SecProbe.io

CORRESP
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filename1.htm

  DLA Piper Rudnick Gray Cary US
  LLP

  1200 Nineteenth Street,
  N.W.

  Washington, D.C.
  20036-2412

  T
  202.861.3900

  F
  202.223.2085

  W
  www.dlapiper.com

  NANCY A. SPANGLER

  nancy.spangler@dlapiper.com

  T
  703.773.4021 F 703.773.5021

July 7,
2005

VIA EDGAR
AND HAND DELIVERY

United States Securities
and Exchange Commission

450 Fifth Street, N.W.

Judiciary Plaza

Washington, D.C.  20549-0305

Attn:  Larry Spirgel, Assistant Director

Re:                               Eschelon
Telecom, Inc.

Amendment No. 1 to Form S-1

Filed June 15, 2005

File No. 333-124703

Form 10-K for the
fiscal year ended Dec. 31, 2004, filed March 31, 2005

Form 10-Q for the fiscal quarter ended March 31, 2005, filed May 16, 2005

File No. 000-50706

Dear Mr. Spirgel:

This letter is submitted
on behalf of Eschelon Telecom, Inc. (“Eschelon”
or the “Company”) in response to the
comments set forth in your letter to Richard A. Smith, President and Chief
Executive Officer, dated June 28, 2005, regarding Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (File No. 333-124703).  This letter should be read in conjunction
with Amendment No. 2 to the Registration Statement (“Amendment
No. 2”), which was filed today with the SEC via EDGAR.

Certain responses set
forth below reflect discussions between Eschelon representatives and its
independent auditors and legal counsel and representatives of the underwriters
and their legal counsel.  However,
Eschelon has reviewed and approved all of the responses set forth below.  The supplemental information referred to in
this letter will be forwarded separately to Mr. Daniel Zimmerman at the SEC.

For your convenience, we
have set forth below each of your numbered comments, followed by the response
of Eschelon.

Serving clients globally

General

1.                                      Please
note that we will send you any comments on your pending request for
confidential treatment by separate letter.
All confidential treatment issues must be resolved before we will
consider a request for acceleration of the registration statement.

Eschelon Response:  The Company notes
the Staff’s comment and will respond under separate cover to the Staff’s
comments on the Company’s pending request for confidential treatment.  Please be advised that the Company is also
filing a confidential treatment request with respect to Exhibit 10.7.9, which
is being filed with Amendment No. 2.

Amendment
No. 1 to Form S-1

Summary
Consolidated Historical and Pro Forma Financial and Other Data, page 5

Selected Consolidated Financial and Other Data, page 25

2.                                      Please
refer to prior comments 10 and 12.  As
previously requested, delete the pro forma EBITDA and cash flows presented as a
measure of your liquidity.  We do not
believe that your pro forma cash flows are factually supportable.

Eschelon Response:  The Company has revised the disclosure in accordance with the Staff’s
comment.

3.                                      Please
refer to prior comment 11.  Since your
wholly-owned subsidiary has registered debt, present the ratio of earnings to
fixed charges.

Eschelon Response:  The Company has revised the disclosure in accordance with the Staff’s
comment.

Risk Factors, page 9

The communications market in which we operate is
highly competitive..., page 14

4.                                      We
note your response to prior comment 17.
Please revise to disclose your supplemental explanation in the Overview
subsection of your Management’s Discussion and Analysis and in the Competition
subsection of your Business discussion.

Eschelon Response:  The Company has revised the disclosure in accordance with the Staff’s
comment.

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Notes
to Unaudited Pro Forma Combined Financial Statements, page 32

5.                                      Please
refer to prior comment 19.  Delete this
adjustment since it is not appropriate to include interest income from the use
of proceeds from an offering.  You may
provide this in a disclosure in the footnotes.

Eschelon Response:  The Company has revised the disclosure in accordance with the Staff’s
comment.

Management’s
Discussion and Analysis, page 33

Key
Components of Results of Operations, page 34

Revenue,
page 34

6.                                      Please
refer to prior comment 22.  Tell us in
detail the nature of the arrangement involving non-recurring network services
and your basis for your accounting.
Include in your response references to the appropriate accounting literature.

Eschelon Response:  The Company bills a customer a
one-time installation fee related to the initial set-up of the customer’s
service.  The Company believes this
accounting is appropriate based on its review of SAB 104, “Revenue
Recognition”. Under the delivery and performance questions and
answer section of SAB 104, the Staff sets forth a number of examples of
situations were registrants receive upfront fees from customers that do not
constitute a separate earnings event, and therefore the revenue is properly
deferred and recognized over the life of the customer agreement. The Company
has determined that its one-time installation fees do not represent a separate
earnings event since the terms, conditions and amount of these fees are
negotiated in conjunction with the pricing of all the elements of the
arrangement.  As described in SAB 104,
the customer would ascribe a significantly lower, and perhaps no, value to
elements ostensibly associated with the up-front fee in the absence of the
Company’s performance of other contract elements. Because the one-time
installation fee represents an upfront fee, the Company has appropriately
deferred this revenue and is recognizing it over the average life of a
customer.

Results
of Operation, page 36

Three Months Ended March 31,
2005 compared to Three Months Ended March 31, 2004, page 37

Network
Services, page 38

7.                                      Please
refer to prior comments 25 and 37 and your statement that Global Crossing has
the “contractual right” (but is not required) to pass charges through to the
Company.

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Please tell us how you are accounting for this
contractual right.  Include in your
response references to the appropriate accounting literature.

Eschelon Response:  Under the terms of the Company’s
agreement with Global Crossing, Global Crossing had the contractual ability to
bill the Company for pass-through charges associated with monthly charges
billed to Global Crossing from local exchange carriers. Throughout the life of
the agreement, the Company periodically reviewed the contract terms and
billings with Global Crossing executives and had reason to believe that Global
Crossing would never pass through full PICC charges.  The Global Crossing executive in charge of
setting pricing recently confirmed that Global Crossing chose not to pass
through full PICC charges in order to keep their rates competitive.  In addition, the contract stated that Global
Crossing had a duty to bill in a timely manner and was prohibited from back
billing for a period of greater than 180 days.
As a result, the Company concluded that it did not have a liability to
accrue because it was not probable that the Company would ever be billed for
these charges, as is required by SFAS 5, “Accounting for Contingencies”.
As discussed in the Company’s response to prior Comment No. 25, in November
2004, Global Crossing elected to back-bill the Company for four years worth of
monthly PICC charges. The Company believes this was largely the result of new
management at Global Crossing.  The
Company disputed Global Crossing’s ability to back-bill these charges, which
resulted in the Global Crossing litigation.
On June 21, 2005, the Company and Global Crossing settled this dispute.

Recent Accounting Pronouncements, page 49

8.                                      Please
refer to prior comment 49.  The Preferred
Stock is required to be redeemed in June 2012 (date certain) unless previously
redeemed or converted by the holder and therefore, within the scope of SFAS
150.  Refer to FSP 150-3.  Please revise.

Eschelon Response:  The Company believes that its current
accounting for its preferred stock is appropriate based on its conclusion that
both classes of preferred stock are considered contingently redeemable, and
therefore outside the scope of SFAS 150. As the Company stated in response to
prior Comment No. 49, it has concluded that its outstanding preferred stock
does not meet the definition of a mandatorily redeemable financial instrument
as set forth in SFAS 150. SFAS 150 defines a mandatorily redeemable financial
instrument as “[a]ny of various financial instruments issued in the form of
shares that embody an unconditional obligation requiring the issuer to redeem
the instrument by transferring its assets at a specified or determinable date
(or dates) or upon an event that is certain to occur.” Although the shares of
preferred stock will be redeemed in June 2012 if not previously redeemed or
converted, that event is not certain of occurrence because of the other
conversion and redemption features of the preferred stock (as described below).
 The Company has concluded that because
these other conversion and redemption features exist, the preferred stock does
not fall within the scope of SFAS 150.  In
addition to

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paragraph B25 of SFAS 150 mentioned
in its previous response, the Company also considered the provisions of paragraph
A9 of SFAS 150, which reads:

For another example of a conditionally redeemable instrument,
an entity may issue preferred shares with a stated redemption date 30 years
hence that also are convertible at the option of the holders into a fixed
number of common shares during the first 10 years. Those instruments are not
mandatorily redeemable for the first 10 years because the redemption is
conditional, contingent upon the holder’s not exercising its option to convert
into common shares. However, when the conversion option (the condition)
expires, the shares would become mandatorily redeemable and would be
reclassified as liabilities, measured initially at fair value.

Because the holders of the preferred
stock have the ability to convert their shares at any time (similar to holders
of the shares in the example in paragraph A9), the shares of preferred stock
are contingently redeemable and therefore outside the scope of SFAS 150.

In
addition, the Company has reviewed the provisions of FSP 150-3, which dealt
with the deferral of the effective date of SFAS 150 for certain companies and
believes that it has appropriately applied the provisions of FSP 150-3.

Business,
page 50

Our
Business Strengths, page 51

Leading
Position in Our Markets, page 51

9.                                      We
note your response to prior comment 30, particularly the quantitative estimates
of your market share in your markets.
Please revise the prospectus to disclose this information with
appropriate explanations that clarify your market share relative to any leading
competitors that are not competitive local exchange carriers.  Additionally, please disclose the date of the
market survey.

Eschelon Response:
The Company has revised the disclosure to clarify the Company’s market
position relative to non-competitive local exchange carriers in accordance with
the Staff’s comment.  The Company
respectfully submits that the market survey and internal data maintained by the
Company supports the Company’s position as a leading competitive services
provider in its geographic markets.  The
survey illustrates the Company’s relative market share among the CLEC competitors
in a given market.  The Company does not
believe, however, this data is precise enough to include estimated market share
data on a quantitative basis.

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Our
Customers, page 54

10.                               We
note your revisions in response to prior comment 34.  Please further revise to clarify what you
mean by “pro forma” in this context.

Eschelon Response:  The Company has revised the disclosure in accordance with the Staff’s
comment.

Financial
Statements

Note 1.
Goodwill and Other Intangible Assets, page F-10

11.                               Please
refer to prior comments 51 and 54.  It
appears to us that these costs should be classified as cost of revenue.  Revise or provide us with the specific
accounting literature that supports your conclusion.

Eschelon
Response:  Customer installation costs consist of expenses such as
internal labor costs and non-recurring one-time installation fees. The Company
believes that under SFAS 142, “Goodwill and
Other Intangible Assets”,  which carried forward the provisions of APB 17 related to accounting
for internally developed intangible assets, capitalization of these expenses is
appropriate. The Company has determined that based on the number of customers
it has, which currently exceeds 50,000, utilizing an average customer life to
calculate amortization of capitalized customer installation costs is both
appropriate and practical.  In its
summary of SFAS 142, FASB notes:

The useful life of an intangible asset is defined in the glossary of
Statement 142 as “the period over which an asset is expected to contribute
directly or indirectly to future cash flows.” There is a direct link,
therefore, between the period over which an entity estimates future cash flows
for a renewable intangible asset under Statement 141 and the period over which
that asset is amortized under Statement 142. As described in paragraph B44 of
Statement 142, the Board concluded that “the amortization periods for
intangible assets should generally reflect those useful lives and, by
extension, the cash flow streams associated with them.”

The Company believes its
method of amortizing customer installation costs fully complies with this
principle and notes the FASB’s use of the word “expected” in describing
amortization period rather than the word “actual.”  The Company also believes that it would be
impractical, unduly burdensome and unnecessary to track the actual customer
life of each one of its more than 50,000 customers in order to calculate amortization
expense.  All of the Company’s network
services customers are small business (an average customer bill is roughly $350
per month), and its largest network services customer represents less than 1%
of its total revenue. Therefore, the loss of a single customer is never
material to the Company’s financial results.

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Furthermore, the Company utilizes
the same average customer life method in amortizing its non-recurring customer
installation revenue.  Therefore, the
Company believes that it is appropriate that installation revenue and cost be
amortized using the same method in keeping with the principle of matching
revenue with cost.

Regarding classification
of amortization expense within the Company’s income statement, the Company
believes it is also appropriate to include amortization of customer intangibles
in depreciation and amortization expense, rather than as a cost of sales.  SAB Topic 11 B. specifically states that:

If cost of sales or operating expenses exclude charges for
depreciation, depletion and amortization of property, plant and equipment, the
description of the line item should read somewhat as follows: … “Cost of goods sold
(exclusive of depreciation shown separately below).”  To avoid placing undue emphasis on “cash flow,”
depreciation, depletion and amortization should not be positioned in the income
statement in a manner which results in reporting a figure for income before
depreciation.

The Company has added the
parenthetical phrase “(exclusive of depreciation and amortization shown
separately below)” to its cost of sales line item.  In doing so, the Company’s reporting method is
substantially similar to other public registrants in its industry, most notably
US LEC and McLeod USA.  The Company doe