##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the Quarterly Period Ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From            to
 Commission File Number: 000-24931
 S1 CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of incorporation or organization)
    
    58-2395199(I.R.S. Employer Identification No.)
 3500 Lenox Road, Suite 200
Atlanta, Georgia(Address of principal executive offices)
    
    30326(Zip Code)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
 þ o
 o þ




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S1 CORPORATION AND SUBSIDIARIES
 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September
30, 2005 and 2004 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005
and 2004 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    28Signature
    
    
    29EX-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
  2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 S1 CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    55,907
    
    
    $
    43,223Short-term investments
    
    
    45,715
    
    
    
    65,248Accounts receivable, net
    
    
    62,522
    
    
    
    61,216Prepaid expenses
    
    
    5,897
    
    
    
    6,113Other current assets
    
    
    3,361
    
    
    
    5,485Total current assets
    
    
    173,402
    
    
    
    181,285Property and equipment, net
    
    
    14,020
    
    
    
    15,150Intangible assets, net
    
    
    19,638
    
    
    
    22,766Goodwill, net
    
    
    117,831
    
    
    
    117,699Other assets
    
    
    2,911
    
    
    
    3,981Total assets
    
    $
    327,802
    
    
    $
    340,881LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,178
    
    
    $
    6,253Accrued compensation and benefits
    
    
    9,115
    
    
    
    14,269Accrued restructuring
    
    
    4,702
    
    
    
    3,337Accrued other expenses
    
    
    12,683
    
    
    
    17,369Deferred revenues
    
    
    39,557
    
    
    
    33,302Current portion of capital lease obligation
    
    
    1,232
    
    
    
    1,523Total current liabilities
    
    
    71,467
    
    
    
    76,053Capital lease obligation, excluding current portion
    
    
    1,109
    
    
    
    1,572Accrued restructuring, excluding current portion
    
    
    4,295
    
    
    
    4,789Other liabilities
    
    
    2,686
    
    
    
    3,471Total liabilities
    
    
    79,557
    
    
    
    85,885Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    744
    
    
    
    742Additional paid-in capital
    
    
    1,915,580
    
    
    
    1,913,913Common stock
held in treasury  at cost
    
    
    (25,000
    )
    
    
    (21,593
    )Accumulated deficit
    
    
    (1,650,607
    )
    
    
    (1,646,147
    )Accumulated other comprehensive loss
    
    
    (2,472
    )
    
    
    (1,919
    )Total stockholders equity
    
    
    248,245
    
    
    
    254,996Total liabilities and stockholders equity
    
    $
    327,802
    
    
    $
    340,881Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    74,400,449
    
    
    
    74,152,529Common stock held in treasury
    
    
    4,053,886
    
    
    
    3,544,111
  3




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##### Table of Contents



S1 CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Software licenses
    
    $
    10,593
    
    
    $
    11,397
    
    
    $
    37,780
    
    
    $
    32,347Support and maintenance
    
    
    17,518
    
    
    
    15,472
    
    
    
    52,937
    
    
    
    46,727Professional services
    
    
    18,935
    
    
    
    23,956
    
    
    
    60,577
    
    
    
    66,720Data center
    
    
    10,181
    
    
    
    9,153
    
    
    
    29,728
    
    
    
    28,022Other
    
    
    648
    
    
    
    332
    
    
    
    1,304
    
    
    
    2,000Total revenues
    
    
    57,875
    
    
    
    60,310
    
    
    
    182,326
    
    
    
    175,816Operating expenses:Cost of software licenses
    
    
    2,060
    
    
    
    2,128
    
    
    
    5,290
    
    
    
    6,569Cost of professional services, support and maintenance (1)
    
    
    20,862
    
    
    
    18,497
    
    
    
    60,850
    
    
    
    53,292Cost of data center (1)
    
    
    4,245
    
    
    
    4,056
    
    
    
    12,467
    
    
    
    12,891Cost of other revenue
    
    
    434
    
    
    
    135
    
    
    
    697
    
    
    
    1,583Selling and marketing
    
    
    11,032
    
    
    
    8,870
    
    
    
    32,334
    
    
    
    25,964Product development
    
    
    12,764
    
    
    
    12,991
    
    
    
    39,279
    
    
    
    40,269General and administrative
    
    
    7,509
    
    
    
    6,984
    
    
    
    23,915
    
    
    
    19,983Restructuring costs
    
    
    4,255
    
    
    
    
    
    
    
    4,255
    
    
    
    Depreciation
    
    
    2,314
    
    
    
    2,625
    
    
    
    7,428
    
    
    
    7,721Amortization of other intangible assets
    
    
    358
    
    
    
    222
    
    
    
    1,015
    
    
    
    687Total operating expenses
    
    
    65,833
    
    
    
    56,508
    
    
    
    187,530
    
    
    
    168,959Operating (loss) income
    
    
    (7,958
    )
    
    
    3,802
    
    
    
    (5,204
    )
    
    
    6,857Interest and other income (expense), net
    
    
    655
    
    
    
    180
    
    
    
    1,548
    
    
    
    (526
    )(Loss) income before income tax expense
    
    
    (7,303
    )
    
    
    3,982
    
    
    
    (3,656
    )
    
    
    6,331Income tax expense
    
    
    (193
    )
    
    
    (635
    )
    
    
    (1,228
    )
    
    
    (1,096
    )(Loss) income from continuing operations)
    
    
    (7,496
    )
    
    
    3,347
    
    
    
    (4,884
    )
    
    
    5,235Discontinued operations:Loss from operations of discontinued operations, net of tax
    
    
    
    
    
    
    (128
    )
    
    
    (31
    )
    
    
    (952
    )Gain on disposal of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    455
    
    
    
    Net (loss) income
    
    $
    (7,496
    )
    
    $
    3,219
    
    
    $
    (4,460
    )
    
    $
    4,283Basic (loss) earnings per share:Continuing operations
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.07
    )
    
    $
    0.07Discontinued operations
    
    
    
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    (0.01
    )Net (loss) income per share
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.06
    )
    
    $
    0.06Diluted (loss) earnings per share:Continuing operations
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.07
    )
    
    $
    0.07Discontinued operations
    
    
    
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    (0.01
    )Net (loss) income per share
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.06Weighted average common shares outstanding  basic
    
    
    70,303,365
    
    
    
    70,506,931
    
    
    
    70,361,627
    
    
    
    70,692,776Weighted
average common shares outstanding  fully diluted
    
    
    n/a
    
    
    
    72,699,694
    
    
    
    n/a
    
    
    
    73,106,864
 
 (1)
    
    Cost of professional services, support and maintenance and cost of data center excludes
charges for depreciation  4




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S1 CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net (loss) income
    
    $
    (4,460
    )
    
    $
    4,283Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    11,163
    
    
    
    10,433Equity in net loss of affiliate
    
    
    
    
    
    
    750Provision for doubtful accounts receivable and billing adjustments
    
    
    3,211
    
    
    
    1,087Compensation expense for stock options
    
    
    570
    
    
    
    Changes in assets and liabilities, excluding effects of acquisitions:Increase in accounts receivable
    
    
    (4,842
    )
    
    
    (11,584
    )Decrease in prepaid expenses and other assets
    
    
    3,472
    
    
    
    913Decrease in accounts payable
    
    
    (1,831
    )
    
    
    (1,148
    )Decrease in accrued expenses and other liabilities
    
    
    (9,067
    )
    
    
    (11,177
    )Increase (decrease) in deferred revenues
    
    
    5,654
    
    
    
    (7,764
    )Net cash provided by (used in) operating activities
    
    
    3,870
    
    
    
    (14,207
    )Cash flows from investing activities:Cash paid in connection with acquisition
    
    
    (857
    )
    
    
    (5,278
    )Maturities of short-term investment securities
    
    
    54,500
    
    
    
    68,421Purchases of short-term investment securities
    
    
    (34,967
    )
    
    
    (53,116
    )Investment in equity method investment
    
    
    
    
    
    
    (750
    )Purchases of property, equipment and technology
    
    
    (5,739
    )
    
    
    (5,156
    )Net cash provided by (used in) investing activities
    
    
    12,937
    
    
    
    4,121Cash flows from financing activities:Proceeds from sale of common stock under employee stock purchase and
option plans
    
    
    1,103
    
    
    
    2,602Payments on capital lease obligations
    
    
    (1,281
    )
    
    
    (739
    )Repurchase of common stock held in treasury
    
    
    (3,407
    )
    
    
    (10,798
    )Net cash used in financing activities
    
    
    (3,585
    )
    
    
    (8,935
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (538
    )
    
    
    (53
    )Net increase (decrease) in cash and cash equivalents
    
    
    12,684
    
    
    
    (19,074
    )Cash and cash equivalents at beginning of period
    
    
    43,223
    
    
    
    76,713Cash and cash equivalents at end of period
    
    $
    55,907
    
    
    $
    57,639Noncash investing and financing activities:Property and equipment acquired through leases
    
    $
    527
    
    
    $
    1,547Maintenance agreement financed through vendor
    
    
    
    
    
    
    1,201
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S1 CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
  
    6




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2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
  Recent accounting pronouncements
   Stockbased compensation
   Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net (loss) income
    
    $
    (7,496
    )
    
    $
    3,219
    
    
    $
    (4,460
    )
    
    $
    4,283Add: Stock based employee compensation expense included in
reported net (loss) income, net of related tax effects
    
    
    570
    
    
    
    
    
    
    
    570
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (4,823
    )
    
    
    (6,414
    )
    
    
    (10,990
    )
    
    
    (19,196
    )Pro forma net loss
    
    $
    (11,749
    )
    
    $
    (3,195
    )
    
    $
    (14,880
    )
    
    $
    (14,913
    )Basic and diluted net (loss) income per share:As reported  basic
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.06
    )
    
    $
    0.06As reported  diluted
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.06Pro forma
    
    $
    (0.17
    )
    
    $
    (0.05
    )
    
    $
    (0.21
    )
    
    $
    (0.21
    )
 7




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2005
    
    
    2004Expected volatility
    
    
    83.8
    %
    
    
    103.3
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    3.6
    %Expected life
    
    3.8 years
    
    4.0 years
 Reclassifications
   Condensed
Consolidated Balance Sheet  September 30, 2004
 Previously
    
    
    
    
    
    
    AsReported
    
    
    Reclass
    
    
    ReclassifiedCash and cash equivalents
    
    $
    123,737
    
    
    $
    (66,098
    )
    
    $
    57,639Short-term investments
    
    
    6,074
    
    
    
    66,098
    
    
    
    72,172Total
    
    $
    129,811
    
    
    $
    
    
    
    $
    129,811
 Condensed
Consolidated Statement of Cash Flow  Nine months Ended September 30, 2004
 Previously
    
    
    
    
    
    
    AsReported
    
    
    Reclass
    
    
    ReclassifiedMaturities of short-term
investments securities
    
    $
    34,898
    
    
    $
    33,523
    
    
    $
    68,421Purchases of short-term
investments securities
    
    
    (26,846
    )
    
    
    (26,270
    )
    
    
    (53,116
    )Net change
    
    $
    8,052
    
    
    $
    7,253
    
    
    $
    15,305
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Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2004Cost of software licenses:Previously reported
    
    $
    1,514
    
    
    $
    4,819Reclassification
    
    
    614
    
    
    
    1,750As reclassified
    
    $
    2,128
    
    
    $
    6,569Amortization of other intangible assets:Previously reported
    
    $
    836
    
    
    $
    2,437Reclassification
    
    
    (614
    )
    
    
    (1,750
    )As reclassified
    
    $
    222
    
    
    $
    687
 3. ACQUISITION
   Property and equipment
    
    $
    32Goodwill
    
    
    348Developed technology(1)
    
    
    500Customer relationship asset (1)
    
    
    100Current liabilities
    
    
    (123
    )Total purchase price
    
    $
    857
 
 (1)
    
    Both developed technology and customer relationship asset have useful lives of five years.   9




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4. DISCONTINUED OPERATIONS
    Three MonthsEnded
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,2004
    
    2005
    
    2004Revenues
    
    $
    1,945
    
    
    $
    
    
    
    $
    5,253Loss from discontinued operations
    
    $
    (128
    )
    
    
    (31
    )
    
    $
    (952
    )Income tax benefit
    
    
    
    
    
    
    455
    
    
    
    
 5. GOODWILL AND OTHER INTANGIBLE ASSETS
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,989
    
    
    $
    (9,050
    )Customer relationships
    
    
    12,700
    
    
    
    (4,001
    )Total
    
    $
    32,689
    
    
    $
    (13,051
    )
  2005
    
    2006
    
    2007
    
    2008
    
    2009Financial institutions business segment
    
    $
    4,991
    
    
    $
    5,051
    
    
    $
    4,110
    
    
    $
    3,285
    
    
    $
    2,320
  FinancialInstitutions
    
    
    Edify
    
    
    Total(In thousands)Balance, January 1, 2005
    
    $
    112,813
    
    
    $
    4,886
    
    
    $
    117,699Acquisition
    
    
    348
    
    
    
    
    
    
    
    348Purchase price adjustment
    
    
    178
    
    
    
    
    
    
    
    178Utilization of acquisition related
income tax benefits
    
    
    (394
    )
    
    
    
    
    
    
    (394
    )Balance, September 30, 2005
    
    $
    112,945
    
    
    $
    4,886
    
    
    $
    117,831
 10




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6. STOCKHOLDERS EQUITY
   7. COMPREHENSIVE (LOSS) INCOME
  Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net (loss) income
    
    $
    (7,496
    )
    
    $
    3,219
    
    
    $
    (4,460
    )
    
    $
    4,283Foreign currency translation adjustment
    
    
    426
    
    
    
    137
    
    
    
    (617
    )
    
    
    (37
    )Unrealized gain on cash flow hedges
    
    
    10
    
    
    
    
    
    
    
    67
    
    
    
    Comprehensive (loss) income
    
    $
    (7,060
    )
    
    $
    3,356
    
    
    $
    (5,010
    )
    
    $
    4,246
 8. DERIVATIVE FINANCIAL INSTRUMENTS
     11




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Three MonthsEndedSeptember 30, 2005Accumulated derivative net gain as of July 1, 2005
    
    $
    55Net change in fair value of derivatives
    
    
    12Net gains reclassified from AOCI into earnings
    
    
    (4
    )Accumulated derivative net gain as of September 30, 2005
    
    $
    63
 Nine MonthsEndedSeptember 30, 2005Accumulated derivative net gain as of January 1, 2005
    
    $
    Net change in fair value of derivatives
    
    
    67Net gains reclassified from AOCI into earnings
    
    
    (4
    )Accumulated derivative net gain as of September 30, 2005
    
    $
    63
  9. RESTRUCTURING CHARGES
  Lease Costs(In thousands)Balance, December 31, 2004
    
    $
    8,126Amounts utilized
    
    
    (2,705
    )Balance, September 30, 2005
    
    $
    5,421
   Personnel Costs(In thousands)Restructuring charge
    
    $
    4,255Amounts utilized
    
    
    (679
    )Balance, September 30, 2005
    
    $
    3,576
 12




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10. CONTINGENCIES
 Litigation
   Warranties
  11. SEGMENT REPORTING AND MAJOR CUSTOMERS
    Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Financial institutions
    
    $
    20
    
    
    $
    33
    
    
    $
    101
    
    
    $
    133Edify
    
    
    341
    
    
    
    719
    
    
    
    1,307
    
    
    
    1,561
 13




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Three Months Ended September 30, 2005FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    48,148
    
    
    $
    10,088
    
    
    $
    (361
    )
    
    $
    57,875Operating expenses:Direct costs
    
    
    24,433
    
    
    
    3,529
    
    
    
    (361
    )
    
    
    27,601Selling and marketing
    
    
    8,352
    
    
    
    2,680
    
    
    
    
    
    
    
    11,032Product development
    
    
    11,331
    
    
    
    1,433
    
    
    
    
    
    
    
    12,764General and administrative
    
    
    6,610
    
    
    
    899
    
    
    
    
    
    
    
    7,509Restructuring costs
    
    
    4,255
    
    
    
    
    
    
    
    
    
    
    
    4,255Depreciation
    
    
    2,198
    
    
    
    116
    
    
    
    
    
    
    
    2,314Amortization of other intangible assets
    
    
    358
    
    
    
    
    
    
    
    
    
    
    
    358Total operating expenses
    
    
    57,537
    
    
    
    8,657
    
    
    
    (361
    )
    
    
    65,833Segment operating income
    
    $
    (9,389
    )
    
    $
    1,431
    
    
    $
    
    
    
    $
    (7,958
    )
 Three Months Ended September 30, 2004FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    52,053
    
    
    $
    9,009
    
    
    $
    (752
    )
    
    $
    60,310Operating expenses:Direct costs
    
    
    22,433
    
    
    
    3,135
    
    
    
    (752
    )
    
    
    24,816Selling and marketing
    
    
    6,206
    
    
    
    2,664
    
    
    
    
    
    
    
    8,870Product development
    
    
    11,423
    
    
    
    1,568
    
    
    
    
    
    
    
    12,991General and administrative
    
    
    5,869
    
    
    
    1,115
    
    
    
    
    
    
    
    6,984Depreciation
    
    
    2,357
    
    
    
    268
    
    
    
    
    
    
    
    2,625Amortization of other intangible assets
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    222Total operating expenses
    
    
    48,510
    
    
    
    8,750
    
    
    
    (752
    )
    
    
    56,508Segment operating income
    
    $
    3,543
    
    
    $
    259
    
    
    $
    
    
    
    $
    3,802
 Nine Months Ended September 30, 2005FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    158,112
    
    
    $
    25,622
    
    
    $
    (1,408
    )
    
    $
    182,326Operating expenses:Direct costs
    
    
    72,116
    
    
    
    8,596
    
    
    
    (1,408
    )
    
    
    79,304Selling and marketing
    
    
    24,878
    
    
    
    7,456
    
    
    
    
    
    
    
    32,334Product development
    
    
    34,918
    
    
    
    4,361
    
    
    
    
    
    
    
    39,279General and administrative
    
    
    21,256
    
    
    
    2,659
    
    
    
    
    
    
    
    23,915Restructuring costs
    
    
    4,255
    
    
    
    
    
    
    
    
    
    
    
    4,255Depreciation
    
    
    7,031
    
    
    
    397
    
    
    
    
    
    
    
    7,428Amortization of other intangible assets
    
    
    1,015
    
    
    
    
    
    
    
    
    
    
    
    1,015Total operating expenses
    
    
    165,469
    
    
    
    23,469
    
    
    
    (1,408
    )
    
    
    187,530Segment operating income
    
    $
    (7,357
    )
    
    $
    2,153
    
    
    $
    
    
    
    $
    (5,204
    )
 14




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##### Table of Contents



Nine Months Ended September 30, 2004FinancialInstitutions
    
    
    Edify
    
    
    Eliminations
    
    
    TotalRevenues
    
    $
    149,819
    
    
    $
    27,691
    
    
    $
    (1,694
    )
    
    $
    175,816Operating expenses:Direct costs
    
    
    65,485
    
    
    
    10,544
    
    
    
    (1,694
    )
    
    
    74,335Selling and marketing
    
    
    17,803
    
    
    
    8,161
    
    
    
    
    
    
    
    25,964Product development
    
    
    35,668
    
    
    
    4,601
    
    
    
    
    
    
    
    40,269General and administrative
    
    
    16,849
    
    
    
    3,134
    
    
    
    
    
    
    
    19,983Depreciation
    
    
    7,014
    
    
    
    707
    
    
    
    
    
    
    
    7,721Amortization of other intangible assets
    
    
    612
    
    
    
    75
    
    
    
    
    
    
    
    687Total operating expenses
    
    
    143,431
    
    
    
    27,222
    
    
    
    (1,694
    )
    
    
    168,959Segment operating income
    
    $
    6,388
    
    
    $
    469
    
    
    $
    
    
    
    $
    6,857
  12. NET (LOSS) INCOME PER COMMON SHARE
    15




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##### Table of Contents



Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Basic (loss) earnings per share:(Loss) income from continuing operations
    
    $
    (7,496
    )
    
    $
    3,347
    
    
    $
    (4,884
    )
    
    $
    5,235Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (78
    )(Loss) income available to common stockholders  basic
    
    $
    (7,496
    )
    
    $
    3,297
    
    
    $
    (4,884
    )
    
    $
    5,157Weighted average common shares outstanding
    
    
    70,303
    
    
    
    70,507
    
    
    
    70,362
    
    
    
    70,693Basic (loss) earnings from continuing operations per share
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.07
    )
    
    $
    0.07Diluted (loss) earnings per share:(Loss) income from continuing operations
    
    $
    (7,496
    )
    
    $
    3,347
    
    
    $
    (4,884
    )
    
    $
    5,235Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (78
    )Income available to common stockholders  diluted
    
    $
    (7,496
    )
    
    $
    3,297
    
    
    $
    (4,884
    )
    
    $
    5,157Weighted average common shares outstanding
    
    
    70,303
    
    
    
    70,507
    
    
    
    70,362
    
    
    
    70,693Weighted average effect of common stock equivalents:Stock options
    
    
    435
    
    
    
    2,193
    
    
    
    992
    
    
    
    2,414Convertible preferred stock
    
    
    1,070
    
    
    
    
    
    
    
    1,070
    
    
    
    Weighted average diluted shares outstanding
    
    
    71,808
    
    
    
    72,700
    
    
    
    72,424
    
    
    
    73,107(Loss) earnings from continuing operations per share  diluted
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.07
    )
    
    $
    0.07
 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
    
  17




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##### Table of Contents



Acquisitions
  
   18




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##### Table of Contents



Comparison of the Three Months Ended September 30, 2005 and 2004
  Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalQuarter Ended
September 30, 2005:Core FI business
    
    $
    6,684
    
    
    $
    12,938
    
    
    $
    17,697
    
    
    $
    10,181
    
    
    $
    648
    
    
    $
    48,148Edify
    
    
    3,980
    
    
    
    4,870
    
    
    
    1,238
    
    
    
    
    
    
    
    
    
    
    
    10,088Eliminations
    
    
    (71
    )
    
    
    (290
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (361
    )Total
    
    $
    10,593
    
    
    $
    17,518
    
    
    $
    18,935
    
    
    $
    10,181
    
    
    $
    648
    
    
    $
    57,875Quarter Ended
September 30, 2004:Core FI business
    
    $
    8,452
    
    
    $
    11,294
    
    
    $
    22,822
    
    
    $
    9,153
    
    
    $
    332
    
    
    $
    52,053Edify
    
    
    3,077
    
    
    
    4,791
    
    
    
    1,141
    
    
    
    
    
    
    
    
    
    
    
    9,009Eliminations
    
    
    (132
    )
    
    
    (613
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (752
    )Total
    
    $
    11,397
    
    
    $
    15,472
    
    
    $
    23,956
    
    
    $
    9,153
    
    
    $
    332
    
    
    $
    60,310
     19




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##### Table of Contents



Direct Costs and Gross Margins.
     20




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##### Table of Contents



Selling and Marketing Expenses.
 Product Development Expenses.
  General and Administrative Expenses.
 Depreciation.
 Restructuring Costs.
 Amortization of Other Intangible Assets.
 Interest and Other Income (Expense), Net.
 Income Tax Expense.
 21




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##### Table of Contents




    
    for tax expense in certain subsidiaries or jurisdictions for which do not have
NOLs to utilize;
    
    in the United States due to limitations on the use of our federal NOLs for
alternative minimum tax purposes which will be paid in cash; or
    
    if there are NOLs that were acquired as part of a business combination, upon
which we placed a valuation allowance at acquisition date. This results in non-cash
income tax expense as goodwill is reduced and the valuation allowance is released.
  Comparison of the Nine months Ended September 30, 2005 and 2004
  Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine months Ended September 30, 2005Core FI business
    
    $
    29,896
    
    
    $
    39,772
    
    
    $
    57,412
    
    
    $
    29,728
    
    
    $
    1,304
    
    
    $
    158,112Edify
    
    
    8,286
    
    
    
    14,171
    
    
    
    3,165
    
    
    
    
    
    
    
    
    
    
    
    25,622Eliminations
    
    
    (402
    )
    
    
    (1,006
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,408
    )Total
    
    $
    37,780
    
    
    $
    52,937
    
    
    $
    60,577
    
    
    $
    29,728
    
    
    $
    1,304
    
    
    $
    182,326Nine months Ended September 30, 2004:Core FI business
    
    $
    23,470
    
    
    $
    33,971
    
    
    $
    62,356
    
    
    $
    28,022
    
    
    $
    2,000
    
    
    $
    149,819Edify
    
    
    9,416
    
    
    
    13,842
    
    
    
    4,433
    
    
    
    
    
    
    
    
    
    
    
    27,691Eliminations
    
    
    (539
    )
    
    
    (1,086
    )
    
    
    (69
    )
    
    
    
    
    
    
    
    
    
    
    (1,694
    )Total
    
    $
    32,347
    
    
    $
    46,727
    
    
    $
    66,720
    
    
    $
    28,022
    
    
    $
    2,000
    
    
    $
    175,816
    22




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##### Table of Contents



Direct Costs and Gross Margins.
      23




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##### 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 Expense.
 Loss from Discontinued Operations.
 24




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##### Table of Contents



Liquidity and Capital Resources
  Nine months Ended September 30,2005
    
    
    2004(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    10,484
    
    
    $
    16,553Change in operating assets and liabilities
    
    
    (6,614
    )
    
    
    (30,760
    )Net cash provided by (used in) operating activities
    
    
    3,870
    
    
    
    (14,207
    )Net cash provided by (used in) investing activities
    
    
    12,937
    
    
    
    4,121Net cash used in financing activities
    
    
    (3,585
    )
    
    
    (8,935
    )Effect of exchange rates on cash and cash equivalents
    
    
    (538
    )
    
    
    (53
    )Net increase (decrease) in cash and cash equivalents
    
    $
    12,684
    
    
    $
    (19,074
    )
 As ofSeptember 30, 2005
    
    December 31, 2004(In thousands)Cash and cash equivalents
    
    $
    55,907
    
    
    $
    43,223Short term investments
    
    
    45,715
    
    
    
    65,248Working capital
    
    
    101,935
    
    
    
    105,232Total assets
    
    
    327,802
    
    
    
    340,881Total stockholders equity
    
    
    248,245
    
    
    
    254,996
 Operating Activities.
  
    
    our net loss of $4.5 million;
    
    non-cash charges of $11.2 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $3.2 million;
    
    a decrease in accrued expenses and other liabilities of $9.1 million, approximately
$4.7 million related to the payment of annual expenses, including annual employee
bonuses and incentive pay;
    
    an increase of $4.8 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
and
    
    changes in other operating assets and liabilities of $7.9 million.
  
    
    our net income of $4.3 million;
    
    non-cash charges of $10.4 million of depreciation and amortization;
    
    provision of doubtful accounts receivable and billing adjustments of $1.1 million;
    
    a decrease in accrued expenses and other liabilities of $11.2 million, including a
$4.5 million payment for a settlement and approximately $3.0 million related to the
payment of annual expenses, including annual employee bonuses and incentive pay;
    
    an increase of $11.6 million in accounts receivable due to the timing of billings
and receipts of payment during the quarter; and
    
    changes in other operating assets and liabilities of $7.2 million.
 25




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##### Table of Contents



Investing Activities.
  
    
    converted $19.5 million, net, from short-term investments to cash and cash equivalents;
    
    purchased $5.7 million of property and equipment; and
    
    paid approximately $0.9 million in connection with the acquisition of the Providus business.
  
    
    paid $5.3 million in connection with the acquisition of the Indian development
business and X/Net Associates, Inc.;
    
    converted $15.3 million, net, from short-term investments to cash and cash equivalents;
    
    invested $0.8 million in an unconsolidated subsidiary; and
    
    purchased $5.2 million of property and equipment.
  Financing Activities.
    26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls.
 Changes in Internal Control over Financial Reporting.
 27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 6. Exhibits.
  31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002
 28




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##### Table of Contents



SIGNATURE
  S1 CORPORATIONBy:
    /s/ Matthew HaleMatthew HaleChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 29