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DETERMINE, INC. 8-K 2005 Table of Contents
UNITED STATES
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): August 9, 2005
SELECTICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
(408) 570-9700
(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):
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Item 4.01. Changes in Registrant’s Certifying Accountant.
(a) Ernst & Young LLP (“Ernst & Young”), which had served as the independent
registered public accounting firm for Selectica, Inc. (the “Company”), resigned as the Company’s
independent registered public accounting firm on August 9, 2005, the filing due date of the quarterly report for
the fiscal quarter ended June 30, 2005.
The reports of Ernst & Young on the Company’s consolidated financial statements as of and for
each of the fiscal years ended March 31, 2004 and 2005 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended March 31, 2004 and 2005, and in the subsequent interim period
ended August 9, 2005, there have been no disagreements (as described under Item 304(a)(1)(iv) of
Regulation S-K) between the Company and Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which disagreements, if
not resolved to Ernst & Young’s satisfaction, would have caused Ernst & Young to make reference to
the subject matter thereof in their report.
Except for the material weaknesses in internal control over financial reporting described in
this paragraph, during the fiscal years ended March 31, 2004 and 2005, and in the subsequent
interim period ended August 9, 2005, the Company did not have any reportable events within the
meaning of Item 304(a)(1)(v) of Regulation S-K. The Company and Ernst & Young reported certain
material weaknesses in the Company’s internal control over financial reporting in the Company’s
Annual Report on Form 10-K for the year ended March 31, 2005. That Annual Report stated the Company
had material weaknesses in the following five areas:
First, management identified a material weakness for insufficient controls over the Quote to
Collect process related to the review, approval, and accounting for the Allowance for Doubtful
Accounts. The Company had incorrectly included a general reserve provision in the Allowance for
Doubtful Accounts as of December 31, 2004. Also, the Company had incorrectly recorded a receivable
as uncollectible as of March 31, 2005, for which payment was subsequently received after March 31,
2005 but prior to the completion of the quarterly close process. As a result of this material
weakness, Accounts Receivable and Services Revenue were incorrectly stated. Adjustments were
recorded to increase Accounts Receivable and Services Revenue as of December 31, 2004 and as of
March 31, 2005, prior to the issuance of our financial statements for the respective dates.
Second, management identified a material weakness for insufficient controls for the Treasury
process related to the classification of Cash Equivalents and Investments. The Company had
incorrectly classified Cash Equivalents and Investments in its India subsidiary. As a result of
this material weakness, Cash Equivalents, Short Term and Long Term Investments were not classified
in accordance with generally accepted accounting principles. An adjustment was recorded to reduce
Cash Equivalents and increase Short Term and Long Term Investments as of March 31, 2005.
Third, management identified the following deficiencies in its revenue recognition process,
which constitute a material weakness in the aggregate.
a) Insufficient controls over the monitoring of deferred revenue accounts for the purpose of
determining when revenue should be recognized. The Company failed to reverse deferred revenue
when all criteria for revenue recognition had occurred.
b) Insufficient controls for the identification of services to be provided to customers at no
charge. The Company inappropriately recorded revenue related to a service provided to a customer
that was provided for no charge.
Fourth, management identified the following deficiencies in its payroll process, which
constitute a material weakness in the aggregate.
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a) Insufficient controls over the recording of expenses related to the benefits
of terminated employees. The Company had failed to record the expenses related to the benefits
extended when employees were involuntarily terminated as part of a reduction in force program.
These inadequate controls resulted in an adjustment as of March 31, 2005 to increase Accrued
Payroll and Related Liabilities, and increase Sales and Marketing expense.
b) Insufficient controls over the recording of expenses related to the
acceleration of stock options for a former executive. The error arose because of a lack of
in-depth review of the appropriate accounting treatment for this transaction. These inadequate
controls resulted in an adjustment as of March 31, 2005 to decrease Additional Paid-in Capital
and Sales and Marketing expense.
Fifth, management identified the following deficiencies in our financial statement
close process, which constitute a material weakness in the aggregate.
a) Insufficient controls over the monitoring of the terms of employment
agreements and bonus programs and determining the appropriate accounting treatment for related
accrued bonuses in accordance with employment agreements and bonus programs. These inadequate
controls resulted in adjustments as of December 31, 2004 and March 31, 2005 to decrease Accrued
Payroll and Related Liabilities, and decrease General and Administrative expense. These
adjustments were recorded prior to the issuance of the respective financial statements.
b) Insufficient controls over the monitoring of accrued liabilities recorded upon the sale of
the e-insurance business to Accenture in December 2003. The Company had incorrectly not reversed
the accrual when the related obligation expired on December 31, 2004. The error arose because of
a lack of in-depth review of the account reconciliation. These inadequate controls resulted in
an adjustment as of December 31, 2004 to decrease Accrued Liabilities and decrease General and
Administrative expense. The adjustment was recorded prior to the issuance of the December 31,
2004 financial statements.
The Company’s Audit Committee and management have discussed these material weaknesses with
Ernst & Young and have authorized Ernst & Young to respond fully to any inquiries about the
Company’s material weaknesses over financial reporting as may be made by the Company’s successor
independent registered public accounting firm.
The Company has provided Ernst &Young with a copy of the foregoing disclosures and requested
that Ernst & Young furnish a letter to the Securities and Exchange Commission stating whether or
not Ernst & Young agrees with the above statements. A copy of Ernst & Young’s letter, dated August
15, 2005, is filed as Exhibit 16.01 to this Form 8-K.
(b) The Company and its Audit Committee have initiated the process of selecting a new independent
registered public accounting firm.
Item 9.01. Financial Statements And Exhibits.
(c) Exhibits
The following exhibits are filed herewith as part of this Current Report on Form 8-K:
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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.
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