##### 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, 2006
 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 200Atlanta, Georgia(Address of principal executive 
offices)
    
    30326(Zip Code)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
  o þ o
 o þ




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##### 



S1 CORPORATION
 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006
and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements as of September 30, 2006
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 6.Exhibits
    
    
    35Signature
    
    
    36EX-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
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE DATA)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    113,228
    
    
    $
    85,108Short-term investments
    
    
    26,009
    
    
    
    44,170Accounts receivable, net
    
    
    57,061
    
    
    
    48,659Prepaid expenses
    
    
    4,642
    
    
    
    4,885Other current assets
    
    
    3,108
    
    
    
    3,870Total current assets
    
    
    204,048
    
    
    
    186,692Property and equipment, net
    
    
    13,762
    
    
    
    11,351Intangible assets, net
    
    
    14,136
    
    
    
    18,375Goodwill, net
    
    
    125,300
    
    
    
    125,808Other assets
    
    
    5,578
    
    
    
    2,297Total assets
    
    $
    362,824
    
    
    $
    344,523LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,839
    
    
    $
    5,292Accrued compensation and benefits
    
    
    8,475
    
    
    
    8,267Accrued restructuring
    
    
    4,392
    
    
    
    7,675Accrued other expenses
    
    
    13,361
    
    
    
    17,587Accrued purchase price consideration
    
    
    
    
    
    
    12,900Deferred revenues
    
    
    28,535
    
    
    
    27,499Current portion of capital lease obligation
    
    
    3,008
    
    
    
    1,222Total current liabilities
    
    
    62,610
    
    
    
    80,442Capital lease obligation, excluding current portion
    
    
    4,149
    
    
    
    791Accrued restructuring, excluding current portion
    
    
    5,323
    
    
    
    7,810Other liabilities
    
    
    2,021
    
    
    
    3,094Total liabilities
    
    
    74,103
    
    
    
    92,137Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    711
    
    
    
    744Additional paid-in capital
    
    
    1,897,092
    
    
    
    1,915,617Common stock held in treasury  at cost
    
    
    
    
    
    
    (25,000
    )Accumulated deficit
    
    
    (1,616,414
    )
    
    
    (1,647,204
    )Accumulated other comprehensive loss:Net (loss) gain on derivative financial instruments
    
    
    (134
    )
    
    
    104Cumulative foreign currency translation adjustment
    
    
    (2,534
    )
    
    
    (1,875
    )Total stockholders equity
    
    
    288,721
    
    
    
    252,386Total liabilities and stockholders equity
    
    $
    362,824
    
    
    $
    344,523Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    71,057,405
    
    
    
    74,410,099Common stock held in treasury
    
    
    
    
    
    
    4,053,886
  3




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##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Software licenses
    
    $
    10,508
    
    
    $
    4,440
    
    
    $
    22,920
    
    
    $
    22,069Support and maintenance
    
    
    11,120
    
    
    
    10,953
    
    
    
    32,974
    
    
    
    33,936Professional services
    
    
    18,355
    
    
    
    16,247
    
    
    
    49,926
    
    
    
    52,468Data center
    
    
    11,616
    
    
    
    10,181
    
    
    
    35,113
    
    
    
    29,728Other
    
    
    297
    
    
    
    627
    
    
    
    1,142
    
    
    
    1,264Total revenues
    
    
    51,896
    
    
    
    42,448
    
    
    
    142,075
    
    
    
    139,465Operating expenses:Cost of software licenses
    
    
    1,128
    
    
    
    1,020
    
    
    
    3,220
    
    
    
    3,661Cost of professional services, support and maintenance (1) (2)
    
    
    17,385
    
    
    
    15,537
    
    
    
    47,836
    
    
    
    46,576Cost of data center (1) (2)
    
    
    5,713
    
    
    
    4,740
    
    
    
    16,888
    
    
    
    14,028Cost of other revenue
    
    
    244
    
    
    
    672
    
    
    
    693
    
    
    
    922Selling and marketing (2)
    
    
    7,155
    
    
    
    7,371
    
    
    
    19,713
    
    
    
    22,435Product development (2)
    
    
    9,516
    
    
    
    10,027
    
    
    
    28,999
    
    
    
    31,419General and administrative (2)
    
    
    7,085
    
    
    
    5,628
    
    
    
    19,280
    
    
    
    18,279Restructuring costs(2)
    
    
    400
    
    
    
    4,255
    
    
    
    1,282
    
    
    
    4,255Depreciation
    
    
    2,074
    
    
    
    2,104
    
    
    
    5,797
    
    
    
    6,797Amortization of other intangible assets
    
    
    327
    
    
    
    333
    
    
    
    981
    
    
    
    990Total operating expenses
    
    
    51,027
    
    
    
    51,687
    
    
    
    144,689
    
    
    
    149,362Operating income (loss)
    
    
    869
    
    
    
    (9,239
    )
    
    
    (2,614
    )
    
    
    (9,897
    )Interest and other income, net
    
    
    1,277
    
    
    
    780
    
    
    
    3,526
    
    
    
    1,795Income (loss) before income tax expense
    
    
    2,146
    
    
    
    (8,459
    )
    
    
    912
    
    
    
    (8,102
    )Income tax expense
    
    
    (253
    )
    
    
    (146
    )
    
    
    (907
    )
    
    
    (475
    )Income (loss) from continuing operations
    
    
    1,893
    
    
    
    (8,605
    )
    
    
    5
    
    
    
    (8,577
    )Income from discontinued operations, net of tax (2)
    
    
    31,452
    
    
    
    1,109
    
    
    
    30,785
    
    
    
    4,117Net income (loss)
    
    $
    33,345
    
    
    $
    (7,496
    )
    
    $
    30,790
    
    
    $
    (4,460
    )Basic earnings (loss) per share:Continuing operations
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    0.00
    
    
    $
    (0.12
    )Discontinued operations
    
    $
    0.43
    
    
    $
    0.01
    
    
    $
    0.43
    
    
    $
    0.06Net income (loss) per share
    
    $
    0.46
    
    
    $
    (0.11
    )
    
    $
    0.43
    
    
    $
    (0.06
    )Diluted earnings (loss) per share:Continuing operations
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    0.00
    
    
    $
    (0.12
    )Discontinued operations
    
    $
    0.43
    
    
    $
    0.01
    
    
    $
    0.43
    
    
    $
    0.06Net income (loss) per share
    
    $
    0.46
    
    
    $
    (0.11
    )
    
    $
    0.43
    
    
    $
    (0.06
    )Weighted average common shares outstanding  basic
    
    
    71,007,675
    
    
    
    70,303,365
    
    
    
    70,798,519
    
    
    
    70,361,627Weighted average common shares outstanding  fully diluted
    
    
    71,161,983
    
    
    
    n/a
    
    
    
    70,987,628
    
    
    
    n/a
 
 (1)
    
    Cost of professional services, support and maintenance and cost of data center excludes charges
for depreciation.(2)
    
    Includes stock based compensation expense of: Cost of professional services, support and maintenance
    
    $
    119
    
    
    $
    
    
    
    $
    406
    
    
    $
    Cost of data center
    
    
    12
    
    
    
    
    
    
    
    60
    
    
    
    Selling and marketing
    
    
    394
    
    
    
    
    
    
    
    1,150
    
    
    
    Product development
    
    
    119
    
    
    
    
    
    
    
    690
    
    
    
    General and administrative
    
    
    432
    
    
    
    
    
    
    
    1,417
    
    
    
    Restructuring costs
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    570Discontinued operations
    
    
    20
    
    
    
    
    
    
    
    176
    
    
    
    Total
    
    $
    1,096
    
    
    $
    570
    
    
    $
    3,899
    
    
    $
    570
  4




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##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    30,790
    
    
    $
    (4,460
    )Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    9,555
    
    
    
    11,163Gain on disposal of discontinued operations, net of tax
    
    
    (32,817
    )
    
    
    Provision for doubtful accounts receivable and billing adjustments
    
    
    897
    
    
    
    3,211Stock based compensation expense
    
    
    3,899
    
    
    
    570Changes in assets and liabilities:Increase in accounts receivable
    
    
    (12,664
    )
    
    
    (4,842
    )Decrease in prepaid expenses and other assets
    
    
    506
    
    
    
    3,955Increase (decrease) in accounts payable
    
    
    25
    
    
    
    (1,831
    )Decrease in accrued expenses and other liabilities
    
    
    (10,660
    )
    
    
    (9,550
    )Increase in deferred revenues
    
    
    7,001
    
    
    
    5,654Net cash (used in) provided by operating activities
    
    
    (3,468
    )
    
    
    3,870Cash flows from investing activities:Cash paid in connection with acquisition
    
    
    (14,000
    )
    
    
    (857
    )Proceeds from sale of subsidiaries
    
    
    32,639
    
    
    
    Maturities of short-term investment securities
    
    
    41,600
    
    
    
    54,500Purchases of short-term investment securities
    
    
    (23,439
    )
    
    
    (34,967
    )Amounts held in escrow related to sale of business
    
    
    (3,500
    )
    
    
    Purchases of property, equipment and technology
    
    
    (5,169
    )
    
    
    (5,739
    )Net cash provided by investing activities
    
    
    28,131
    
    
    
    12,937Cash flows from financing activities:Proceeds from employee stock option plans
    
    
    2,543
    
    
    
    1,103Payments on capital lease obligations
    
    
    (1,472
    )
    
    
    (1,281
    )Repurchase of common stock held in treasury
    
    
    
    
    
    
    (3,407
    )Proceeds from sale-lease back transaction
    
    
    2,502
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,573
    
    
    
    (3,585
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (116
    )
    
    
    (538
    )Net increase in cash and cash equivalents
    
    
    28,120
    
    
    
    12,684Cash and cash equivalents at beginning of period
    
    
    85,108
    
    
    
    43,223Cash and cash equivalents at end of period
    
    $
    113,228
    
    
    $
    55,907Noncash investing and financing activities:Property and equipment financed through capital leases
    
    $
    6,616
    
    
    $
    527
  5




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##### Table of Contents



S1 CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
      6
    Table of Contents    2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Recent accounting pronouncements
     Stock-based compensation
  7
    Table of Contents      Nine Months Ended September,2005
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    83.8
    %
    
    
    59.8
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    4.8
    %Expected life
    
    4.0years
    
    4.0years
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2006Decrease in income from continuing operations
    
    $
    (1,076
    )
    
    $
    (3,723
    )Decrease in income from discontinued operations
    
    
    (20
    )
    
    
    (176
    )Decrease in Net income
    
    $
    (1,096
    )
    
    $
    (3,899
    )
  8
    Table of Contents    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net loss, as reported
    
    $
    (7,496
    )
    
    $
    (4,460
    )Add: Stock-based employee compensation expense
included in reported net loss, net of
related tax effects
    
    
    570
    
    
    
    570Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (4,823
    )
    
    
    (10,990
    )Pro forma net loss
    
    $
    (11,749
    )
    
    $
    (14,880
    )Basic and diluted net loss per share:As reported  basic
    
    $
    (0.11
    )
    
    $
    (0.06
    )As reported  diluted
    
    
    (0.11
    )
    
    
    (0.06
    )Pro forma  basic and diluted
    
    
    (0.17
    )
    
    
    (0.21
    )
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2006Costs and expenses:Cost of professional services, support and maintenance
    
    $
    119
    
    
    $
    406Cost of data center
    
    
    12
    
    
    
    60Selling and marketing
    
    
    394
    
    
    
    1,150Product development
    
    
    119
    
    
    
    690General and administrative
    
    
    432
    
    
    
    1,417Discontinued operations
    
    
    20
    
    
    
    176Total stock-based compensation expense
    
    $
    1,096
    
    
    $
    3,899
   9
    Table of Contents  3. DISCONTINUED OPERATIONS
   10
    Table of Contents  Three Months Ended September 30,
    
    
    Nine months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Risk and Compliance
    
    $
    2,176
    
    
    $
    5,700
    
    
    $
    12,434
    
    
    $
    18,647Edify
    
    
    
    
    
    
    10,088
    
    
    
    
    
    
    
    25,622Total
    
    $
    2,176
    
    
    $
    15,788
    
    
    $
    12,434
    
    
    $
    44,269Pretax (loss) income from discontinued operations:Risk and Compliance
    
    $
    (712
    )
    
    $
    (149
    )
    
    $
    (1,969
    )
    
    $
    2,510Davidge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Edify
    
    
    
    
    
    
    1,305
    
    
    
    
    
    
    
    1,936(Loss) gain on disposal of Edify
    
    
    (97
    )
    
    
    
    
    
    
    457Gain on disposal of Risk and
Compliance
    
    
    32,263
    
    
    
    
    
    
    
    32,263
    
    
    
    Income tax (expense) benefit
    
    
    (2
    )
    
    
    (47
    )
    
    
    34
    
    
    
    (298
    )Income from discontinued
operations
    
    $
    31,452
    
    
    $
    1,109
    
    
    $
    30,785
    
    
    $
    4,117
  Current assets
    
    $
    8,373Property and equipment, net
    
    
    1,075Other non-current assets
    
    
    142Intangible assets
    
    
    480Goodwill
    
    
    1,558Current liabilities
    
    
    (7,557
    )Long term tax liabilities
    
    
    (560
    )Net assets of discontinued operations
    
    $
    3,511
 4. GOODWILL AND OTHER INTANGIBLE ASSETS
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,489
    
    
    $
    (12,647
    )Customer relationships
    
    
    12,000
    
    
    
    (4,706
    )Total
    
    $
    31,489
    
    
    $
    (17,353
    )
  11
    Table of Contents  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Enterprise
    
    $
    2,199
    
    
    $
    1,780
    
    
    $
    1,057
    
    
    $
    303
    
    
    $
    210Postilion
    
    
    2,733
    
    
    
    2,210
    
    
    
    2,108
    
    
    
    1,897
    
    
    
    880Total
    
    $
    4,932
    
    
    $
    3,990
    
    
    $
    3,165
    
    
    $
    2,200
    
    
    $
    1,090
  Enterprise
    
    
    Postilion
    
    
    Risk and Compliance
    
    
    Total(In thousands)Balance, January 1, 2006
    
    $
    66,064
    
    
    $
    58,186
    
    
    $
    1,558
    
    
    $
    125,808Additional consideration
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    1,100Utilization of acquisition related
income tax benefits
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )Sale of Risk and Compliance
    
    
    
    
    
    
    
    
    
    
    (1,558
    )
    
    
    (1,558
    )Balance, September 30, 2006
    
    $
    66,014
    
    
    $
    59,286
    
    
    $
    
    
    
    $
    125,300
 
 12
    Table of Contents  5. STOCK OPTION PLANS
   Weighted-Weighted-
    
    
    average
    
    
    Aggregateaverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    Value(000)
    
    
    Price
    
    
    Life
    
    
    ($000)Outstanding at December 31, 2005
    
    
    14,932
    
    
    $
    9.40Granted
    
    
    525
    
    
    
    4.59Exercised
    
    
    (701
    )
    
    
    3.63
    
    
    
    
    
    
    $
    724Forfeited/canceled
    
    
    (3,501
    )
    
    
    8.88Outstanding at September 30, 2006
    
    
    11,255
    
    
    $
    9.70
    
    
    
    5.40
    
    
    $
    2,291Exercisable at September 30, 2006
    
    
    7,805
    
    
    $
    11.84
    
    
    
    3.87
    
    
    $
    986
   Non-Vested
    
    
    Weighted-Number of
    
    
    averageShares
    
    
    Grant-Date(000)
    
    
    Fair ValueNon-vested balance at December 31, 2005
    
    
    4,339
    
    
    $
    3.73Granted
    
    
    525
    
    
    $
    2.32Canceled
    
    
    (524
    )
    
    $
    3.80Vested
    
    
    (890
    )
    
    $
    5.75Non-vested balance at September 30, 2006
    
    
    3,450
    
    
    $
    2.98
  13
    Table of Contents  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
    
    
    1,049
    
    
    
    5.1
    
    
    $
    3.56
    
    
    
    845
    
    
    $
    3.544.01  5.00
    
    
    2,930
    
    
    
    8.2
    
    
    
    4.21
    
    
    
    472
    
    
    
    4.505.01  7.00
    
    
    1,085
    
    
    
    4.4
    
    
    
    5.96
    
    
    
    839
    
    
    
    6.177.01  8.50
    
    
    2,269
    
    
    
    4.7
    
    
    
    8.00
    
    
    
    1,864
    
    
    
    8.028.51  11.00
    
    
    641
    
    
    
    5.1
    
    
    
    9.34
    
    
    
    504
    
    
    
    9.4011.01  15.00
    
    
    643
    
    
    
    4.6
    
    
    
    13.19
    
    
    
    643
    
    
    
    13.1915.01  20.00
    
    
    2,295
    
    
    
    3.9
    
    
    
    16.79
    
    
    
    2,295
    
    
    
    16.7920.01  97.44
    
    
    343
    
    
    
    2.2
    
    
    
    44.98
    
    
    
    343
    
    
    
    44.980.95  97.44
    
    
    11,255
    
    
    
    5.4
    
    
    $
    9.70
    
    
    
    7,805
    
    
    $
    11.84
  6. COMPREHENSIVE (LOSS) INCOME
  Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    33,345
    
    
    $
    (7,496
    )
    
    $
    30,790
    
    
    $
    (4,460
    )Foreign currency translation adjustment
    
    
    (327
    )
    
    
    426
    
    
    
    (659
    )
    
    
    (617
    )Unrealized (loss) income on cash flow hedges
    
    
    (40
    )
    
    
    10
    
    
    
    (263
    )
    
    
    67Comprehensive (loss) income
    
    $
    32,978
    
    
    $
    (7,060
    )
    
    $
    29,868
    
    
    $
    (5,010
    )
 7. DERIVATIVE FINANCIAL INSTRUMENTS
    14
    Table of Contents  Three MonthsEndedSeptember 30, 2006Accumulated derivative net gain as of July 1, 2006
    
    $
    (109
    )Net change in fair value of derivatives
    
    
    (40
    )Net losses reclassified from AOCI into earnings
    
    
    15Accumulated derivative net loss as of September 30, 2006
    
    $
    (134
    )
 Nine monthsEndedSeptember 30, 2006Accumulated derivative net gain as of January 1, 2006
    
    $
    104Net change in fair value of derivatives
    
    
    (263
    )Net losses reclassified from AOCI into earnings
    
    
    25Accumulated derivative net loss as of September 30, 2006
    
    $
    (134
    )
  8. RESTRUCTURING CHARGES
  Lease CostsBalance at December 31, 2005
    
    $
    5,800Amounts utilized through September 30, 2006
    
    
    (960
    )Change in estimate
    
    
    (75
    )Balance at September 30, 2006
    
    $
    4,765
 15
    Table of Contents  Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance at December 31, 2005
    
    $
    4,635
    
    
    $
    5,050
    
    
    $
    9,6852006 restructuring charge
    
    $
    333
    
    
    $
    
    
    
    $
    333Amounts utilized
    
    
    (4,003
    )
    
    
    (2,089
    )
    
    
    (6,092
    )Change in estimate
    
    
    
    
    
    
    1,024
    
    
    
    1,024Balance at September 30, 2006
    
    $
    965
    
    
    $
    3,985
    
    
    $
    4,950
   9. CONTINGENCIES
 Litigation
   Sale-Leaseback Transaction
  Guarantees
 16
    Table of Contents  10. EQUITY TRANSACTIONS
  11. SEGMENT REPORTING AND MAJOR CUSTOMERS
     Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended
September 30, 2006:Enterprise
    
    $
    5,369
    
    
    $
    5,514
    
    
    $
    14,366
    
    
    $
    4,793
    
    
    $
    140
    
    
    $
    30,182Postilion
    
    
    5,139
    
    
    
    5,606
    
    
    
    3,989
    
    
    
    6,823
    
    
    
    157
    
    
    
    21,714Total
    
    $
    10,508
    
    
    $
    11,120
    
    
    $
    18,355
    
    
    $
    11,616
    
    
    $
    297
    
    
    $
    51,896
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended
September 30, 2005:Enterprise
    
    $
    1,784
    
    
    $
    5,815
    
    
    $
    13,491
    
    
    $
    4,132
    
    
    $
    365
    
    
    $
    25,587Postilion
    
    
    2,656
    
    
    
    5,138
    
    
    
    2,756
    
    
    
    6,049
    
    
    
    262
    
    
    
    16,861Total
    
    $
    4,440
    
    
    $
    10,953
    
    
    $
    16,247
    
    
    $
    10,181
    
    
    $
    627
    
    
    $
    42,448
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine months Ended
September 30, 2006:Enterprise
    
    $
    10,830
    
    
    $
    17,389
    
    
    $
    40,696
    
    
    $
    15,083
    
    
    $
    405
    
    
    $
    84,403Postilion
    
    
    12,090
    
    
    
    15,585
    
    
    
    9,230
    
    
    
    20,030
    
    
    
    737
    
    
    
    57,672Total
    
    
    22,920
    
    
    
    32,974
    
    
    
    49,926
    
    
    
    35,113
    
    
    
    1,142
    
    
    
    142,075
 17
    Table of Contents  Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine months Ended
September 30, 2005:Enterprise
    
    $
    8,956
    
    
    $
    18,149
    
    
    $
    44,721
    
    
    $
    12,276
    
    
    $
    702
    
    
    $
    84,804Postilion
    
    
    13,113
    
    
    
    15,787
    
    
    
    7,747
    
    
    
    17,452
    
    
    
    562
    
    
    
    54,661Total
    
    $
    22,069
    
    
    $
    33,936
    
    
    $
    52,468
    
    
    $
    29,728
    
    
    $
    1,264
    
    
    $
    139,465
  Three Months Ended September 30, 2006Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    30,182
    
    
    $
    21,714
    
    
    $
    51,896Operating expenses:Direct costs
    
    
    14,982
    
    
    
    9,488
    
    
    
    24,470Selling and marketing
    
    
    3,158
    
    
    
    3,997
    
    
    
    7,155Product development
    
    
    7,630
    
    
    
    1,886
    
    
    
    9,516General and administrative
    
    
    3,743
    
    
    
    3,342
    
    
    
    7,085Restructuring costs
    
    
    239
    
    
    
    161
    
    
    
    400Depreciation
    
    
    1,368
    
    
    
    706
    
    
    
    2,074Amortization of other intangible assets
    
    
    103
    
    
    
    224
    
    
    
    327Total operating expenses
    
    
    31,223
    
    
    
    19,804
    
    
    
    51,027Segment operating loss
    
    $
    (1,041
    )
    
    $
    1,910
    
    
    $
    869
 Three Months Ended September 30, 2005Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    25,587
    
    
    $
    16,861
    
    
    $
    42,448Operating expenses:Direct costs
    
    
    13,868
    
    
    
    8,101
    
    
    
    21,969Selling and marketing
    
    
    4,024
    
    
    
    3,347
    
    
    
    7,371Product development
    
    
    8,344
    
    
    
    1,683
    
    
    
    10,027General and administrative
    
    
    2,521
    
    
    
    3,107
    
    
    
    5,628Restructuring costs
    
    
    2,384
    
    
    
    1,871
    
    
    
    4,255Depreciation
    
    
    1,372
    
    
    
    732
    
    
    
    2,104Amortization of other intangible assets
    
    
    108
    
    
    
    225
    
    
    
    333Total operating expenses
    
    
    32,621
    
    
    
    19,066
    
    
    
    51,687Segment operating (loss) income
    
    $
    (7,034
    )
    
    $
    (2,205
    )
    
    $
    (9,239
    )
 Nine months Ended September 30, 2006Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    84,403
    
    
    $
    57,672
    
    
    $
    142,075Operating expenses:Direct costs
    
    
    42,125
    
    
    
    26,512
    
    
    
    68,637Selling and marketing
    
    
    8,807
    
    
    
    10,906
    
    
    
    19,713Product development
    
    
    23,379
    
    
    
    5,620
    
    
    
    28,999General and administrative
    
    
    10,030
    
    
    
    9,250
    
    
    
    19,280Restructuring costs
    
    
    876
    
    
    
    406
    
    
    
    1,282Depreciation
    
    
    3,733
    
    
    
    2,064
    
    
    
    5,797Amortization of other intangible assets
    
    
    309
    
    
    
    672
    
    
    
    981Total operating expenses
    
    
    89,259
    
    
    
    55,430
    
    
    
    144,689Segment operating (loss) income
    
    $
    (4,856
    )
    
    $
    2,242
    
    
    $
    (2,614
    )
 18
    Table of Contents  Nine months Ended September 30, 2005Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    84,804
    
    
    $
    54,661
    
    
    $
    139,465Operating expenses:Direct costs
    
    
    41,420
    
    
    
    23,767
    
    
    
    65,187Selling and marketing
    
    
    12,201
    
    
    
    10,234
    
    
    
    22,435Product development
    
    
    26,186
    
    
    
    5,233
    
    
    
    31,419General and administrative
    
    
    8,404
    
    
    
    9,875
    
    
    
    18,279Restructuring costs
    
    
    2,384
    
    
    
    1,871
    
    
    
    4,255Depreciation
    
    
    4,408
    
    
    
    2,389
    
    
    
    6,797Amortization of other intangible assets
    
    
    316
    
    
    
    674
    
    
    
    990Total operating expenses
    
    
    95,319
    
    
    
    54,043
    
    
    
    149,362Segment operating (loss) income
    
    $
    (10,515
    )
    
    $
    618
    
    
    $
    (9,897
    )
  19
    Table of Contents  11. NET (LOSS) INCOME PER COMMON SHARE
    Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Basic earnings per share:(Loss) income from continuing operations
    
    $
    1,893
    
    
    $
    (8,605
    )
    
    $
    5
    
    
    $
    (8,577
    )Amount allocated to participating preferred stockholders
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (Loss) income from continuing operations
available to common stockholders  basic
    
    $
    1,865
    
    
    $
    (8,605
    )
    
    $
    5
    
    
    $
    (8,577
    )Weighted average common shares outstanding
    
    
    71,008
    
    
    
    70,303
    
    
    
    70,799
    
    
    
    70,362Basic (loss) income from continuing operations per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    0.00
    
    
    $
    (0.12
    )Diluted earnings per share:(Loss) income from continuing operations
    
    $
    1,893
    
    
    $
    (8,605
    )
    
    $
    5
    
    
    $
    (8,577
    )Amount allocated to participating preferred stockholders
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (Loss) income from continuing operations
available to common stockholders  diluted
    
    $
    1,865
    
    
    $
    (8,605
    )
    
    $
    5
    
    
    $
    (8,577
    )Weighted average common shares outstanding
    
    
    71,008
    
    
    
    70,303
    
    
    
    70,799
    
    
    
    70,362Weighted average effect of common stock equivalentStock options
    
    
    154
    
    
    
    435
    
    
    
    189
    
    
    
    992Convertible preferred stock
    
    
    
    
    
    
    1,070
    
    
    
    
    
    
    
    1,070Weighted average diluted shares outstanding
    
    
    71,162
    
    
    
    71,808
    
    
    
    70,988
    
    
    
    72,424Diluted (loss) income from continuing operations per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
 20
    Table of Contents  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
      21
    Table of Contents  Recent Accounting Pronouncements
     22
    Table of Contents  Critical Accounting Policies and Estimates
  Determination of the fair value of employee stock options.
 Comparison of the Three Months Ended September 30, 2006 and 2005
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended
September 30, 2006:Enterprise
    
    $
    5,369
    
    
    $
    5,514
    
    
    $
    14,366
    
    
    $
    4,793
    
    
    $
    140
    
    
    $
    30,182Postilion
    
    
    5,139
    
    
    
    5,606
    
    
    
    3,989
    
    
    
    6,823
    
    
    
    157
    
    
    
    21,714Total
    
    $
    10,508
    
    
    $
    11,120
    
    
    $
    18,355
    
    
    $
    11,616
    
    
    $
    297
    
    
    $
    51,896
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended
September 30, 2005:Enterprise
    
    $
    1,784
    
    
    $
    5,815
    
    
    $
    13,491
    
    
    $
    4,132
    
    
    $
    365
    
    
    $
    25,587Postilion
    
    
    2,656
    
    
    
    5,138
    
    
    
    2,756
    
    
    
    6,049
    
    
    
    262
    
    
    
    16,861Total
    
    $
    4,440
    
    
    $
    10,953
    
    
    $
    16,247
    
    
    $
    10,181
    
    
    $
    627
    
    
    $
    42,448
   23
    Table of Contents  Direct Costs.
    24
    Table of Contents  Selling and Marketing Expenses.
 Product Development Expenses.
  General and Administrative Expenses.
 Restructuring costs.
 Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income, Net.
 Income Tax (Expense) Benefit.
  25
    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.
   Income from discontinued operations
 Three Months Ended September 30,2006
    
    
    2005Loss from Risk and Compliance
    
    $
    (712
    )
    
    $
    (149
    )Gain on disposal of Risk and Compliance
    
    
    32,263
    
    
    
    Income from Edify
    
    
    
    
    
    
    1,305Loss on disposal of Edify
    
    
    (97
    )
    
    
    Income tax expense
    
    
    (2
    )
    
    
    (47
    )Total
    
    $
    31,452
    
    
    $
    1,109
 Comparison of the Nine Months Ended September 30, 2006 and 2005
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine Months Ended
September 30, 2006:Enterprise
    
    $
    10,830
    
    
    $
    17,389
    
    
    $
    40,696
    
    
    $
    15,083
    
    
    $
    405
    
    
    $
    84,403Postilion
    
    
    12,090
    
    
    
    15,585
    
    
    
    9,230
    
    
    
    20,030
    
    
    
    737
    
    
    
    57,672Total
    
    
    22,920
    
    
    
    32,974
    
    
    
    49,926
    
    
    
    35,113
    
    
    
    1,142
    
    
    
    142,075
 26
    Table of Contents  Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine Months Ended September 30, 2005:Enterprise
    
    $
    8,956
    
    
    $
    18,149
    
    
    $
    44,721
    
    
    $
    12,276
    
    
    $
    702
    
    
    $
    84,804Postilion
    
    
    13,113
    
    
    
    15,787
    
    
    
    7,747
    
    
    
    17,452
    
    
    
    562
    
    
    
    54,661Total
    
    $
    22,069
    
    
    $
    33,936
    
    
    $
    52,468
    
    
    $
    29,728
    
    
    $
    1,264
    
    
    $
    139,465
     Direct
Costs.
   27
    Table of Contents  Selling and Marketing Expenses.
 Product Development Expenses.
  General and Administrative Expenses.
 Restructuring costs.
 28
    Table of Contents  Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
  Income from discontinued operations.
 Nine months Ended September 30,2006
    
    
    2005(Loss) income from Risk and Compliance
    
    $
    (1,969
    )
    
    $
    2,510Loss from Davidge
    
    
    
    
    
    
    (31
    )Income from Edify
    
    
    
    
    
    
    1,936Gain on disposal of Edify
    
    
    457
    
    
    
    Gain on disposal of Risk and Compliance
    
    
    32,263
    
    
    
    Income tax benefit (expense)
    
    
    34
    
    
    
    (298
    )Total
    
    $
    30,785
    
    
    $
    4,117
 Liquidity and Capital Resources
  Nine months Ended September 30,2006
    
    
    2005(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    12,324
    
    
    $
    10,484Change in operating assets and liabilities
    
    
    (15,792
    )
    
    
    (6,614
    )Net cash (used in) provided by operating activities
    
    
    (3,468
    )
    
    
    3,870Net cash provided by investing activities
    
    
    28,131
    
    
    
    12,937Net cash provided by (used in) financing activities
    
    
    3,573
    
    
    
    (3,585
    )Effect of exchange rates on cash and cash equivalents
    
    
    (116
    )
    
    
    (538
    )Net increase in cash and cash equivalents
    
    $
    28,120
    
    
    $
    12,684
 29
    Table of Contents  As ofSeptember 30, 2006
    
    December 31, 2005(In thousands)Cash and cash equivalents.
    
    $
    113,228
    
    
    $
    85,108Short term investments
    
    
    26,009
    
    
    
    44,170Working capital
    
    
    141,438
    
    
    
    106,250Total assets
    
    
    362,824
    
    
    
    344,523Total stockholders equity
    
    
    288,721
    
    
    
    252,386
 Operating Activities.
  
    
    our net income of $30.8 million;
    
    depreciation and amortization expense of $9.6 million;
    
    gain on the disposal of Edify of $0.6 million and gain on disposal of the Risk and
Compliance business of $32.2 million;
    
    provision of doubtful accounts receivable and billing adjustments of $0.9 million;
    
    stock based compensation expense of $3.9 million;
    
    a decrease in accrued expenses and other liabilities of $10.7 million;
    
    an increase of $12.7 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
    
    a $7.0 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
    
    changes in other operating assets and liabilities of $0.5 million.
  
    
    our net loss of $4.5 million;
    
    depreciation and amortization expense of $11.2 million;
    
    provision of doubtful accounts receivable and billing adjustments of $3.2 million;
    
    a decrease in accrued expenses and other liabilities of $9.6 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;
    
    a $5.7 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
    
    changes in other operating assets and liabilities of $2.1 million.
 Investing Activities.
  30
    Table of Contents  
    
    paid $14.0 million to the sellers of Mosaic in settlement of the earn-out;
    
    converted $18.2 million, net, from short-term investments to cash and cash equivalents;
    
    received net proceeds from the sale of the Risk and Compliance segment of $32.6 million;
    
    cash held in escrow of $3.5 million related to the sale of the Risk and Compliance segment;
    
    received $0.6 million working capital adjustment from the sale of Edify; and
    
    purchased $5.2 million of property and equipment.
  
    
    converted $19.5 million, net, from cash and cash equivalents to short-term investments;
    
    purchased $5.7 million of property and equipment; and
    
    paid approximately $0.9 million in connection with the acquisition of the Providus business.
 Financing Activities.
  
    
    received $2.5 million from the sale of common stock under our employee stock option plans; and
    
    received $2.5 million from a sale lease back transaction ; and
    
    paid $1.5 million for capital lease obligations.
  
    
    received $1.1 million from the sale of common stock under our employee stock option plans; and
    
    repurchased $3.4 million of our common stock; and
    
    paid $1.3 million for capital lease obligations.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls.
 31
    Table of Contents  Changes in Internal Control over Financial Reporting.
 32
    Table of Contents  PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors
     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 will be selling our financial institutions products on both a perpetual license and a term or subscription
license, we cannot accurately predict 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; perpetual license
revenue can vary significantly on a quarterly basis;
    
    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 or are delayed in the introduction of 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;
 33
    Table of Contents  
    
    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.
 We have experienced substantial losses in the past and may not achieve or maintain profitable
operations in the future
  34
    Table of Contents  Item 6. Exhibits
 ExhibitNo.
    
    Exhibit Description31.1
    
    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
 35
    Table of Contents  SIGNATURE
  S1 CORPORATIONBy:
    /s/ JOHN A. STONEJohn A. StoneChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 36
    Table of Contents  Exhibit Index
 ExhibitNo.
    
    Exhibit Description31.1
    
    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
 37