SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 26, 1999
ACE*COMM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 0-21059 52-1283030
(State or other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation Identification No.)
704 Quince Orchard Road, Gaithersburg, Maryland 20878
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 721-3000
ITEM 4. Changes in Registrant's Certifying Accountant.
Following discussions about the relationship between the Registrant and
PricewaterhouseCoopers LLP ("PwC"), the parties agreed to a cessation of the
relationship and PwC resigned effective January 19, 1999, as the Registrant's
independent accountants. The Registrant is in active discussions with five
accounting firms to replace PwC and believes that it will have selected and
engaged a new auditing firm by February 15, 1999.
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PwC's reports on the financial statements of the Registrant for either
of the past two years have not contained an adverse opinion or a disclaimer
of opinion, and were not qualified or modified as to uncertainty, audit
scope, or accounting principles.
During the Registrant's two most recent fiscal years, and any
subsequent interim period preceding the resignation of PwC, there have been
no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of PwC, would have
caused them to make reference to the subject matter of the disagreements in
connection with their report.
During the Registrant's two most recent fiscal years, and through
January 19, 1999, there were no reportable events within the meaning of
Regulation S-K Item 304(a)(1)(v), except to the extent referred to in the
following:
(i) In connection with its most recent year-end audit of the
Registrant's financial statement, in September 1998, PwC presented a draft
report to management and the Audit Committee of the Board of Directors of the
Registrant describing certain material weaknesses, referred to below, in the
Registrant's internal accounting control structure. The Registrant has
carefully reviewed its internal controls in light of PwC's report and in view
of its significant growth in recent years, and has the following responses to
PwC's recommendations. In addition, the Board of Directors of the Registrant
has engaged a "big five" accounting firm (the "Accounting Firm") to assist
the Registrant by reviewing the Registrant's accounting policies and
practices and their application in the financial statements for the quarter
ended December 31, 1998.
1. PwC recommended that the Registrant continue to assess its
accounting and finance personnel needs and expand the staff as needed
to meet the Registrant's needs, including in the areas of contract
accounting and revenue recognition, financial analysis, collection of
aged accounts receivable, cash management, assessment of adequate
reserve levels, management information and accounting and SEC
reporting.
In September 1998, the Registrant hired a consultant, who was
subsequently named Executive Vice President - Finance and
Administration as of January 1, 1999 ("the EVP Finance"), whose
immediate assignments included, among other things, assessing the
depth of the Registrant's finance and accounting staff and making
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recommendations to the Chief Executive Officer for improvement.
Supported by a staff of six professional employees and consultants
and additional clerical staff, the EVP Finance currently is
responsible for all accounting and finance functions. The EVP
Finance coordinates financial information and decisions through
weekly meetings that were established beginning on December 1, 1998,
involving members of senior management and members of the operations
and finance and accounting staffs. The Company recently initiated a
comprehensive internal reorganization of the Registrant's operations,
reflecting its growth and development. As part of the reorganization
of its finance and accounting department, the Registrant is in the
process of hiring, or is interviewing, candidates for three senior
level positions, all of which management expects will be filled by
March 31, 1999.
2. PwC recommended that the Registrant formally document its
revenue recognition policies and procedures and ensure adherence to
such policies.
The Registrant's revenue recognition policies are set forth in
the footnotes to its financial statements, included in its filings
made from time to with the Securities and Exchange Commission. The
Registrant is in the process of formalizing written revised and
expanded revenue recognition policies and practices, which address
software, service and solution transactions. The Accounting Firm
will assist in a review of these policies. To further ensure uniform
application of its policies, the Registrant established in December
1998 a committee, which is chaired by the EVP Finance, with
participation by members of senior management and of the sales,
operations and finance and accounting staffs, to meet monthly and
review each contract and prospective contract with respect to which
revenue is expected to be recorded each month and for the quarter and
the related revenue amounts and costs (the "Review Committee"). The
reorganization of the finance and accounting functions referred to
above, is designed to further enhance consistency of policies and
practices with respect to revenue recognition.
3. PwC recommended that the Registrant further formalize and
document its software capitalization policy.
Previously, the Registrant had established practices regarding
software capitalization that had been consistently applied.
Recently, with the assistance of its EVP Finance, the Registrant has
developed and internally disseminated written, formal software
capitalization procedures. As of December 1998, the Registrant's
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Review Committee also performs monthly reviews of the status of
projects with respect to software capitalization for the current
quarter. The EVP Finance, with the assistance of the Accounting
Firm, is in the process of further assessing current policy and
compliance.
4. PwC recommended that the Registrant enhance the controls
surrounding job costing.
The Registrant currently uses a MAS 90 Accounting System
including a Job Cost Module supported by Lotus Notes, that is used to
collect and organize costs and other project related information.
Under procedures developed under the Registrant's ISO 9000 quality
management program, the Registrant has specific policies and
practices for recording data relating to job costing. The Registrant
believes that its systems, including the procedures for cost data
input, produce information used in support of financial reporting
that is materially correct. The EVP Finance, with the assistance of
the Accounting Firm, is in the process of further assessing current
policy and compliance in this area.
(ii) In connection with the Registrant's first quarter ended September
30, 1998, PwC has advised the Registrant that there are certain areas
described below where information came to their attention that, if further
investigated, may materially impact the fairness or reliability of the
financial statements for the first quarter and that, as of January 19, 1999.
PwC had therefore not undertaken its investigation of such information.
Although PWC did not discuss the subject matter of each of the following
items with each of the members of the Board of Directors or Audit Committee
of the Registrant, PWC discussed the subject matter of this item (ii) with
the then-Chairman of the Audit Committee and with the Chief Executive Officer
and Chairman of the Board of Directors. The Registrant has authorized PwC
fully to respond to inquiries by a successor accountant regarding the subject
matter of each of the items referred to below.
As described below, after thoroughly reviewing the information referred
to by PwC, the Registrant has concluded that the information does not
materially impact the fairness or reliability of its first quarter financial
statements.
(a) With respect to three contracts representing approximately
$243,000, $226,000 and $110,000, respectively, in revenue for the first
quarter, information came to PwC's attention relating to the adequacy of
documentation in support of the Registrant's revenue recognition positions.
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Based on a review of the information, the Registrant's records, discussions
with its customers, operations personnel, and the Registrant's experience
with similar contracts and other factors, the Registrant believes that the
revenue was recorded correctly, particularly in view of the fact that, with
respect to each of the contracts, the customers are current on payments due
with respect to the revenue recorded.
(b) With respect to its review of the Registrant's accounts
receivable reserve for the first quarter, PwC advised the Registrant to
obtain additional information to support the reconciliation of certain items
in the reserve with the treatment of those items at June 30, 1998. The
Registrant has obtained such information, has reviewed its records,
management's knowledge of the condition of the accounts, write-offs taken and
credits recorded and has reconciled all amounts included in the reserve as
between June 30, 1998, and September 30, 1998.
(c) PwC recommended that the Registrant identify additional
documentation to support the value of the software capitalization asset at
September 30, 1998. The Registrant has reviewed the methodology for valuing
the capitalized software at September 30 and it has concluded that its
policies have been consistent.
(d) After PwC had completed its review of the first quarter, the
Registrant received a letter from its then-Controller raising certain issues
relating to the first quarter. Based on a review of its records and
inquiries of internal personnel, the Registrant believes that the letter
contains no information that materially impacts the fairness or reliability
of the financial statements for the first quarter.
The Registrant has furnished PwC a copy of this Current Report on Form
8-K and requested them to furnish the Registrant with a letter addressed to
the Securities and Exchange Commission stating whether they agree with the
statements made herein and, if not, stating the respects in which they do not
agree. The Registrant will file PwC's response by amendment to this Current
Report on Form 8-K within two business days of receipt.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed in its behalf
by the undersigned hereunto duly authorized.
DATED this 26th day of January, 1999.
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ACE*COMM CORPORATION
By: /s/ GEORGE T. JIMENEZ
George T. Jimenez
Chief Executive Officer
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