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(S1 LOGO)
<Table>
<Caption>
S1 CORPORATION HEADQUARTERS 3500 Lenox Road, Suite 200, Atlanta Georgia 30326 U.S.A.
T +1 404.923.3500 F +1 404.923.6727 TOLL FREE +1 888.457.2237
</Table>
June 20, 2005
Mr. Craig Wilson
Senior Assistant Chief Accountant
Division of Corporation Finance
United States Securities and Exchange Commission
Station Place
100 F Street, N.E.
Washington, DC 20549
Re: S1 Corporation
Form 10-K for Fiscal Year Ended December 31, 2004
Filed March 16, 2005
File No. 000-24931
Dear Mr. Wilson:
On behalf of S1 Corporation ("S1" or the "Company"), this letter responds to the
comments in your letter dated May 31, 2005 (the "Comment Letter") regarding the
Company's Form 10-K for the fiscal year ended December 31, 2004. The comments
and responses are set forth below and are keyed to the sequential numbering of
the comments and the headings used in the Comment Letter.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, page 20
RESTRUCTURING CHARGES, PAGE 22
1. YOUR DISCLOSURES INDICATE THAT YOU RECORDED THE 2003 EDIFY
RESTRUCTURING IN ORDER TO ALIGN COSTS WITH EXPECTED REVENUES.
SUPPLEMENTALLY EXPLAIN TO US WHAT YOU MEAN BY THIS DISCLOSURE. WE
FURTHER NOTE THAT YOU ALSO RECORDED A GOODWILL IMPAIRMENT CHARGE AND
ACCELERATED AMORTIZATION IN 2003 RELATED TO THE EDIFY SEGMENT.
SUPPLEMENTALLY EXPLAIN TO US WHY YOU RECORDED ACCELERATED AMORTIZATION
OF THE INTANGIBLES AND TELL US WHETHER THESE INTANGIBLES WERE TESTED
FOR IMPAIRMENT PRIOR TO YOU RECORDING THE ACCELERATED AMORTIZATION.
RESPONSE:
Revenues from the Edify business decreased significantly from $50.6 million in
2001, to $47.4 million in 2002 to $30.0 million in 2003, however operating costs
were not decreasing at the same rate. A significant portion of Edify's operating
costs were relatively fixed and consequently difficult to reduce in the short
term. In light of Edify's performance and in order to return the Edify business
to breakeven profitability, management undertook a restructuring plan to reduce
costs. That plan reduced the workforce and consolidated office facilities and
replaced the entire senior management team of the Edify business. We recorded
restructuring charges of $4.3 million for the year ended December 31, 2003 as a
result of these activities. These restructuring charges were accounted for and
related disclosures were made in accordance with SFAS 146.
As to the accelerated amortization of intangibles, as of July 1, 2002, we began
accounting for the Edify business as held for sale under the provisions of SFAS
144 and ceased depreciation of fixed assets and amortization of other intangible
assets associated with the Edify business in accordance with SFAS 144. In
April 2003, we determined that we would not be able to sell the Edify business
on terms agreeable to us before June 30, 2003 (one year after the business was
initially placed into the held for sale category). When we reclassified Edify to
continuing operations and ceased discontinued operations treatment, we recorded
an adjustment for any amortization expense that would have been recognized
through March 31, 2003 had the Edify business been continuously classified as
held and used (SFAS 144 para 38) which we characterized in our disclosure as
accelerated amortization expense.
During the third quarter of 2002, when all of the required "held for sale"
criteria were met pursuant to SFAS 144, we compared the carrying value of the
business to the estimated fair value in order to record the assets held for sale
at the lower of the carrying value or the estimated fair value less costs to
sell. We determined the estimated fair value exceeded the carrying value
indicating no impairment was necessary at July 1, 2002 based on indications of
interest we had received from third parties to purchase the Edify business. At
each subsequent balance sheet date, we had indications of interest to purchase
the Edify business for more than the carrying value, which we viewed as positive
evidence that no triggering event had occurred. In April 2003, at the completion
of the buyers evaluation and due diligence, the remaining bids were reduced to
terms that were not agreeable to us. Therefore, in accordance with SFAS 144, we
ceased categorizing the assets as held for sale and discontinued operations
treatment and presented the Edify business as part of continuing operations for
all periods presented. In doing so, we reduced the business' carrying value to
its estimated fair value at the date of the subsequent decision not to sell
(SFAS 144 para 38). This resulted in the goodwill impairment charge that was
recorded in the first quarter of 2003.
2. SUPPLEMENTALLY QUANTIFY THE AMOUNT OF SUBLEASE INCOME WHICH WILL OFFSET
FUTURE RESTRUCTURING RELATED CASH EXPENDITURES.
RESPONSE:
At December 31, 2004, facility lease obligations included in the restructuring
reserves were $19.5 million in future cash expenditures that will be offset by
approximately $11.4 million of sublease income. The sublease income includes
contracted subleases of $10.1 million. The lease obligation and contracted
subleases are included in the tables under Commitments in Liquidity and Capital
Resources (p 39) and footnote 11 Commitments and Contingencies (p 62). The
restructuring reserve also includes an estimate of $1.3 million for anticipated
sublease income on two facilities in Europe.
RESULTS OF OPERATIONS, PAGE 27
3. IN THE DISCUSSION OF YOUR RESULTS OF OPERATIONS, YOU REFER TO VARIOUS
FACTORS THAT HAVE IMPACTED RESULTS WITHOUT QUANTIFYING THE IMPACT OF
EACH FACTOR. FOR EXAMPLE, YOU REFER TO SEVERAL FACTORS THAT CONTRIBUTED
TO THE INCREASE IN SELLING AND MARKETING EXPENSES IN FISCAL 2004, BUT
GIVE NO INDICATION AS TO THE RELATIVE IMPACT OF EACH FACTOR. EXPLAIN TO
US HOW YOU CONSIDERED SECTION III.D OF SEC RELEASE NO. 33-6835.
RESPONSE:
Section III.D of SEC Release No. 33-6835 asks registrants to discuss and
quantify the contribution of two or more factors in material changes from
year-to-year financial statements to the extent they are necessary to
understanding the business as a whole.
As such, when preparing the MD&A, management considers each item individually
and in the aggregate to determine if they are necessary to understanding the
business as a whole.
For the comparison of the 12 month periods ended December 31, 2004 and 2003,
revenues decreased $6.6 million from $247.6 in 2003 to $241.0 million in 2004
and total operating expenses decreased $47.5 million from $277.5 in 2003 to
$230.0 million in 2004. We believe the primary factor was the termination of the
Zurich contract and that an understanding of that termination was necessary to
understand our business as a whole. As such, we quantified the effect of the
Zurich business on revenues and expenses.
We also disclosed the impact of certain loss accruals on the direct costs
associated with professional services, quantified the reduction of data center
costs related to the closure of our UK data center, quantified the impact of the
merger related and restructuring charges in detail and described the significant
change in the discontinued operations line. We described, but do not quantify
other changes in operating expenses, because we determined that they were not
material to understanding the business as a whole.
In the future, changes in our results from operations will not include the
effects of the termination of the Zurich contract and therefore other factors
may be material to the understanding of our business as a whole. As such, we
will expand our quantification of material factors in our results of operations
discussion in future filings.
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, PAGE 41
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 45
4. WE NOTE THAT YOU EXCLUDE DEPRECIATION, AMORTIZATION OF PURCHASED
TECHNOLOGY AND SOFTWARE DEVELOPMENT COSTS FROM COST OF REVENUES. REVISE
YOUR PRESENTATION AS THESE COSTS SHOULD NOT BE EXCLUDED FROM COST OF
REVENUES. REVISIONS SHOULD ALSO BE MADE TO YOUR MANAGEMENT'S DISCUSSION
AND ANALYSIS AND YOUR QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
REFER TO ITEM 5-03(b)(2) OF REGULATION S-X AND QUESTION 17 OF THE FASB
STAFF IMPLEMENTATION GUIDE TO SFAS 86.
RESPONSE:
We respectfully advise the Staff that our consolidated statement of operations
does not include a subtotal summarizing cost of revenues nor does it contain a
line item for gross margin. In response to the Staff's comment and consistent
with guidelines in SAB Topic 11B, the Company will no longer report gross margin
in the MD&A and S-K 302 data and will add parenthetical disclosure discussed in
SAB Topic 11B in future filings.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE 48
FINANCIAL INSTRUMENTS, PAGE 49
5. WE NOTE THAT YOU RECLASSIFIED CERTAIN AUCTION RATE SECURITIES FROM CASH
AND CASH EQUIVALENTS TO SHORT TERM INVESTMENTS. REVISE YOUR DISCLOSURES
TO QUANTIFY THE EFFECT THE RECLASSIFICATION HAD ON YOUR BALANCE SHEET
AND STATEMENT OF CASH FLOW. YOU INDICATE THAT THE RECLASSIFICATION WAS
MADE BASED ON A RE-EVALUATION OF THE MATURITY DATES ASSOCIATED WITH THE
UNDERLYING BONDS YET IT APPEARS THE RECLASS WAS MADE IN ORDER TO COMPLY
WITH SFAS 95. YOUR DISCLOSURES SHOULD BE REVISED ACCORDINGLY.
ADDITIONALLY, TELL US HOW YOU CONSIDERED DISCLOSING THE
RECLASSIFICATION IN THE "RECLASSIFICATIONS" POLICY ON PAGE 55.
RESPONSE:
The table below reflects the impact of the reclassification on S1's consolidated
financial statements (in thousands).
Consolidated Balance Sheet - December 31, 2003
<Table>
<Caption>
Previously
Reported Reclass Revised
---------- ---------- ----------
Cash and cash equivalents $ 150,064 $ (73,351) $ 76,713
Short-term investments 14,126 73,351 87,477
---------- ---------- ----------
Total $ 164,190 $ -- $ 164,190
</Table>
Consolidated Statement of Cash Flow - Year Ended December 31, 2003
<Table>
<Caption>
Previously
Reported Reclass Revised
---------- ---------- ----------
Maturities of short-term
investments securities $ 31,483 $ 8,650 $ 40,133
Purchases of short-term
investments securities (28,135) (45,821) (73,956)
---------- ---------- ----------
Net change $ 3,348 $ (37,171) $ (33,823)
</Table>
Consolidated Statement of Cash Flow - Year Ended December 31, 2002
<Table>
<Caption>
Previously
Reported Reclass Revised
---------- ---------- ----------
Maturities of short-term
investments securities $ 74,789 $ 2,095 $ 76,884
Purchases of short-term
investments securities (60,814) (25,009) (85,823)
---------- ---------- ----------
Net change $ 13,975 $ (22,914) $ (8,939)
</Table>
In considering disclosing the reclassification in the "Reclassifications" policy
on page 55, we noted the change had no impact on our current assets, cash flows
from operating activities and financing activities, liquidity or capital
resources or any ratios required to be maintained for leases, letters of credit
and other third party agreements that stipulate required minimum amounts of cash
and short term investments. Therefore, while from a quantitative perspective the
amount reclassified is large, qualitatively speaking it is of little
consequence. As part of our SAB 99 analysis, we concluded that the adjustment
was not material to the financial statements and decided that a reclassification
was appropriate treatment. Based on the foregoing, management believes the
presentation of this adjustment as a reclassification is valid and disclosure is
appropriate. We respectfully advise the Staff that for the remaining Form 10-Q's
in 2005, we will disclose a quantitative analysis of the impact of the
reclassification to comply with SFAS 95 on prior year's quarterly information.
6. WE FURTHER NOTE THAT YOUR AUCTION RATE SECURITIES ARE CLASSIFIED AS
AVAILABLE FOR SALE SECURITIES. JUSTIFY THE CLASSIFICATION OF THESE
SECURITIES AS CURRENT BY ADDRESSING HOW YOU DETERMINED THAT YOU HAVE A
REASONABLE EXPECTATION OF COMPLETING A SUCCESSFUL AUCTION WITHIN THE
SUBSEQUENT TWELVE-MONTH PERIOD. REFER TO PARAGRAPH 17 OF SFAS 115 AND
CHAPTER 3A OF ARB AS WELL AS SFAS 95.
RESPONSE:
We have discussed investment risks and liquidity of these types of instruments
with the Company's independent investment advisors. The auction rate securities
we hold are of the highest credit rating, fully collateralized by debt
securities and are highly liquid. The Company is not aware of any auction
failure for auction rate securities with the collateral and credit ratings in
which we invest and believes the risk is so remote as to make the classification
appropriate. Management has chosen to invest in them due to the high liquidity
and low risk related to these securities, and we continue to view these
investments as highly liquid with a favorable market return relative to risk. In
accordance with ARB No. 43, par.4, we have designated these investments as short
term investments because they are reasonably expected to be realized in cash or
sold or consumed during our normal annual operating cycle in 2005. Our
experience since the balance sheet date through May 31, 2005 supports the
liquidity of these asset backed auction rate securities as we have liquidated
$24.4 million of the $62.7 million held at December 31, 2004 through successful
auctions. Additionally, through successful auctions we have opted to hold $35.5
million since December 31, 2004.
7. SUPPLEMENTALLY TELL US HOW YOU CONSIDERED THIS RECLASSIFICATION WHEN
ASSESSING YOUR ITEM 307 DISCLOSURE CONTROLS AND PROCEDURES AND ITEM
308(c) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.
RESPONSE:
In assessing Item 307 disclosure controls and procedures and Item 308(c) changes
in internal controls over financial reporting, we determined the
reclassification was a significant deficiency based on the prudent official test
under AS No. 2, but not a material weakness and therefore not subject to
disclosure. We believe that the conclusion reached in our SAB 99 analysis
(discussed below and in Response to Comment 5) and our evaluation of a control
deficiency in internal control over financial reporting should be consistent. In
this situation, we determined that the presentation of auction rate securities
was not material to the reader under SAB 99 nor material to the prudent official
under AS No. 2
As discussed in our response to Comment 5, we performed a SAB 99 analysis to
assess whether the reclassification of the prior period amounts was so material
as to warrant a restatement. Management and the Audit Committee viewed these
reclassifications to be of little consequence as we have historically spoken to
investors about liquidity and asset resources in terms of cash and short term
investments in the aggregate. The reclassification merely transferred balances
between the two. We do not have any financial covenants that are affected by
this reclassification.
REVENUE RECOGNITION, DEFERRED REVENUES AND COST OF REVENUES, PAGE 51
8. TELL US HOW YOU HAVE ESTABLISHED VSOE OF FAIR VALUE FOR EACH OF THE
ELEMENTS INCLUDE IN MULTIPLE ELEMENT ARRANGEMENTS.
RESPONSE:
We have established VSOE of fair value for each of the elements in our multiple
element arrangements as follows:
o Software licenses where VSOE of fair value is based upon
list prices, adjusted for transaction size and volume, that
have been consistently used in pricing our software
products.
o In instances where we don't have VSOE of the software
element, we follow the residual method under SOP 98-9.
o Maintenance revenues where VSOE of fair value is based on
substantive renewal rates contained in our contracts.
o Professional services revenues where VSOE of fair value is
based upon the price charged for these services when sold
separately.
o Data center hosting revenues where VSOE of fair value is
based upon the use of similar pricing when the hosting
element is sold on a stand alone basis.
9. WE NOTE THAT YOU PROVIDE PROFESSIONAL SERVICES ON A FIXED FEE BASIS AND
REVENUES ARE RECOGNIZED USING A PERCENTAGE OF COMPLETION METHOD,
MEASURED BY THE PERCENTAGE OF LABOR HOURS INCURRED TO DATE TO ESTIMATED
TOTAL LABOR HOURS FOR THE CONTRACT. TELL US SPECIFICALLY THE TYPES OF
SERVICES BEING PROVIDED. NOTE THAT THE RECOGNITION OF REVENUE PURSUANT
TO SOP 81-1 IS NOT PERMITTED FOR SERVICE ARRANGEMENTS.
RESPONSE:
The services accounted for under percentage of completion ("POC") are primarily
implementation services that are essential to licensed software functionality in
multiple element arrangements. Certain of our customers have requested
additional services subsequent to the delivery and implementation of the
software license. These add-on service arrangements are generally fixed price in
nature and we account for these contracts pursuant to SAB 104 on a proportional
performance method based upon labor hours incurred as a
percentage of total estimated labor hours. We will prospectively clarify the
description of our accounting policy in future filings to describe the
accounting for these services in our disclosures to read:
"Revenues from professional services where services are deemed to be
essential to the functionality of the software are recognized using the
percentage of completion method. For other revenues from professional
services that are provided on a fixed fee basis, revenues are
recognized pursuant to SAB 104 on a proportional performance method
based upon labor hours incurred as a percentage of total estimated
labor hours to complete the project."
Other service contracts, for example data center hosting services, are typically
provided on a price per unit volume basis and revenue for these arrangements is
recognized as services are rendered in accordance with SAB 104.
10. YOU DISCLOSE THAT DATA CENTER ARRANGEMENTS ARE REVIEWED ON A CONTRACT
BY CONTRACT BASIS TO DETERMINE WHETHER A SOFTWARE ELEMENT COVERED BY
SOP 97-2 IS INCLUDED IN THE ARRANGEMENT. TELL US MORE ABOUT THE
ARRANGEMENTS THAT DO INCLUDE SOFTWARE ELEMENTS AND THOSE THAT DO NOT.
TELL US HOW YOU HAVE CONSIDERED EITF 00-3 IN ASSESSING WHETHER THESE
ARRANGEMENTS INCLUDE SOFTWARE ELEMENTS.
RESPONSE:
We consider the applicability of EITF 00-3, "Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software Stored On
Another Entity's Hardware," to our data center hosting services arrangement on a
contract-by-contract basis. If we determine that the customer has the
contractual right to take possession of our software at anytime during the
hosting period without significant penalty, and can feasibly run the software on
its own hardware or enter into another arrangement with a third party to host
the software, a software element covered by SOP 97-2 exists. When a software
element exists in a data center hosting services arrangement, we recognize the
license, professional services and hosting services revenues pursuant to SOP
97-2. If we determine that a software element is not present in a hosting
services arrangement, we recognize revenues for the hosting services
arrangement, pursuant to SAB 104, as services are delivered over the term of the
hosting agreement.
All of our products are designed and primarily marketed for customers to license
and operate themselves (or through a third party). Consequently, it is feasible
for the customer to either run the software on their own hardware or contract
with another party to host the software without significant penalty.
The majority of our customers host the software themselves or with a third
party. In other cases, customers request that S1 host such software. We only
provide hosting services for our software. As these hosting services are
available from other sources, S1 must price these services at market rates. All
our hosting contracts (that were entered into contemporaneously with licenses)
allow the customer the right to take possession of the software at anytime
without significant penalty.
NOTE 6. ACCOUNTS RECEIVABLE, PAGE 58
11. WE NOTE YOU HAVE UNBILLED RECEIVABLES. TELL US MORE ABOUT THE
ARRANGEMENTS THAT RESULT IN THESE UNBILLED RECEIVABLES AND TELL US HOW
YOU HAVE CONSIDERED THE COLLECTIBILITY CRITERIA WHEN RECOGNIZING
REVENUE. TELL US WHEN THEY TYPICALLY BECOME BILLABLE AND ADDRESS THE
EXTENT TO WHICH YOU HAVE SUCCESSFULLY BILLED AND COLLECTED THESE
AMOUNTS SUBSEQUENT TO THE BALANCE SHEET DATE. REVISE TO INCLUDE
DISCLOSURE REGARDING UNBILLED RECEIVABLES IN YOUR ACCOUNTING POLICIES.
SEE ITEM 5-02(3)(b) OF REGULATION S-X.
RESPONSE:
Unbilled receivables balances arise primarily from our performance of services
in advance of billing terms on contracted software implementation services where
these services are considered essential to the
functionality of the software and percentage of completion accounting is
applied. Generally, billing occurs at the achievement of milestones that
correlate with progress towards completion of implementation services. However,
between project milestones, costs are incurred and revenue is often earned in
excess of previous contract billings to date.
The majority of our unbilled receivables balances are from customers who are
banks and other regulated financial institutions that have strong credit
histories and/or our collection history with the customer has been positive in
order to determine that collection of the amounts recognized are reasonably
assured. We only record receivables when we (1) have clear evidence on an
arrangement (signed contracts); (2) we have performed the necessary services and
delivered the required products; (3) have a fee that is fixed or determinable
and; (4) believe that collection of our fee is probable in order to meet all
required revenue recognition criteria. Finally, in considering collectibility of
unbilled receivables, we have demonstrated a history of billing and collecting
unbilled balances in accordance with the terms of our customer agreements.
Of the $20.5 million of unbilled receivables at December 31, 2004, we have
billed $11.7 million and collected $9.5 million through May 31, 2005, with the
remainder to be billed during 2005.
In our Summary of Significant Accounting Policies on page 50, under the heading
"Accounts receivable and allowance for doubtful accounts and billing
adjustments," we describe accounts receivable to include amounts billed to
customers and unbilled amounts of revenue earned in advance of billings. In the
future, we will expand our disclosure to read:
"Accounts receivable include amounts billed to customers and unbilled
amounts of revenue earned in advance of billings. Unbilled receivables
balances arise primarily from our performance of services in advance of
billing terms on contracted software implementation services where
these services are considered essential to the functionality of the
software and percentage of completion accounting is applied. Generally,
billing occurs at the achievement of milestones that correlate with
progress towards completion of implementation services."
CERTIFICATION - EXHIBITS 31.1 AND 31.2
12. IT APPEARS THAT YOU HAVE OMITTED ITEM 4B. FROM YOUR CERTIFICATIONS
WHICH YOU HAVE FILED PURSUANT TO RULES 13a-14(a) AND 15d-14(a). PLEASE
REVISE THE CERTIFICATIONS TO CONFORM TO THE FORMAT PROVIDED IN ITEM
601(b)(31) OF REGULATION S-K.
RESPONSE:
We note the omission of Item 4b from the Certifications which were filed
pursuant to Rules 13a-14(a) and 15d-14(a) was an oversight for this filing.
Revised certifications will be filed.
******
In responding to the comments, the Company acknowledges:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action with
respect to the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under federal
securities laws of the United States.
If you have any questions or would like further information concerning the
Company's responses to the Comment Letter, please do not hesitate to contact me
at 404-923-3500. Thank you for your consideration.
Sincerely,
/s/ Matthew Hale
Matthew Hale
Chief Financial Officer
cc: Jaime Ellertson