##### 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 June 30, 2005
 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)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
 þ o




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S1 CORPORATION AND SUBSIDIARIES
 QUARTERLY PERIOD ENDED JUNE 30, 2005
 TABLE OF CONTENTS
  
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005
and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005
and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements as of June 30, 2005
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 6. Exhibits
    
    
    25Signature
    
    
    26EX-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
   
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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)
(Unaudited)
 June 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,981
    
    
    $
    43,223Short-term investments
    
    
    52,619
    
    
    
    65,248Accounts receivable, net
    
    
    64,011
    
    
    
    61,216Prepaid expenses
    
    
    6,880
    
    
    
    6,113Other current assets
    
    
    3,748
    
    
    
    5,485Total current assets
    
    
    177,239
    
    
    
    181,285Property and equipment, net
    
    
    13,792
    
    
    
    15,150Intangible assets, net
    
    
    20,300
    
    
    
    22,766Goodwill, net
    
    
    117,657
    
    
    
    117,699Other assets
    
    
    3,126
    
    
    
    3,981Total assets
    
    $
    332,114
    
    
    $
    340,881LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,717
    
    
    $
    6,253Accrued compensation and benefits
    
    
    8,372
    
    
    
    14,269Accrued restructuring
    
    
    2,323
    
    
    
    3,337Accrued other expenses
    
    
    11,279
    
    
    
    17,369Deferred revenues
    
    
    41,814
    
    
    
    33,302Current portion of capital lease obligation
    
    
    1,212
    
    
    
    1,523Total current liabilities
    
    
    69,717
    
    
    
    76,053Capital lease obligation, excluding current portion
    
    
    1,437
    
    
    
    1,572Accrued restructuring, excluding current portion
    
    
    3,931
    
    
    
    4,789Other liabilities
    
    
    3,083
    
    
    
    3,471Total liabilities
    
    
    78,168
    
    
    
    85,885Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    742
    
    
    
    742Additional paid-in capital
    
    
    1,914,221
    
    
    
    1,913,913Common stock held in treasury  at cost
    
    
    (25,000
    )
    
    
    (21,593
    )Accumulated deficit
    
    
    (1,643,111
    )
    
    
    (1,646,147
    )Accumulated other comprehensive loss
    
    
    (2,906
    )
    
    
    (1,919
    )Total stockholders equity
    
    
    253,946
    
    
    
    254,996Total liabilities and stockholders equity
    
    $
    332,114
    
    
    $
    340,881Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    74,217,499
    
    
    
    74,152,529Common stock held in treasury
    
    
    4,053,886
    
    
    
    3,544,111
  3




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S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 302005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Software licenses
    
    $
    13,941
    
    
    $
    9,349
    
    
    $
    27,187
    
    
    $
    20,950Support and maintenance
    
    
    17,544
    
    
    
    16,191
    
    
    
    35,419
    
    
    
    31,255Professional services
    
    
    20,325
    
    
    
    23,415
    
    
    
    41,642
    
    
    
    42,764Data center
    
    
    9,883
    
    
    
    9,759
    
    
    
    19,547
    
    
    
    18,869Other
    
    
    344
    
    
    
    678
    
    
    
    656
    
    
    
    1,668Total revenues
    
    
    62,037
    
    
    
    59,392
    
    
    
    124,451
    
    
    
    115,506Operating expenses:Cost of software licenses
    
    
    1,524
    
    
    
    2,510
    
    
    
    3,230
    
    
    
    4,441Cost of professional services, support and maintenance (1)
    
    
    20,008
    
    
    
    17,894
    
    
    
    39,988
    
    
    
    34,795Cost of data center (1)
    
    
    4,019
    
    
    
    4,461
    
    
    
    8,222
    
    
    
    8,835Cost of other revenue
    
    
    94
    
    
    
    548
    
    
    
    263
    
    
    
    1,448Selling and marketing
    
    
    11,507
    
    
    
    9,030
    
    
    
    21,302
    
    
    
    17,094Product development
    
    
    12,714
    
    
    
    13,614
    
    
    
    26,515
    
    
    
    27,278General and administrative
    
    
    7,598
    
    
    
    7,094
    
    
    
    16,406
    
    
    
    12,999Depreciation
    
    
    2,554
    
    
    
    2,475
    
    
    
    5,114
    
    
    
    5,096Amortization of other intangible assets
    
    
    328
    
    
    
    195
    
    
    
    657
    
    
    
    465Total operating expenses
    
    
    60,346
    
    
    
    57,821
    
    
    
    121,697
    
    
    
    112,451Operating income
    
    
    1,691
    
    
    
    1,571
    
    
    
    2,754
    
    
    
    3,055Interest and other income (expense), net
    
    
    757
    
    
    
    (753
    )
    
    
    893
    
    
    
    (706
    )Income before income tax expense
    
    
    2,448
    
    
    
    818
    
    
    
    3,647
    
    
    
    2,349Income tax expense
    
    
    (556
    )
    
    
    (1
    )
    
    
    (1,035
    )
    
    
    (461
    )Income from continuing operations
    
    
    1,892
    
    
    
    817
    
    
    
    2,612
    
    
    
    1,888Discontinued operations:Loss from operations of discontinued operations, net of tax
    
    
    (31
    )
    
    
    (197
    )
    
    
    (31
    )
    
    
    (824
    )Gain on disposal of discontinued operations, net of tax
    
    
    455
    
    
    
    
    
    
    
    455
    
    
    
    Net income
    
    $
    2,316
    
    
    $
    620
    
    
    $
    3,036
    
    
    $
    1,064Basic earnings per share:Continuing operations
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.03Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    (0.01
    )Net income per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.02Diluted earnings per share:Continuing operations
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.02Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    (0.01
    )Net income per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.01Weighted average common shares outstanding  basic
    
    
    70,191,090
    
    
    
    70,590,274
    
    
    
    70,391,240
    
    
    
    70,786,719Weighted
average common shares outstanding  fully diluted
    
    
    70,872,560
    
    
    
    73,553,854
    
    
    
    71,570,373
    
    
    
    73,293,175
 
 (1)
    
    Cost of professional services, support and maintenance and cost of data center excludes
charges for depreciation  4




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S1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
 Six Months EndedJune 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    3,036
    
    
    $
    1,064Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    7,580
    
    
    
    6,889Equity in net loss of affiliate
    
    
    
    
    
    
    750Provision for doubtful accounts receivable and billing adjustments
    
    
    1,041
    
    
    
    1,163Changes in assets and liabilities, excluding effects of acquisitions:Increase in accounts receivable
    
    
    (4,405
    )
    
    
    (8,748
    )Decrease (increase) in prepaid expenses and other assets
    
    
    1,880
    
    
    
    (30
    )Decrease in accounts payable
    
    
    (1,536
    )
    
    
    (706
    )Decrease in accrued expenses and other liabilities
    
    
    (14,022
    )
    
    
    (12,652
    )Increase (decrease) in deferred revenues
    
    
    8,329
    
    
    
    (1,296
    )Net cash provided by (used in) operating activities
    
    
    1,903
    
    
    
    (13,566
    )Cash flows from investing activities:Cash paid in connection with acquisition
    
    
    
    
    
    
    (1,198
    )Maturities of short-term investment securities
    
    
    33,800
    
    
    
    41,236Purchases of short-term investment securities
    
    
    (21,171
    )
    
    
    (41,811
    )Investment in equity method investee
    
    
    
    
    
    
    (750
    )Purchases of property, equipment and technology
    
    
    (3,229
    )
    
    
    (3,642
    )Net cash provided by (used in) investing activities
    
    
    9,400
    
    
    
    (6,165
    )Cash flows from financing activities:Proceeds from sale of common stock under employee stock purchase and
option plans
    
    
    309
    
    
    
    1,777Payments on capital lease obligations
    
    
    (973
    )
    
    
    (491
    )Repurchase of common stock held in treasury
    
    
    (3,407
    )
    
    
    (5,369
    )Net cash used in financing activities
    
    
    (4,071
    )
    
    
    (4,083
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (474
    )
    
    
    (159
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,758
    
    
    
    (23,973
    )Cash and cash equivalents at beginning of period
    
    
    43,223
    
    
    
    76,713Cash and cash equivalents at end of period
    
    $
    49,981
    
    
    $
    52,740Noncash investing and financing activities:Property and equipment acquired through leases
    
    $
    527
    
    
    $
    1,249
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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
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    2,316
    
    
    $
    620
    
    
    $
    3,036
    
    
    $
    1,064Deduct:Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (2,927
    )
    
    
    (6,519
    )
    
    
    (6,167
    )
    
    
    (12,782
    )Pro forma net loss
    
    $
    (611
    )
    
    $
    (5,899
    )
    
    $
    (3,131
    )
    
    $
    (11,718
    )Basic and diluted net income (loss) per share:As reported  basic
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.02As reported  diluted
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.01Pro forma
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    (0.17
    )
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2005
    
    
    2004Expected volatility
    
    
    87.5
    %
    
    
    105.4
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    3.4
    %Expected life
    
    3.8 years
    
    4.0 years
 Reclassifications
   Consolidated Balance Sheet  June 30, 2004
 Previously
    
    
    
    
    
    
    AsReported
    
    
    Reclass
    
    

ReclassifiedCash and cash equivalents
    
    $
    126,145
    
    
    $
    (73,405
    )
    
    $
    52,740Short-term investments
    
    
    14,647
    
    
    
    73,405
    
    
    
    88,052Total
    
    $
    140,792
    
    
    $
    
    
    
    $
    140,792
 Consolidated Statement of Cash Flow  Six Months Ended June 30, 2004
 Previously
    
    
    
    
    
    
    AsReported
    
    
    Reclass
    
    

ReclassifiedMaturities of short-term
investments securities
    
    $
    22,313
    
    
    $
    18,923
    
    
    $
    41,236Purchases of short-term
investments securities
    
    
    (22,834
    )
    
    
    (18,977
    )
    
    
    (41,811
    )Net change
    
    $
    (521
    )
    
    $
    (54
    )
    
    $
    (575
    )
  Consolidated
Balance Sheet  December 31, 2003
 PreviouslyReported
    
    
    Reclass
    
    

RevisedCash and
cash equivalents
    
    $
    150,064
    
    
    $
    (73,351
    )
    
    $
    76,713Short-term
investments
    
    
    14,126
    
    
    
    73,351
    
    
    
    87,477Total
    
    $
    164,190
    
    
    $
    
    
    
    $
    164,190
 Consolidated Statement of Cash flow  Year Ended December 31, 2003
 PreviouslyReported
    
    
    Reclass
    
    

RevisedMaturities of short-term
investments securities
    
    $
    31,483
    
    
    $
    8,650
    
    
    $
    40,133Purchases of short-term
investments securities
    
    
    (28,135
    )
    
    
    (45,821
    )
    
    
    (73,956
    )Net change
    
    $
    3,348
    
    
    $
    (37,171
    )
    
    $
    (33,823
    )
 Consolidated
Statement of Cash Flow  Year Ended December 31, 2002
 PreviouslyReported
    
    
    Reclass
    
    

RevisedMaturities of short-term
investments securities
    
    $
    74,789
    
    
    $
    2,095
    
    
    $
    76,884Purchases of short-term
investments securities
    
    
    (60,814
    )
    
    
    (25,009
    )
    
    
    (85,823
    )Net change
    
    $
    13,975
    
    
    $
    (22,914
    )
    
    $
    (8,939
    )
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Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004Cost of software licenses:Previously reported
    
    $
    801
    
    
    $
    1,940
    
    
    $
    3,305Reclassification
    
    
    905
    
    
    
    570
    
    
    
    1,136As reclassified
    
    
    1,706
    
    
    
    2,510
    
    
    
    4,441Amortization of other intangible assets:Previously reported
    
    $
    1,234
    
    
    $
    765
    
    
    $
    1,601Reclassification
    
    
    (905
    )
    
    
    (570
    )
    
    
    (1,136
    )As reclassified
    
    
    329
    
    
    
    195
    
    
    
    465
 3. DISCONTINUED OPERATIONS
    Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    
    
    
    
    $
    1,514
    
    
    
    
    
    
    $
    3,308Loss from discontinued operations
    
    $
    (31
    )
    
    $
    (197
    )
    
    $
    (31
    )
    
    $
    (824
    )Income tax benefit
    
    $
    455
    
    
    
    
    
    
    $
    455
    
    
    
    
 4. GOODWILL AND OTHER INTANGIBLE ASSETS
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,489
    
    
    $
    (8,120
    )Customer relationships
    
    
    12,600
    
    
    
    (3,669
    )Total
    
    $
    32,089
    
    
    $
    (11,789
    )
  2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Financial institutions business segment
    
    $
    4,931
    
    
    $
    4,931
    
    
    $
    3,990
    
    
    $
    3,165
    
    
    $
    2,200
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FinancialInstitutions
    
    
    Edify
    
    
    Total(In thousands)Balance, January 1, 2005
    
    $
    112,813
    
    
    $
    4,886
    
    
    $
    117,699Purchase price adjustment
    
    
    178
    
    
    
    
    
    
    
    178Utilization of acquisition related
income tax benefits
    
    
    (220
    )
    
    
    
    
    
    
    (220
    )Balance, June 30, 2005
    
    $
    112,771
    
    
    $
    4,886
    
    
    $
    117,657
 5. STOCKHOLDERS EQUITY
   6. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    2,316
    
    
    $
    620
    
    
    $
    3,036
    
    
    $
    1,064Foreign currency translation adjustment
    
    
    (357
    )
    
    
    (356
    )
    
    
    (1,043
    )
    
    
    (174
    )Unrealized loss on cash flow hedges
    
    
    91
    
    
    
    
    
    
    
    57
    
    
    
    Comprehensive income
    
    $
    2,050
    
    
    $
    264
    
    
    $
    2,050
    
    
    $
    890
 7. DERIVATIVE FINANCIAL INSTRUMENTS
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Three MonthsEndedJune 30, 2005Accumulated derivative net loss as of April 1, 2005
    
    $
    (34
    )Net change in fair value of derivatives
    
    
    90Net gains reclassified from AOCI into earnings
    
    
    (1
    )Accumulated derivative net gain as of June 30, 2005
    
    $
    55
 Six MonthsEndedJune 30, 2005Accumulated derivative net loss as of January 1, 2005
    
    $
    Net change in fair value of derivatives
    
    
    56Net gains reclassified from AOCI into earnings
    
    
    (1
    )Accumulated derivative net gain as of June 30, 2005
    
    $
    55
  8. RESTRUCTURING CHARGES
  Lease Costs(In thousands)Balance, December 31, 2004
    
    $
    8,126Amounts paid
    
    
    (1,872
    )Balance, June 30, 2005
    
    $
    6,254
  9. CONTINGENCIES
 Litigation
   11




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Warranties
  10. SEGMENT REPORTING AND MAJOR CUSTOMERS
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Financial institutions
    
    $
    38
    
    
    $
    43
    
    
    $
    81
    
    
    $
    99Edify
    
    
    430
    
    
    
    243
    
    
    
    967
    
    
    
    843
  Three Months Ended June 30, 2005FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    54,486
    
    
    $
    8,018
    
    
    $
    (467
    )
    
    $
    62,037Operating expenses:Direct costs
    
    
    23,580
    
    
    
    2,532
    
    
    
    (467
    )
    
    
    25,645Selling and marketing
    
    
    9,014
    
    
    
    2,493
    
    
    
    
    
    
    
    11,507Product development
    
    
    11,304
    
    
    
    1,410
    
    
    
    
    
    
    
    12,714General and administrative
    
    
    6,780
    
    
    
    818
    
    
    
    
    
    
    
    7,598Depreciation
    
    
    2,425
    
    
    
    129
    
    
    
    
    
    
    
    2,554Amortization of other intangible assets
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    328Total operating expenses
    
    
    53,431
    
    
    
    7,382
    
    
    
    (467
    )
    
    
    60,346Segment operating income
    
    $
    1,055
    
    
    $
    636
    
    
    $
    
    
    
    $
    1,691
 12




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##### Table of Contents



Three Months Ended June 30, 2004FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    50,401
    
    
    $
    9,277
    
    
    $
    (286
    )
    
    $
    59,392Operating expenses:Direct costs
    
    
    21,938
    
    
    
    3,761
    
    
    
    (286
    )
    
    
    25,413Selling and marketing
    
    
    6,338
    
    
    
    2,692
    
    
    
    
    
    
    
    9,030Product development
    
    
    12,137
    
    
    
    1,477
    
    
    
    
    
    
    
    13,614General and administrative
    
    
    6,050
    
    
    
    1,044
    
    
    
    
    
    
    
    7,094Depreciation
    
    
    2,252
    
    
    
    223
    
    
    
    
    
    
    
    2,475Amortization of other intangible assets
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    195Total operating expenses
    
    
    48,910
    
    
    
    9,197
    
    
    
    (286
    )
    
    
    57,821Segment operating income
    
    $
    1,491
    
    
    $
    80
    
    
    $
    
    
    
    $
    1,571
 Six Months Ended June 30, 2005FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    109,964
    
    
    $
    15,534
    
    
    $
    (1,047
    )
    
    $
    124,451Operating expenses:Direct costs
    
    
    47,683
    
    
    
    5,067
    
    
    
    (1,047
    )
    
    
    51,703Selling and marketing
    
    
    16,526
    
    
    
    4,776
    
    
    
    
    
    
    
    21,302Product development
    
    
    23,587
    
    
    
    2,928
    
    
    
    
    
    
    
    26,515General and administrative
    
    
    14,646
    
    
    
    1,760
    
    
    
    
    
    
    
    16,406Depreciation
    
    
    4,833
    
    
    
    281
    
    
    
    
    
    
    
    5,114Amortization of other intangible assets
    
    
    657
    
    
    
    
    
    
    
    
    
    
    
    657Total operating expenses
    
    
    109,932
    
    
    
    14,812
    
    
    
    (1,047
    )
    
    
    121,697Segment operating income
    
    $
    2,032
    
    
    $
    722
    
    
    $
    
    
    
    $
    2,754
 Six Months Ended June 30, 2004FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    97,766
    
    
    $
    18,682
    
    
    $
    (942
    )
    
    $
    115,506Operating expenses:Direct costs
    
    
    43,052
    
    
    
    7,409
    
    
    
    (942
    )
    
    
    49,519Selling and marketing
    
    
    11,597
    
    
    
    5,497
    
    
    
    
    
    
    
    17,094Product development
    
    
    24,245
    
    
    
    3,033
    
    
    
    
    
    
    
    27,278General and administrative
    
    
    10,980
    
    
    
    2,019
    
    
    
    
    
    
    
    12,999Depreciation
    
    
    4,657
    
    
    
    439
    
    
    
    
    
    
    
    5,096Amortization of other intangible assets
    
    
    390
    
    
    
    75
    
    
    
    
    
    
    
    465Total operating expenses
    
    
    94,921
    
    
    
    18,472
    
    
    
    (942
    )
    
    
    112,451Segment operating income
    
    $
    2,845
    
    
    $
    210
    
    
    $
    
    
    
    $
    3,055
  13




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##### Table of Contents



11. NET INCOME PER COMMON SHARE
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Basic earnings per share:Net income
    
    $
    2,316
    
    
    $
    620
    
    
    $
    3,036
    
    
    $
    1,064Amount allocated to participating preferred stockholders
    
    
    (35
    )
    
    
    (9
    )
    
    
    (45
    )
    
    
    (16
    )Income available to common stockholders  basic
    
    $
    2,281
    
    
    $
    611
    
    
    $
    2,991
    
    
    $
    1,048Weighted average common shares outstanding
    
    
    70,191
    
    
    
    70,590
    
    
    
    70,391
    
    
    
    70,787Basic earnings per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.02Diluted earnings per share:Net income
    
    $
    2,316
    
    
    $
    620
    
    
    $
    3,036
    
    
    $
    1,064Amount allocated to participating preferred stockholders
    
    
    (35
    )
    
    
    (9
    )
    
    
    (45
    )
    
    
    (16
    )Income available to common stockholders  diluted
    
    $
    2,281
    
    
    $
    611
    
    
    $
    2,991
    
    
    $
    1,048Weighted average common shares outstanding
    
    
    70,191
    
    
    
    70,590
    
    
    
    70,391
    
    
    
    70,787Weighted average effect of common stock equivalents:Stock options
    
    
    681
    
    
    
    2,964
    
    
    
    1,179
    
    
    
    2,506Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    70,872
    
    
    
    73,554
    
    
    
    71,570
    
    
    
    73,293Diluted earnings per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.01
 14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
      15




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##### Table of Contents











Comparison of the Three Months Ended June 30, 2005 and 2004




Revenues.


Software
    
    
    Support and
    
    
    ProfessionalLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Data Center
    
    
    Other
    
    
    TotalQuarter Ended June 30, 2005:Core FI business
    
    $
    11,797
    
    
    $
    13,268
    
    
    $
    19,194
    
    
    $
    9,883
    
    
    $
    344
    
    
    $
    54,486Edify
    
    
    2,256
    
    
    
    4,631
    
    
    
    1,131
    
    
    
    
    
    
    
    
    
    
    
    8,018Eliminations
    
    
    (112
    )
    
    
    (355
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (467
    )Total
    
    $
    13,941
    
    
    $
    17,544
    
    
    $
    20,325
    
    
    $
    9,883
    
    
    $
    344
    
    
    $
    62,037Quarter Ended June 30, 2004:Core FI business
    
    $
    6,415
    
    
    $
    11,756
    
    
    $
    21,793
    
    
    $
    9,759
    
    
    $
    678
    
    
    $
    50,401Edify
    
    
    3,033
    
    
    
    4,620
    
    
    
    1,624
    
    
    
    
    
    
    
    
    
    
    
    9,277Eliminations
    
    
    (99
    )
    
    
    (185
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (286
    )Total
    
    $
    9,349
    
    
    $
    16,191
    
    
    $
    23,415
    
    
    $
    9,759
    
    
    $
    678
    
    
    $
    59,392




16




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##### Table of Contents



Direct Costs and Gross Margins.
   17




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##### Table of Contents



Selling and Marketing Expenses.
 Product Development Expenses.
  General and Administrative Expenses.
 Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income (Expense), Net.
 Income Tax Expense.
 18




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##### Table of Contents




    
    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.
   Loss from Discontinued Operations.
 Comparison of the Six Months Ended June 30, 2005 and 2004
  Revenues.
 Software
    
    
    Support and
    
    
    ProfessionalLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Data Center
    
    
    Other
    
    
    TotalSix Months Ended June 30, 2005Core FI business
    
    $
    23,212
    
    
    $
    26,834
    
    
    $
    39,715
    
    
    $
    19,547
    
    
    $
    656
    
    
    $
    109,964Edify
    
    
    4,306
    
    
    
    9,301
    
    
    
    1,927
    
    
    
    
    
    
    
    
    
    
    
    15,534Eliminations
    
    
    (331
    )
    
    
    (716
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,047
    )Total
    
    $
    27,187
    
    
    $
    35,419
    
    
    $
    41,642
    
    
    $
    19,547
    
    
    $
    656
    
    
    $
    124,451Six Months Ended June 30, 2004:Core FI business
    
    $
    15,018
    
    
    $
    22,677
    
    
    $
    39,534
    
    
    $
    18,869
    
    
    $
    1,668
    
    
    $
    97,766Edify
    
    
    6,339
    
    
    
    9,051
    
    
    
    3,292
    
    
    
    
    
    
    
    
    
    
    
    18,682Eliminations
    
    
    (407
    )
    
    
    (473
    )
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (942
    )Total
    
    $
    20,950
    
    
    $
    31,255
    
    
    $
    42,764
    
    
    $
    18,869
    
    
    $
    1,668
    
    
    $
    115,506
  19




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Direct
Costs and Gross Margins.
      20




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##### Table of Contents



Selling and Marketing Expenses.
 Product Development Expenses.
 General and Administrative Expenses.
 Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income (Expense), Net.
 Income Tax Expense.
 Loss from Discontinued Operations.
 Liquidity and Capital Resources
  Six Months Ended June 30,2005
    
    
    2004(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    11,657
    
    
    $
    9,866Change in operating assets and liabilities
    
    
    (9,754
    )
    
    
    (23,432
    )Net cash provided by (used in) operating activities
    
    
    1,903
    
    
    
    (13,566
    )Net cash provided by (used in) investing activities
    
    
    9,400
    
    
    
    (6,165
    )Net cash used in financing activities
    
    
    (4,071
    )
    
    
    (4,083
    )Effect of exchange rates on cash and cash equivalents
    
    
    (474
    )
    
    
    (159
    )Net decrease in cash and cash equivalents
    
    $
    (6,758
    )
    
    $
    (23,973
    )
 21




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##### Table of Contents



As ofJune 30, 2005
    
    
    December 31, 2004(In thousands)Cash and cash equivalents.
    
    $
    49,981
    
    
    $
    43,223Short term investments
    
    
    52,619
    
    
    
    65,248Working capital
    
    
    107,522
    
    
    
    105,232Total assets
    
    
    332,114
    
    
    
    340,881Total stockholders equity
    
    
    253,946
    
    
    
    254,996
 Operating Activities.
  
    
    our net income of $3.0 million;
    
    non-cash charges of $7.6 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $1.0 million;
    
    a decrease in accrued expenses and other liabilities of $14.0 million, approximately
$4.7 million related to the payment of annual expenses, including annual employee
bonuses and incentive pay;
    
    an increase of $4.4 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
and
    
    changes in other operating assets and liabilities of $8.7 million.
  
    
    our net income of $1.1 million;
    
    non-cash charges of $6.9 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $1.2 million;
    
    a decrease in accrued expenses and other liabilities of $12.7 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 $8.7 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 $2.0 million.
 Investing Activities.
  
    
    converted $12.6 million, net, from short-term investments to cash and cash equivalents; and
    
    purchased $3.2 million of property and equipment.
  
    
    paid $1.2 million in connection with the acquisition of the Indian development business;
    
    invested $0.8 million in an unconsolidated subsidiary; and
    
    purchased $3.6 million of property and equipment.
  22




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##### Table of Contents







Financing Activities.











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.


23



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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
 Issuer Purchases of Equity Securities
 Total Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value of SharesTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    that May Yet BeShares
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePurchased
    
    
    per Share
    
    
    Programs
    
    
    Plans or ProgramsApril 1, 2005 to April 30, 2005
    
    
    279,865
    
    
    $
    6.31
    
    
    
    279,865
    
    
    $
    -0-
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    S1s 2005 annual meeting of shareholders was held on May 12, 2005.(b)
    
    Gregory J. Owens was re-elected and Ram Gupta was elected as directors at the 2005 annual
meeting. Continuing directors include Jaime W. Ellertson, James S. Mahan, M. Douglas Ivester
and John W. Speigel.(c)
    
    The election of two directors for three-year terms was voted on and approved by S1s
shareholders at the 2005 annual meeting of shareholders held on May 12, 2005.The results of the voting by shareholders at the annual meeting were as follows:
 Against/Director Nominee
    
    For
    
    
    Withheld
    
    
    Broker Non-VotesRam Gupta
    
    
    56,268,716
    
    
    
    6,613,075
    
    
    
    -0-Gregory J. Owens
    
    
    59,774,076
    
    
    
    3,107,715
    
    
    
    -0-
 At S1s 2005 annual meeting of shareholders, shareholders did not approve the
proposed amendment to the 2003 Stock Incentive Plan. There were 17,669,552 votes to
approve the amendment to the 2003 Stock Incentive Plan, 26,268,192 against approval,
146,676 votes abstained and 19,474,746 un-voted shares.(d)
    
    Not applicable
 24




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##### Table of Contents



Item 6. Exhibits.
 (a)
    
    Exhibits31.1
    
    
    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
 25




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##### Table of Contents



SIGNATURE
  S1 CORPORATIONBy:
    /s/ Matthew HaleMatthew HaleChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 26