Hogan
& Hartson
l.l.p.
COLUMBIA SQUARE
555 THIRTEENTH STREET, NW
WASHINGTON, DC 20004-1109
TEL. (202) 637-5600
FAX (202) 637-5910
WWW.HHLAW.COM
February 13, 2006
BY HAND DELIVERY AND EDGAR
Stephen Krikorian, Accounting Branch Chief
U.S. Securities and Exchange Commission
450 5th Street, NW
Mail Stop 4-6
Washington, DC 20549
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ACE*COMM Corporation
Form 10-K for the fiscal year ended 6/30/05
Filed August 31, 2005
Form 10-Q for the quarter ended 9/30/05
Filed November 14, 2005
File No. 000-21059 |
Dear Mr. Krikorian:
On behalf of ACE*COMM Corporation (“ACE*COMM”), set forth below are ACE*COMM’s responses to
the Staff’s comment letter dated February 10, 2006 to ACE*COMM’s response letter dated February 6,
2006 relating to your accounting comments on ACE*COMM’s financial statements in the above filings.
ACE*COMM’s responses to the Staff’s comments are set forth below beneath the text of the
corresponding comment from the comment letter.
Form 10-K for the Fiscal Year Ended June 30, 2005
Financial Statements
Notes to Consolidated Financial Statements
WASHINGTON, DC
BALTIMORE BEIJING BERLIN BOULDER BRUSSELS BUDAPEST CARACAS
COLORADO
SPRINGS DENVER GENEVA HONG
KONG LONDON
LOS ANGELES MIAMI MOSCOW NEW YORK NORTHERN VIRGINIA PARIS SHANGHAI TOKYO WARSAW
Hogan & Hartson L.L.P.
Stephen Krikorian, Accounting Branch Chief
U.S. Securities and Exchange Commission
February 13, 2006
Page 2
Note 7 – Merger and Acquisitions, page 11
4. We note your response to prior comment number 4. Clarify your statement that the
amendment related “Primarily to the estimated value of certain specific contracts existing
on the date of acquisition and changes in that estimated value post acquisition”.
Explain why the estimated value has changed (i.e., original assumptions were incorrect or
events occurred subsequent to acquisition that changed those assumptions). In this regard,
demonstrate to us how you can clearly and directly link the adjustment on an objective basis
to the estimated fair value of the contracts post acquisition. Indicate why the “post
acquisition” decline in value is not the result of an impairment subsequent to acquisition
that should be recorded in accordance with SFAS 144. In addition, tell us and clearly
disclose how you will account for the earn-out. See paragraph 51(f) of SFAS 141.
Response: ACE*COMM’s negotiation of the purchase price paid for 2helix was derived from a formula
that calculated the purchase price by multiplying the sum of the prior year’s revenue plus the
forecasted revenue for the first year after acquisition by a multiplier. As part of ACE*COMM’s due
diligence on 2helix, it estimated forecasted revenues from significant customers. However, within
three weeks of consummating the acquisition, ACE*COMM learned that it had relied on erroneous
information related to the revenues and subsequent cash flows expected to be derived from two major
2helix customers, directly impacting the fair value assigned to 2helix.
Discussions were immediately commenced with the selling shareholders to amend the deal to give
effect to this change in value, culminating in the formal amendment signed in October 2005. Because
the reduction in revenue from the two customers is directly linked to the purchase price reduction
in the formula, ACE*COMM believes it is appropriate to adjust the purchase price as the conditions
that gave rise to the amendment existed at the acquisition date. To account for the amendment
through the income statement post acquisition implies that the events involving these contracts
occurred post acquisition, which is not believed to be the case.
The purchase price adjustment was reflected in the same manner as the original purchase price
allocation. The revenue forecasted from the two customers was adjusted and a revised contract
value was determined. The excess of reduction in purchase price over the reduction in contract
value of $1.2 million was allocated to goodwill in the same manner as the original allocation.
As part of the change in purchase price, a higher earn-out and escrow were established. The
earn-out was extended to two years and the revenue target was increased to $11.0 million with
partial payment beginning at 75% achievement $8.25 million. At the time of the amendment (and
today), seven months into the two-year period, ACE*COMM assessed
Hogan & Hartson L.L.P.
Stephen Krikorian, Accounting Branch Chief
U.S. Securities and Exchange Commission
February 13, 2006
Page 3
that payment under the earn-out was not determinable beyond a reasonable doubt as set forth in
paragraph 26 of Statement 141.
Because the reduction in purchase price is directly linked to the original purchase price and the
reduction in purchase price exceeded the reduction in contract value, ACE*COMM properly recorded
the amendment as a reduction in purchase price and not an impairment.
Should the earn-out become determinable beyond a reasonable doubt, the additional consideration
then payable will need to be recorded. ACE*COMM also has considered the implication of EITF 95-8 on
the acquisition of 2helix and plans to account for this additional consideration, if any, as an
adjustment to purchase price based upon the relevant facts and circumstances. ACE*COMM notes that
one of the factors considered is the earn-out is not contingent upon the continued employment of
the selling shareholders. The Company will expand its disclosure on the accounting for the
earn-out in future filings.
* * * * *
Your attention to this response is greatly appreciated. Should you have any questions
concerning the above response please do not hesitate to call me at (202) 637-5736 or Frank A.
Bacelli at (202) 637-8769.
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Respectfully submitted,
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/s/ Steven M. Kaufman
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Steven M. Kaufman |
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Enclosures
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Steven R. Delmar
Frank A. Bacelli |