UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended March 31, 2004

or

For the Transition Period From            to

Commission File Number: 000-24931

S1 CORPORATION

Registrant’s Telephone Number, Including Area Code: (404) 923-3500

NOT APPLICABLE
(Former name if changed since last report.)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No o

     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes x   No o

     Shares of common stock outstanding as of May 5, 2004: 70,540,605

S1 CORPORATION AND SUBSIDIARIES

QUARTERLY PERIOD ENDED MARCH 31, 2004

TABLE OF CONTENTS

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PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

S1 CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION AND SUBSIDIARIES

     1.       BACKGROUND AND BASIS OF PRESENTATION

     S1 Corporation is a provider of global enterprise software solutions for more than 4,000 financial organizations including banks, credit unions, investment firms and insurance companies. Our solutions automate the channels by which financial institutions interact with their customers. Our objective is to be the leading global provider of integrated enterprise solutions that enable financial institutions to improve the way they service their customers by integrating all delivery channels expanding the total financial relationship and increasing profits. We sell our solutions to small, mid-sized and large financial organizations in two geographic regions: (i) the Americas region and (ii) the International region, consisting primarily of Europe, the Middle East region and Africa (EMEA) and the Asia-Pacific region and Japan (APJ) region. We refer to our core business segment as the “Financial Institutions” business.

     Through Edify Corporation and its subsidiaries, we provide a variety of customer relationship management (CRM) applications that allow organizations in various industries to automate, integrate, personalize and analyze interactions with customers across touch points such as phone, web, wireless, email, fax and kiosk.

     S1 is headquartered in Atlanta, Georgia, USA, with additional domestic offices in Boston, Massachusetts; Charlotte, North Carolina; Austin, Texas; New York, New York; West Hills, California and Santa Clara, California; and additional international offices in Brussels, Dublin, Hong Kong, Lisbon, London, Luxembourg, Madrid, Munich, Paris and Rotterdam. S1 is incorporated in Delaware.

     We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of our financial condition as of March 31, 2004 and our results of operations for the three months ended March 31, 2004 and cash flows for the three months ended March 31, 2004. The data in the condensed consolidated balance sheet as of December 31, 2003 was derived from our audited consolidated balance sheet as of December 31, 2003, as presented in our Annual Report on Form 10-K for the year ended December 31, 2003. The condensed consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. Our operating results for the three months ended March 31, 2004 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2004.

     2.       SIGNIFICANT ACCOUNTING POLICIES

     Our significant accounting policies are included in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2003.

     Stock–based compensation

     We account for our stock option plans in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148. As such, we record compensation expense on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Additionally, if a modification is made to an existing grant, any related compensation expense is calculated on the date both parties accept the modification and recorded on the date the modification becomes effective. Otherwise, we do not record stock compensation expense when we grant stock options to S1 employees.

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     In the three months ended March 31, 2003, we recognized compensation expense of approximately $0.2 million relating to stock options granted with exercise prices less than the market price on the date of grant. Had we determined compensation expense based on the fair value at the grant date for our stock options and stock purchase rights under SFAS No. 123, our net income (loss) would have changed to the unaudited pro forma amounts indicated below:

     The effect of applying SFAS No. 123 for providing these pro forma disclosures is not necessarily representative of the effects on reported net income (loss) in future periods.

     The fair value of our stock-based option awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

     3.       GOODWILL AND OTHER INTANGIBLE ASSETS

     At March 31, 2004, our other intangible assets consisted of the following:

     We recorded amortization expense of $3.4 million and $0.8 million during the three months ended March 31, 2003 and 2004, respectively. We estimate aggregate amortization expense for 2004 and the next four calendar years to be as follows (in thousands):

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     The changes in the carrying value of our goodwill for the three months ended March 31, 2004 are as follows:

     4.       STOCKHOLDERS’ EQUITY

     In July 2002, our board of directors approved a $10.0 million stock repurchase program to enhance long-term shareholder value. We completed this program in January 2003. Under this program, we repurchased 2,051,862 shares of our common stock at an average price of $4.87 per share.

     In October 2003, our board of directors approved another $15.0 million stock repurchase program to offset the dilution of our common stock from shares granted under our employee stock option plans. This program was funded from available cash and short-term investments. As of March 31, 2004, we had repurchased 666,000 shares of our common stock at a cost of $5.0 million under this program.

     As of March 31, 2004, we hold 2,717,862 shares of our common stock in treasury at a cost of $15.0 million.

     5.       COMPREHENSIVE INCOME (LOSS)

     The components of comprehensive income (loss) are as follows (in thousands):

     6.       MERGER RELATED COSTS AND RESTRUCTURING CHARGES

     Components of merger related and restructuring costs are as follows (in thousands):

     During the three months ended March 31, 2003, we began consolidating our U.K. data center operations into our global hosting center in Atlanta, resulting in restructuring charges of $2.3 million comprised of accelerated depreciation of assets, severance costs and other related costs. In addition, we provided $6.3 million for losses on unused office facilities vacated as a result of cost alignment activities and recorded other restructuring charges including severance associated with a work force reduction in our financial institutions and Edify business operations as well as other corporate charges. In total, we

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reduced our workforce by approximately 80 people. Additionally, we decreased our reserve for legal claims by $0.5 million, which was established in connection with our acquisition of FICS Group, N.V. in November 1999. We were able to resolve this legal matter during the first quarter of 2003 for less than previously estimated.

     The restructuring reserves as of December 31, 2003 and March 31, 2004 and their utilization for the three months ended March 31, 2004 are summarized as follows:

     We expect to make future cash expenditures, net of anticipated sublease income, related to these restructuring activities of approximately $10.1 million, of which we anticipate to pay approximately $3.7 million within the next twelve months.

     7.       CONTINGENCIES

     Litigation

     Except as noted below, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which S1, or any of its subsidiaries is a party or which their property is subject.

     As previously reported, S1 Corporation is involved in litigation with Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the Southern District of New York. The action was filed in March 2003 against S1 Corporation, Bank of America Corporation and Bank of America National Association. We believe that the plaintiff’s claims are not meritorious and intend to vigorously defend the suit. There can be no assurance on the ultimate outcome of this matter. An adverse judgment could be material to our financial position and results of operations.

     Guarantees

     We typically grant our customers a warranty that guarantees that our product will substantially conform to our current specifications for 90 days from the delivery date. We also indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to these guarantees have not been significant and we are unable to estimate the potential impact of these guarantees on our future results of operations.

     8.       SEGMENT REPORTING AND MAJOR CUSTOMERS

     We operate and manage S1 in two business segments: financial institutions, our core business segment, and the Edify business. The financial institutions segment develops, markets and implements integrated, transactional and brandable enterprise applications for small, mid-sized and large financial institutions worldwide, available as in-house or hosted solutions. The Edify business segment provides a variety of voice and speech recognition applications that help organizations globally in a wide range of industries (including retail, telecommunications and travel) increase customer retention through automation and improved operational effectiveness.

     We evaluate the performance of our operating segments based on their contribution before interest, other income and income taxes, as reflected in the tables presented below for the three months ended March 31, 2004 and 2003. We do not use any asset-based metrics to measure the operating performance of our segments.

     We have entered into reseller arrangements between our operating segments to sell the Edify IVR product to financial institutions and the S1 CRM application to non-financial institutions. Under these arrangements, intercompany

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revenues and intercompany expenses are recorded in each operating segment. These revenues and expenses are eliminated in consolidation.

     Intercompany revenues recorded by the financial institutions segment were $0.5 million and $0.1 million for the three months ended March 31, 2003 and 2004, respectively. Intercompany revenues recorded by the Edify segment were $0.3 million and $0.6 million for three months ended March 31, 2003 and 2004, respectively.

     The following table shows revenues by revenue type for our operating segments:

     Currently, we have one major customer in the financial institutions segment (defined as any customer who individually contributes more than 10% of total revenues). We derived 24% and 20% of our financial institutions segment revenues from State Farm Mutual Automobile Insurance Company during the three months ended March 31, 2003 and 2004, respectively.

     In 2003, we had a second major customer, Zurich Insurance Company and certain of its affiliates or subsidiaries, which accounted for 18% of our revenues from the financial institutions segment during the three months ended March 31, 2003. We did not earn any revenue from this customer during the three months ended March 31, 2004, nor do we expect to earn any revenue from Zurich in future periods.

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     9.       NET INCOME (LOSS) PER COMMON SHARE

     We calculate basic net income (loss) per common share as the loss available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common stock that would share in the earnings of S1. Because of our net losses in the quarter ended March 31, 2003, the issuance of additional shares of common stock through the exercise of stock options or stock warrants or upon the conversion of preferred stock would have an anti-dilutive effect on our net loss per share for that period. The total number of common shares included in our computation of diluted loss per share when they are dilutive is as follows (in thousands):

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This quarterly report contains forward-looking statements and information relating to our subsidiaries and us. The words “believes,” “expects,” “may,” “will,” “should,” “project