SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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): March 31, 2005
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Castelle
(Exact Name of Registrant as Specified in Its Charter)
California
(State or Other Jurisdiction of Incorporation)
000-22020 77-0164056
(Commission File Number) (IRS Employer Identification No.)
855 Jarvis Drive
Suite 100
Morgan Hill, California 95037
(Address of Principal Executive Offices) (Zip Code)
(408) 852-8000
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-(b)) |_| Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 4.02 - Non-Reliance on Previously Issued Financial Statements or a
Related Audit Report or Completed Interim Review
On March 28, 2005, the Company completed a preliminary review of its
accounting practices with respect to the classification of cost of
service revenue, procedures for revenue recognition and accrual for
paid-time-off, and determined that its Annual Report on Form 10-K for
the year ended December 31, 2003 and its Quarterly Reports on Form 10-Q
for the quarters ended March 31, June 30 and September 30, 2004 contain
the following incorrect assumptions and interpretations:
1. Classification of cost of service revenue
The Company has concluded that its historical classification
of certain costs of service revenues did not conform to
generally accepted accounting principles. Historically, such
costs have been improperly included as a component of sales
and marketing expenses on the Company's consolidated
statements of operations; however under generally accepted
accounting principles, such costs are required to be
classified as cost of service revenues. Based on a preliminary
analysis, the Company expects to reclassify approximately
$700,000 in each of fiscal 2002 and 2003, and approximately
$800,000 for the nine-months ended September 30, 2004 out of
sales and marketing and include these amounts within cost of
service revenues in its statements of operations. The
reclassification will have no impact on reported revenue, net
income (loss) and earnings (loss) per share for the respective
periods. The misclassification, however, did result in gross
profit and operating expenses being overstated by equal
amounts. Consequently, the Company will restate its
consolidated financial statements for fiscal 2002 and 2003 in
its 2004 Form 10-K. The Company will also restate its
unaudited quarterly consolidated financial statements for each
of the 2003 and 2004 periods. The Company has concluded that
the internal control deficiency that led to the errors in the
historical classification of cost of service revenues is a
"material weakness" as defined by the Public Company
Accounting Oversight Board's Auditing Standard No. 2.
The Company's review of such costs was prompted in part by the
receipt in November 2004 and thereafter of a series of comment
letters issued by the Office of the Chief Accountant of the
Securities and Exchange Commission to the Company.
2. Revenue recognition related to extended support contracts and
accrual for paid-time-off
The Company has determined based on a preliminary analysis
that as a result of an internal control deficiency, service
revenues attributable to extended support contracts were
overstated by approximately $50,000, $35,000 and $40,000 for
the nine-months ended September 30, 2004, fiscal 2003 and
fiscal 2002, respectively. These amounts should have been
deferred and recognized as service revenues in subsequent
periods. Such errors were the result of inadequate procedures
in place to correctly recognize sales related to deferred
support contracts. The revenue overstatements represent less
than 1% of the Company's total sales for the respective
periods. In connection with their audit of the Company's
consolidated financial statements for the year ended December
31, 2004, The Company's independent auditors, Grant Thornton
LLP, concluded that the internal control deficiency that led
to the aforementioned revenue recognition errors is a
"material weakness" as defined by the Public Company
Accounting Oversight Board's Auditing Standard No. 2.
The Company has also identified an error that resulted in an
overstatement of its accrual for paid-time-off beginning in
2002 and continuing through 2004. Based on a preliminary
2
analysis, this error resulted in the overstatement of expenses
by approximately $25,000 in the aggregate during fiscal 2002,
2003 and for the nine-months ended September 30, 2004.
The Company will restate its consolidated financial statements
for fiscal 2002 and 2003 to correct for these errors. The
restated financial statements will be included in the
Company's 2004 Form 10-K. The Company will also restate the
unaudited quarterly consolidated financial statements for each
of the 2003 and 2004 periods.
Both the Company's audit committee and management have discussed with
Grant Thornton, the Company's Independent Registered Public Accounting
Firm, and with PricewaterhouseCoopers LLP, the Company's predecessor
Independent Registered Public Accounting Firm, the matters disclosed in
this Current Report on Form 8-K.
As a result of the material weaknesses described above, Company
management will conclude that its disclosure controls and procedures
were not effective as of December 31, 2004 and as of each date affected
by the restatement.
As a result of the pending restatement, the historical financial
statements contained in Castelle's Annual Report on Form 10-K for the
year ended December 31, 2003 and each of Castelle's Forms 10-Q for the
year ended December 31, 2004 should no longer be relied upon.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 31, 2005
Castelle
By: /s/ Paul W. Cheng
Paul W. Cheng
Vice President, Chief Financial