SEC Company Response from OPEN TEXT CORP (OTEX) (CIK 0001002638) (OTEX) — Dec 23, 2005
OPEN TEXT CORP (OTEX) (CIK 0001002638)
Date: Dec. 23, 2005 · CIK: 0001002638 · Accession: 0001193125-05-248619
AI Filing Summary & Sentiment
File numbers found in text: 000-27544
Referenced dates: November 7, 2005
Letter
United States Securities and Exchange Commission Division of Corporation Finance Attention: Kathleen Collins Accounting Branch Chief RE: Open Text Corporation Form 10-K for Fiscal Year Ended June 30, 2005 File No. 000-27544
Dear Ms. Collins:
On behalf of our client Open Text Corporation (the “Company”), this letter reflects the Company’s responses to the comments of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) as set forth in your letter dated November 7, 2005 to Mr. Alan Hoverd, the Company’s Chief Financial Officer.
The responses set forth below have been organized in the same manner in which the Staff’s comments were organized.
Prior Comment no. 2
1. Please note that we may have further comments when you file the IXOS financial statements under Form 8-K/A.
The Company acknowledges that the Staff may have further comments when the Company files the IXOS financial statements under Form 8-K/A.
United States Securities and Exchange Commission
December 23, 2005
Page 2
Form 10-K for Fiscal Year Ended June 30, 2005
Item 3. Legal Proceedings, page 20
2. Tell us more about the employee action concerning certain share options granted in 1996. Summarize the underlying terms of the settlement agreement in January 2005 and explain why the settlement resulted in no financial impact given that the individual received shares. Explain how those shares had been “previously reserved for him under his stock options agreement”. Your response should include a summary of the terms of the initial option award, how you accounted for those options, the number of shares issued to this individual as a result of the settlement agreement, any proceeds from the exercise of the options and any other additional information that would explain your accounting for this arrangement and settlement. Refer to the authoritative literature that supports your accounting.
Mr. Stirlen became Chief Financial Officer of Open Text in July 1996. On September 17, 1996, Mr. Stirlen was granted options to purchase 450,000 Common Shares on a “pre-split” basis under the 1995 Flexible Stock Incentive Plan. The stock options had an exercise price of $5.10 per share on a “pre-split” basis, vested equally over four years, and had a contractual life of 10 years. The Company accounted for these options using the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25 (“APB 25”). As the exercise price equaled the fair value of the underlying Common Shares on the date of grant, no compensation expense was recognized in the financial statements with respect to these options.
Under the terms of the 1995 Flexible Stock Incentive Plan, Mr. Stirlen had 90 days post termination of his employment to exercise the stock options before they were cancelled.
Open Text severed its relationship with Mr. Stirlen on October 16, 1998. Prior to October 16, 1998, Mr. Stirlen exercised options to purchase 40,700 Common Shares for proceeds of $207,570 and the Company delivered to Mr. Stirlen 40,700 Common Shares. As of October 16, 1998, 409,300 options remained outstanding.
In November 1998, Mr. Stirlen exercised options to purchase and was granted 40,000 Common Shares for proceeds of $204,000 leaving 369,300 options unexercised and outstanding.
On January 8, 1999, Mr. Stirlen exercised all of his remaining options by tendering a bank draft to the Company in the amount of $1,883,430 which was equal to the aggregate exercise price of the remaining options. Mr. Stirlen exercised these options within the 90 day period subsequent to his termination
United States Securities and Exchange Commission
December 23, 2005
Page 3
based on his belief that his employment contract, established prior to the granting of these options, provided for the acceleration and immediate vesting of all outstanding options upon the termination of his employment contract. In connection with such exercise, Open Text issued 200,550 and 56,250 Common Shares to Mr. Stirlen in January 1999 and June 1999, respectively. However, the Company did not deliver to Mr. Stirlen Common Shares relating to the remaining 112,500 stock options because the Company believed that under the employment contract with Mr. Stirlen these options did not immediately vest upon his termination. The Company did not accept from Mr. Stirlen the funds advanced as the exercise price with respect to such 112,500 stock options and returned such funds to Mr. Stirlen. As a result, in September 1999 an action was commenced by Mr. Stirlen in relation to the options to purchase 112,500 Common Shares to compel Open Text to either deliver the Common Shares related to these options or in the alternative award damages for not honoring the provisions of his employment contract.
The 112,500 options were “segregated” internally and accounted for as outstanding by the Company pending the resolution of this matter.
On November 23, 2004, a settlement was reached with Mr. Stirlen whereby he was granted 158,831 Common Shares (79,461 Common Shares on a pre-split basis). As part of the settlement, Mr. Stirlen relinquished his claims on all remaining Common Shares, and paid the full exercise price to the Company related to the Common Shares provided to him. The settlement on November 23, 2004 resulted in the partial delivery of Common Shares in accordance with the exercise of the options that took place on January 8, 1999.
It is the Company’s view that the life of the option was not extended beyond the 90 day exercise period stated within the 1995 Flexible Stock Incentive Plan. Rather, as a consequence of the dispute, the act of delivering the Common Shares to Mr. Stirlen was extended beyond the 90 day period. The exercise of the options was completed within the 90 day period specified in the original option agreement but the delivery of shares was held in abeyance. The Company believes that, in both a legal and an economic sense, Mr. Stirlen received Common Shares pursuant to the January 1999 exercise of stock options. There was no further “benefit” that was granted to Mr. Stirlen as part of the settlement. It is also the Company’s view that they did not prevent Mr. Stirlen from making the demand (within 90 days of his termination) to exercise the options.
Based on this assessment, the Company believes that no modification/renewal or new grant/issuance of the stock option award was made; therefore, the eventual delivery of the Common Shares to Mr. Stirlen in fiscal 2005, based on the exercise of the options in January 1999, which was finally determined in the settlement to Mr. Stirlen, does not have an accounting implication under APB 25.
United States Securities and Exchange Commission
December 23, 2005
Page 4
Note 4 – Goodwill and Note 12 – Commitments and Contingencies, pages 74 and 85
3. We understand that you recorded $2.5 million of the award payable to the Tilburys as additional purchase consideration. We further note your statement of cash flows reflects $1.2 million of additional purchase consideration for prior period acquisitions and the table on page 74 indicates adjustments to goodwill for prior acquisitions for both periods presented. Tell us more about the various adjustments/payments associated with prior period acquisitions and for each adjustment/payment, explain your respective accounting with reference to the authoritative accounting literature.
As disclosed in Note 4 on page 74, the adjustments to purchase price allocation for prior acquisitions and foreign exchange totaled $6,137,000 during fiscal 2005. Of this amount, $822,000 relates to a net reduction to purchase price allocation for prior acquisitions and $6,959,000 relates to adjustments to the carrying value of the goodwill denominated in a foreign currency, in accordance with SFAS 52 Foreign Currency Translation.
The adjustments to purchase price allocation for prior acquisitions relate to:
•
Amounts paid to former shareholders based on revenue targets that were achieved during the year. This has been accounted for as contingent consideration and included as part of the purchase price adjustment in accordance with paragraph 28 of SFAS 141, Business Combinations (“SFAS 141”).
•
Purchases of additional shares from minority shareholders. These purchases have been accounted for in accordance with paragraph 14 of SFAS 141.
•
Reductions in acquisition related accruals accounted for in accordance with EITF 95-3.
•
Tax related adjustments. In accordance with SFAS 141 par. 40 “the potential tax effects of (a) temporary differences and carry forwards of an acquired entity that exist at acquisition date and (b) income tax uncertainties related to the acquisition, (for example, an uncertainty related to the tax basis of an acquired asset that will ultimately be agreed to by the taxing authority)”, are not treated as pre-acquisition contingencies. Instead, pursuant to footnote 13 of SFAS 141, such adjustments are accounted for in accordance with SFAS 109 Accounting for Income Taxes. SFAS 109 provides that the resolution of such uncertainties that existed at the date of the business combination, generally, is recorded as an adjustment to goodwill.
United States Securities and Exchange Commission
December 23, 2005
Page 5
The details of the total adjustments to purchase price allocation for prior acquisitions and foreign exchange are provided below.
Name of Acquisition
USD (‘000s)
Description of Accounting Treatment
DOMEA
$ 1,611
Contingent consideration
Gauss
(441 )
Purchase of shares, tax adjustments and EITF 95-3 accrual adjustments
IXOS
(2,870 )
Purchase of shares (including step adjustments), tax adjustments and EITF 95-3 accrual adjustments
Bluebird
2,486
Contingent consideration related to Tilbury settlement (see # 4 below)
FirstClass
(1,621 )
Tax adjustments and EITF 95-3 accruals
Other:
Corechange
(395 )
EITF 95-3 accrual adjustments
KPTI
Contingent consideration
Pallas
Contingent consideration
Other acquisitions
Tax adjustments
Foreign exchange
6,959
Total per Note 4
$ 6,137
Included in the $6,137,000 of adjustments to purchase price allocation for prior acquisitions and foreign exchange per note 4 are net cash payments of $1,182,000 which relate to contingent consideration paid during the year with respect to the acquisition of DOMEA, KPTI, Bluebird and Pallas which payments are reported in the statement of cash flows.
4. Regarding the $2.5 million award, explain to us why you believe it is appropriate to record an arbitration settlement award for an acquisition that occurred a number of years ago as additional purchase consideration. Tell us why you do not consider adjustments and/or payments that arise out of litigation over the purchase price between the acquirer and the former owners of the acquired company as a charge to income when settled. Refer to paragraph B177 of SFAS 141.
In October 2000, the Company acquired the outstanding share capital of Bluebird Systems Inc. (“Bluebird”). The consideration for this acquisition was composed of (i) cash of $8.0 million paid on closing, and (ii) additional cash consideration contingent on Bluebird meeting certain defined revenue and earnings targets during the eight subsequent three-month periods.
In July 2002, the Harold Tilbury and Yolanda Tilbury Family Trust (the former owners of Bluebird) brought an action against the Company alleging damages for breach of the stock purchase agreement relating to the Company’s acquisition of Bluebird. Bluebird and Open Text counterclaimed against the Tilburys claiming that not only was no further amount owing for the purchase of their shares, but
United States Securities and Exchange Commission
December 23, 2005
Page 6
that they were entitled to a return of the money already paid to the Tilburys in respect of the business acquisition. Open Text also claimed damages against Harold Tilbury with respect to the lease of the Bluebird premises.
In April 2005, the arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and for termination of employment related costs. The arbitrator subsequently ruled that a further $222,000 was payable by Open Text under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of legal costs had been deferred, at that date, and in August 2005 the arbitrator ruled that the sum of approximately $847,000 was payable by the Company to the Tilburys on account of legal costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys composed of the following:
•
Employment related costs and leasehold related costs;
•
Consideration contingent on Bluebird meeting certain defined revenue and earnings targets;
•
Interest; and
•
Legal costs.
In accounting for the employment and leasehold related costs, the Company considered paragraph B177 of SFAS 141 which indicates that the provisions of SFAS 38 should not be applied to “…contingencies that arise from the acquisition and did not exist prior to acquisition. Examples provided include litigation over the acquisition and the tax effect of the purchase.” In accordance with this guidance, the Company recognized an expense of $240,000 for employment related costs and $85,000 related to a leasehold dispute as these amounts were not pre-acquisition contingencies. Interest of $759,000 associated with the litigation was also expensed during fiscal 2005.
In accounting for the contingent consideration, the Company considered paragraph 28 of SFAS 141 which states that “additional consideration may be contingent on maintaining or achieving specified earnings levels in future periods. When the contingency is resolved and additional consideration is distributable, the acquiring entity shall record the fair value of the consideration issued or issuable as an additional cost of the acquired entity (Opinion 16, paragraph 80).”
With respect to accounting for contingent consideration, the one year allocation period relating to the acquisition is not applicable; rather, the additional purchase consideration is recognized, and allocated (in this case fully to goodwill), at such time as the fair value of the contingent consideration becomes known. In the case of the Bluebird acquisition, the amount of contingent consideration was not known until resolution of the legal dispute. As a result, the settlement amount of
United States Securities and Exchange Commission
December 23, 2005
Page 7
$1,762,000 was recorded as additional purchase price and allocated to goodwill on the date the dispute was resolved.
Total legal costs associated with the dispute were approximately $847,000. In accounting for the legal costs, the Company reviewed a December 11, 2003 AICPA Conference speech by Randolph Green of the SEC Staff, which states “…we have generally concluded that legal claims between an acquirer and the former owners of an acquired business should be reflected in the income statement when settled. Instances in which we have been persuaded that a settlement of litigation over a purchase is more appropriately reflected as an adjustment to the cost of the acquired business demonstrate a clear and direct link to the purchase price. For example, litigation seeking enforcement of an escrow or escrow-like arrangement, say, specifying a minimum amount of working cap
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CORRESP 1 filename1.htm RESPONSE LETTER CHOATE, HALL & STEWART LLP Two International Place Boston, MA 02110 T (617) 248-5000 F(617) 248-4000 Barbara M. Johnson (617) 248-5090 bjohnson@choate.com December 23, 2005 By Electronic Submission United States Securities and Exchange Commission Division of Corporation Finance 100 F Street N.E. Mail Stop 4-06 Washington, D.C. 20549 Attention: Kathleen Collins Accounting Branch Chief RE: Open Text Corporation Form 10-K for Fiscal Year Ended June 30, 2005 File No. 000-27544 Dear Ms. Collins: On behalf of our client Open Text Corporation (the “Company”), this letter reflects the Company’s responses to the comments of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) as set forth in your letter dated November 7, 2005 to Mr. Alan Hoverd, the Company’s Chief Financial Officer. The responses set forth below have been organized in the same manner in which the Staff’s comments were organized. Prior Comment no. 2 1. Please note that we may have further comments when you file the IXOS financial statements under Form 8-K/A. The Company acknowledges that the Staff may have further comments when the Company files the IXOS financial statements under Form 8-K/A. United States Securities and Exchange Commission December 23, 2005 Page 2 Form 10-K for Fiscal Year Ended June 30, 2005 Item 3. Legal Proceedings, page 20 2. Tell us more about the employee action concerning certain share options granted in 1996. Summarize the underlying terms of the settlement agreement in January 2005 and explain why the settlement resulted in no financial impact given that the individual received shares. Explain how those shares had been “previously reserved for him under his stock options agreement”. Your response should include a summary of the terms of the initial option award, how you accounted for those options, the number of shares issued to this individual as a result of the settlement agreement, any proceeds from the exercise of the options and any other additional information that would explain your accounting for this arrangement and settlement. Refer to the authoritative literature that supports your accounting. Mr. Stirlen became Chief Financial Officer of Open Text in July 1996. On September 17, 1996, Mr. Stirlen was granted options to purchase 450,000 Common Shares on a “pre-split” basis under the 1995 Flexible Stock Incentive Plan. The stock options had an exercise price of $5.10 per share on a “pre-split” basis, vested equally over four years, and had a contractual life of 10 years. The Company accounted for these options using the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25 (“APB 25”). As the exercise price equaled the fair value of the underlying Common Shares on the date of grant, no compensation expense was recognized in the financial statements with respect to these options. Under the terms of the 1995 Flexible Stock Incentive Plan, Mr. Stirlen had 90 days post termination of his employment to exercise the stock options before they were cancelled. Open Text severed its relationship with Mr. Stirlen on October 16, 1998. Prior to October 16, 1998, Mr. Stirlen exercised options to purchase 40,700 Common Shares for proceeds of $207,570 and the Company delivered to Mr. Stirlen 40,700 Common Shares. As of October 16, 1998, 409,300 options remained outstanding. In November 1998, Mr. Stirlen exercised options to purchase and was granted 40,000 Common Shares for proceeds of $204,000 leaving 369,300 options unexercised and outstanding. On January 8, 1999, Mr. Stirlen exercised all of his remaining options by tendering a bank draft to the Company in the amount of $1,883,430 which was equal to the aggregate exercise price of the remaining options. Mr. Stirlen exercised these options within the 90 day period subsequent to his termination United States Securities and Exchange Commission December 23, 2005 Page 3 based on his belief that his employment contract, established prior to the granting of these options, provided for the acceleration and immediate vesting of all outstanding options upon the termination of his employment contract. In connection with such exercise, Open Text issued 200,550 and 56,250 Common Shares to Mr. Stirlen in January 1999 and June 1999, respectively. However, the Company did not deliver to Mr. Stirlen Common Shares relating to the remaining 112,500 stock options because the Company believed that under the employment contract with Mr. Stirlen these options did not immediately vest upon his termination. The Company did not accept from Mr. Stirlen the funds advanced as the exercise price with respect to such 112,500 stock options and returned such funds to Mr. Stirlen. As a result, in September 1999 an action was commenced by Mr. Stirlen in relation to the options to purchase 112,500 Common Shares to compel Open Text to either deliver the Common Shares related to these options or in the alternative award damages for not honoring the provisions of his employment contract. The 112,500 options were “segregated” internally and accounted for as outstanding by the Company pending the resolution of this matter. On November 23, 2004, a settlement was reached with Mr. Stirlen whereby he was granted 158,831 Common Shares (79,461 Common Shares on a pre-split basis). As part of the settlement, Mr. Stirlen relinquished his claims on all remaining Common Shares, and paid the full exercise price to the Company related to the Common Shares provided to him. The settlement on November 23, 2004 resulted in the partial delivery of Common Shares in accordance with the exercise of the options that took place on January 8, 1999. It is the Company’s view that the life of the option was not extended beyond the 90 day exercise period stated within the 1995 Flexible Stock Incentive Plan. Rather, as a consequence of the dispute, the act of delivering the Common Shares to Mr. Stirlen was extended beyond the 90 day period. The exercise of the options was completed within the 90 day period specified in the original option agreement but the delivery of shares was held in abeyance. The Company believes that, in both a legal and an economic sense, Mr. Stirlen received Common Shares pursuant to the January 1999 exercise of stock options. There was no further “benefit” that was granted to Mr. Stirlen as part of the settlement. It is also the Company’s view that they did not prevent Mr. Stirlen from making the demand (within 90 days of his termination) to exercise the options. Based on this assessment, the Company believes that no modification/renewal or new grant/issuance of the stock option award was made; therefore, the eventual delivery of the Common Shares to Mr. Stirlen in fiscal 2005, based on the exercise of the options in January 1999, which was finally determined in the settlement to Mr. Stirlen, does not have an accounting implication under APB 25. United States Securities and Exchange Commission December 23, 2005 Page 4 Note 4 – Goodwill and Note 12 – Commitments and Contingencies, pages 74 and 85 3. We understand that you recorded $2.5 million of the award payable to the Tilburys as additional purchase consideration. We further note your statement of cash flows reflects $1.2 million of additional purchase consideration for prior period acquisitions and the table on page 74 indicates adjustments to goodwill for prior acquisitions for both periods presented. Tell us more about the various adjustments/payments associated with prior period acquisitions and for each adjustment/payment, explain your respective accounting with reference to the authoritative accounting literature. As disclosed in Note 4 on page 74, the adjustments to purchase price allocation for prior acquisitions and foreign exchange totaled $6,137,000 during fiscal 2005. Of this amount, $822,000 relates to a net reduction to purchase price allocation for prior acquisitions and $6,959,000 relates to adjustments to the carrying value of the goodwill denominated in a foreign currency, in accordance with SFAS 52 Foreign Currency Translation. The adjustments to purchase price allocation for prior acquisitions relate to: • Amounts paid to former shareholders based on revenue targets that were achieved during the year. This has been accounted for as contingent consideration and included as part of the purchase price adjustment in accordance with paragraph 28 of SFAS 141, Business Combinations (“SFAS 141”). • Purchases of additional shares from minority shareholders. These purchases have been accounted for in accordance with paragraph 14 of SFAS 141. • Reductions in acquisition related accruals accounted for in accordance with EITF 95-3. • Tax related adjustments. In accordance with SFAS 141 par. 40 “the potential tax effects of (a) temporary differences and carry forwards of an acquired entity that exist at acquisition date and (b) income tax uncertainties related to the acquisition, (for example, an uncertainty related to the tax basis of an acquired asset that will ultimately be agreed to by the taxing authority)”, are not treated as pre-acquisition contingencies. Instead, pursuant to footnote 13 of SFAS 141, such adjustments are accounted for in accordance with SFAS 109 Accounting for Income Taxes. SFAS 109 provides that the resolution of such uncertainties that existed at the date of the business combination, generally, is recorded as an adjustment to goodwill. United States Securities and Exchange Commission December 23, 2005 Page 5 The details of the total adjustments to purchase price allocation for prior acquisitions and foreign exchange are provided below. Name of Acquisition USD (‘000s) Description of Accounting Treatment DOMEA $ 1,611 Contingent consideration Gauss (441 ) Purchase of shares, tax adjustments and EITF 95-3 accrual adjustments IXOS (2,870 ) Purchase of shares (including step adjustments), tax adjustments and EITF 95-3 accrual adjustments Bluebird 2,486 Contingent consideration related to Tilbury settlement (see # 4 below) FirstClass (1,621 ) Tax adjustments and EITF 95-3 accruals Other: Corechange (395 ) EITF 95-3 accrual adjustments KPTI 149 Contingent consideration Pallas 184 Contingent consideration Other acquisitions 75 Tax adjustments Foreign exchange 6,959 Total per Note 4 $ 6,137 Included in the $6,137,000 of adjustments to purchase price allocation for prior acquisitions and foreign exchange per note 4 are net cash payments of $1,182,000 which relate to contingent consideration paid during the year with respect to the acquisition of DOMEA, KPTI, Bluebird and Pallas which payments are reported in the statement of cash flows. 4. Regarding the $2.5 million award, explain to us why you believe it is appropriate to record an arbitration settlement award for an acquisition that occurred a number of years ago as additional purchase consideration. Tell us why you do not consider adjustments and/or payments that arise out of litigation over the purchase price between the acquirer and the former owners of the acquired company as a charge to income when settled. Refer to paragraph B177 of SFAS 141. In October 2000, the Company acquired the outstanding share capital of Bluebird Systems Inc. (“Bluebird”). The consideration for this acquisition was composed of (i) cash of $8.0 million paid on closing, and (ii) additional cash consideration contingent on Bluebird meeting certain defined revenue and earnings targets during the eight subsequent three-month periods. In July 2002, the Harold Tilbury and Yolanda Tilbury Family Trust (the former owners of Bluebird) brought an action against the Company alleging damages for breach of the stock purchase agreement relating to the Company’s acquisition of Bluebird. Bluebird and Open Text counterclaimed against the Tilburys claiming that not only was no further amount owing for the purchase of their shares, but United States Securities and Exchange Commission December 23, 2005 Page 6 that they were entitled to a return of the money already paid to the Tilburys in respect of the business acquisition. Open Text also claimed damages against Harold Tilbury with respect to the lease of the Bluebird premises. In April 2005, the arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and for termination of employment related costs. The arbitrator subsequently ruled that a further $222,000 was payable by Open Text under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of legal costs had been deferred, at that date, and in August 2005 the arbitrator ruled that the sum of approximately $847,000 was payable by the Company to the Tilburys on account of legal costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys composed of the following: • Employment related costs and leasehold related costs; • Consideration contingent on Bluebird meeting certain defined revenue and earnings targets; • Interest; and • Legal costs. In accounting for the employment and leasehold related costs, the Company considered paragraph B177 of SFAS 141 which indicates that the provisions of SFAS 38 should not be applied to “…contingencies that arise from the acquisition and did not exist prior to acquisition. Examples provided include litigation over the acquisition and the tax effect of the purchase.” In accordance with this guidance, the Company recognized an expense of $240,000 for employment related costs and $85,000 related to a leasehold dispute as these amounts were not pre-acquisition contingencies. Interest of $759,000 associated with the litigation was also expensed during fiscal 2005. In accounting for the contingent consideration, the Company considered paragraph 28 of SFAS 141 which states that “additional consideration may be contingent on maintaining or achieving specified earnings levels in future periods. When the contingency is resolved and additional consideration is distributable, the acquiring entity shall record the fair value of the consideration issued or issuable as an additional cost of the acquired entity (Opinion 16, paragraph 80).” With respect to accounting for contingent consideration, the one year allocation period relating to the acquisition is not applicable; rather, the additional purchase consideration is recognized, and allocated (in this case fully to goodwill), at such time as the fair value of the contingent consideration becomes known. In the case of the Bluebird acquisition, the amount of contingent consideration was not known until resolution of the legal dispute. As a result, the settlement amount of United States Securities and Exchange Commission December 23, 2005 Page 7 $1,762,000 was recorded as additional purchase price and allocated to goodwill on the date the dispute was resolved. Total legal costs associated with the dispute were approximately $847,000. In accounting for the legal costs, the Company reviewed a December 11, 2003 AICPA Conference speech by Randolph Green of the SEC Staff, which states “…we have generally concluded that legal claims between an acquirer and the former owners of an acquired business should be reflected in the income statement when settled. Instances in which we have been persuaded that a settlement of litigation over a purchase is more appropriately reflected as an adjustment to the cost of the acquired business demonstrate a clear and direct link to the purchase price. For example, litigation seeking enforcement of an escrow or escrow-like arrangement, say, specifying a minimum amount of working cap