004 and 2003. In 2004, we recorded alternative minimum
tax expense for our domestic operations as a result of limitations on the use
of our federal net operating loss carryforwards (NOLs). Although we have
NOLs and tax credit carryforwards of approximately $445.7 million at December
31, 2003, we may be required to record an income tax provision in future
periods for certain foreign subsidiaries which do not have NOLs to utilize and
in the United States due to limitations on the use of our federal NOLs for
alternative minimum tax purposes. At December 31, 2003, we had a valuation
allowance of $217.9 million on our deferred tax assets. If we achieve
sustained profitability, we may be required to reverse this valuation
allowance, which would have a positive impact on our income tax benefit and our
earnings in the period in which it may be reversed. We do not expect to
reverse this valuation allowance during 2004. Liquidity and Capital Resources The following tables show information about our cash flows during the
three months ended March 31, 2004 and 2003 and selected balance sheet data as
of March 31, 2004 and December 31, 2003: Three Months Ended March 31,2004
    
    2003(In thousands)Net cash used in operating activities before
changes in operating assets and liabilities
    
    $
    4,595
    
    
    $
    (3,753
    )Change in operating assets and liabilities
    
    
    (16,857
    )
    
    
    (6,127
    )Net cash used in operating activities
    
    
    (12,262
    )
    
    
    (9,880
    )Net cash (used in) provided by investing activities
    
    
    (9,959
    )
    
    
    9,684Net cash used in financing activities
    
    
    (4,535
    )
    
    
    (2,315
    )Effect of exchange rates on cash and cash equivalents
    
    
    (58
    )
    
    
    441Net decrease in cash and cash equivalents
    
    $
    (26,814
    )
    
    $
    (2,070
    )
 As ofMarch 31,
    
    December 31,2004
    
    2003(In thousands)Cash and cash equivalents
    
    $
    123,250
    
    
    $
    150,064Short term investments
    
    
    21,992
    
    
    
    14,126Working capital
    
    
    123,771
    
    
    
    125,940Total assets
    
    
    326,803
    
    
    
    337,088Total stockholders equity
    
    
    240,168
    
    
    
    243,814
 16




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Operating Activities.During the three months ended March 31, 2004, cash
used in operations was $12.3 million compared to $9.9 million for same period
in 2003. The deterioration in net cash flows from operating activities
generally reflects the effects of changes in operating assets and liabilities
offset in part by 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, 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. Cash used in operations for the three months ended March 31, 2003 included the effects of:  
    
    our net loss of $29.3 million;
    
    non-cash charges of $20.8 million of depreciation, amortization
and a $13.4 million impairment of goodwill and other intangible
assets in the Edify business;
    
    provision of doubtful accounts receivable and billing
adjustments of $2.6 million; and
    
    an increase of $9.8 million in accounts receivable, including
$6.0 million due to the timing of payments from Zurich which was
received in April 2003. Investing Activities.Cash used in investing activities was $10.0 million
for the three months ended March 31, 2004 compared to cash provided by
investing activities of $9.7 million in the same period in 2003. In the first three months of 2004, we:  
    
    converted $7.9 million, net, from cash and cash equivalents to short-term investments; and
    
    purchased $2.1 million of property and equipment. In the first three months of 2003, we:  
    
    converted $10.3 million, net, from short-term investments to cash and cash equivalents; and
    
    purchased $0.7 million of property and equipment. Financing Activities.Cash used in financing activities was $4.5 million
for the three months ended March 31, 2004 compared to $2.3 million in same
period in 2003. In the first three months of 2004 and 2003, we received $0.3 million and
$0.4 million, respectively, from the sale of common stock under our employee
stock plans. We paid $0.3 million and $1.9 million, respectively, for capital
lease obligations in the three months ended March 31, 2004 and 2003. In the
first quarter of 2004 and 2003, we repurchased $4.5 million and $0.8 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, 2004, we repurchased 0.7
million shares of our common stock for $5.0 million under this program. 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 17




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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. 
 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 2003 Annual Report on Form 10-K. There have been no
significant changes in our market risk from December 31, 2003. 
 Item 4.      Controls and Procedures Our management, including the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) (the Exchange Act) as
of the end of the period covered by this report. Based upon that evaluation,
our management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, our disclosure controls and procedures are effective
in timely alerting them to any material information relating to the Company and
its subsidiaries required to be included in our Exchange Act filings. There were no significant changes made in our internal controls over
financial reporting that occurred during our most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 18




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PART II  OTHER INFORMATION 
 Item 1.      Legal Proceedings. Except as noted below, there is 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.  
    
    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. While we do not believe that the above matter or any other pending
litigation will be material to our financial position or results of operations,
there can be no assurance on the ultimate outcome of this matter. 
 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 DollarNumber of
    
    Average Price
    
    Purchased as Part of
    
    Value of Shares that MayShares
    
    Paid per
    
    Publicly Announced Plans
    
    Yet Be Purchased UnderPurchased
    
    Share
    
    or Programs
    
    the Plans or ProgramsJanuary 1, 2004 to January 31, 2004
    
    
    28,000
    
    
    $
    8.16
    
    
    
    28,000
    
    
    $
    14,351,828February 1, 2004 to February 29, 2004
    
    
    144,000
    
    
    $
    7.36
    
    
    
    144,000
    
    
    $
    13,681,886March 1, 2004 to March 31, 2004
    
    
    440,000
    
    
    $
    7.34
    
    
    
    440,000
    
    
    $
    10,472,862Total
    
    
    612,000
    
    
    $
    7.42
    
    
    
    612,000
    
    
    $
    10,472,862
 In October 2003, 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, 2004: Current Report on Form 8-K filed with the SEC on February 12,
2004 (date of report February 12, 2004) (regarding a press release
and an analyst conference call related to fourth quarter of 2003
results and S1 and its operations). Current Report on Form 8-K filed with the SEC on March 15, 2004
(date of report March 15, 2004) (regarding an adjustment to S1s
2003 financial information during the preparation of the Form 10-K
for the year ended December 31, 2003). 19




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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 10, 2004. S1 CORPORATIONBy:
    /s/ Matthew HaleMatthew HaleChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 20