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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
 FORM 10-Q
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period From                    to
 Commission File Number: 000-24931 S1 CORPORATION (Exact name of registrant as specified in its charter)
 Delaware(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 August 5, 2004: 70,606,408




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S1 CORPORATION AND SUBSIDIARIES QUARTERLY PERIOD ENDED JUNE 30, 2004 TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements as of June 30, 2004
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 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 Holder
    
    
    24Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    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
  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)
 June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    126,145
    
    
    $
    150,064Short-term investments
    
    
    14,647
    
    
    
    14,126Accounts receivable, net
    
    
    44,758
    
    
    
    37,188Prepaid expenses
    
    
    7,248
    
    
    
    5,745Other current assets
    
    
    1,650
    
    
    
    3,218Total current assets
    
    
    194,448
    
    
    
    210,341Property and equipment, net
    
    
    15,315
    
    
    
    15,661Intangible assets, net
    
    
    12,853
    
    
    
    14,073Goodwill, net
    
    
    94,158
    
    
    
    93,462Other assets
    
    
    3,736
    
    
    
    3,551Total assets
    
    $
    320,510
    
    
    $
    337,088LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,521
    
    
    $
    6,166Accrued compensation and benefits
    
    
    9,865
    
    
    
    11,500Accrued restructuring
    
    
    3,153
    
    
    
    4,711Accrued other expenses
    
    
    13,807
    
    
    
    22,726Deferred revenues
    
    
    37,395
    
    
    
    38,536Current portion of capital lease obligation
    
    
    1,026
    
    
    
    762Total current liabilities
    
    
    70,767
    
    
    
    84,401Capital lease obligation, excluding current portion
    
    
    1,017
    
    
    
    523Accrued restructuring, excluding current portion
    
    
    6,417
    
    
    
    7,063Other liabilities
    
    
    1,197
    
    
    
    1,287Total liabilities
    
    
    79,398
    
    
    
    93,274Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    735
    
    
    
    732Additional paid-in capital
    
    
    1,909,692
    
    
    
    1,907,918Common stock held in treasury  at cost
    
    
    (15,807
    )
    
    
    (10,438
    )Accumulated deficit
    
    
    (1,660,653
    )
    
    
    (1,661,717
    )Accumulated other comprehensive loss
    
    
    (2,855
    )
    
    
    (2,681
    )Total stockholders equity
    
    
    241,112
    
    
    
    243,814Total liabilities and stockholders equity
    
    $
    320,510
    
    
    $
    337,088Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    73,547,204
    
    
    
    73,230,760Common stock held in treasury
    
    
    2,817,862
    
    
    
    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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Software licenses
    
    $
    9,369
    
    
    $
    14,185
    
    
    $
    20,997
    
    
    $
    29,151Support and maintenance
    
    
    16,371
    
    
    
    14,575
    
    
    
    31,672
    
    
    
    30,017Professional services
    
    
    23,930
    
    
    
    23,044
    
    
    
    43,997
    
    
    
    46,322Data center
    
    
    10,558
    
    
    
    14,970
    
    
    
    20,484
    
    
    
    26,731Other
    
    
    678
    
    
    
    951
    
    
    
    1,664
    
    
    
    1,166Total revenues
    
    
    60,906
    
    
    
    67,725
    
    
    
    118,814
    
    
    
    133,387Operating expenses:Cost of software licenses
    
    
    1,940
    
    
    
    1,014
    
    
    
    3,305
    
    
    
    1,858Cost of professional services, support and maintenance
    
    
    18,662
    
    
    
    22,196
    
    
    
    36,322
    
    
    
    47,588Cost of data center
    
    
    4,911
    
    
    
    6,664
    
    
    
    9,748
    
    
    
    13,390Cost of other revenue
    
    
    559
    
    
    
    858
    
    
    
    1,478
    
    
    
    1,014Selling and marketing
    
    
    9,259
    
    
    
    10,124
    
    
    
    17,604
    
    
    
    21,654Product development
    
    
    13,198
    
    
    
    11,069
    
    
    
    26,862
    
    
    
    23,374General and administrative, including stock compensation
expense of $70 and $281 in 2003
    
    
    7,661
    
    
    
    7,803
    
    
    
    14,374
    
    
    
    17,030Depreciation
    
    
    2,578
    
    
    
    4,703
    
    
    
    5,288
    
    
    
    10,438Merger related costs and restructuring charges
    
    
    
    
    
    
    8,418
    
    
    
    
    
    
    
    16,512Amortization of other intangible assets and goodwill
impairment
    
    
    765
    
    
    
    788
    
    
    
    1,601
    
    
    
    15,857Total operating expenses
    
    
    59,533
    
    
    
    73,637
    
    
    
    116,582
    
    
    
    168,715Operating income (loss)
    
    
    1,373
    
    
    
    (5,912
    )
    
    
    2,232
    
    
    
    (35,328
    )Interest and other expense, net
    
    
    (752
    )
    
    
    (491
    )
    
    
    (705
    )
    
    
    (245
    )Income (loss) before income tax expense
    
    
    621
    
    
    
    (6,403
    )
    
    
    1,527
    
    
    
    (35,573
    )Income tax expense
    
    
    (1
    )
    
    
    
    
    
    
    (463
    )
    
    
    (119
    )Net income (loss)
    
    $
    620
    
    
    $
    (6,403
    )
    
    $
    1,064
    
    
    $
    (35,692
    )Basic net income (loss) per common share
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.02
    
    
    $
    (0.52
    )Diluted net income per common share
    
    $
    0.01
    
    
    
    n/a
    
    
    $
    0.01
    
    
    
    n/aWeighted average common shares outstanding  basic
    
    
    70,590,274
    
    
    
    69,348,903
    
    
    
    70,786,719
    
    
    
    69,298,568Weighted average common shares outstanding  diluted
    
    
    73,553,854
    
    
    
    n/a
    
    
    
    73,293,175
    
    
    
    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)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    1,064
    
    
    $
    (35,692
    )Adjustments to reconcile net income (loss) to net cash used in operating
activities:Depreciation, amortization and goodwill impairment charge
    
    
    6,889
    
    
    
    26,295Loss on disposal of property and equipment
    
    
    
    
    
    
    3,931Equity in net loss of affiliate
    
    
    750
    
    
    
    Compensation expense for stock options
    
    
    
    
    
    
    281Provision for doubtful accounts receivable and billing adjustments
    
    
    1,163
    
    
    
    3,948Gain on sale of investments available for sale
    
    
    
    
    
    
    (24
    )Loss on impaired cost-basis equity investment
    
    
    
    
    
    
    615Other
    
    
    
    
    
    
    710Changes in assets and liabilities, excluding effects of acquisitions:Increase in accounts receivable
    
    
    (8,748
    )
    
    
    (5,418
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (30
    )
    
    
    450Decrease in accounts payable
    
    
    (706
    )
    
    
    (7,695
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (12,652
    )
    
    
    8,120(Decrease) increase in deferred revenues
    
    
    (1,296
    )
    
    
    3,963Net cash used in operating activities
    
    
    (13,566
    )
    
    
    (516
    )Cash flows from investing activities:Cash paid in connection with acquisition
    
    
    (1,198
    )
    
    
    Maturities of short-term investment securities
    
    
    22,313
    
    
    
    15,851Purchases of short-term investment securities
    
    
    (22,834
    )
    
    
    (11,356
    )Investment
in equity method investee
    
    
    (750
    )
    
    
    Proceeds from sale of investment securities available for sale
    
    
    
    
    
    
    92Purchases of property, equipment and technology
    
    
    (3,642
    )
    
    
    (3,599
    )Net cash (used in) provided by investing activities
    
    
    (6,111
    )
    
    
    988Cash flows from financing activities:Proceeds from sale of common stock under employee stock purchase and
option plans
    
    
    1,777
    
    
    
    640Payments on capital lease obligations
    
    
    (491
    )
    
    
    (1,582
    )Repurchase of common stock held in treasury
    
    
    (5,369
    )
    
    
    (750
    )Net cash used in financing activities
    
    
    (4,083
    )
    
    
    (1,692
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (159
    )
    
    
    811Net decrease in cash and cash equivalents
    
    
    (23,919
    )
    
    
    (409
    )Cash and cash equivalents at beginning of period
    
    
    150,064
    
    
    
    127,842Cash and cash equivalents at end of period
    
    $
    126,145
    
    
    $
    127,433Noncash investing activities:Property and equipment acquired through capital leases
    
    $
    1,249
    
    
    $
    1,293
 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 and Santa Clara, California; and additional
international offices in Brussels, Dublin, Hong Kong, Lisbon, London,
Luxembourg, Madrid, Munich, Paris, Pune 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 June 30, 2004 and our results of operations for the
three and six months ended June 30, 2004 and cash flows for the six months
ended June 30, 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 and six months ended June 30, 2004 are not
necessarily indicative of the operating results that may be expected for the
year ending December 31, 2004. 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS 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 6




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the modification
becomes effective. Otherwise, we do not record stock compensation expense when
we grant stock options to S1 employees. In the three and six months ended June 30, 2003, we recognized
compensation expense of approximately $0.1 million and $0.3 million,
respectively, 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    620
    
    
    $
    (6,403
    )
    
    $
    1,064
    
    
    $
    (35,692
    )Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    281Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (9,813
    )
    
    
    (27,014
    )
    
    
    (19,122
    )
    
    
    (54,373
    )Pro forma net loss
    
    $
    (9,193
    )
    
    $
    (33,347
    )
    
    $
    (18,058
    )
    
    $
    (89,784
    )Basic and diluted net income (loss) per share:As reported  basic
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.02
    
    
    $
    (0.52
    )As reported  diluted
    
    $
    0.01
    
    
    
    n/a
    
    
    $
    0.01
    
    
    
    n/aPro forma  basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.48
    )
    
    $
    (0.26
    )
    
    $
    (1.30
    )
 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
    
    
    105.4
    %
    
    
    114.4
    %Risk-free interest rate
    
    
    3.4
    %
    
    
    2.9
    %Expected life
    
    
    4.0
    years
    
    
    4.6
    years
 Recent Accounting Pronouncements In March 2004, the Emerging Issue Task Force (EITF) reached consensus on
EITF Issue No. 03-06, Participating Securities and the Two-Class Method under
Statement of Financial Accounting Standards No. 128, Earnings Per Share. EITF
Issue No. 03-06 provides guidance in applying the two-class method of
calculating earnings per share and clarifies what constitutes a participating
security. The consensuses significantly expand the notion of
participation right from previous practice. EITF Issue No. 03-06 is effective
for fiscal periods beginning after March 31, 2004. We have adopted EITF Issue
No. 03-06 as of April 1, 2004, with no material impact on our consolidated
financial statements. We determined that our preferred shares outstanding are
participating securities as defined in EITF Issue No. 03-06 and we have
restated prior period earnings per share amounts to ensure comparability. 3. BUSINESS ACQUISITION On May 16, 2004, we purchased a business unit from vMoksha Technologies,
Private Limited, an Indian- based provider of software development,
programming, infrastructure development and related services. This business
unit previously
provided services to us under several software development agreements. We
believe this acquisition will reduce our costs and provide greater control over the quality of the development efforts 7




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undertaken. We paid cash consideration of approximately $1.2 million for the
business unit, of which we paid $1.0 million in the quarter ended June 30, 2004
and $0.2 million in July 2004. We have included the results of the business in
our consolidated results of operations from the date of acquisition. In
connection with this acquisition, we increased our employees by approximately
240. We accounted for this acquisition using the purchase accounting method of
accounting as prescribed by SFAS No. 141, Business Combinations. We assigned
the total purchase price to the net assets of the business with the remaining
amount assigned to goodwill. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed at the acquisition
date (in thousands): Current assets
    
    $
    87Property and equipment
    
    
    433Goodwill
    
    
    888Current liabilities
    
    
    (210
    )Total purchase price
    
    $
    1,198
 We did not present proforma results of operations for the acquisition
because the effect of the acquisition was not significant. 4. GOODWILL AND OTHER INTANGIBLE ASSETS At June 30, 2004, our other intangible assets consisted of the following: Gross
    
    AccumulatedCarrying Value
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    12,794
    
    

    $
    (4,916
    )Customer relationships
    
    
    7,500
    
    
    
    (2,525
    )Total
    
    $
    20,294
    
    
    $
    (7,441
    )
 We recorded amortization expense of $1.6 million and $4.2 million during
the six months ended June 30, 2004 and 2003, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The changes in the carrying value of our goodwill for the six months ended June 30, 2004 are as follows: FinancialInstitutions
    
    Edify
    
    Total(In thousands)Balance, January 1, 2004
    
    $
    88,576
    
    
    $
    4,886
    
    
    $
    93,462Acquisition
    
    
    888
    
    
    
    
    
    
    
    888Utilization of acquisition related
income tax benefits
    
    
    (192
    )
    
    
    
    
    
    
    (192
    )Balance, June 30, 2004
    
    $
    89,272
    
    
    $
    4,886
    
    
    $
    94,158
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5. STOCKHOLDERS EQUITY In July 2002, our board of directors approved a $10.0 million stock
repurchase program to enhance long-term shareholder value. We completed this
program in January 2003. Under this program, we repurchased 2,051,862 shares
of our common stock at 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 June 30, 2004, we had
repurchased 766,000 shares of our common stock at a cost of $5.8 million under
this program. As of June 30, 2004, we hold 2,817,862 shares of our common stock in
treasury at a cost of $15.8 million. 6. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) are as follows (in
thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    620
    
    
    $
    (6,403
    )
    
    $
    1,064
    
    
    $
    (35,692
    )Foreign currency translation adjustment
    
    
    (356
    )
    
    
    405
    
    
    
    (174
    )
    
    
    615Unrealized loss on investment securities
available for sale, net of taxes
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (86
    )Comprehensive income (loss)
    
    $
    264
    
    
    $
    (6,049
    )
    
    $
    890
    
    
    $
    (35,163
    )
 7. MERGER RELATED COSTS AND RESTRUCTURING CHARGES Components of merger related and restructuring costs are as follows (in
thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Merger related costs
    
    $
    
    
    
    $
    (514
    )
    
    $
    
    
    
    $
    (997
    )Restructuring charges
    
    
    
    
    
    
    8,932
    
    
    
    
    
    
    
    17,509Total merger related costs and restructuring charges
    
    $
    
    
    
    $
    8,418
    
    
    $
    
    
    
    $
    16,512
 During the first half of 2003, we undertook several initiatives to align
our cost structure with our anticipated 2004 revenues. As a result, management
approved restructuring plans to consolidate our data center operations in the
United Kingdom into our global hosting center in Atlanta, reduce the work
force, relocate and consolidate certain office facilities and sell certain
corporate assets. In connection with these plans, we recorded restructuring
charges of $17.5 million during the six months ended June 30, 2003. In the first quarter of 2003, we decreased our merger related 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. In the second quarter of 2003, we further reduced our merger
related accrual by $0.5 million when we determined that we had an alternate use
for excess office space that was reserved when we completed the acquisition of
Point in March 2002. In the second quarter of 2004, we adjusted our restructuring reserves as
we re-occupied certain office space, re-hired certain employees who were
previously terminated and adjusted our estimates based on sublease assumptions
for certain vacant office space. 9




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##### Table of Contents



The restructuring reserves as of December 31, 2003 and June 30, 2004 and
their utilization for the six months ended June 30, 2004 are summarized as
follows: Personnel Costs
    
    Lease Costs
    
    Other
    
    Total(In thousands)Balance, December 31, 2003
    
    $
    944
    
    
    $
    10,312
    
    
    $
    518
    
    
    $
    11,774Amounts utilized
    
    
    (571
    )
    
    
    (1,456
    )
    
    
    (177
    )
    
    
    (2,204
    )Adjustment
    
    
    (284
    )
    
    
    284
    
    
    
    
    
    
    
    Balance, June 30, 2004
    
    $
    89
    
    
    $
    9,140
    
    
    $
    341
    
    
    $
    9,570
 We expect to make future cash expenditures, net of anticipated sublease
income, related to these restructuring activities of approximately $9.2
million, of which we anticipate to pay approximately $2.9 million within the
next twelve months. 8. 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. 9. 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 and six months ended June 30, 2004 and
2003. We do not use any asset-based metrics to measure the operating
performance of our segments. 10




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##### Table of Contents



We have entered into reseller arrangements between our operating segments
to sell the Edify IVR product to financial institutions and the S1 CRM
application to non-financial institutions. Under these arrangements,
intercompany revenues and intercompany expenses are recorded in each operating
segment. These revenues and expenses are eliminated in consolidation. The
table below represents intercompany revenues recorded by each business segment: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Financial institutions
    
    $
    43
    
    
    $
    239
    
    
    $
    99
    
    
    $
    718Edify
    
    
    243
    
    
    
    317
    
    
    
    843
    
    
    
    663
 Three Months Ended June 30, 2004FinancialInstitutions
    
    Edify
    
    Eliminations
    
    TotalRevenues
    
    $
    51,915
    
    
    $
    9,277
    
    
    $
    (286
    )
    
    $
    60,906Operating expenses:Direct costs
    
    
    22,597
    
    
    
    3,761
    
    
    
    (286
    )
    
    
    26,072Selling and marketing
    
    
    6,567
    
    
    
    2,692
    
    
    
    
    
    
    
    9,259Product development
    
    
    11,721
    
    
    
    1,477
    
    
    
    
    
    
    
    13,198General and administrative
    
    
    6,617
    
    
    
    1,044
    
    
    
    
    
    
    
    7,661Depreciation
    
    
    2,355
    
    
    
    223
    
    
    
    
    
    
    
    2,578Amortization of other intangible assets and
goodwill impairment
    
    
    765
    
    
    
    
    
    
    
    
    
    
    
    765Total operating expenses
    
    
    50,622
    
    
    
    9,197
    
    
    
    (286
    )
    
    
    59,533Segment operating income
    
    $
    1,293
    
    
    $
    80
    
    
    $
    
    
    
    $
    1,373
 Three Months Ended June 30, 2003FinancialInstitutions
    
    Edify
    
    Eliminations
    
    TotalRevenues
    
    $
    61,438
    
    
    $
    6,843
    
    
    $
    (556
    )
    
    $
    67,725Operating expenses:Direct costs
    
    
    26,709
    
    
    
    4,579
    
    
    
    (556
    )
    
    
    30,732Selling and marketing
    
    
    7,527
    
    
    
    2,597
    
    
    
    
    
    
    
    10,124Product development
    
    
    9,593
    
    

    
    1,476
    
    
    
    
    
    
    
    11,069General and administrative
    
    
    6,777
    
    
    
    1,026
    
    
    
    
    
    
    
    7,803Depreciation
    
    
    4,510
    
    
    
    193
    
    
    
    
    
    
    
    4,703Merger related costs and restructuring charges
    
    
    6,197
    
    
    
    2,221
    
    
    
    
    
    
    
    8,418Amortization of other intangible assets and
goodwill impairment
    
    
    713
    
    
    
    75
    
    
    
    
    
    
    
    788Total operating expenses
    
    
    62,026
    
    
    
    12,167
    
    
    
    (556
    )
    
    
    73,637Segment operating loss
    
    $
    (588
    )
    
    $
    (5,324
    )
    
    $
    
    
    
    $
    (5,912
    )
 Six Months Ended June 30, 2004FinancialInstitutions
    
    Edify
    
    Eliminations
    
    TotalRevenues
    
    $
    101,074
    
    
    $
    18,682
    
    
    $
    (942
    )
    
    $
    118,814Operating expenses:Direct costs
    
    
    44,386
    
    
    
    7,409
    
    
    
    (942
    )
    
    
    50,853Selling and marketing
    
    
    12,107
    
    
    
    5,497
    
    
    
    
    
    
    
    17,604Product development
    
    
    23,829
    
    
    
    3,033
    
    
    
    
    
    
    
    26,862General and administrative
    
    
    12,355
    
    
    
    2,019
    
    
    
    
    
    
    
    14,374Depreciation
    
    
    4,849
    
    
    
    439
    
    
    
    
    
    
    
    5,288Amortization of other intangible assets and
goodwill impairment
    
    
    1,526
    
    
    
    75
    
    
    
    
    
    
    
    1,601Total operating expenses
    
    
    99,052
    
    
    
    18,472
    
    
    
    (942
    )
    
    
    116,582Segment operating income
    
    $
    2,022
    
    
    $
    210
    
    
    $
    
    
    
    $
    2,232
 11




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##### Table of Contents



Six Months Ended June 30, 2003FinancialInstitutions
    
    Edify
    
    Eliminations
    
    TotalRevenues
    
    $
    120,680
    
    
    $
    14,088
    
    
    $
    (1,381
    )
    
    $
    133,387Operating expenses:Direct costs
    
    
    55,713
    
    
    
    9,518
    
    
    
    (1,381
    )
    
    
    63,850Selling and marketing
    
    
    15,304
    
    
    
    6,350
    
    
    
    
    
    
    
    21,654Product development
    
    
    20,236
    
    
    
    3,138
    
    
    
    
    
    
    
    23,374General and administrative
    
    
    14,344
    
    
    
    2,686
    
    
    
    
    
    
    
    17,030Depreciation
    
    
    9,916
    
    
    
    522
    
    
    
    
    
    
    
    10,438Merger related costs and restructuring charges
    
    
    13,412
    
    
    
    3,100
    
    
    
    
    
    
    
    16,512Amortization of other intangible assets and
goodwill impairment
    
    
    2,344
    
    
    
    13,513
    
    
    
    
    
    
    
    15,857Total operating expenses
    
    
    131,269
    
    
    
    38,827
    
    
    
    (1,381
    )
    
    
    168,715Segment operating loss
    
    $
    (10,589
    )
    
    $
    (24,739
    )
    
    
    
    
    
    $
    (35,328
    )
 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 23% and 25% of our financial institutions segment
revenues from State Farm Mutual Automobile Insurance Company during the three
months ended June 30, 2003 and 2004, respectively. We derived 23% of our
financial institutions segment revenues from State Farm Mutual Automobile
Insurance Company during the six months ended June 30, 2003 and 2004. In 2003, we had a second major customer, Zurich Insurance Company and
certain of its affiliates or subsidiaries, which accounted for 23% and 21% of
our revenues from the financial institutions segment during the three and six
months ended June 30, 2003. We did not earn any revenue from this customer
during the six months ended June 30, 2004, nor do we expect to earn any revenue
from Zurich in future periods. 10. NET INCOME (LOSS) PER COMMON SHARE In the second quarter of 2004, we adopted EITF 03-06 and began calculating
earnings per share using the two-class method during periods which we recorded
net income. For periods which we record a net loss, we calculate net loss per
share as the net loss during the period divided by the weighted average number
of common shares outstanding during the period as the effect of adopting EITF
03-06 would be anti-dilutive. Net income has been allocated to the common and preferred stock based on
their respective rights to share in dividends. Net losses have not been
allocated to preferred stock, as there is no contractual obligation for the
holders of the participating preferred stock to share in our losses. We
excluded the preferred convertible stock from diluted earnings per share under
the if-converted method because the effect is anti-dilutive. Diluted earnings per share is calculated to reflect the potential dilution
that would occur if stock options or other contracts to issue common stock were
exercised and resulted in additional common stock that would share in the
earnings of S1. Because of our net losses in the three and six months ended
June 30, 2003, the issuance of additional shares of common stock through the
exercise of stock options or upon the conversion of preferred stock were
excluded as they would have an anti-dilutive effect on our net loss per share
for that period. 12




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Basic earnings per share:Net income (loss)
    
    $
    620
    
    
    $
    (6,403
    )
    
    $
    1,064
    
    
    $
    (35,692
    )Amount allocated to participating preferred stockholders
    
    
    (9
    )
    
    
    
    
    
    
    (16
    )
    
    
    Income (loss) available to common stockholders  basic
    
    $
    611
    
    
    $
    (6,403
    )
    
    $
    1,048
    
    
    $
    (35,692
    )Weighted average common shares outstanding
    
    
    70,590
    
    
    
    69,349
    
    
    
    70,787
    
    
    
    69,299Basic earnings per share
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.02
    
    
    $
    (0.52
    )Diluted earnings per share:Net income (loss)
    
    $
    620
    
    
    $
    (6,403
    )
    
    $
    1,064
    
    
    $
    (35,692
    )Amount allocated to participating preferred stockholders
    
    
    (9
    )
    
    
    
    
    
    
    (16
    )
    
    
    Income (loss) available to common stockholders  diluted
    
    $
    611
    
    
    $
    (6,403
    )
    
    $
    1,048
    
    
    $
    (35,692
    )Weighted average common shares outstanding
    
    
    70,590
    
    
    
    69,349
    
    
    
    70,787
    
    
    
    69,299Weighted average effect of common stock equivalents:Stock options
    
    
    2,964
    
    
    
    768
    
    
    
    2,506
    
    
    
    847Convertible preferred stock
    
    
    
    
    
    
    1,719
    
    
    
    
    
    
    
    1,719Weighted average diluted shares outstanding
    
    
    73,554
    
    
    
    71,836
    
    
    
    73,293
    
    
    
    71,865Diluted earnings per share
    
    $
    0.01
    
    
    
    n/a
    
    
    $
    0.01
    
    
    
    n/a
 13




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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 half of 2004, we continued to invest in the
development of the integrated S1 Enterprise Platform as the technology
foundation for the S1 Enterprise family of products. In 2003, we released for
general availability additional applications for the S1 Enterprise Platform
including: retail Internet banking, small business Internet banking, 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 ninety-five financial institutions are in production mode with a
hosted or on-premise S1 Enterprise solution. In the second quarter of 2004, we purchased a business unit from vMoksha
Technologies, Private Limited to establish a wholly-owned software development
center in Pune, India. Previously, this business unit exclusively provided software
development, programming and other related services to certain of our
subsidiaries. We believe this acquisition will reduce our costs and provide
greater control over the quality of the development effort undertaken. During the first quarter of 2004, we entered into long-term 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 six months of 2004. 14




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##### Table of Contents



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 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 June 30, 2004 and 2003 Revenues.The following table sets forth our revenue data for the three
months ended June 30, 2004 and 2003. Software
    
    Support and
    
    Professional
    
    DataLicenses
    
    Maintenance
    
    Services
    
    Center
    
    Other
    
    TotalQuarter Ended June 30, 2004:Core FI business
    
    $
    6,435
    
    
    $
    11,936
    
    
    $
    22,308
    
    
    $
    10,558
    
    
    $
    678
    
    
    $
    51,915Zurich
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial institutions segment
    
    
    6,435
    
    
    
    11,936
    
    
    
    22,308
    
    
    
    10,558
    
    
    
    678
    
    
    
    51,915Edify
    
    
    3,033
    
    
    
    4,620
    
    
    
    1,624
    
    
    
    
    
    
    
    
    
    
    
    9,277Eliminations
    
    
    (99
    )
    
    
    (185
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (286
    )Total
    
    $
    9,369
    
    
    $
    16,371
    
    
    $
    23,930
    
    
    $
    10,558
    
    
    $
    678
    
    
    $
    60,906Quarter Ended June 30, 2003:Core FI business
    
    $
    4,260
    
    
    $
    11,419
    
    
    $
    21,662
    
    
    $
    9,088
    
    
    $
    951
    
    
    $
    47,380Zurich
    
    
    8,176
    
    
    
    
    
    
    
    
    
    
    
    5,882
    
    
    
    
    
    
    
    14,058Financial institutions segment
    
    
    12,436
    
    
    
    11,419
    
    
    
    21,662
    
    
    
    14,970
    
    
    
    951
    
    
    
    61,438Edify
    
    
    1,831
    
    
    
    3,574
    
    
    
    1,438
    
    
    
    
    
    
    
    
    
    
    
    6,843Eliminations
    
    
    (82
    )
    
    
    (418
    )
    
    
    (56
    )
    
    
    
    
    
    
    
    
    
    
    (556
    )Total
    
    $
    14,185
    
    
    $
    14,575
    
    
    $
    23,044
    
    
    $
    14,970
    
    
    $
    951
    
    
    $
    67,725
 Total revenues decreased by $6.8 million to $60.9 million for the three
months ended June 30, 2004 compared to $67.7 million for the same period in
2003, or 10%. Our financial institutions segment earned revenues of $51.9
million for the quarter ended June 30, 2004 compared with $61.4 million for the
same period in 2003. Revenues for our Edify business were $9.3 million for the
three months ended June 30, 2004 compared with $6.8 million for the same period
in 2003. In the second quarter of 2003, we recorded total revenue from Zurich
of approximately $14.1 million, including license revenue of $8.2 million and
data center revenue of $5.8 million. We did not earn any revenue from Zurich
in the second 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 $6.4
million for the three months ended June 30, 2004, a decrease of $6.0 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 June 30, 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 $2.2 million or 51%. 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 $3.0 million for our Edify business increased
$1.2 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 $11.9 million for the three months ended June 30, 2004 as compared to
$11.4 million for the same period in 2003. The decrease is primarily
attributable to the attrition of legacy Internet-only customers; partially
offset by support and maintenance fees earned from new and existing customers who 15




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##### Table of Contents



purchased
licenses during 2003 and 2004. 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 continue to grow on a sequential
quarter basis. Support and maintenance revenues for the Edify business were $4.6 million
for the three months ended June 30, 2004, an increase of $1.0 million from the
same period in 2003. This increase is attributable to the increase in
Edify license revenue. We expect support and maintenance revenues for our Edify
business to remain stable over the remainder of 2004. Professional services revenues for our financial institutions segment were
$22.3 million for the three months ended June 30, 2004, a increase of $0.6
million from the same period in 2003. This increase is primarily attributable
to the revenues from new projects, offset in part by a decrease in professional
services revenues from State Farm of $0.8 million. Services revenue in any one
quarter can be impacted by one or two large customer projects and therefore can
be an increase or a decrease based on the projects. However, we expect
professional services revenue to decrease for the remainder of 2004 as revenues
lost to completed projects are expected to exceed revenues from new projects. The Edify business segment recorded $1.6 million for professional services
revenues during the second quarter of 2004, which compares to $1.4 million for
the second quarter of 2003. We expect professional services revenues to be
between $1.4 and $2.0 million per quarter for the remainder of 2004. Data center revenues were $10.6 million for the three months ended June
30, 2004, a decrease of $4.4 million from the same period in 2003. The decrease
resulted from the loss of revenue from Zurich of $5.8 million, offset by
increases in the number of hosted customers. We expect data center
revenues to remain stable in the third quarter and then increase on a
sequential quarter basis beginning in the fourth quarter of 2004, as
the expiration of a contract with a large Asian customer during the
second quarter of 2004 is offset by new hosted customers on our
S1 Enterprise products and our existing customers businesses
grow. 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 second quarter of 2004, we recorded $0.4
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
minimal gross margin associated with other revenue. Direct Costs and Gross Margins.Direct costs decreased by $4.7 million to
$26.1 million for the three months ended June 30, 2004 as compared with the
same period in 2003. Overall gross margins were 57% and 55% for the three
months ended June 30, 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 expected to be between 5% and 10%
of license revenue because we internally develop most of
the software components, the cost of which is reflected in product development
expense as it is incurred. License costs include software components that we license from
third parties. However, cost of software licenses will continue to vary with
the mix of products sold. License costs for the second quarter of
2004 included approximately a $0.6 million charge related to a
true-up with a third party vendor. 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 $18.7 million for the three
months ended June 30, 2004, a decrease of $3.5 million from $22.2 million for
the same period in 2003. $1.1 million of the decrease from 2003 is due to the
release of accruals on services projects in the second 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. 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 second quarter of 2004, we 16




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reduced these loss accruals by approximately $1.1 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. Remaining loss accruals at June 30, 2004 are not
material. 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 $1.8 million to $4.9 million for the three months ended
June 30, 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 and $0.9 million of accelerated costs
during the second quarter of 2003 related to the amendment of the Zurich
contract in our U.K. data center. Selling and Marketing Expenses.Total selling and marketing expenses
decreased by $0.9 million to $9.3 million for the three months ended June 30,
2004 from $10.1 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, offset in part by an increase in the cost of
marketing programs. Product Development Expenses.Total product development expenses increased
by $2.1 million to $13.2 million for the three months ended June 30, 2004 from
$11.1 million for the same period in 2003. This increase is primarily
attributable to an increase in product development headcount 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 $0.1 million to $7.7 million for the three months ended June 30,
2004 from $7.8 million for the same period in 2003. As a percentage of
revenues, general and administrative expenses were 13% and 12% for the three
months ended June 30, 2004 and 2003, respectively. Depreciation.Depreciation decreased to $2.6 million for the three months
ended June 30, 2004 from $4.8 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 second quarter of 2004. We
recorded restructuring charges of $8.9 million in the second
quarter of 2003. This charge was partially offset by the release of a
pre-merger liability of $0.5 million. During the first half of 2003, we undertook several initiatives to align
our cost structure with our anticipated 2004 revenues. In our American
operations, we recorded $0.6 million in restructuring charges during the six
months ended June 30, 2003, which were primarily comprised of charges for
excess office space, relocation expenses and other corporate charges. In the
first quarter of 2003, we began the process of consolidating our U.K. data
center operations into our global hosting center in Atlanta. In connection
with this consolidation, we recorded $2.3 million of restructuring charges
during the second quarter of 2003 comprised of accelerated depreciation of
assets, severance costs and other related costs to relocate the data center
operations. In the second quarter of 2003, we relocated our remaining
U.K. operations to a smaller facility, which resulted in a restructuring charge of
approximately $3.4 million for losses on the vacated office space, relocation
expenses and the write off of abandoned leasehold improvements. Additionally,
in the second quarter of 2003, we recorded a charge of $0.3 million to
reorganize our APJ operations and close certain offices. In our Edify
business, we changed senior management (including a new General Manager),
reduced the workforce and closed and consolidated several Edify office
facilities worldwide. These actions resulted in restructuring charges of $2.2
million for the three months ended June 30, 2003 for unused office facilities,
severance and other related costs. These charges were partially offset by the
release a merger related accrual for excess office space acquired during the
Point acquisition when we determined that we had an alternate use for that
facility in the second quarter of 2003. Amortization of Other Intangible Assets and Goodwill Impairment.
Amortization of other intangible assets and goodwill impairment was $0.8
million for the three months ended June 30, 2004 and 2003. Amortization expense
is expected to be approximately $0.8 million each quarter for the remainder of
2004. 17




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Interest and Other Expense, Net.Interest and other expense net was $0.7
million and $0.5 million for the three months ended June 30, 2004 and 2003,
respectively. In the second quarter of 2004, we made a $0.8 million
investment in an equity method investment which was expensed immediately under
the equity method of accounting due to the fact that our share of the
accumulated losses exceeded the investment amount. In the second quarter of
2003, we recorded a non-cash charge of $0.6 million to write down our carrying
value in a certain cost-basis equity investment for other than temporary
impairments. Income Tax Expense.We recorded minimal income tax expense during the
three months ended June 30, 2004 and 2003. Comparison of the Six Months Ended June 30, 2004 and 2003 Revenues.The following table sets forth our revenue data for the six
months ended June 30, 2004 and 2003. Software
    
    Support and
    
    Professional
    
    DataLicenses
    
    Maintenance
    
    Services
    
    Center
    
    Other
    
    TotalSix Months Ended June 30, 2004:Core FI business
    
    $
    15,065
    
    
    $
    23,094
    
    
    $
    40,767
    
    
    $
    20,484
    
    
    $
    1,664
    
    
    $
    101,074Zurich
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial institutions segment
    
    
    15,065
    
    
    
    23,094
    
    
    
    40,767
    
    
    
    20,484
    
    
    
    1,664
    
    
    
    101,074Edify
    
    
    6,339
    
    
    
    9,051
    
    
    
    3,292
    
    
    
    
    
    
    
    
    
    
    
    18,682Eliminations
    
    
    (407
    )
    
    
    (473
    )
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (942
    )Total
    
    $
    20,997
    
    
    $
    31,672
    
    
    $
    43,997
    
    
    $
    20,484
    
    
    $
    1,664
    
    
    $
    118,814Six Months Ended June 30, 2003:Core FI business
    
    $
    10,456
    
    
    $
    23,059
    
    
    $
    42,916
    
    
    $
    18,097
    
    
    $
    1,166
    
    
    $
    95,694Zurich
    
    
    16,352
    
    
    
    
    
    
    
    
    
    
    
    8,634
    
    
    
    
    
    
    
    24,986Financial institutions segment
    
    
    26,808
    
    
    
    23,059
    
    
    
    42,916
    
    
    
    26,731
    
    
    
    1,166
    
    
    
    120,680Edify
    
    
    2,676
    
    
    
    7,896
    
    
    
    3,516
    
    
    
    
    
    
    
    
    
    
    
    14,088Eliminations
    
    
    (333
    )
    
    
    (938
    )
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    (1,381
    )Total
    
    $
    29,151
    
    
    $
    30,017
    
    
    $
    46,322
    
    
    $
    26,731
    
    
    $
    1,166
    
    
    $
    133,387
 Total revenues decreased by $14.6 million to $118.8 million for the six
months ended June 30, 2004 compared to $133.4 million for the same period in
2003, a decrease of 11%. Our financial institutions segment earned revenues of
$101.1 million for the six months ended June 30, 2004 compared with $120.7
million for the same period in 2003. Revenues for our Edify business were
$18.7 million for the six months ended June 30, 2004 compared with $14.1
million for the same period in 2003. In the first half of 2003, we recorded
total revenue from Zurich of approximately $25.0 million, including license
revenue of $16.4 million and data center revenue of $8.6 million. We did not
earn any revenue from Zurich in 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 for the full year 2004 to be lower than
2003. Software license revenues for our financial institutions segment were
$15.1 million for the six months ended June 30, 2004, a decrease of $11.7
million from the same period in 2003. This decrease is attributable to the loss
of license revenue earned from Zurich of $16.4 million during the six months
ended June 30, 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 $4.6 million or 44%. Software license revenue of $6.3 million for our Edify business increased
$3.7 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. Support and maintenance revenues for our financial institutions segment
were $23.1 million for the six months ended June 30, 2004 as compared to $23.1
million for the same period in 2003. We experienced some attrition from our
legacy Internet-only customers; which was offset by support and maintenance
fees earned from customers who purchased licenses during 2003 and 2004. 18




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Support and maintenance revenues for the Edify business were $9.1 million
for the six months ended June 30, 2004, an increase of $1.2 million from the
same period in 2003. This increase relates to an increase in Edify
license revenue. Professional services revenues for our financial institutions segment were
$40.8 million for the six months ended June 30, 2004, a decrease of $2.1
million from the same period in 2003. This decrease is principally attributable
to a decrease in professional services revenues from State Farm of $4.9
million, offset in part by the revenues from new projects. The Edify business recorded $3.3 million for professional services
revenues during the first half of 2004, which compares to $3.5 million for the
first half of 2003. Data center revenues were $20.5 million for the six months ended June 30,
2004, a decrease of $6.3 million from the same period in 2003. The decrease
resulted from the loss of revenue from Zurich of $8.6 million, offset by
increases in the number of hosted customers. Other revenues are primarily related to the sale of third party hardware
and software that is used in connection with our products. Direct Costs and Gross Margins.Direct costs decreased by $13.0 million to
$50.9 million for the six months ended June 30, 2004 from the same period in
2003. Overall gross margins were 57% and 52% for the six months ended June 30,
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 between 5% and 10% of license
revenue because we internally develop most of
the software components, the cost of which is reflected in product development
expense as it is incurred. The overall increase in cost of software licenses
was primarily related to increased license sales (excluding Zurich) in our
financial institutions business. 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 $36.3 million for the six
months ended June 30, 2004, a decrease of $11.3 million from $47.6 million for
the same period in 2003. $6.9 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. 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 half of 2004, we reduced
these loss accruals by approximately $3.3 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. Remaining
loss accruals at June 30, 2004 are not material. 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 $3.7 million to $9.7
million for the six months ended June 30, 2004 from $13.4 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 and $1.9 million of accelerated costs
during the first half of 2003 related to the amendment of the Zurich contract
in our U.K. data center. Selling and Marketing Expenses.Total selling and marketing expenses
decreased by $4.1 million to $17.6 million for the six months ended June 30,
2004 from $21.7 million for the same period in 2003. This decrease is primarily
attributable 19




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to reduced sales and marketing headcount resulting in a decrease
in compensation expense, other payroll related costs and benefits and travel
and entertainment expenses, and bad debt expense. Product Development Expenses.Total product development expenses increased
by $3.5 million to $26.9 million for the six months ended June 30, 2004 from
$23.4 million for the same period in 2003. This increase is primarily
attributable to an increase in product development headcount 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 $2.7 million to $14.4 million for the six months ended June 30,
2004 from $17.0 million for the same period in 2003. As a percentage of
revenues, general and administrative expenses were 12% and 13% for the six
months ended June 30, 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 $5.3 million for the six months
ended June 30, 2004 from $10.4 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 half of 2004. During the first half of 2003, we undertook several initiatives to align
our cost structure with our anticipated 2004 revenues. In our American
operations, we recorded $4.9 million in restructuring charges during the six
months ended June 30, 2003, which were primarily comprised of charges for
excess office space, relocation expenses and other corporate charges. In the
first quarter of 2003, we began the process of consolidating our U.K. data
center operations into our global hosting center in Atlanta. In connection
with this consolidation, we recorded $4.9 million of restructuring charges
during the first half of 2003 comprised of accelerated depreciation of assets,
severance costs and other related costs to relocate the data center operations.
In the second quarter of 2003, we relocated our remaining U.K operations to a
smaller facility, which resulted in a restructuring charge of approximately
$3.4 million for losses on the vacated office space, relocation expenses and
the write off of abandoned leasehold improvements. Under the provisions of
SFAS No. 146, we recorded the loss at the present value of the expected cash
flows. We will record accretion expense of approximately $0.9 million over the
remaining term of the lease, which is six years. Additionally, in the first
half of 2003, we recorded a charge of $1.0 million to reorganize our APJ
operations and close certain offices. In our Edify business, we changed senior
management (including a new General Manager), reduced the workforce and closed
and consolidated several Edify office facilities worldwide. These actions
resulted in restructuring charges of $3.1 million for the six months ended June
30, 2003 for unused office facilities, severance and other related costs.
These charges were partially offset by the release of two merger related
accrual for excess office space acquired during the Point acquisition when we
determined that we had an alternate use for that facility and the resolution of
a legal matter accrued for during the FICS acquisition. Amortization of Other Intangible Assets and Goodwill Impairment.
Amortization of other intangible assets and goodwill impairment was $1.6
million for the six months ended June 30, 2004 and $15.9 million for the same
period in 2003. 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. 20




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Interest and Other Expense, Net.Interest and other expense net was $0.7
million and $0.3 million for the six months ended June 30, 2004 and 2003,
respectively. In the second quarter of 2004, we made a $0.8 million
investment in an equity method investment which was expensed immediately under
the equity method of accounting due to the fact that our share of the
accumulated losses exceeded the investment amount. In the second quarter of
2003, we recorded a non-cash charge of $0.6 million to write down our carrying
value in a certain cost-basis equity investment for other than temporary
impairments. Income Tax Expense.We recorded income tax expense of $0.5 million and
$0.1 million during the six months ended June 30, 2004 and 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 (NOLs). Although we have NOLs 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 NOLs to utilize and in the United States due to limitations
on the use of our federal NOLs 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 six
months ended June 30, 2004 and 2003 and selected balance sheet data as of June
30, 2004 and December 31, 2003: Six Months Ended June 30,2004
    
    2003(In thousands)Net cash used in operating activities before changes in operating assets
and liabilities
    
    $
    9,866
    
    
    $
    64Change in operating assets and liabilities
    
    
    (23,432
    )
    
    
    (580
    )Net cash used in operating activities
    
    
    (13,566
    )
    
    
    (516
    )Net cash (used in) provided by investing activities
    
    
    (6,111
    )
    
    
    988Net cash used in financing activities
    
    
    (4,083
    )
    
    
    (1,692
    )Effect of exchange rates on cash and cash equivalents
    
    
    (159
    )
    
    
    811Net decrease in cash and cash equivalents
    
    $
    (23,919
    )
    
    $
    (409
    )
 As ofJune 30, 2004
    
    December 31, 2003(In thousands)Cash and cash equivalents
    
    $
    126,145
    
    
    $
    150,064Short term investments
    
    
    14,647
    
    
    
    14,126Working capital
    
    
    123,681
    
    
    
    125,940Total assets
    
    
    320,510
    
    
    
    337,088Total stockholders equity
    
    
    241,112
    
    
    
    243,814
 Operating Activities.During the six months ended June 30, 2004, cash used
in operations was $13.6 million compared to $0.5 million for same period in
2003. 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 six months ended June 30, 2004 included the effects of:  
    
    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; 21




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
    
    a decrease in accrued expenses and other liabilities of $12.7
million, including a $4.5 million payment for a settlement,
approximately $3.0 million related to the payment of annual expenses,
including annual employee bonuses and incentive pay, and release of
$3.3 million of contract loss accruals;  
    
    an increase of $8.7 million in accounts receivable due to the
timing of billings and receipts of payment during the period; and  
    
    changes in other operating assets and liabilities of $2.0 million. Cash
used in operations for the six months ended June 30, 2003 included the effects of:  
    
    our net loss of $35.7 million;  
    
    non-cash charges of $12.9 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 $3.9 million; and  
    
    changes in other operating assets and liabilities of $0.6 million. Investing Activities.
Cash used in investing activities was $6.1 million
for the six months ended June 30, 2004 compared to cash provided by investing
activities of $1.0 million in the same period in 2003. In the first six months of 2004, we:  
    
    paid $1.2 million in connection with the acquisition of the Indian development business;  
    
    invested $0.8 million in an equity method investee; and  
    
    purchased $3.6 million of property and equipment. In the first six months of 2003, we:  
    
    converted $4.5 million, net, from short-term investments to cash and cash equivalents; and  
    
    purchased $3.6 million of property and equipment. Financing Activities.Cash used in financing activities was $4.1 million
for the six months ended June 30, 2004 compared to $1.7 million in same period
in 2003. In the first six
months of 2004 and 2003, we received $1.8 million and
$0.6 million, respectively, from the sale of common stock under our employee
stock plans. We paid $0.5 million and $1.6 million, respectively, for capital
lease obligations in the six months ended June 30, 2004 and 2003. In the first
half of 2004 and 2003, we repurchased $5.4 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 June 30, 2004, we repurchased 0.8
million shares of our common stock at a cost of $5.8 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 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. 22




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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. 23




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings. Except as noted below, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which S1
or any of its subsidiaries is a party or which their property is subject.  
    
    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 Dollar ValueNumber of
    
    
    
    
    
    Purchased as Part of
    
    of Shares that May Yet BeShares
    
    Average Price
    
    Publicly Announced Plans
    
    Purchased Under thePurchased
    
    Paid per Share
    
    or Programs
    
    Plans or ProgramsApril 1, 2004 to April 30, 2004
    
    
    72,500
    
    
    $
    8.11
    
    
    
    72,500
    
    
    $
    9,433,065May 1, 2004 to May 31, 2004
    
    
    27,500
    
    
    $
    8.74
    
    
    
    27,500
    
    
    $
    9,192,743June 1, 2004 to June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,192,743Total
    
    
    100,000
    
    
    $
    8.28
    
    
    
    100,000
    
    
    $
    9,192,743
 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 4.Submission of Matters to a Vote of Security Holders  (a)
    
    S1s 2004 annual meeting of shareholders was held on May 14, 2004.(b)
    
    Jaime W. Ellertson, James S. Mahan and M. Douglas Ivester were re-elected
as directors at the 2004 annual meeting. Continuing directors include
David C. Hodgson, Gregory J. Owens and Howard J. Runnion.(c)
    
    The election of three directors for three-year terms was voted on and
approved by S1s shareholders at the 2004 annual meeting of shareholders
held on May 14, 2004.The results of the voting by shareholders at the annual meeting were
as follows: Against/Director Nominee
    
    For
    
    Withheld
    
    Broker Non-VotesJaime W. Ellertson
    
    
    63,859,657
    
    
    
    1,178,264
    
    
    
    5,735,527James S. Mahan
    
    
    63,934,521
    
    
    
    1,103,400
    
    
    
    5,735,527M. Douglas Ivester
    
    
    63,908,196
    
    
    
    1,129,725
    
    
    
    5,735,527
  (d)
    
    Not applicable 24




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##### Table of Contents



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 Report on Form 8-K with the
Securities and Exchange Commission (the SEC) during the quarter
ended June 30, 2004: Current Report on Form 8-K filed with the SEC on April 28, 2004
(date of report April 28, 2004) (regarding a press release and an
analyst conference call related to first quarter of 2004 results and
S1 and its operations). 25




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##### Table of Contents



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 August 9, 2004. S1 CORPORATIONBy:
    
    /s/ Matthew HaleMatthew HaleChief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer)
 26