| S1 CORP /DE/ Item 1A Risk Factors You should consider carefully the following risks |
| If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer |
| In that case, the trading price of our common stock could decline, and you may lose all or a part of the money you paid to buy our common stock |
| Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price of our common stock Our quarterly operating results have fluctuated significantly to date |
| If we fail to meet the expectations of securities analysts or investors as a result of any future fluctuations in our quarterly operating results, the market price of our common stock would likely decline |
| We may experience fluctuations in future quarters because: • we cannot accurately predict the number and timing of contracts we will sign in a period, in part because the budget constraints and internal review processes of existing and potential customers are not within our control; • as we transition from selling our financial institutions products on a perpetual license to a term or subscription license, we cannot accurately predict how long it will take to complete this transition or the mix of perpetual licenses to term licenses sold in any one quarter |
| Term licenses significantly reduce the amount of revenue recognized in the first year of the contract, but is intended to increase the overall revenue earned from the customer during the typical customer life cycle; • the length of our sales cycle to large financial organizations generally lasts from six to eighteen months, which adds an element of uncertainty to our ability to forecast revenues; • if we fail to introduce new or enhanced products, or if our competitors introduce new or enhanced products, sales of our products and services may not achieve expected levels and/or may decline; • our ability to expand the mix of distribution channels through which our products are sold may be limited; • our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower than expected; • we have had significant contracts with legacy customers that have decreased or terminated their services and we may not be able to replace this revenue and / or the gross margins associated with this revenue; • our sales may be constrained by the timing of releases of third-party software that works with our products; • a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term if revenues decrease; and • the migration of our license sales model to be more focused on recurring revenue contracts may result in less predictable revenue due to an inability to predict the rate at which it is adopted by our customers, or the rate at which it may be deferred |
| In 2006, we will depend on one customer for a significant portion of our revenue and if that customer terminates its contract with us, our revenues and financial performance would decline In 2005, we derived 22prca of our total revenues from continuing operations from one customer |
| This customer accounted for 21prca and 23prca of our total revenue from continuing operations in 2003 and 2004, respectively |
| Over the past three years, this customer has moved from a period of heavy investment and is now entering a more stable maintenance state with their applications |
| System failures or performance problems with our products could cause demand for these products to decrease, require us to make significant capital expenditures or impair customer relations There are many factors that could adversely affect the performance, quality and desirability of our products |
| In certain instances, product releases have been delayed |
| This has impacted and may continue to impact or prevent these products from gaining market acceptance |
| These factors include, but are not limited to the following: • delays in completing and/or testing new products, resulting in significant delays; • extraordinary end-user volumes or other events could cause systems to fail; • our products could contain errors, or “bugs”, which could impair the services we provide; • during the initial implementation of some products, we have experienced significant delays in implementing and integrating software, and we may experience similar difficulties or delays in connection with future implementations and upgrades to new versions; and 11 _________________________________________________________________ [46]Table of Contents • many of our products require integration with third-party products and systems, and we may not be able to integrate these products with new or existing products |
| We have experienced substantial losses in the past and may not achieve or maintain profitable operations in the future We incurred losses from continuing operations in fiscal years 2003 and 2005 |
| We are beginning the transition from a perpetual license revenue model to a term or subscription license model which may significantly reduce the amount of revenue in any one quarter during the transition |
| As a result, we could experience losses, which could negatively impact the value of our common stock |
| We are engaged in offshore software development activities, which may not be successful and which may put our intellectual property at risk In order to optimize available research and development resources and meet development timeframes, in 2002, we acquired a development center in Dublin, Ireland |
| In 2004, we acquired an Indian based development center |
| In 2004, associated with our acquisition of Mosaic, we acquired a development center in Cape Town, South Africa |
| While our experience to date with these offshore development centers has been positive, there is no assurance that this will continue |
| Specifically, there are a number of risks associated with this activity, including but not limited to the following: • communications and information flow may be less efficient and accurate as a consequence of the time, distance and language differences between our primary development organization and the foreign based activities, resulting in delays in development or errors in the software developed; • potential disruption from the involvement of the United States in political and military conflicts around the world; • the quality of the development efforts undertaken offshore may not meet our requirements because of language, cultural and experiential differences, resulting in potential product errors and/or delays; • we have experienced a greater level of voluntary turnover of personnel in India than in other development centers which could have an adverse impact on efficiency and timeliness of development as well as the opportunity for misappropriation of our intellectual property; • in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general risk of the potential for misappropriation of our intellectual property that might not be readily discoverable; and • currency exchange rates could fluctuate and adversely impact the cost advantages intended from maintaining these facilities |
| We are involved in litigation over proprietary rights, which may be costly and time consuming From time to time, we have received claims that certain of our products, or other proprietary rights require a license of intellectual property rights of a party and infringe, or may infringe, the intellectual property rights of others |
| Those claims, with or without merit, could: • be time-consuming to investigate and defend; • result in costly litigation; • cause product shipment delays; • require us to enter into royalty or licensing agreements; or • result in an injunction being issued against the use of our products |
| Royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all, which could harm our business, financial condition and results of operations |
| Litigation to determine the validity of any claims could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not the litigation is determined in our favor |
| In the event of an adverse ruling, we may be required to: • pay substantial damages; • discontinue the use and sale of infringing products; • expend significant resources to develop non-infringing technology; or • obtain licenses to infringing technology |
| Our failure to develop or license a substitute technology could significantly harm our business |
| 12 _________________________________________________________________ [47]Table of Contents Our operating results would suffer if we were subject to a protracted infringement claim or a significant damage award |
| Substantial intellectual property litigation and threats of litigation exist in our industry |
| The number of patents issued protecting software and business methods has grown significantly in recent years, with the scope of such patents often unclear |
| Additionally, copyright and trade secrets are regularly asserted as a means for protecting software |
| We expect software to be increasingly subject to third-party intellectual property infringement claims as a result of the increased level of intellectual property based actions relating to such technology and methods, and as the number of competitors grows and the functionality of products in different industry segments overlaps |
| Third parties may have, or may eventually be issued, patents or assert copyrights and/or trade secrets that would be infringed by our products or technology |
| Any of these third parties could make a claim of infringement against us with respect to our products or technology |
| In some instances, our customers may be accused of infringing the intellectual property rights of third parties |
| As a result, we provide limited indemnity for our customers against infringement claims |
| Even if such accusations ultimately prove lacking in merit, the disposition of such disputes may be costly, distracting, and result in damages, royalties, or injunctive relief preventing the use of the intellectual property in question and may require entering into licensing agreements, redesigning our products or ceasing production entirely |
| Any claims, with or without merit, could have the following negative consequences: • costly litigation and damage awards; • diversion of management attention and resources; • product shipment delays or suspensions; • injunction prohibiting us from selling our products; and • the need to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all |
| Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management resources or dilute stockholder value We acquired three companies in 2004 and one company in 2005 |
| We also divested one company in 2004 and one company in 2005 |
| The integration of these companies and any future acquisitions into our existing operations is a complex, time-consuming and expensive process and may disrupt our business |
| With acquisitions made prior to 2001, we have encountered difficulties, costs and delays in integrating the acquired operations with our own and may continue to do so in the future |
| Among the issues related to integration are: • potential incompatibility of business cultures; • potential delays in rationalizing diverse technology platforms; • potential difficulties in coordinating geographically separated organizations; • potential difficulties in re-training sales forces to market all of our products across all of our intended markets; • potential difficulties implementing common internal business systems and processes; • potential conflicts in third-party relationships; and • the loss of key employees and diversion of the attention of management from other ongoing business concerns |
| A significant portion of our customers are in a consolidating financial services industry, which is subject to economic changes that could reduce demand for our products and services For the foreseeable future, we expect to derive most of our revenue from products and services we provide to the banking industry and other financial services firms such |
| Changes in economic conditions and unforeseen events, like recession or inflation, could occur and reduce consumers’ use of banking services |
| Any event of this kind, or implementation for any reason by banks of cost reduction measures, could result in significant decreases in demand for our products and services |
| Mergers and acquisitions are pervasive in today’s banking industry |
| Our existing customers may be acquired by or merged into other financial institutions that have their own financial software solutions or decide to terminate their relationships with us for other reasons |
| Market volatility may affect the price of our common stock The trading prices of technology stocks in general, and ours in particular, have experienced extreme price fluctuations |
| Our stock price has declined significantly since reaching a high in 2000 |
| Any further negative change in the 13 _________________________________________________________________ [48]Table of Contents public’s perception of the prospects of technology based companies, particularly those which are associated with the Internet or e-commerce such as ours, could further depress our stock price regardless of our results of operations |
| Other broad market and industry factors may decrease the trading price of our common stock, regardless of our operating performance |
| Market fluctuations, as well as general political and economic conditions such as a recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock |
| In addition, our stock price could be subject to wide fluctuations in response to the following factors: • actual or anticipated variations in our quarterly operating results; • 21prca of our common stock is owned by 5 institutions, a rapid change in position of any one of these holders could cause a significant drop in our stock price if market demand is insufficient to meet sales demand; • announcements of new products, product enhancements, technological innovations or new services by us or our competitors; • changes in financial estimates by securities analysts; • conditions or trends in the computer software, electronic commerce and Internet industries; • changes in the market valuations of other technology companies; • developments in Internet regulations; • announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; • unscheduled system downtime of our products in either a hosted or in-house environment; • additions or departures of key personnel; and • sales of our common stock or other securities in the open market |
| Future sales of our common stock in the public market could negatively affect our stock price If our stockholders sell substantial amounts of our common stock, including shares issued when options and warrants are exercised or shares of our preferred stock are converted into common stock, the market price of our common stock could fall |
| As of March 1, 2006, we had 70dtta5 million shares of common stock outstanding, assuming no exercise of outstanding options or warrants or conversion of preferred stock |
| As of March 1, 2006, there were outstanding employee stock options to purchase 14dtta7 million shares of our common stock and 0dtta8 million shares of preferred stock convertible into an aggregate of 1dtta1 million shares of our common stock |
| The common stock issuable after vesting and upon exercise of these options and warrants and upon conversion of this preferred stock will be eligible for sale in the public market from time to time |
| The possible sale of a significant number of these shares may cause the market price of our common stock to fall |
| By exercising their registration rights and causing a large number of shares to be sold in the public market, these stockholders could cause the market price of our common stock to fall |
| Our market is highly competitive and if we are unable to keep pace with evolving technology our revenue and future prospects may decline The market for our products and services is characterized by rapidly changing technology, intense competition and evolving industry standards |
| We have many competitors who offer various components of our suite of applications or who use a different technology platform to accomplish similar tasks |
| In some cases, our existing customers also use some of our competitors’ products |
| Our future success will depend on our ability to develop, sell and support enhancements of current products and new software products in response to changing customer needs |
| If the completion of the next version of any of our products is delayed, our revenue and future prospects could be harmed |
| In addition, competitors may develop products or technologies that the industry considers more attractive than those we offer or that render our technology obsolete |
| International operations may adversely affect us We conduct our business worldwide and may be adversely affected by changes in demand resulting from: • fluctuations in currency exchange rates; • governmental currency controls; • changes in various regulatory requirements; • political and economic changes and disruptions; • difficulties in enforcing our contracts in foreign jurisdictions; • export/import controls; • tariff regulations; 14 _________________________________________________________________ [49]Table of Contents • difficulties in staffing and managing foreign sales and support operations; • greater difficulties in trade accounts receivable collection; and • possible adverse tax consequences |
| Our solutions use encrypted technology, the export of which is regulated by the United States government |
| If the United States government were to adopt new legislation restricting the export of software or encryption technology, we could experience delays or reductions in our shipments of products internationally |
| In addition, existing or future export regulations could limit our ability to distribute our solutions outside of the United States |
| We maintain international offices and portions of our maintenance, consulting, and research and development operations in Europe, Africa and Asia |
| Therefore, our operations may also be affected by economic conditions in international regions |
| The risks associated with international operations may harm our business |
| Infringement of our proprietary technology could hurt our competitive position and income potential Our success depends upon our proprietary technology and information |
| We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary technology and information |
| Because it is difficult to police unauthorized use of software, the steps we have taken to protect our services and products may not prevent misappropriation of our technology |
| Any misappropriation of our proprietary technology or information could reduce any competitive advantages we may have or result in costly litigation |
| We now also have a significant international presence |
| The laws of some foreign countries may not protect our proprietary technology as well as the laws of the United States |
| Our ability to protect our proprietary technology abroad may not be adequate |
| If we are unable to attract and retain highly skilled technical employees, we may not be able to compete Based on the need for highly skilled technical employees, we believe that our future success will depend in large part on our ability to attract and retain highly skilled technical personnel |
| Because the development of our software requires knowledge of computer hardware, as well as a variety of software applications, we need to attract and retain technical personnel who are proficient in all these disciplines |
| There is substantial competition for employees with the technical skills we require |
| If we cannot hire and retain talented technical personnel, this could adversely affect our growth prospects and future success |
| We are subject to government regulation We are subject to examination, and are indirectly regulated, by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the various state financial regulatory agencies that supervise and regulate the banks and thrift institutions for which we provide data processing services |
| Matters subject to review and examination by federal and state financial institution regulatory agencies include our internal controls in connection with our performance of data processing services and the agreements giving rise to those processing activities |
| The adoption or modification of laws or regulations relating to the Internet, or interpretations of existing law, could adversely affect our business Laws and regulations which apply to communications and commerce over the Internet are becoming more prevalent |
| Currently, there are Internet laws regarding copyrights, taxation and the transmission of specified types of material |
| Congress also adopted legislation imposing obligations on financial institutions to notify their customers of the institution’s privacy practices, restrict the sharing of non-public customer data with non-affiliated parties at the customer’s request, and establish procedures and practices to protect and secure customer data |
| These privacy provisions are implemented by regulations with which compliance is now required |
| Additionally, many legislative and regulatory actions have been enacted or are pending at the state and federal level with respect to privacy |
| Further, our customers and we may be faced with state and federal requirements that differ drastically, and in some cases conflict |
| In addition, the European Union enacted its own privacy regulations and is currently considering other Internet-related legislation |
| The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action |
| It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet |
| In addition, the growth and development of the market for online financial services, including online banking, may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online |