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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the fiscal year ended December 31, 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
    
    58-2395199(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3500 Lenox Road, NE, Suite 200Atlanta, Georgia
    
    30326(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (404) 923-3500
 Securities registered pursuant to Section 12(b) of the Act:
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   Documents Incorporated by Reference




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##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 FOR THE YEAR ENDED DECEMBER 31, 2005
 TABLE OF CONTENTS
  
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    16Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    17Item 6. Selected Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A. Qualitative and Quantitative Disclosures about Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    37Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A. Controls and Procedures
    
    
    72Item 9B. Other Information
    
    
    72PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    72Item 11. Executive Compensation
    
    
    73Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    73Item 13. Certain Relationships and Related Transactions
    
    
    73Item 14. Principal Accountant Fees and Services
    
    
    73PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    74Signatures
    
    
    77EX-10.17 DESCRIPTION FOR ARRANGEMENT OF DIRECTORS' FEESEX-21 SUBSIDIARIES OF S1 CORPORATIONEX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO




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PART I
 
 Item 1. Business
  Business Overview
       1




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Financial Institutions Segment
     Risk and Compliance Segment
  General Background
   2




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Financial Industry Background
  
    
    pressure to grow their businesses organically instead of through mergers/acquisitions;
    
    increased security concerns and regulatory requirements; and
    
    the need to minimize information technology and infrastructure costs while meeting the
ever-rising consumer expectations for customer service and convenience.
     
   3




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S1 Solutions
    S1 Vision and Strategy
  -
    
    Achieve financial and operational stability by focusing on the satisfaction of our
current customers across all product lines.In 2005, we generated approximately 78% of our
revenues from the sale of licenses and services in the global financial services market and
the remaining 22%, or approximately $45.4 million, from services provided to our principal
insurance customer (State Farm Mutual Automobile Insurance Company). The State Farm revenue
is expected to be approximately the same in 2006 as it was in 2005. In February 2006, we
released a new version of our Enterprise solution to a small number of customers in our
Managed Introduction Program (MIP). Following implementations of the MIP during 2006, we
plan to make this version available to the broader market, likely beginning in the second
half of 2006. We will continue to sell to our community bank customers and invest in the
next-generation of Internet, voice and ATM banking solutions that meet their unique needs.
We believe that there are opportunities for cross-selling our products and services across
certain of our customer segments as we continue to enhance and add new solutions to our
offering. We remain committed to our strategy of moving more of our business to a recurring
license revenue model, as this will provide greater long-term revenue visibility and
stability and higher operating margins. In addition to the recurring license and
maintenance revenues we will earn, we expect to generate implementation fees from these
sales.-
    
    Release quality software solutions to the market that help our customers differentiate
themselves and be more successful.We intend to follow structured internal testing
procedures, as well as testing our software in production environments at select customer
sites. We believe an improvement in the quality of our software code, our implementation
services, and our customer support processes will improve customer satisfaction and
long-term profitability and will have a positive impact on our ability to sell additional
applications to our customers and use them as references to help win future customers.-
    
    Invest in our people to build greater return for our customers and shareholders.We
believe that our employees are at the core of our success. Based on input from the
employees and the management team, we embrace corporate values that ensure all employees
act with integrity through every customer and fellow employee interaction, have the tools
and knowledge to do their jobs to the best of their ability, understand the specific
standards of quality that are acceptable through a series of guiding principles, and take
pride in the leadership position that we hold in the markets that we serve.
 S1 Products
  4




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S1 Retail Banking Solutions
  S1 Enterprise Applications
 
    
    S1 Personal Bankinggives individual consumers anytime, anywhere access to their
accounts with our customer banks, including deposit, credit card and loan accounts via the
Internet. Functions include the ability to utilize personal financial management
capabilities, conduct and view transactions and statements online, transfer funds between
accounts and pay bills electronically.
    
    S1 Business Internet Bankingis a comprehensive banking product geared to the unique
needs of small business owner-operators. This solution helps banks drive additional revenue
streams with advanced features such as daily account balance and transaction reporting,
disbursement services, payroll, account transfers, wires, and electronic tax payments are
delivered via the Internet. Personalization options simplify cash management tasks for easy
organization, management and control of the funds of the small business owner.
    
    S1 Telleris a smart-client teller application, meaning it has the capability to
continue to perform and manage transactions whenever the bank may be offline, combining
thin and rich client technologies to provide scalability, real-time connectivity, and low
total cost of ownership with extensive offline capabilities. The application is highly
flexible and customizable, and its centralized administration capabilities enable quick and
efficient rollout of new products, features, and upgrades. Generally, this product is
utilized by the customers employees to deliver personalized service to their customers who
physically enter their financial institution.
    
    S1 Sales & Service Platformprovides a robust set of transactional capabilities and
embedded relationship management tools to the branch personnel of the bank. With real-time
information from all channels and advanced features that support selling, branches can
significantly improve their visibility of potential cross-sell and up-sell opportunities,
and have the tools to act on those opportunities.
    
    S1 Call Centeroffers a full set of workflows, transactions and core services organized
into an efficient agent desktop application that meet the specialized needs of the call
center environment. In addition to the core services found in the teller and platform
applications, S1 Enterprise Call Center provides customer information, sales and service
capabilities, process flow, reporting, and the fulfillment management specific to call
center agents and operations.
    
    S1 Analyticsfeatures easy to use analytical and segmentation tools, comprehensive
campaign development and management capabilities, and a unique methodology to drive the
results of CRM out to all channels. It permits real time access to customer contact and
value information, as well as target campaigns, and significantly enhances the value of CRM
efforts.
 S1 Heritage Branch Applications
 
    
    S1 Check Truncationmodule enables S1 Branch Solutions to process checks electronically
in accordance with the Check 21 legislation that went into effect on October 28, 2004.
By processing check images electronically, banks are able to reduce their processing costs,
provide immediate credit to customers accounts, and reduce check fraud.
    
    S1 Teller, a more traditional, functionally rich client-server based technology,
provides the complete set of transactions and core services necessary for fulfilling the
rigorous requirements of todays teller environment, including host communications, sharing
and storing of information, cumulative totals, electronic journal, transaction security and
approval, and balancing aids.
    
    S1 Sales and Service Platform,which also incorporates a functionally rich client-server
based technology, includes an extensive set of transactions, sales tools, and core services
that expedite selling new products, as well as servicing existing accounts.
    
    S1 Banking Call Centerprovides the customer information, sales and service
capabilities, process flows, reporting, and fulfillment management specific to call center
operations. The S1 Banking Call Center application integrates
with other call center technologies, including integrated voice response (IVR) systems,
computer telephony integration servers, and automatic call distributor systems.
    
    S1 Marketing Centersupports the planning and execution of marketing campaigns based on
multiple segmentations of customers and prospects. It includes robust inbound and outbound
telemarketing features that can be combined
 5




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with advanced Computer Telephony Integration (CTI) functionality to enhance the efficiency of our customers marketing personnel.
 S1 Wholesale Banking Solutions
  
    
    S1 Corporate Bankingis a comprehensive Internet-based cash management solution that
enables financial institutions to better serve large and medium corporations on a local,
regional and global basis. This application offers multi-lingual, multi-currency cash and
liquidity management services, which includes functions such as information reporting,
global payments, check services, file services and customer administration on a global
basis.
    
    S1 Trade Financesolutions help financial institutions increase the efficiency of
processing their trade transactions. S1 Trade Finance delivers one integrated system to
create and report on trade documents from purchase order, to letter of credit, to direct
collections. This solution enhances the risk evaluation process for global trade using
optimized workflow and reporting and delivers up-to-date status reports on all outstanding
trade finance engagements. It also enables banks to offer value added services to their
commercial customers in managing purchase orders and settlement.
 S1 Community Banking and Payments Solutions
  
    
    S1 IBS Cash Management Systemis designed to help community banks deliver services to
small businesses. Functions include integrated front and back office systems, multiple
payment vehicles such as domestic and SWIFT wires, ACH, and EFTPS, integration with the IBS
retail Internet banking application and EDI data display.
    
    S1 Internet Banking System (IBS) Retail Bankingis designed specifically with the unique
needs of the community banking market in mind. This turn-key application includes functions
such as the ability to view statements, account activity, and cleared and pending
transactions online, to transfer funds between accounts and to pay bills electronically.
    
    S1 Voice Bankingdelivers IVR functionality in a stable, flexible, Windows-based
application. With the push of a button, users can check on a deposit or account balance,
find a CD rate, pay bills or transfer funds.
    
    Postilion,S1s payment solution, is used by financial institutions, retailers and
processors to drive electronic payments through ATMs, point-of-sale terminals, phones and
Internet access points. It is a modularized family of products that can be implemented in
large financial institutions as well as smaller community and regional banks and credit
unions.
 S1 Lending Solutions
  
    
    S1 Consumer Lendingoffers highly customizable, complete credit origination system
designed for indirect, direct, credit card, home equity and revolving credit lending, to be
used in conjunction with multiple scoring and decision support tools.
    
    S1 Business Lendingis a complete workflow solution that supports the processing of a
financial institutions small business lending requirements from data entry through
qualification, notification, closing and document delivery.
 Risk and Compliance Solutions
 
    
    FRS, our suite of financial reporting solutions, provides financial institutions
worldwide with a suite of optimized regulatory reporting, financial intelligence and
analytic solutions. FRS FinancialAnalytics provides a consolidated global data foundation
to help banks prepare and comply with Basel II and IAS. These solutions ease the burden of
complying with national regulatory reporting requirements of central banks, monetary
authorities, and other financial regulators in more than 20 countries. More than 900
financial institutions utilize our financial reporting solutions.
    
    RiskResolvedelivers advanced workflow, extensive reporting options and a catalogue of
industry best practices to further support financial institutions efforts to achieve
compliance efficiencies. The solution provides a sustainable compliance framework for
multiple and overlapping regulatory mandates including Sarbanes-Oxley (SOX), Basel II,
FDICIA, Gramm Leach Bliley Act (GLBA) and various anti-money laundering laws and
regulations.
 6




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Additional Solutions
 
    
    S1 Website Solutionsis a virtual financial lobby which provides customers with a
destination web site or portal that gives them access to product information, news and
other content, as well as community pages and bulletin boards. The S1 Customer Center
enables financial institutions to efficiently create, manage and quantify their web
presence.
    
    The S1 online adoption solution, marketed as S1 to One Solutions, is designed to help
financial institutions of all sizes improve their base of active online users. These
solutions range from marketing support to educational programs.
    
    Pay Anyone Bill-Pay services offered through partnerships with Checkfree and Princeton
through all of our personal on-line banking applications.
    
    Account Aggregation. Through a reseller agreement with Yodlee, Inc. (described in Note
20 to our consolidated financial statements included elsewhere in this report) we provide
account aggregation capabilities, which allow the delivery of an integrated balance sheet
consolidating, organizing and presenting a consumers personal account information from a
variety of providers for confidential viewing and access.
    
    Voice and Speech Recognition.Through a strategic relationship with Edify Corporation
(now a wholly owned subsidiary of Intervoice, Inc., we provide advanced voice and speech
recognition solutions. Edifys voice solution was one of the first third-party solutions to
integrate with the S1 Enterprise Platform. Through this solution, customers benefit from
an ability to provide one view of the transactions, transaction history and total banking
relationship by providing a consitent view between S1 Enterprise and Edify / Intervoice.
 S1 Services
  S1 Hosting Services
  S1 Customer Support
  
    
    Technical Support Customer support engineers will work to provide solutions on S1
products;
    
    Software Release Management Software upgrades that include enhancements to our
software as well as operational and performance improvements; and
    
    Online Support The S1 Support Website is designed to provide one-stop access to
technical information for S1 products. The S1 Support Website provides access to technical
FAQs, download patches, the latest documentation, and support bulletins.
 S1 Professional Services
  
    
    Project Management Our project managers are responsible for oversight of services
projects throughout the implementation cycle;
    
    Custom Software Development Our software developers customize certain software
solutions to meet the specific business requirements of our customers  from analysis and
design to building and testing;
 7




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
    
    Technical Services Our technical services teams will design, implement and test the
servers and network infrastructure to support our solutions. Our expertise includes
software integration, database services, networking and the applications skills required to
deliver secure, robust solutions;
    
    Educational Services Our training professionals help financial institutions train
their employees to use our solutions to better serve their customers; and
    
    Web Design Services Our web design group is available to assist with delivery of a
complete web presence for financial institutions.
 Customers and Markets
   Strategic Alliances and Partners
  Sales and Marketing
     8




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Product Development
   Competition
  In-house Development Organizations
  
    
    building, maintaining and upgrading an in-house solution can be very costly;
    
    attracting and retaining the necessary technical personnel can be difficult and costly; and
    
    technological development may be too far outside the financial organizations core
competencies to be effective or successful.
  Single-Point Solution Vendors
  
    
    integrating applications and channels from multiple vendors may greatly lengthen a
financial organizations time-to-market and implementation costs;
    
    operating and upgrading solutions from multiple vendors is typically very costly; and
    
    a combination of best-of-breed solutions across different channels does not provide a
single view of the customer.
 Core Processing Vendors
  9




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##### Table of Contents



Enterprise Solution Vendors
  Government Regulation
   Employees
  Available Information
 www.sec.gov
 10




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Item 1A. Risk Factors
 You should consider carefully the following risks. If any of the following risks actually
occur, our business, financial condition or results of operations would likely suffer. In that
case, the trading price of our common stock could decline, and you may lose all or a part of the
money you paid to buy our common stock.
 Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price
of our common stock
  
    
    we cannot accurately predict the number and timing of contracts we will sign in a period, in part because the budget
constraints and internal review processes of existing and potential customers are not within our control;
 
    
    as we transition from selling our financial institutions products on a perpetual license to a term or subscription
license, we cannot accurately predict how long it will take to complete this transition or the mix of perpetual
licenses to term licenses sold in any one quarter. Term licenses significantly reduce the amount of revenue recognized
in the first year of the contract, but is intended to increase the overall revenue earned from the customer during the
typical customer life cycle;
 
    
    the length of our sales cycle to large financial organizations generally lasts from six to eighteen months, which adds
an element of uncertainty to our ability to forecast revenues;
 
    
    if we fail to introduce new or enhanced products, or if our competitors introduce new or enhanced products, sales of
our products and services may not achieve expected levels and/or may decline;
 
    
    our ability to expand the mix of distribution channels through which our products are sold may be limited;
 
    
    our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower than expected;
 
    
    we have had significant contracts with legacy customers that have decreased or terminated their services and we may not
be able to replace this revenue and / or the gross margins associated with this revenue;
 
    
    our sales may be constrained by the timing of releases of third-party software that works with our products;
 
    
    a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term
if revenues decrease; and
 
    
    the migration of our license sales model to be more focused on recurring revenue contracts may result in less
predictable revenue due to an inability to predict the rate at which it is adopted by our customers, or the rate at
which it may be deferred.
 In 2006, we will depend on one customer for a significant portion of our revenue and if that
customer terminates its contract with us, our revenues and financial performance would decline
  System failures or performance problems with our products could cause demand for these products to
decrease, require us to make significant capital expenditures or impair customer relations
  
    
    delays in completing and/or testing new products, resulting in significant delays;
 
    
    extraordinary end-user volumes or other events could cause systems to fail;
 
    
    our products could contain errors, or bugs, which could impair the services we provide;
 
    
    during the initial implementation of some products, we have experienced significant delays in implementing and
integrating software, and we may experience similar difficulties or delays in connection with future implementations
and upgrades to new versions; and
 11




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
    
    many of our products require integration with third-party products and systems, and we may not be able to integrate
these products with new or existing products.
 We have experienced substantial losses in the past and may not achieve or maintain profitable
operations in the future
  We are engaged in offshore software development activities, which may not be successful and which
may put our intellectual property at risk
  
    
    communications and information flow may be less efficient and
accurate as a consequence of the time, distance and language
differences between our primary development organization and the
foreign based activities, resulting in delays in development or
errors in the software developed;
 
    
    potential disruption from the involvement of the United States in
political and military conflicts around the world;
 
    
    the quality of the development efforts undertaken offshore may not
meet our requirements because of language, cultural and
experiential differences, resulting in potential product errors
and/or delays;
 
    
    we have experienced a greater level of voluntary turnover of
personnel in India than in other development centers which could
have an adverse impact on efficiency and timeliness of development
as well as the opportunity for misappropriation of our
intellectual property;
 
    
    in addition to the risk of misappropriation of intellectual
property from departing personnel, there is a general risk of the
potential for misappropriation of our intellectual property that
might not be readily discoverable; and
 
    
    currency exchange rates could fluctuate and adversely impact the
cost advantages intended from maintaining these facilities.
 We are involved in litigation over proprietary rights, which may be costly and time consuming
  
    
    be time-consuming to investigate and defend;
 
    
    result in costly litigation;
 
    
    cause product shipment delays;
 
    
    require us to enter into royalty or licensing agreements; or
 
    
    result in an injunction being issued against the use of our products.
  
    
    pay substantial damages;
 
    
    discontinue the use and sale of infringing products;
 
    
    expend significant resources to develop non-infringing technology; or
 
    
    obtain licenses to infringing technology.
  12




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Our operating results would suffer if we were subject to a protracted infringement claim or a
significant damage award.
    
    
    costly litigation and damage awards;
    
    diversion of management attention and resources;
    
    product shipment delays or suspensions;
    
    injunction prohibiting us from selling our products; and
    
    the need to enter into royalty or licensing agreements, which may not be available on
terms acceptable to us, if at all.
 Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management
resources or dilute stockholder value
  
    
    potential incompatibility of business cultures;
 
    
    potential delays in rationalizing diverse technology platforms;
 
    
    potential difficulties in coordinating geographically separated organizations;
 
    
    potential difficulties in re-training sales forces to market all of our products across all of our intended markets;
 
    
    potential difficulties implementing common internal business systems and processes;
 
    
    potential conflicts in third-party relationships; and
 
    
    the loss of key employees and diversion of the attention of management from other ongoing business concerns.
 A significant portion of our customers are in a consolidating financial services industry, which is
subject to economic changes that could reduce demand for our products and services
  Market volatility may affect the price of our common stock
  13




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
    
    actual or anticipated variations in our quarterly operating results;
 
    
    21% of our common stock is owned by 5 institutions, a rapid change in position of any one
of these holders could cause a significant drop in our stock price if market demand is
insufficient to meet sales demand;
 
    
    announcements of new products, product enhancements, technological innovations or new services by us or our competitors;
 
    
    changes in financial estimates by securities analysts;
 
    
    conditions or trends in the computer software, electronic commerce and Internet industries;
 
    
    changes in the market valuations of other technology companies;
 
    
    developments in Internet regulations;
 
    
    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital
commitments;
 
    
    unscheduled system downtime of our products in either a hosted or in-house environment;
 
    
    additions or departures of key personnel; and
 
    
    sales of our common stock or other securities in the open market.
 Future sales of our common stock in the public market could negatively affect our stock price
  Our market is highly competitive and if we are unable to keep pace with evolving technology our
revenue and future prospects may decline
  International operations may adversely affect us
  
    
    fluctuations in currency exchange rates;
 
    
    governmental currency controls;
 
    
    changes in various regulatory requirements;
 
    
    political and economic changes and disruptions;
 
    
    difficulties in enforcing our contracts in foreign jurisdictions;
 
    
    export/import controls;
 
    
    tariff regulations;
 14




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
    
    difficulties in staffing and managing foreign sales and support operations;
 
    
    greater difficulties in trade accounts receivable collection; and
 
    
    possible adverse tax consequences.
   Infringement of our proprietary technology could hurt our competitive position and income potential
  If we are unable to attract and retain highly skilled technical employees, we may not be able to
compete
  We are subject to government regulation
  The adoption or modification of laws or regulations relating to the Internet, or interpretations of
existing law, could adversely affect our business
  15




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings.
    
 Item 4. Submission of Matters to a Vote of Security Holders.
     16




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PART II
 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
  High
    
    Low2004First Quarter
    
    $
    9.73
    
    
    $
    6.66Second Quarter
    
    
    10.65
    
    
    
    7.60Third Quarter
    
    
    9.94
    
    
    
    7.27Fourth Quarter
    
    
    10.08
    
    
    
    7.912005First Quarter
    
    $
    9.08
    
    
    $
    6.73Second Quarter
    
    
    6.99
    
    
    
    4.11Third Quarter
    
    
    5.42
    
    
    
    3.71Fourth Quarter
    
    
    4.67
    
    
    
    3.51
    17




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Item 6. Selected Financial Data.
  Year Ended December 31,2001(1)
    
    

2002(2)(3)
    
    

2003(3)
    
    

2004(3)(4)
    
    

2005(3)(5)(in thousands, except per share data)Statement of Operations Data:Total revenues
    
    $
    220,299
    
    
    $
    236,684
    
    
    
    
    
    
    $
    220,953
    
    
    $
    206,353
    
    
    $
    204,068(Loss) income from continuing operations
    
    
    (199,513
    )
    
    
    (5,632
    )
    
    
    
    
    
    
    (2,540
    )
    
    
    7,640
    
    
    
    (27,367
    )(Loss) income from discontinued operations
    
    
    (22,030
    )
    
    
    (10,765
    )
    
    
    
    
    
    
    (35,632
    )
    
    
    7,930
    
    
    
    26,310Net (loss) income
    
    
    (221,543
    )
    
    
    (16,397
    )
    
    
    
    
    
    
    (38,172
    )
    
    
    15,570
    
    
    
    (1,057
    )(Loss) earnings per share:Basic:Continuing operations
    
    $
    (3.37
    )
    
    $
    (0.08
    )
    
    
    
    
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.39
    )Discontinued operations
    
    
    (0.37
    )
    
    
    (0.16
    )
    
    
    
    
    
    
    (0.51
    )
    
    
    0.11
    
    
    
    0.37Net (loss) income per share
    
    $
    (3.74
    )
    
    $
    (0.24
    )
    
    
    
    
    
    $
    (0.55
    )
    
    $
    0.22
    
    
    $
    (0.02
    )Diluted:Continuing operations
    
    $
    (3.37
    )
    
    $
    (0.08
    )
    
    
    
    
    
    $
    (0.04
    )
    
    $
    0.10
    
    
    $
    (0.39
    )Discontinued operations
    
    
    (0.37
    )
    
    
    (0.16
    )
    
    
    
    
    
    
    (0.51
    )
    
    
    0.11
    
    
    
    0.37Net (loss) income per share
    
    $
    (3.74
    )
    
    $
    (0.24
    )
    
    
    
    
    
    $
    (0.55
    )
    
    $
    0.21
    
    
    $
    (0.02
    )
 As of December 31,2001
    
    2002
    




    2003
    
    2004
    
    2005(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    106,366
    
    
    $
    94,162
    
    




    $
    76,713
    
    
    $
    43,223
    
    
    $
    85,108Short-term investments
    
    
    42,235
    
    
    
    48,523
    
    




    
    87,477
    
    
    
    65,248
    
    
    
    44,170Working capital
    
    
    129,827
    
    
    
    120,864
    
    




    
    125,940
    
    
    
    105,715
    
    
    
    106,250Goodwill, net
    
    
    79,723
    
    
    
    106,971
    
    




    
    93,462
    
    
    
    117,699
    
    
    
    125,808Total assets
    
    
    372,037
    
    
    
    376,974
    
    




    
    337,088
    
    
    
    341,364
    
    
    
    344,523Capital lease obligation, excluding current portion
    
    
    1,450
    
    
    
    185
    
    




    
    523
    
    
    
    1,572
    
    
    
    791Stockholders equity
    
    
    274,618
    
    
    
    279,761
    
    




    
    243,814
    
    
    
    254,996
    
    
    
    252,386
 Year Ended December 31,2001 (1)
    

2002(2)(3)
    





2003 (3)
    

2004 (3)(4)
    

2005
(3)(5)(in thousands)Other Selected Data:Cash (used in) provided by operating activities
    
    $
    11,894
    
    
    $
    21,421
    
    




    $
    22,374
    
    
    $
    (15,244
    )
    
    $
    (236
    )Depreciation
    
    
    26,798
    
    
    
    21,194
    
    




    
    15,863
    
    
    
    9,350
    
    
    
    9,198Amortization and impairment of acquisition
intangible assets
    
    
    60,012
    
    
    
    15,943
    
    




    
    1,024
    
    
    
    878
    
    
    
    1,322Weighted
average common shares outstanding basic
    
    
    59,242
    
    
    
    67,725
    
    




    
    69,872
    
    
    
    70,613
    
    
    
    70,359Weighted average common shares outstanding  diluted
    
    
    n/a
    
    
    
    n/a
    
    




    
    n/a
    
    
    
    73,130
    
    
    
    n/a
 
 (1)
    
    Our net loss and net loss per share for the year ended December 31, 2001 were affected
by the loss on the sale of VerticalOne of $52.3 million and charges of $61.9 million from
our equity investment in Yodlee.(2)
    
    Our net loss, net loss per share and cash flows for the year ended December 31, 2002
were affected by the results of operations from acquired businesses, including Software
Dynamics, Inc. (September 2001), Regency Systems, Inc. (February 2002) and the assets and
subsidiaries of Point Holdings, Ltd. (March 2002). Revenues and expenses from the
operations of these acquired businesses were included in our operations from their
respective dates of acquisition.(3)
    
    Our results for the years ended December 31, 2002, 2003,
2004 and 2005 were positively
affected by the adoption of a new accounting principle, Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets. Effective January 1, 2002, we
stopped amortizing goodwill and assembled workforce, which was reclassified to goodwill.(4)
    
    Our net income for the year ended December 31, 2004 includes the gain on disposal of
discontinued operations of $9.3 million.(5)
    
    Our net loss for the year ended December 31, 2005 includes the gain on disposal of
discontinued operations of $25.0 million. Our net loss, net loss
per share and cash flows for the year ended December 31, 2005 were
affected by the results of operations from the acquired business,
Mosaic Software Holdings Limited (November 2004). Revenues and
expenses from the operations of the acquired business were included
in our operations from its respective date of acquisition. 18




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
   Executive Overview
       19




---



##### Table of Contents



2005 Business Acquisitions
  2004 Business Acquisitions
   20




---



##### Table of Contents



Revenue from Significant Customers
   Restructuring
Charges and Merger Related Costs
         21




---



##### Table of Contents



Merger Related Costs
  Critical Accounting Policies and Estimates
   
    
    revenue recognition;
    
    estimation of our allowance for doubtful accounts and billing adjustments;
    
    valuation and recoverability of long-lived assets, including goodwill;
    
    valuation of acquired businesses;
    
    determination of technological feasibility and capitalization of software development costs;
    
    determination of the fair value of employee stock options;
    
    recognition of costs in connection with restructuring plans and merger-related activities;
    
    reserve for contingencies; and
    
    income taxes.
 Revenue recognition .
 Software license revenue.
   22




---



##### Table of Contents



Support and maintenance revenue.
 Professional services revenue.
 Data center revenue.
   
    
    whether the fees associated with our products and services are fixed or determinable;
    
    whether or not collection of our fees is reasonably assured;
    
    whether professional services are essential to the functionality of the related software product;
    
    whether we have the ability to make reasonably dependable estimates in the application of the
percentage of completion method; and
    
    whether we have verifiable objective evidence of fair value for our products and services.
  
    
    percentage of labor hours incurred to date to the estimated total labor hours for each contract;
    
    provisions for estimated losses on uncompleted contracts; and
    
    the need for an allowance for doubtful accounts or billing adjustments.
  Estimation of allowance for doubtful accounts and billing adjustments.
 23




---



##### Table of Contents



Valuation and recoverability of long-lived assets, including goodwill.
 
    
    significant under-performance relative to expected historical or projected future operating results;
    
    significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
    
    significant negative industry or economic trends;
    
    significant decline in our stock price for a sustained period; and
    
    our market capitalization relative to net book value.
   Valuation of acquired businesses.
 Determination of technological feasibility and capitalization of software development costs.
 Determination of the fair value of employee stock options.
 Recognition of costs in connection with restructuring plans and merger-related activities.
  24




---



##### Table of Contents



Reserve for contingencies.
 Income taxes.
 Recent Accounting Pronouncements
    25




---



##### Table of Contents



Results of Operations
  2003
    
    
    2004
    
    
    2005Revenues:Software licenses
    
    $
    54,893
    
    
    
    25
    %
    
    $
    37,151
    
    
    
    18
    %
    
    $
    38,276
    
    
    
    19
    %Support and maintenance
    
    
    43,697
    
    
    
    20
    %
    
    
    45,880
    
    
    
    22
    %
    
    
    51,513
    
    
    
    25
    %Professional services
    
    
    77,165
    
    
    
    35
    %
    
    
    83,677
    
    
    
    41
    %
    
    
    72,065
    
    
    
    35
    %Data center
    
    
    42,288
    
    
    
    19
    %
    
    
    37,354
    
    
    
    18
    %
    
    
    40,000
    
    
    
    20
    %Other
    
    
    2,910
    
    
    
    1
    %
    
    
    2,291
    
    
    
    1
    %
    
    
    2,214
    
    
    
    1
    %Total revenues
    
    
    220,953
    
    
    
    100
    %
    
    
    206,353
    
    
    
    100
    %
    
    
    204,068
    
    
    
    100
    %Direct costs:Software licenses
    
    
    4,271
    
    
    
    2
    %
    
    
    5,461
    
    
    
    3
    %
    
    
    5,522
    
    
    
    3
    %Professional services, support and maintenance
    
    
    69,353
    
    
    
    31
    %
    
    
    63,410
    
    
    
    31
    %
    
    
    72,749
    
    
    
    36
    %Data center
    
    
    21,603
    
    
    
    10
    %
    
    
    18,465
    
    
    
    8
    %
    
    
    19,227
    
    
    
    8
    %Other
    
    
    2,594
    
    
    
    1
    %
    
    
    1,715
    
    
    
    1
    %
    
    
    1,790
    
    
    
    1
    %Total direct costs(1)
    
    
    97,821
    
    
    
    44
    %
    
    
    89,051
    
    
    
    43
    %
    
    
    99,288
    
    
    
    48
    %Operating expenses:Selling and marketing
    
    
    27,366
    
    
    
    12
    %
    
    
    25,921
    
    
    
    13
    %
    
    
    31,498
    
    
    
    15
    %Product development
    
    
    39,275
    
    
    
    18
    %
    
    
    46,214
    
    
    
    22
    %
    
    
    45,661
    
    
    
    22
    %General and administrative
    
    
    26,506
    
    
    
    12
    %
    
    
    24,431
    
    
    
    12
    %
    
    
    29,961
    
    
    
    15
    %Merger related and restructuring costs
    
    
    15,599
    
    
    
    8
    %
    
    
    
    
    
    
    0
    %
    
    
    15,030
    
    
    
    7
    %Depreciation
    
    
    15,863
    
    
    
    7
    %
    
    
    9,350
    
    
    
    5
    %
    
    
    9,198
    
    
    
    4
    %Amortization and impairment of acquisition
intangible assets
    
    
    1,024
    
    
    
    0
    %
    
    
    878
    
    
    
    0
    %
    
    
    1,322
    
    
    
    1
    %Total operating expenses
    
    
    125,633
    
    
    
    57
    %
    
    
    106,794
    
    
    
    52
    %
    
    
    132,670
    
    
    
    65
    %Operating (loss) income
    
    
    (2,501
    )
    
    
    (1
    )%
    
    
    10,508
    
    
    
    5
    %
    
    
    (27,890
    )
    
    
    (13
    )%Interest, investment and other income, net
    
    
    239
    
    
    
    0
    %
    
    
    (1,577
    )
    
    
    (1
    )%
    
    
    1,996
    
    
    
    1
    %(Loss) income from continuing operations before income taxes
    
    
    (2,262
    )
    
    
    (1
    )%
    
    
    8,931
    
    
    
    4
    %
    
    
    (25,894
    )
    
    
    (12
    )%Income tax (expense) benefit
    
    
    (278
    )
    
    
    0
    %
    
    
    (1,291
    )
    
    
    (1
    )%
    
    
    (1,473
    )
    
    
    (1
    )%(Loss) income from continuing operations
    
    
    (2,540
    )
    
    
    (1
    )%
    
    
    7,640
    
    
    
    3
    %
    
    
    (27,367
    )
    
    
    (13
    )%Discontinued operations:(Loss) income from discontinued operations, net of tax
    
    
    (35,632
    )
    
    
    (16
    )%
    
    
    7,930
    
    
    
    4
    %
    
    
    26,310
    
    
    
    13
    %Net (loss) income
    
    $
    (38,172
    )
    
    
    (17
    )%
    
    $
    15,570
    
    
    
    7
    %
    
    $
    (1,057
    )
    
    
    0
    %
 
 (1)
    
    Direct costs exclude charges for depreciation of property and equipment. 26




---



##### Table of Contents



Comparison of the Year Ended December 31, 2005 to the Year Ended December 31, 2004
 Revenues.
 Software
    
    
    Support and
    
    
    ProfessionalLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Data Center
    
    
    Other
    
    
    TotalYear Ended December 31, 2005:Financial institutions
    
    $
    27,337
    
    
    $
    44,289
    
    
    $
    65,346
    
    
    $
    40,000
    
    
    $
    2,169
    
    
    $
    179,141Risk and compliance
    
    
    10,939
    
    
    
    7,224
    
    
    
    6,719
    
    
    
    
    
    
    
    45
    
    
    
    24,927Total
    
    $
    38,276
    
    
    $
    51,513
    
    
    $
    72,065
    
    
    $
    40,000
    
    
    $
    2,214
    
    
    $
    204,068Year Ended December 31, 2004:Financial institutions
    
    $
    30,297
    
    
    $
    39,159
    
    
    $
    76,075
    
    
    $
    37,354
    
    
    $
    2,269
    
    
    $
    185,154Risk and compliance
    
    
    6,854
    
    
    
    6,721
    
    
    
    7,602
    
    
    
    
    
    
    
    22
    
    
    
    21,199Total
    
    $
    37,151
    
    
    $
    45,880
    
    
    $
    83,677
    
    
    $
    37,354
    
    
    $
    2,291
    
    
    $
    206,353
      27




---



##### Table of Contents



Direct Costs.
     28




---



##### Table of Contents



Selling and Marketing Expenses.
 Product Development Expenses.
  General and Administrative Expenses.
 Depreciation.
 Restructuring Costs.
  Amortization of Other Intangible Assets.
 Interest and Other Income (Expense), Net.
 Income Tax Benefit (Expense).
  
    
    for tax expense in certain subsidiaries or jurisdictions for which do not have
NOLs to utilize;
    
    in the United States due to limitations on the use of our federal NOLs for
alternative minimum tax purposes which will be paid in cash; or
    
    if there are NOLs that were acquired as part of a business combination, upon
which we placed a valuation allowance at acquisition date. This results in non-cash
income tax expense as goodwill is reduced and the
valuation allowance is released.
 29




---



##### Table of Contents



(Loss) income from discontinued operations.
 Year Ended December 31,2004(1)
    
    2005Loss from Davidge operations
    
    $
    (1,148
    )
    
    $
    (31
    )Income from Edify operations
    
    
    618
    
    
    
    1,658Gain on disposal of Davidge
    
    
    9,254
    
    
    
    Gain on disposal of Edify
    
    
    
    
    
    
    24,985Income tax expense
    
    
    (794
    )
    
    
    (302
    )
 
 (1)
    
    For Davidge, ten months ended October 31, 2004 prior to sale Comparison of the Year Ended December 31, 2004 to the Year Ended December 31, 2003
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalYear Ended December 31, 2004:Financial institutions excluding Zurich
    
    $
    30,297
    
    
    $
    39,159
    
    
    $
    76,075
    
    
    $
    37,354
    
    
    $
    2,269
    
    
    $
    185,154Zurich
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial institutions
    
    
    30,297
    
    
    
    39,159
    
    
    
    76,075
    
    
    
    37,354
    
    
    
    2,269
    
    
    
    185,154Risk and compliance
    
    
    6,854
    
    
    
    6,721
    
    
    
    7,602
    
    
    
    
    
    
    
    22
    
    
    
    21,199Total
    
    $
    37,151
    
    
    $
    45,880
    
    
    $
    83,677
    
    
    $
    37,354
    
    
    $
    2,291
    
    
    $
    206,353Year Ended December 31, 2003Financial institutions excluding Zurich
    
    $
    17,769
    
    
    $
    38,062
    
    
    $
    69,624
    
    
    $
    33,654
    
    
    $
    2,899
    
    
    $
    162,008Zurich
    
    
    32,704
    
    
    
    
    
    
    
    1,500
    
    
    
    8,634
    
    
    
    
    
    
    
    42,838Financial institutions
    
    
    50,473
    
    
    
    38,062
    
    
    
    71,124
    
    
    
    42,288
    
    
    
    2,899
    
    
    
    204,846Risk and compliance
    
    
    4,420
    
    
    
    5,635
    
    
    
    6,041
    
    
    
    
    
    
    
    11
    
    
    
    16,107Total
    
    $
    54,893
    
    
    $
    43,697
    
    
    $
    77,165
    
    
    $
    42,288
    
    
    $
    2,910
    
    
    $
    220,953
     30




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##### Table of Contents



Direct Costs.
      Selling and Marketing.
 Product Development.
  31




---



##### Table of Contents



General and Administrative.
 Depreciation.
 Merger Related and Restructuring Costs.
    Amortization and Impairment of Acquisition Intangible Assets.
 Interest, Investment and Other Income (Expense).
 Income Tax Benefit (Expense).
  
    
    for tax expense in certain subsidiaries or jurisdictions for which do not have
NOLs to utilize;
    
    in the United States due to limitations on the use of our federal NOLs for
alternative minimum tax purposes
 32




---



##### Table of Contents



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) income from discontinued operations.
 Year Ended December 31,2003
    
    2004(1)Loss from Davidge
    
    $
    (8,076
    )
    
    $
    (1,148
    )(Loss) income from Edify
    
    
    (27,551
    )
    
    
    618Gain on disposal of Davidge
    
    
    
    
    
    
    9,254Income tax expense
    
    
    (5
    )
    
    
    (794
    )
 
 (1)
    
    For Davidge, ten months ended October 31, 2004 prior to sale  Valuation of Acquired Businesses
   Liquidity and Capital Resources
  Year Ended December 31,2003
    
    
    2004
    
    
    2005(in thousands)Net cash provided by (used in) operating activities
before changes in operating assets and liabilities
    
    $
    7,956
    
    
    $
    22,942
    
    
    $
    (4,503
    )Changes in operating assets and liabilities
    
    
    14,418
    
    
    
    (38,186
    )
    
    
    4,267Net cash provided by (used in) operating activities
    
    
    22,374
    
    
    
    (15,244
    )
    
    
    (236
    )Net cash (used in) provided by investing activities
    
    
    (38,212
    )
    
    
    (12,534
    )
    
    
    46,597Net cash provided by (used in) financing activities
    
    
    37
    
    
    
    (6,239
    )
    
    
    (3,877
    )Effect of exchange rates on cash and cash equivalents
    
    
    852
    
    
    
    527
    
    
    
    (599
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (14,949
    )
    
    $
    (33,490
    )
    
    $
    41,885
 33




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##### Table of Contents



As of December 31,2004
    
    2005(in thousands)Cash and cash equivalents
    
    $
    43,223
    
    
    $
    85,108Short-term investments
    
    
    65,248
    
    
    
    44,170Working capital (1)
    
    
    105,715
    
    
    
    106,250Total assets
    
    
    341,364
    
    
    
    344,523Total stockholders equity
    
    
    254,996
    
    
    
    252,386
 
 (1)
    
    Working capital includes deferred revenues of $33.3 million and $27.5 million as of December
31, 2004 and 2005, respectively. Operating Activities.
  
    
    our net loss of $1.1 million;
    
    non-cash charges of $14.7 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $5.2 million;
    
    a decrease of $4.9 million in prepaid expenses and other assets; and
    
    changes in other operating assets and liabilities of $0.6 million.
 Cash used in operations for the year ended December 31, 2004 included the effects of:
 
    
    our net income of $15.6 million, which included the gain on the sale of a subsidiary
of $8.6 million and $1.5 million equity in net loss of affiliate;
    
    non-cash charges of $14.0 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $0.4 million;
    
    a decrease in accrued expenses and other liabilities of $10.1 million, including a
$4.5 million payment for the settlement of a disputed claim in our discontinued
business and $3.6 million for restructuring;
    
    an increase of $19.9 million in accounts receivable due to the increased revenue
accounted for under the percentage of completion accounting, the timing of billings at
or near quarter end;
    
    a decrease in deferred revenues of $6.4 million due to the timing of billings and
the recognition of revenues; and
    
    changes in other operating assets and liabilities of $1.8 million.
    Investing Activities.
  34




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##### Table of Contents



Financing Activities.
     Non-cash Investing Activities.
 Commitments.
    Less than
    
    
    1  3
    
    
    3  5
    


    
    Greater1 year
    
    
    years
    
    
    years
    
    
    than 5 years
    
    
    TotalOperating leases
    
    $
    13,303
    
    
    $
    21,592
    
    
    $
    15,554
    
    
    $
    9,357
    
    
    $
    59,806Capital leases
    
    
    1,317
    
    
    
    791
    
    
    
    
    
    
    
    
    
    
    
    2,108Purchase obligations
    
    
    2,164
    
    
    
    1,859
    
    
    
    
    
    
    
    
    
    
    
    4,023Total
    
    $
    16,784
    
    
    $
    24,242
    
    
    $
    15,554
    
    
    $
    9,357
    
    
    $
    65,937Operating sub-lease income
    
    $
    (1,812
    )
    
    $
    (3,311
    )
    
    $
    (2,526
    )
    
    $
    (848
    )
    
    $
    (8,497
    )
 35




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##### Table of Contents



Item 7A. Qualitative and Quantitative Disclosures about Market Risk.
   36




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 INDEX TO FINANCIAL STATEMENTS
 PageFINANCIAL STATEMENTS:Report of Independent Registered Public Accounting Firm
    
    
    38Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    
    40Consolidated Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005
    
    
    41Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005
    
    
    42Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the Years Ended
December 31, 2003, 2004 and 2005
    
    
    43Notes to Consolidated Financial Statements
    
    
    44FINANCIAL STATEMENT SCHEDULE:For each of the three years ended December 31, 2005Schedule IIValuation and Qualifying Accounts
    
    
    71
  37




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
    Consolidated financial statements and financial statement schedule
  Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
  38




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39




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##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2004
    
    
    2005(in thousands, except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    43,223
    
    
    $
    85,108Short-term investments
    
    
    65,248
    
    
    
    44,170Accounts receivable, net of allowance for doubtful accounts and billing adjustments
of $4,705 and $5,810 at December 31, 2004 and 2005, respectively
    
    
    61,216
    
    
    
    48,659Prepaid expenses
    
    
    6,113
    
    
    
    4,885Other current assets
    
    
    5,968
    
    
    
    3,870Total current assets
    
    
    181,768
    
    
    
    186,692Property and equipment, net
    
    
    15,150
    
    
    
    11,351Intangible assets, net
    
    
    22,766
    
    
    
    18,375Goodwill, net
    
    
    117,699
    
    
    
    125,808Other assets
    
    
    3,981
    
    
    
    2,297Total assets
    
    $
    341,364
    
    
    $
    344,523LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,253
    
    
    $
    5,292Accrued compensation and benefits
    
    
    14,269
    
    
    
    8,267Accrued restructuring
    
    
    3,337
    
    
    
    7,675Accrued other expenses
    
    
    17,369
    
    
    
    17,587Accrued purchase price consideration
    
    
    
    
    
    
    12,900Deferred revenues
    
    
    33,302
    
    
    
    27,499Current portion of capital lease obligation
    
    
    1,523
    
    
    
    1,222Total current liabilities
    
    
    76,053
    
    
    
    80,442Capital lease obligation, excluding current portion
    
    
    1,572
    
    
    
    791Accrued restructuring, excluding current portion
    
    
    4,789
    
    
    
    7,810Other liabilities
    
    
    3,954
    
    
    
    3,094Total liabilities
    
    
    86,368
    
    
    
    92,137Commitments and contingencies (Note 13)Stockholders equity:Preferred stock, $0.01 par value. Authorized 25,000,000 shares. Issued and
outstanding 749,064 shares at December 31, 2004 and 2005,
respectively
    
    
    10,000
    
    
    
    10,000Common stock, $0.01 par value. Authorized 350,000,000 shares. Issued and
outstanding 74,152,529 and 74,410,099 shares at December 31, 2004 and 2005,
respectively
    
    
    742
    
    
    
    744Additional paid-in capital
    
    
    1,913,913
    
    
    
    1,915,617Common stock held in treasury, at cost. 3,544,111 and 4,053,886 shares at
December 31, 2004 and 2005, respectively
    
    
    (21,593
    )
    
    
    (25,000
    )Accumulated deficit
    
    
    (1,646,147
    )
    
    
    (1,647,204
    )Accumulated other comprehensive income (loss):Net gain on derivative financial instruments, net of tax
    
    
    
    
    
    
    104Cumulative foreign currency translation adjustment, net of tax
    
    
    (1,919
    )
    
    
    (1,875
    )Total stockholders equity
    
    
    254,996
    
    
    
    252,386Total liabilities and stockholders equity
    
    $
    341,364
    
    
    $
    344,523
  40




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##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2003
    
    
    2004
    
    
    2005(in thousands, except share and per share data)Revenues:Software licenses
    
    $
    54,893
    
    
    $
    37,151
    
    
    $
    38,276Support and maintenance
    
    
    43,697
    
    
    
    45,880
    
    
    
    51,513Professional services
    
    
    77,165
    
    
    
    83,677
    
    
    
    72,065Data center
    
    
    42,288
    
    
    
    37,354
    
    
    
    40,000Other
    
    
    2,910
    
    
    
    2,291
    
    
    
    2,214Total revenues
    
    
    220,953
    
    
    
    206,353
    
    
    
    204,068Operating expenses:Cost of software licenses
    
    
    4,271
    
    
    
    5,461
    
    
    
    5,522Cost of professional services, support and maintenance(1)
    
    
    69,353
    
    
    
    63,410
    
    
    
    72,749Cost of data center(1)
    
    
    21,603
    
    
    
    18,465
    
    
    
    19,227Cost of other revenue
    
    
    2,594
    
    
    
    1,715
    
    
    
    1,790Selling and marketing
    
    
    27,366
    
    
    
    25,921
    
    
    
    31,498Product development
    
    
    39,275
    
    
    
    46,214
    
    
    
    45,661General and administrative, including stock option compensation
expense of $281, $0 and $0 for 2003, 2004 and 2005
    
    
    26,506
    
    
    
    24,431
    
    
    
    29,961Merger related and restructuring costs
    
    
    15,599
    
    
    
    
    
    
    
    15,030Depreciation
    
    
    15,863
    
    
    
    9,350
    
    
    
    9,198Amortization of other intangible assets
    
    
    1,024
    
    
    
    878
    
    
    
    1,322Total operating expenses
    
    
    223,454
    
    
    
    195,845
    
    
    
    231,958Operating (loss) income
    
    
    (2,501
    )
    
    
    10,508
    
    
    
    (27,890
    )Interest and other income (expense), net
    
    
    239
    
    
    
    (1,577
    )
    
    
    1,996(Loss) income before income tax expense
    
    
    (2,262
    )
    
    
    8,931
    
    
    
    (25,894
    )Income tax expense
    
    
    (278
    )
    
    
    (1,291
    )
    
    
    (1,473
    )(Loss) income from continuing operations
    
    
    (2,540
    )
    
    
    7,640
    
    
    
    (27,367
    )Discontinued operations:(Loss) income from discontinued operations, net of tax
    
    
    (35,632
    )
    
    
    7,930
    
    
    
    26,310Net (loss) income
    
    $
    (38,172
    )
    
    $
    15,570
    
    
    $
    (1,057
    )Basic (loss) earnings per share:Continuing operations
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.39
    )Discontinued operations
    
    
    (0.51
    )
    
    
    0.11
    
    
    
    0.37Net (loss) income per share
    
    $
    (0.55
    )
    
    $
    0.22
    
    
    $
    (0.02
    )Diluted (loss) earnings per share:Continuing operations
    
    $
    (0.04
    )
    
    $
    0.10
    
    
    $
    (0.39
    )Discontinued operations
    
    
    (0.51
    )
    
    
    0.11
    
    
    
    0.37Net (loss) income per share
    
    $
    (0.55
    )
    
    $
    0.21
    
    
    $
    (0.02
    )Weighted average common shares outstanding  basic
    
    
    69,872,436
    
    
    
    70,612,973
    
    
    
    70,359,200Weighted average common shares outstanding  fully diluted
    
    
    n/a
    
    
    
    73,130,026
    
    
    
    n/a
 
 (1)
    
    Cost of professional services, support and maintenance and cost of data center excludes
charges for depreciation  41




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##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2003
    
    
    2004
    
    
    2005(in thousands)Cash flows from operating activities:Net (loss) income
    
    $
    (38,172
    )
    
    $
    15,570
    
    
    $
    (1,057
    )Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation, amortization and intangible asset impairment charges
    
    
    34,308
    
    
    
    14,010
    
    
    
    14,711Gain on disposal of discontinued operations, net of tax
    
    
    
    
    
    
    (8,559
    )
    
    
    (24,850
    )Provision for doubtful accounts receivable and billing adjustments
    
    
    6,063
    
    
    
    421
    
    
    
    5,152Equity in net loss of affiliate
    
    
    
    
    
    
    1,500
    
    
    
    Compensation expense for options
    
    
    281
    
    
    
    
    
    
    
    570Loss on disposal of property and equipment
    
    
    3,931
    
    
    
    
    
    
    
    971Other
    
    
    1,545
    
    
    
    
    
    
    
    Changes in operating assets and liabilitiesDecrease (increase) in accounts receivable
    
    
    11,089
    
    
    
    (19,884
    )
    
    
    (660
    )Decrease (increase) in prepaid expenses and other assets
    
    
    6,249
    
    
    
    (1,314
    )
    
    
    4,881(Decrease) increase in accounts payable
    
    
    (7,588
    )
    
    
    (457
    )
    
    
    (362
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    6,314
    
    
    
    (10,141
    )
    
    
    (536
    )(Decrease) increase in deferred revenues
    
    
    (1,646
    )
    
    
    (6,390
    )
    
    
    944Net cash provided by (used in) operating activities
    
    
    22,374
    
    
    
    (15,244
    )
    
    
    (236
    )Cash flows from investing activities:Cash paid in connection with acquisition of businesses
    
    
    
    
    
    
    (39,434
    )
    
    
    (857
    )Proceeds from sale of subsidiary
    
    
    
    
    
    
    12,924
    
    
    
    33,232Maturities of short-term investment securities
    
    
    40,133
    
    
    
    82,752
    
    
    
    73,500Purchases of short-term investment securities
    
    
    (73,956
    )
    
    
    (60,523
    )
    
    
    (52,422
    )Investment in equity method investment
    
    
    
    
    
    
    (1,500
    )
    
    
    Proceeds from sale of other assets
    
    
    1,415
    
    
    
    
    
    
    
    Proceeds from sale of cost -basis investment and other investment securities
    
    
    586
    
    
    
    
    
    
    
    Purchases of property, equipment, and technology
    
    
    (6,390
    )
    
    
    (6,753
    )
    
    
    (6,856
    )Net cash (used in) provided by investing activities
    
    
    (38,212
    )
    
    
    (12,534
    )
    
    
    46,597Cash flows from financing activities:Proceeds from employee stock option plans
    
    
    3,217
    
    
    
    6,005
    
    
    
    1,139Repurchase of common stock held in treasury
    
    
    (1,188
    )
    
    
    (11,155
    )
    
    
    (3,407
    )Payments on capital lease obligations
    
    
    (1,992
    )
    
    
    (1,089
    )
    
    
    (1,609
    )Net cash provided by (used in) financing activities
    
    
    37
    
    
    
    (6,239
    )
    
    
    (3,877
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    852
    
    
    
    527
    
    
    
    (599
    )Net (decrease) increase in cash and cash equivalents
    
    
    (14,949
    )
    
    
    (33,490
    )
    
    
    41,885Cash and cash equivalents at beginning of year
    
    
    91,662
    
    
    
    76,713
    
    
    
    43,223Cash and cash equivalents at end of year
    
    $
    76,713
    
    
    $
    43,223
    
    
    $
    85,108Non-cash financing and investing activities:Property and equipment acquired through leases
    
    $
    1,399
    
    
    $
    2,899
    
    
    $
    527Maintenance agreement financed through vendor
    
    
    
    
    
    
    1,279
    
    
    
    105Conversion of preferred stock to common stock
    
    
    8,328
    
    
    
    
    
    
    
    Accrual for additional purchase price consideration
    
    
    
    
    
    
    
    
    
    
    12,900Assets acquired, net of cash acquired
    
    
    
    
    
    
    8,153
    
    
    
    32Liabilities assumed in acquisition
    
    
    
    
    
    
    5,551
    
    
    
    123
  42




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##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (in thousands, except share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Treasury Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    (Loss) IncomeBalance at December 31, 2002
    
    
    1,398,214
    
    
    $
    18,328
    
    
    
    71,259,901
    
    
    $
    713
    
    
    $
    1,896,111
    
    
    
    (1,906,300
    )
    
    $
    (9,250
    )
    
    $
    (1,623,545
    )
    
    $
    (2,596
    )
    
    $
    279,761Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,172
    )
    
    
    
    
    
    
    (38,172
    )
    
    
    (38,172
    )Change in net unrealized gains on investment
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )
    
    
    (38
    )Change in cumulative foreign currency translation
Adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    (23
    )
    
    
    (23
    )Realized gains on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )
    
    
    Conversion of preferred stock to common stock
    
    
    (649,150
    )
    
    
    (8,328
    )
    
    
    649,150
    
    
    
    6
    
    
    
    8,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon the exercise of stock
options and employee stock purchases
    
    
    
    
    
    
    
    
    
    
    1,321,709
    
    
    
    13
    
    
    
    3,204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,217
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199,562
    )
    
    
    (1,188
    )
    
    
    
    
    
    
    
    
    
    
    (1,188
    )
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (38,233
    )Balance at December 31, 2003
    
    
    749,064
    
    
    $
    10,000
    
    
    
    73,230,760
    
    
    $
    732
    
    
    $
    1,907,918
    
    
    
    (2,105,862
    )
    
    $
    (10,438
    )
    
    $
    (1,661,717
    )
    
    $
    (2,681
    )
    
    $
    243,814Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,570
    
    
    
    
    
    
    
    15,570
    
    
    
    15,570Change in cumulative foreign currency translation
Adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    762
    
    
    
    762
    
    
    
    762Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    921,769
    
    
    
    10
    
    
    
    5,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,005
    
    
    
    Repurchase of common stock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,438,249
    )
    
    
    (11,155
    )
    
    
    
    
    
    
    
    
    
    
    (11,155
    )
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,332Balance at December 31, 2004
    
    
    749,064
    
    
    $
    10,000
    
    
    
    74,152,529
    
    
    $
    742
    
    
    $
    1,913,913
    
    
    
    (3,544,111
    )
    
    $
    (21,593
    )
    
    $
    (1,646,147
    )
    
    $
    (1,919
    )
    
    $
    254,996Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,057
    )
    
    
    
    
    
    
    (1,057
    )
    
    
    (1,057
    )Change in net unrealized gain on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    118
    
    
    
    118Change in cumulative foreign currency translation
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (575
    )
    
    
    (575
    )
    
    
    (575
    )Realized gain on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )
    
    
    Realized cumulative foreign currency translation
related to sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    619
    
    
    
    619
    
    
    
    Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    257,570
    
    
    
    2
    
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,136
    
    
    
    Deferred stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    Repurchase of common st ock, held in treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (509,775
    )
    
    
    (3,407
    )
    
    
    
    
    
    
    
    
    
    
    (3,407
    )
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,514
    )Balance at December 31, 2005
    
    
    749,064
    
    
    $
    10,000
    
    
    
    74,410,099
    
    
    $
    744
    
    
    $
    1,915,617
    
    
    
    (4,053,886
    )
    
    $
    (25,000
    )
    
    $
    (1,647,204
    )
    
    $
    (1,771
    )
    
    $
    252,386
  43




---



##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2004 and 2005
 1. Business
   2. Summary of Significant Accounting Policies
 Basis of presentation
   Use of estimates
  
    
    revenue recognition;
    
    estimation of our allowance for doubtful accounts and billing adjustments;
    
    valuation and recoverability of long-lived assets, including goodwill;
    
    valuation of acquired businesses;
    
    determination of technological feasibility and capitalization of software development costs;
    
    recognition of costs in connection with restructuring plans and merger-related activities;
    
    reserve for contingencies;
    
    valuation of stock based compensation; and
    
    income taxes.
 
 44




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##### Table of Contents



Financial instruments
       Accounts receivable and allowance for doubtful accounts and billing adjustments
  Property and equipment
  45




---



##### Table of Contents



Furniture and fixtures
    
    5 yearsComputer equipment (1)
    
    1.5 to 3 yearsSoftware
    
    3 years
 
 (1)
    
    Computer equipment under capital lease is depreciated over the
term of the lease agreement which approximates the equipments economic useful
life. Goodwill
   Other long-lived assets
   Cost-basis and equity method investments
  46




---



##### Table of Contents



Concentration of credit risk
    Revenue recognition, deferred revenues and cost of revenues
 Software license revenue.
    Support and maintenance revenue.
 Professional services revenue.
 47




---



##### Table of Contents



Data center revenue.
   Other revenue.
 Deferred revenues
 Cost of revenues .
 Product development
  Restructuring and merger related costs
   48




---



##### Table of Contents



Interest, investment and other income (expense), net
  For the year endedDecember 31,2003
    
    
    2004
    
    
    2005Interest and investment income
    
    $
    1,744
    
    
    $
    2,108
    
    
    $
    3,241Interest expense
    
    
    (418
    )
    
    
    (584
    )
    
    
    (495
    )Equity in net loss of affiliate
    
    
    
    
    
    
    (1,500
    )
    
    
    Other
    
    
    (1,087
    )
    
    
    (1,601
    )
    
    
    (750
    )Total
    
    $
    239
    
    
    $
    (1,577
    )
    
    $
    1,996
 Income taxes
  Stock-based compensation
  49




---



##### Table of Contents



2003
    
    
    2004
    
    
    2005Net (loss) income, as reported
    
    $
    (38,172
    )
    
    $
    15,570
    
    
    $
    (1,057
    )Add: Stock-based employee compensation expense
included in reported net (loss) income, net of
related tax effects
    
    
    281
    
    
    
    
    
    
    
    570Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (31,991
    )
    
    
    (25,143
    )
    
    
    (13,070
    )Pro forma net loss
    
    $
    (69,882
    )
    
    $
    (9,573
    )
    
    $
    (13,557
    )Basic and diluted net (loss) income per share:As reported  basic
    
    $
    (0.55
    )
    
    $
    0.22
    
    
    $
    (0.02
    )As reported  diluted
    
    
    (0.55
    )
    
    
    0.21
    
    
    
    (0.02
    )Pro forma  basic and diluted
    
    
    (1.00
    )
    
    
    (0.14
    )
    
    
    (0.19
    )
   2003
    
    2004
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    111.1
    %
    
    
    101.9
    %
    
    
    66.9
    %Risk-free interest rate, stock option plans
    
    
    3.0
    %
    
    
    3.6
    %
    
    
    4.3
    %Expected life, stock option plans
    
    4.1 years
    
    4.0 years
    
    4.0 years
 50




---



##### Table of Contents



Net Income (loss) per share
    Foreign currency translation
  Derivative financial instruments
  Comprehensive income (loss)
  Reclassifications
  Recent accounting pronouncements
  51




---



##### Table of Contents



3. Reclassifications
  4. Business Acquisitions
   52




---



##### Table of Contents



53




---



##### Table of Contents



Providus
    
    
    Mosaic
    
    
    X/Net
    
    
    vMokshaCurrent assets
    
    $
    
    
    
    $
    10,553
    
    
    $
    18
    
    
    $
    87Property and equipment
    
    
    32
    
    
    
    594
    
    
    
    
    
    
    
    433Other non-current assets
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    Developed technology (1)
    
    
    500
    
    
    
    6,100
    
    
    
    600
    
    
    
    Customer relationship assets (2)
    
    
    100
    
    
    
    4,900
    
    
    
    200
    
    
    
    Goodwill (3)
    
    
    348
    
    
    
    33,036
    
    
    
    4,008
    
    
    
    888Current liabilities
    
    
    (123
    )
    
    
    (4,537
    )
    
    
    (743
    )
    
    
    (210
    )Non-current liabilities
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    Total purchase price
    
    $
    857
    
    
    $
    50,885
    
    
    $
    4,083
    
    
    $
    1,198
 
 (1)
    
    Developed technology for Mosaic, X/Net and Providus have an estimated useful life of
five years.(2)
    
    Customer relationship asset for Mosaic has a useful life of ten years and for X/Net
and Providus, it has an estimated useful life of five years.(3)
    
    Goodwill for Mosaic includes $12.9 million of contingent consideration recorded
during the fourth quarter of 2005.  5. Discontinued Operations
    54




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##### Table of Contents



Year Ended December 31,2003
    
    
    2004(1)
    
    
    2005RevenuesDavidge
    
    $
    4,963
    
    
    $
    5,650
    
    
    $
    Edify
    
    
    30,027
    
    
    
    36,848
    
    
    
    34,085Loss from Davidge
    
    $
    (8,076
    )
    
    $
    (1,148
    )
    
    $
    (31
    )(Loss) income from Edify
    
    
    (27,551
    )
    
    
    618
    
    
    
    1,658Gain on disposal of Davidge
    
    
    
    
    
    
    9,254
    
    
    
    Gain on disposal of Edify
    
    
    
    
    
    
    
    
    
    
    24,985Income tax expense
    
    
    (5
    )
    
    
    (794
    )
    
    
    (302
    )(Loss) income from discontinued operations
    
    $
    (35,632
    )
    
    $
    7,930
    
    
    $
    26,310
 
 (1)
    
    For Davidge, ten months ended October 31, 2004 prior to sale  December 31,
    
    
    October 31,2005
    
    
    2004Current assets
    
    $
    8,605
    
    
    $
    1,794Property and Equipment
    
    
    525
    
    
    
    280Goodwill
    
    
    4,886
    
    
    
    346Other assets
    
    
    274
    
    
    
    Current liabilities
    
    
    (10,601
    )
    
    
    (196
    )Net assets of discontinued operations
    
    $
    3,689
    
    
    $
    2,224
  2003
    
    2004
    
    2005(in thousands)Continuing operations
    
    $
    1,519
    
    
    $
    164
    
    
    $
    120Discontinued operations
    
    
    1,843
    
    
    
    1,994
    
    
    
    1,633
  6. Investments
  55




---



##### Table of Contents



7.
    
    Accounts Receivable
  8.
    
    Property and Equipment
  December 31,2004
    
    
    2005(in thousands)Leasehold improvements
    
    $
    9,986
    
    
    $
    5,749Furniture and fixtures
    
    
    6,959
    
    
    
    4,827Computer equipment
    
    
    22,536
    
    
    
    20,778Software
    
    
    10,641
    
    
    
    10,05650,122
    
    
    
    41,410Accumulated depreciation
    
    
    (34,972
    )
    
    
    (30,059
    )$
    15,150
    
    
    $
    11,351
 9.
    
    Goodwill and Other Intangible Assets
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(in thousands)Purchased and acquired technology
    
    $
    19,989
    
    
    $
    (9,981
    )Customer relationships
    
    
    12,100
    
    
    
    (3,733
    )Total
    
    $
    32,089
    
    
    $
    (13,714
    )
  2006
    
    2007
    
    2008
    
    2009
    
    2010Financial institutions business segment
    
    $
    4,931
    
    
    $
    3,990
    
    
    $
    3,165
    
    
    $
    2,200
    
    
    $
    1,090Risk and compliance business segment
    
    
    120
    
    
    
    120
    
    
    
    120
    
    
    
    120
    
    
    
    60
 56




---



##### Table of Contents



Financial
    
    
    Risk andInstitutions
    
    
    Compliance
    
    
    Edify
    
    
    TotalBalance, January 1, 2005
    
    $
    111,603
    
    
    $
    1,210
    
    
    $
    4,886
    
    
    $
    117,699Acquisitions
    
    
    
    
    
    
    348
    
    
    
    
    
    
    
    348Purchase price adjustment
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    178Utilization of acquisition related
income tax benefits
    
    
    (431
    )
    
    
    
    
    
    
    
    
    
    
    (431
    )Additional consideration
    
    
    12,900
    
    
    
    
    
    
    
    
    
    
    
    12,900Sale of Edify
    
    
    
    
    
    
    
    
    
    
    (4,886
    )
    
    
    (4,886
    )Balance, December 31, 2005
    
    $
    124,250
    
    
    $
    1,558
    
    
    $
    
    
    
    $
    125,808
 .
 10.
    
    Derivative Financial Instruments
      57




---



##### Table of Contents



Year EndedDecember 31, 2005Accumulated derivative net gain as of January 1, 2005
    
    $
    Net change in fair value of derivatives
    
    
    118Net gains reclassified from AOCI into earnings
    
    
    (14
    )Accumulated derivative net gain as of December 31, 2005
    
    $
    104
  11.
    
    Restructuring and Merger Related Costs
  2003
    
    
    2004
    
    
    2005(in thousands)Merger related costs
    
    $
    (1,312
    )
    
    $
    
    
    
    $
    Restructuring costs
    
    
    16,911
    
    
    
    
    
    
    
    15,030$
    15,599
    
    
    $
    
    
    
    $
    15,030
    58




---



##### Table of Contents



Personnel Costs
    
    
    Lease Costs
    
    
    Other
    
    
    TotalBalance, December 31, 2002
    
    $
    78
    
    
    $
    6,724
    
    
    $
    308
    
    
    $
    7,1102003 restructuring charge(1)
    
    
    6,461
    
    
    
    7,492
    
    
    
    7,217
    
    
    
    21,170Amounts utilized through December 31, 2003
    
    
    (5,595
    )
    
    
    (3,904
    )
    
    
    (7,007
    )
    
    
    (16,506
    )Balance, December 31, 2003
    
    
    944
    
    
    
    10,312
    
    
    
    518
    
    
    
    11,774Amounts utilized through December 31, 2004
    
    
    (488
    )
    
    
    (2,989
    )
    
    
    (171
    )
    
    
    (3,648
    )Change in estimate
    
    
    (456
    )
    
    
    803
    
    
    
    (347
    )
    
    
    Balance, December 31, 2004
    
    
    
    
    
    
    8,126
    
    
    
    
    
    
    
    8,126Amounts utilized through December 31, 2005
    
    
    
    
    
    
    (3,245
    )
    
    
    
    
    
    
    (3,245
    )Change in estimate
    
    
    
    
    
    
    1,113
    
    
    
    
    
    
    
    1,113Sale of Edify business
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    (194
    )Balance, December 31, 2005
    
    $
    
    
    
    $
    5,800
    
    
    $
    
    
    
    $
    5,800
 
 (1)
    
    In the year ended December 31, 2003, we recorded restructuring
charges of $4.3 million related to our Edify business which is now a part of discontinued
operations.   Personnel Costs
    
    
    Lease Costs
    
    
    Other
    
    
    Total2005 restructuring charge
    
    $
    8,037
    
    
    $
    5,104
    
    
    $
    776
    
    
    $
    13,917Amounts utilized through December 31, 2005
    
    
    (3,402
    )
    
    
    (54
    )
    
    
    (776
    )
    
    
    (4,232
    )Balance, December 31, 2005
    
    $
    4,635
    
    
    $
    5,050
    
    
    $
    
    
    
    $
    9,685
  59




---



##### Table of Contents



12.
    
    Accrued Other Expenses
  December 31,2004
    
    
    2005(in thousands)Accrued service fees payable
    
    $
    3,395
    
    
    $
    1,974Accrued for merger related costs
and costs related to the
disposal of a business
    
    
    2,105
    
    
    
    6,115Sales and income taxes payable
    
    
    3,281
    
    
    
    1,838Accrued contract losses
    
    
    666
    
    
    
    2,313Other
    
    
    7,922
    
    
    
    5,347$
    17,369
    
    
    $
    17,587
 13.
    
    Commitments and Contingencies
 Lease commitments
   Operating Lease
    
    
    Sublease
    
    
    Net LeaseCommitments
    
    
    Income
    
    
    Commitments2006
    
    $
    13,303
    
    
    $
    (1,812
    )
    
    $
    11,4912007
    
    
    11,746
    
    
    
    (1,635
    )
    
    
    10,1112008
    
    
    9,846
    
    
    
    (1,676
    )
    
    
    8,1702009
    
    
    8,695
    
    
    
    (1,296
    )
    
    
    7,3992010
    
    
    6,859
    
    
    
    (1,230
    )
    
    
    5,629Thereafter
    
    
    9,357
    
    
    
    (848
    )
    
    
    8,509$
    59,806
    
    
    $
    (8,497
    )
    
    $
    51,309
  60




---



##### Table of Contents



2006
    
    $
    1,3172007
    
    
    7142008
    
    
    77$
    2,108Less amount representing interest
    
    
    (95
    )2,013Less current portion
    
    
    (1,222
    )Long-term capital lease obligations
    
    $
    791
 Contractual commitments
   Guarantees
  Litigation
   61




---



##### Table of Contents



14.
    
    Income Taxes
  2003
    
    
    2004
    
    
    2005(in thousands)U.S. operations
    
    $
    28,716
    
    
    $
    16,476
    
    
    $
    (8,881
    )Foreign operations
    
    
    (30,978
    )
    
    
    (7,545
    )
    
    
    (17,013
    )$
    (2,262
    )
    
    $
    8,931
    
    
    $
    (25,894
    )
  2003
    
    
    2004
    
    
    2005(in thousands)Current:Federal
    
    $
    96
    
    
    $
    359
    
    
    $
    294Foreign
    
    
    13
    
    
    
    340
    
    
    
    788State
    
    
    42
    
    
    
    143
    
    
    
    (9
    )Total current
    
    $
    151
    
    
    $
    842
    
    
    $
    1,073Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    Foreign
    
    
    127
    
    
    
    449
    
    
    
    400State
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    $
    127
    
    
    $
    449
    
    
    $
    400Total income tax expense
    
    $
    278
    
    
    $
    1,291
    
    
    $
    1,473
  2003
    
    
    2004
    
    
    2005(in thousands)Income taxes at federal statutory rate of 35%
    
    $
    (792
    )
    
    $
    3,126
    
    
    $
    (9,063
    )State income tax (benefit) expense, net of federal benefit
    
    
    (1,521
    )
    
    
    86
    
    
    
    (9
    )(Decrease) increase in valuation allowance related to
current year operations
    
    
    (657
    )
    
    
    (3,219
    )
    
    
    5,863Foreign operations tax rate differences
    
    
    3,502
    
    
    
    295
    
    
    
    767In-process R&D, goodwill amortization, tax assessments and
other permanent items
    
    
    (254
    )
    
    
    1,003
    
    
    
    3,355Other
    
    
    
    
    
    
    
    
    
    
    560Income tax expense
    
    $
    278
    
    
    $
    1,291
    
    
    $
    1,473
 62




---



##### Table of Contents



2004
    
    
    2005(in thousands)Deferred income tax assets:Net operating loss carryforwards
    
    $
    159,100
    
    
    $
    154,009Equity in net loss of affiliate
    
    
    20,299
    
    
    
    20,299Accrued expenses
    
    
    7,258
    
    
    
    7,887Deferred revenue
    
    
    10,693
    
    
    
    8,080Tax credit carryforwards
    
    
    6,872
    
    
    
    6,553Restructuring
    
    
    2,937
    
    
    
    5,548Property and equipment depreciation
    
    
    5,598
    
    
    
    1,626Other
    
    
    
    
    
    
    509Total gross deferred income tax assets
    
    
    212,757
    
    
    
    204,511Valuation allowance for deferred income tax assets
    
    
    (206,241
    )
    
    
    (199,173
    )Total deferred income tax assets
    
    
    6,516
    
    
    
    5,338Deferred income tax liabilities:Identifiable intangibles
    
    
    6,512
    
    
    
    5,338Other
    
    
    4
    
    
    
    Total gross deferred income tax liabilities
    
    
    6,516
    
    
    
    5,338Net deferred income taxes
    
    $
    
    
    
    $
    Included in:Other current assets
    
    $
    483
    
    
    $
    418Other
liabilities
    
    
    (483
    )
    
    
    (418
    )Net deferred income taxes
    
    $
    
    
    
    $
    
    63




---



##### Table of Contents



15.
    
    Convertible Preferred Stock
   
    
    any amendment to any charter provision that would change the specific terms of that
series which would adversely affect the rights of the holders of that series, and
    
    the merger or consolidation of S1 with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of the properties or business of S1 in
exchange for securities of another corporation if series B is to be exchanged for
securities of such other corporation and if the terms of such securities are less favorable
in any respect.
  16.
    
    Equity Transactions
   64




---



##### Table of Contents



17.
    
    Stock Option and Purchase Plans
    2003
    
    
    2004
    
    
    2005Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageShares
    
    
    Exercise
    
    
    Shares
    
    
    Exercise
    
    
    Shares
    
    
    Exercise(000)
    
    
    Price
    
    
    (000)
    
    
    Price
    
    
    (000)
    
    
    PriceOutstanding at beginning of year
    
    
    18,390
    
    
    $
    13.97
    
    
    
    15,067
    
    
    $
    12.00
    
    
    
    14,544
    
    
    $
    11.05Granted
    
    
    2,598
    
    
    
    3.80
    
    
    
    2,520
    
    
    
    8.10
    
    
    
    2,885
    
    
    
    4.36Exercised
    
    
    (1,322
    )
    
    
    2.43
    
    
    
    (922
    )
    
    
    6.51
    
    
    
    (258
    )
    
    
    4.41Forfeited/canceled
    
    
    (4,599
    )
    
    
    18.02
    
    
    
    (2,121
    )
    
    
    16.27
    
    
    
    (2,239
    )
    
    
    14.21Outstanding at end of year
    
    
    15,067
    
    
    $
    12.00
    
    
    
    14,544
    
    
    $
    11.05
    
    
    
    14,932
    
    
    $
    9.40Exercisable at end of year
    
    
    7,751
    
    
    $
    15.37
    
    
    
    8,200
    
    
    $
    12.96
    
    
    
    10,593
    
    
    $
    11.00
  Options OutstandingWeighted-
    
    
    
    
    
    
    Options Exercisableaverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Remaining
    
    
    average
    
    
    Number
    
    
    averageOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseRange of Exercise Price
    
    (000)
    
    
    Life
    
    
    Price
    
    
    (000)
    
    
    Price$0.95  4.00
    
    
    1,827
    
    
    
    7.3
    
    
    $
    3.57
    
    
    
    1,396
    
    
    $
    3.564.01  5.00
    
    
    3,027
    
    
    
    9.3
    
    
    
    4.24
    
    
    
    382
    
    
    
    4.675.01  7.00
    
    
    2,457
    
    
    
    5.5
    
    
    
    6.41
    
    
    
    2,343
    
    
    
    6.447.01  8.50
    
    
    3,135
    
    
    
    6.9
    
    
    
    8.04
    
    
    
    2,328
    
    
    
    8.088.51  11.00
    
    
    677
    
    
    
    6.3
    
    
    
    9.34
    
    
    
    514
    
    
    
    9.3811.01  15.00
    
    
    706
    
    
    
    5.7
    
    
    
    13.08
    
    
    
    628
    
    
    
    12.9315.01  20.00
    
    
    2,596
    
    
    
    5.3
    
    
    
    16.76
    
    
    
    2,495
    
    
    
    16.8220.01  97.44
    
    
    507
    
    
    
    4.0
    
    
    
    41.34
    
    
    
    507
    
    
    
    41.340.95  97.44
    
    
    14,932
    
    
    
    6.7
    
    
    $
    9.40
    
    
    
    10,593
    
    
    $
    11.00
 65




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##### Table of Contents



18.
    
    Retirement Savings Plan
  19.
    
    Segment Reporting, Geographic Disclosures and Major Customers
     Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    Total(in thousands)Year Ended December 31, 2003:Financial institutions
    
    $
    50,473
    
    
    $
    38,062
    
    
    $
    71,124
    
    
    $
    42,288
    
    
    $
    2,899
    
    
    $
    204,846Risk and compliance
    
    
    4,420
    
    
    
    5,635
    
    
    
    6,041
    
    
    
    
    
    
    
    11
    
    
    
    16,107Total
    
    $
    54,893
    
    
    $
    43,697
    
    
    $
    77,165
    
    
    $
    42,288
    
    
    $
    2,910
    
    
    $
    220,953Year Ended December 31, 2004:Financial institutions
    
    $
    30,297
    
    
    $
    39,159
    
    
    $
    76,075
    
    
    $
    37,354
    
    
    $
    2,269
    
    
    $
    185,154Risk and compliance
    
    
    6,854
    
    
    
    6,721
    
    
    
    7,602
    
    
    
    
    
    
    
    22
    
    
    
    21,199Total
    
    $
    37,151
    
    
    $
    45,880
    
    
    $
    83,677
    
    
    $
    37,354
    
    
    $
    2,291
    
    
    $
    206,353Year Ended December 31, 2005:Financial institutions
    
    $
    27,337
    
    
    $
    44,289
    
    
    $
    65,346
    
    
    $
    40,000
    
    
    $
    2,169
    
    
    $
    179,141Risk and compliance
    
    
    10,939
    
    
    
    7,224
    
    
    
    6,719
    
    
    
    
    
    
    
    45
    
    
    
    24,927Total
    
    $
    38,276
    
    
    $
    51,513
    
    
    $
    72,065
    
    
    $
    40,000
    
    
    $
    2,214
    
    
    $
    204,068
 66




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##### Table of Contents



Year Ended December 31, 2003Financial
    
    
    Risk andInstitutions
    
    
    compliance
    
    
    Total(in thousands)Revenues
    
    $
    204,846
    
    
    $
    16,107
    
    
    $
    220,953Operating expenses:Direct costs
    
    
    90,780
    
    
    
    7,041
    
    
    
    97,821Selling and marketing
    
    
    24,535
    
    
    
    2,831
    
    
    
    27,366Product development
    
    
    37,201
    
    
    
    2,074
    
    
    
    39,275General and administrative
    
    
    24,230
    
    
    
    2,276
    
    
    
    26,506Merger related and restructuring costs
    
    
    15,599
    
    
    
    
    
    
    
    15,599Depreciation
    
    
    15,531
    
    
    
    332
    
    
    
    15,863Amortization of other intangible assets
    
    
    1,024
    
    
    
    
    
    
    
    1,024Total operating expenses
    
    
    208,900
    
    
    
    14,554
    
    
    
    223,454Segment operating loss
    
    $
    (4,054
    )
    
    $
    1,553
    
    
    $
    (2,501
    )
 Year Ended December 31, 2004Financial
    
    
    Risk andInstitutions
    
    
    compliance
    
    
    Total(in thousands)Revenues
    
    $
    185,154
    
    
    $
    21,199
    
    
    $
    206,353Operating expenses:Direct costs
    
    
    79,423
    
    
    
    9,628
    
    
    
    89,051Selling and marketing
    
    
    22,488
    
    
    
    3,433
    
    
    
    25,921Product development
    
    
    43,591
    
    
    
    2,623
    
    
    
    46,214General and administrative
    
    
    21,892
    
    
    
    2,539
    
    
    
    24,431Depreciation
    
    
    9,013
    
    
    
    337
    
    
    
    9,350Amortization of other intangible assets
    
    
    878
    
    
    
    
    
    
    
    878Total operating expenses
    
    
    177,285
    
    
    
    18,560
    
    
    
    195,845Segment operating income
    
    $
    7,869
    
    
    $
    2,639
    
    
    $
    10,508
 Year Ended December 31, 2005Financial
    
    
    Risk andInstitutions
    
    
    compliance
    
    
    Total(in thousands)Revenues
    
    $
    179,141
    
    
    $
    24,927
    
    
    $
    204,068Operating expenses:Direct costs
    
    
    89,732
    
    
    
    9,556
    
    
    
    99,288Selling and marketing
    
    
    28,143
    
    
    
    3,355
    
    
    
    31,498Product development
    
    
    40,219
    
    
    
    5,442
    
    
    
    45,661General and administrative
    
    
    26,123
    
    
    
    3,838
    
    
    
    29,961Restructuring costs
    
    
    15,030
    
    
    
    
    
    
    
    15,030Depreciation
    
    
    8,892
    
    
    
    306
    
    
    
    9,198Amortization of other intangible assets
    
    
    1,312
    
    
    
    10
    
    
    
    1,322Total operating expenses
    
    
    209,451
    
    
    
    22,507
    
    
    
    231,958Segment operating loss
    
    $
    (30,310
    )
    
    $
    2,420
    
    
    $
    (27,890
    )
  67




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20.
    
    Related Party Transactions
 Yodlee, Inc.
  
    
    a sales representation (and OEM) agreement;
    
    a data center agreement; and
    
    a facilities sublease, which expired in 2001.
   68




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21.
    
    Net Income (Loss) Per Share
    2003
    
    
    2004
    
    
    2005(in thousands, except per share data)Basic (loss) earnings per share:(Loss) earnings from continuing operations
    
    $
    (2,540
    )
    
    $
    7,640
    
    
    $
    (27,367
    )Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    (114
    )
    
    
    (Loss) income from continuing
operations available to common stockholders  basic
    
    $
    (2,540
    )
    
    $
    7,526
    
    
    $
    (27,367
    )Weighted average common shares outstanding
    
    
    69,872
    
    
    
    70,613
    
    
    
    70,359Basic (loss) earnings from continuing operations per share
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.39
    )Diluted (loss) earnings per share:(Loss) earnings from continuing operations
    
    $
    (2,540
    )
    
    $
    7,640
    
    
    $
    (27,367
    )Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    (114
    )
    
    
    (Loss) income from continuing operations
available to common stockholders  diluted
    
    $
    (2,540
    )
    
    $
    7,526
    
    
    $
    (27,367
    )Weighted average common shares outstanding
    
    
    69,872
    
    
    
    70,613
    
    
    
    70,359Weighted average effect of common stock equivalents:Stock options
    
    
    940
    
    
    
    2,517
    
    
    
    922Convertible preferred stock
    
    
    1,534
    
    
    
    
    
    
    
    1,070Weighted average diluted shares outstanding
    
    
    72,346
    
    
    
    73,130
    
    
    
    72,351Diluted earnings from continuing operations per share
    
    $
    (0.04
    )
    
    $
    0.10
    
    
    $
    (0.39
    )
 69




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22.
    
    Quarterly Financial Information (Unaudited)
  Three Months EndedMar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,
    
    
    Mar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005(in thousands, except per share data)Revenues
    
    $
    47,365
    
    
    $
    50,401
    
    
    $
    52,053
    
    
    $
    56,534
    
    
    $
    55,478
    
    
    $
    54,486
    
    
    $
    48,148
    
    
    $
    45,956Cost of revenues (1)
    
    
    21,114
    
    
    
    21,938
    
    
    
    22,433
    
    
    
    23,566
    
    
    
    24,103
    
    
    
    23,580
    
    
    
    24,433
    
    
    
    27,172Operating income (loss)
    
    
    1,354
    
    
    
    1,491
    
    
    
    3,543
    
    
    
    4,120
    
    
    
    977
    
    
    
    1,055
    
    
    
    (9,389
    )
    
    
    (20,533
    )Income (loss) from continuing operations
    
    
    1,057
    
    
    
    800
    
    
    
    3,106
    
    
    
    2,677
    
    
    
    730
    
    
    
    1,335
    
    
    
    (8,759
    )
    
    
    (20,673
    )(Loss) income from discontinued
operations, net of tax
    
    
    (613
    )
    
    
    (180
    )
    
    
    113
    
    
    
    8,610
    
    
    
    (10
    )
    
    
    981
    
    
    
    1,263
    
    
    
    24,076Net income (loss)
    
    
    444
    
    
    
    620
    
    
    
    3,219
    
    
    
    11,287
    
    
    
    720
    
    
    
    2,316
    
    
    
    (7,496
    )
    
    
    3,403Earnings (loss) per share:Basic:Continuing operations
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    (0.13
    )
    
    $
    (0.29
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.00
    )
    
    
    0.00
    
    
    
    0.12
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.34Net income
(loss) per common share  basic
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    (0.11
    )
    
    $
    0.05Diluted:Continuing operations
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    (0.13
    )
    
    
    (0.29
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.00
    )
    
    
    0.00
    
    
    
    0.11
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.34Net income per common share  diluted
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    (0.11
    )
    
    $
    0.05
 
 (1)
    
    Cost of revenues is derived from our statements of operations as the sum of cost of
software licenses, cost of professional services, support and maintenance, cost of data center
and cost of other revenue. Cost of revenues exclude charges for depreciation of property and
equipment. 70




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Schedule II
 VALUATION AND QUALIFYING ACCOUNTS
 FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
 Balance
    
    Additionsat
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    other
    
    
    
    
    
    end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    period(in thousands)Year ended December 31, 2003:Allowance for doubtful accounts
    
    $
    7,601
    
    
    
    6,063
    
    
    
    
    
    
    
    8,558
    (1)
    
    $
    5,106Valuation allowance for deferred taxes
    
    $
    209,530
    
    
    
    7,258
    
    
    
    1,101
    (3)
    
    
    
    
    
    $
    217,889Year ended December 31, 2004Allowance for doubtful accounts
    
    $
    5,106
    
    
    
    421
    
    
    
    775
    (2)
    
    
    1,597
    (1)
    
    $
    4,705Valuation allowance for deferred taxes
    
    $
    217,889
    
    
    
    (3,467
    )
    
    
    (8,181
    ) (3)
    
    
    
    
    
    $
    206,241Year ended December 31, 2005:Allowance for doubtful accounts
    
    $
    4,705
    
    
    
    5,152
    
    
    
    
    
    
    
    4,047
    (1)
    
    $
    5,810Valuation allowance for deferred taxes
    
    $
    206,241
    
    
    
    5,863
    
    
    
    (12,931
    ) (3)
    
    
    
    
    
    $
    199,173
 
 (1)
    
    Accounts deemed to be uncollectible and written off during the year.(2)
    
    Allowances related to companies acquired.(3)
    
    Allowances related to companies acquired, stock option expense and change in estimation. 71




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A.
    
    Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
  Managements Report on Internal Control Over Financial Reporting .
    
 Item 9B.
    
    Other Information.
  
 PART III
 
 Item 10.
    
    Directors and Executive Officers of the Registrant.
   72




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##### Table of Contents



Item 11.
    
    Executive Compensation.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management.
   Number of securities to be
    
    
    Weighted-average
    
    
    Number of securities remaining availableissued upon exercise of
    
    
    exercise price of
    
    
    for future issuance under equityoutstanding options, warrants
    
    
    outstanding options,
    
    
    compensation plans (excluding securitiesand rights
    
    
    warrants and rights
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans
approved by shareholders
    
    
    6,294,321
    
    
    $
    5.25
    
    
    
    1,155,121Equity compensation plans not
approved by shareholders
    
    
    8,637,573
    
    
    
    12.43
    
    
    
    Total
    
    
    14,931,894
    
    
    $
    9.40
    
    
    
    1,155,121
 
 Item 13.
    
    Certain Relationships and Related Transactions.
  
 Item 14.
    
    Principal Accountant Fees and Services.
  73




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##### Table of Contents



PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules.
    ExhibitNo.
    
    Exhibit Description3.1
    
    Amended and Restated Certificate of Incorporation of S1 Corporation (S1) (filed as
Exhibit 1 to S1s Registration Statement on Form 8-A filed with the Securities and Exchange
Commission (the SEC) on September 30, 1998 and incorporated herein by reference).3.2
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File No.
333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference).3.3
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and incorporated herein by reference).3.4
    
    Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 2 to S1s Registration Statement on Form 8-A filed with the SEC on September 30, 1998
and incorporated herein by reference).3.5
    
    Certificate of Designations for S1s Series E Convertible Preferred Stock (filed as Exhibit 3
to S1s Registration Statement on Form S-8 (File No. 333-72250) filed with the SEC on October
26, 2001 and incorporated herein by reference).3.6
    
    Amended and Restated Bylaws of S1, as amended (filed as Exhibit 4.7 to S1s Post-Effective
Amendment No. 1 to Form S-8 Registration Statement (File No. 333-82383) filed with the SEC on
August 9, 2000 and incorporated herein by reference).4.1
    
    Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference).4.2
    
    Specimen certificate for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 4.3 to S1s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).4.3
    
    Specimen certificate for S1s Series E Convertible Preferred Stock (filed as Exhibit 4.2 to
S1s Registration Statement on Form S-3 (File No. 333-75178) filed with the SEC on December
14, 2001 and incorporated herein by reference).
 74




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##### Table of Contents



ExhibitNo.
    
    Exhibit Description10.1
    
    Stock Purchase Agreement, dated as of June 29, 1998, by and among SFNB, S1 and State Farm
Mutual Automobile Insurance Company (filed as Exhibit 10.4 to Pre-Effective Amendment No. 2 to
the S1s Registration Statement on Form S-4 (File No. 333-56181) filed with the SEC on August
21, 1998 and incorporated herein by reference).10.2
    
    Stock Subscription Warrant, dated December 23, 1999, issued by S1 to America Online, Inc.
(filed as Exhibit 10.16 to S1s Annual Report on Form 10-K for the fiscal year ended December
31, 1999 and incorporated herein by reference).10.3
    
    Alliance Center Office Lease Agreement, entered into as of February 25, 2000, by and between
Solano Associates, as Landlord, and Security First Technologies, Inc., as Tenant (filed as
Exhibit 10.3 to S1s Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000 and incorporated herein by reference).10.4
    
    Security First Technologies Corporation Amended and Restated 1995 Stock Option Plan (filed as
Appendix Bto S1s definitive proxy statement for S1s 1999 annual meeting of shareholders and
incorporated herein by reference).*10.5
    
    Amendment to Security First Technologies Corporation Amended and Restated 1995 Stock Option
Plan (filed as Exhibit 10.3 to S1s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000 and incorporated herein by reference).*10.6
    
    Security First Network Bank Amended and Restated Directors Stock Option Plan (filed as
Exhibit 10.2 to Pre-Effective Amendment No. 2 to S1s Registration Statement on Form S-4 (File
No. 333-56181) filed with the SEC on August 21, 1998 and incorporated herein by reference).*10.7
    
    Amendment to Security First Network Bank Amended and Restated Directors Stock Option Plan
(filed as Exhibit 10.1 to S1s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 and incorporated herein by reference).*10.8
    
    Security First Technologies Corporation 1998 Directors Stock Option Plan (filed as Exhibit
10.3 to Pre-Effective Amendment No. 1 to S1s Registration Statement on Form S-4 (File No.
333-56181) filed with the SEC on July 30, 1998 and incorporated herein by reference).*10.9
    
    Amendment to Security First Technologies Corporation 1998 Directors Stock Option Plan (filed
as Exhibit 10.2 to S1s Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000 and incorporated herein by reference).*10.10
    
    Employment Agreement, entered into as of October 5, 2001, by and between S1 and Matthew Hale
(filed as Exhibit 10.36 to S1s Annual Report on Form 10-K for the fiscal year ended December
31, 2001 and incorporated herein by reference).*10.11
    
    Employment Agreement, entered into as of April 27, 2001, by and between S1 and Jaime
Ellertson (filed as Exhibit 10.1 to S1s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2002 and incorporated herein by reference).*10.12
    
    Employment Agreement, entered into as of April 30, 2001, by and between S1 and James Mahan
(filed as Exhibit 10.2 to S1s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002 and incorporated herein by reference).*10.13
    
    S1 Corporation 2003 Stock Option Plan (filed as Attachment A to S1s Definitive Proxy
Statement on Schedule 14A filed with the SEC on April 18,2003 and incorporated herein by
reference).*10.14
    
    Stock Purchase Agreement By and Among S1 Corporation, Davidge Data Systems Corp. and GL
Consultants, Inc. Dated as of October 20, 2004 (filed as Exhibit 99 to S1s Current Report on
Form 8-K filed with the SEC on October 25, 2004 and incorporated herein by reference).
 75




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##### Table of Contents



ExhibitNo.
    
    Exhibit Description10.15
    
    Share Purchase Agreement, dated November 6, 2004, among several persons listed in Schedule I thereto
and S1 Corporations (filed as Exhibit 2.1 to S1s Current Report on Form 8-K filed with the SEC on November 16,
2004 and incorporated herein by reference).10.16
    
    Agreement and Plan of Merger By and Among S1 Corporation, Edify Corporation, Edify Holding
Company, Inc., Intervoice, Inc., and Arrowhead I, Inc., dated as of November 18, 2005 (filed
as Exhibit 2.1 to S1s Current Report on Form 8-K filed with the SEC on January 4, 2006 and
incorporated herein by reference).10.17
    
    Description of Arrangement for Directors Fees.21
    
    Subsidiaries of S1.23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certificate of Chief Executive Officer31.2
    
    Certificate 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
 
 *
    
    Management contract or compensatory plan. 76




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##### Table of Contents



SIGNATURES
  S1 CORPORATIONBy:
    
    /s/
    
    James S. Mahan, IIIJames S. Mahan, IIIChief Executive Officer
  Name
    
    Title/s/
    
    James S. Mahan, III
    
    Chief Executive Officer and Chairman of the BoardJames S. Mahan, III
    
    (Principal Executive Officer)/s/
    
    John A. Stone
    
    Chief Financial Officer (Principal FinancialJohn A. Stone
    
    Officer and Principal Accounting Officer)/s/
    
    Ram gupta
    
    DirectorRam Gupta/s/
    
    M. Douglas Ivester
    
    DirectorM. Douglas Ivester/s/
    
    Thomas P. Johnson, Jr.
    
    DirectorThomas P. Johnson, Jr./s/
    
    Gregory J. Owens
    
    DirectorGregory J. OwensDirectorJohn W. Spiegel
 77