SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
--------------------------
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 7, 2003
ENDOCARE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
0-27212 33-0618093
(Commission File Number) (I.R.S. Employer
Identification No.)
201 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
(949) 450-5400
(Registrant's telephone number,
including area code)
This Amendment No. 2 to Form 8-K amends and supplements the filing by Endocare,
Inc. (the "Company") on Form 8-K dated March 7, 2003 and filed with the U.S.
Securities and Exchange Commission on March 14, 2003, as amended and
supplemented by the filing made by the Company on Form 8-K/A dated May 1, 2003
and filed with the U.S. Securities and Exchange Commission on May 1, 2003, by
including a letter from KPMG LLP, dated May 14, 2003.
ITEM 4. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
DISMISSAL OF KPMG.
KPMG, LLP ("KPMG") previously served as the accountants of Endocare, Inc. (the
"Company"). The Company's Board of Directors, upon recommendation of the Audit
Committee, approved the dismissal of KPMG as the Company's independent auditor,
effective March 7, 2003.
KPMG's report on the Company's consolidated financial statements as of and for
the fiscal years ended December 31, 2000 and 2001 did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
As previously reported by the Company in a press release dated December 12,
2002, KPMG notified the Company's Audit Committee, by letter dated December 11,
2002 (the "KPMG Letter"), that KPMG's report dated February 19, 2002, except as
to notes 1 and 15, which are dated as of March 25, 2002, on the Company's
consolidated financial statements as of December 31, 2001, and for the year then
ended (the "2001 KPMG Report"), had been withdrawn and can no longer be relied
upon. KPMG also advised the Audit Committee they believed that sufficient
evidence exists to conclude that the Company's consolidated financial statements
for the quarters ended March 31, 2002 and June 30, 2002 should not be relied
upon. KPMG stated that it was unable to rely on the representations of the
Company's senior management and would continue to act as the Company's
independent auditor only if those concerns were satisfactorily resolved.
DISAGREEMENT WITH KPMG.
Following are descriptions of the disagreement with KPMG and the circumstances
underlying such disagreement during the Company's two most recent fiscal years
and any subsequent interim period through March 7, 2003 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
KPMG would have caused KMPG to make reference to the subject matter of the
disagreement in connection with its report on the Company's consolidated
financial statements. The Company's Audit Committee has discussed the subject
matter of the disagreement with KPMG.
2
KPMG has concluded that it is unable to rely on the representations of the
Company's management. KPMG's decision was based upon the totality of the
circumstances described below.
The Company's Audit Committee has investigated these matters and disagrees with
KPMG's conclusion that it could not rely on the representations made by
management. In addition, based on that investigation, the Audit Committee
concluded that there was no indication that there had been any fraud or
intentional wrongdoing by the Company's management. The Company has asked its
new independent accountant, Ernst & Young LLP ("E&Y"), to consider the issues
raised in the KPMG letter in connection with its reaudit of the Company's
financial statements for fiscal years 2001 and 2002.
The Company has authorized KPMG to respond fully to the inquiries of E&Y, the
Company's successor independent accountant, concerning the disagreement, as well
as the matters described below.
REVENUE RECOGNITION
- KPMG expressed concern in the KPMG Letter that the Company had
recorded sales to customers of products that remained in
Company-controlled facilities at the time of KPMG's performance of
its most recent review procedures. The Audit Committee investigated
this matter and concluded that there appear to be three such
transactions and that in each case the products were shipped to the
destination specified by the customer, and that any interim storage
was consistent with the customer's directives. The Audit Committee
is unaware of any evidence causing it to conclude that there was any
fraud or intentional wrongdoing associated with the recognition of
revenue associated with these transactions or any application of
Staff Accounting Bulletin No. 101.
- KPMG expressed concern in the KPMG Letter that the Company had
recorded sales to customers of products that were shipped to
Company-controlled facilities, and then not delivered to the
customers until a subsequent accounting period, remaining in
Company-controlled facilities as of the close of the accounting
period in which the sales were recorded. The Audit Committee
investigated this matter and concluded that, in the six apparent
instances in which products were shipped to interim storage
facilities, that it was done at the customer's direction, and that
any interim storage had been consistent with the customer's
directives. The Audit Committee is unaware of any evidence causing
it to conclude that there was any fraud or intentional wrongdoing
associated with the recognition of revenue associated with these
transactions or any application of Staff Accounting Bulletin No.
101.
- KPMG expressed concern in the KPMG Letter that the Company engaged
in two transactions to acquire assets from customers concurrent with
the sale by the Company of products to such customers, but that only
the sales to the customers were recorded in the Company's accounting
records at the time of the sales, while the concurrent acquisitions
of products from the customer were recognized in a different
accounting period. The Audit Committee investigated this matter and
concluded that, while these transactions should have been documented
more clearly, it was unaware of any evidence causing it to conclude
that there was any fraud or intentional wrongdoing associated with
these transactions or the application of Accounting Principles Board
Opinion No. 29.
- KPMG expressed concern in the KPMG Letter that all of the revenue
related to certain multiple-element sales was fully recorded in a
single accounting period, though certain of the components were not
delivered until a subsequent accounting period. The Audit Committee
investigated this matter and concluded that it was unaware of any
evidence causing it to conclude that there was any fraud or
intentional wrongdoing associated with this belated shipment or the
Company's accounting treatment for this transaction.
- KPMG expressed concern in the KPMG Letter that sales to one customer
ultimately were delivered to a warehouse secured and paid for by a
Company sales representative, for which the sales representative was
reimbursed through his expense report, and that the accounting
records noted that the sale was delivered to the customer location.
The Audit Committee investigated this matter and concluded that the
sales representative was contacted by the customer after products
were delivered to the customer's premises and informed by the
customer that it was not yet ready to receive the products on-site.
Consistent with the customer's directives, the sales representative
then placed the products in interim storage, the expense of which
was processed through the Company. The Audit Committee is unaware of
any evidence causing it to conclude that there was any fraud or
intentional wrongdoing associated with the Company's accounting
treatment for this arrangement, which was done as an accommodation
for the customer.
EXPENSE RECOGNITION
- KMPG expressed concern in the KPMG Letter that notations on
supporting documentation for at least two expense transactions could
be interpreted to indicate that the Company's senior management had
instructed subordinates to record the related transactions outside
of the Company's normal policies and procedures, and potentially not
in accordance with generally accepted accounting principles. The
Audit Committee investigated this matter and did not discover any
evidence that these notations in connection with two transactions,
which involved an aggregate of $340,000, were improper or intended
to inappropriately record these expense transactions not in
accordance with generally accepted accounting principles. The Audit
Committee is unaware of any evidence causing it to conclude that
there was any fraud or intentional wrongdoing associated with the
recognition of expenses associated with these transactions.
- KPMG expressed concern in the KPMG Letter that expenses associated
with certain products or services purchased by the Company knowingly
were not accrued in the proper accounting period. The Audit
Committee investigated this matter and is
unaware of any evidence causing it to conclude that the timing of
the accrual of these expenses, or portions thereof, was the result
of fraud or intentional wrongdoing.
ACCOUNTS RECEIVABLE
- KPMG expressed concern in the KPMG Letter that in two instances the
Company has recorded cash receipts from customers as a reduction of
accounts receivable near quarter end, where, at least in one
instance, management knew the underlying check had been rejected by
the bank for insufficient funds prior to the issuance of the
Company's financial statements and the filing of the Company's
corresponding report on Form 10-Q. The Audit Committee investigated
this matter and believed KPMG was referring to two checks totaling
$750,000, one of which was collected prior to the issuance of the
financial statements and one of which remained uncollected and
apparently should have remained a receivable. The Audit Committee,
however, did not learn of any evidence causing it to conclude that
the treatment of these insufficient funds issues was the result of
fraud or intentional wrongdoing.
- KPMG expressed concern in the KPMG Letter that there were cash
receipts from customers recorded as a reduction of accounts
receivable if the customer check was dated prior to the end of the
accounting period, even though physical receipt of the check
occurred after the end of the accounting period. The Audit Committee
investigated this matter and concluded that this treatment of cash
receipts is a consequence of the Company's routine practice to
record cash receipts as deposits in transit, and the weekly deposits
of cash every Friday. The Audit Committee recognized that the
Company's practices in this regard might be improved upon and the
Company has since implemented appropriate practices. The Audit
Committee is unaware of any evidence causing it to conclude that
there was any fraud or intentional wrongdoing associated with this
practice concerning cash receipts.
- KPMG expressed concern in the KPMG Letter that one customer
concession had been granted by senior management some period of time
after the date of the original sale to facilitate payment of an
outstanding account receivable by the customer, and that the
concession was recorded in a period subsequent to when the cash
receipt was recorded, despite the apparent linkage between the
concession and the payment of cash by the customer. The Audit
Committee investigated this matter and concluded that, with respect
to the $64,500 payment which KPMG called a "customer concession,"
the Audit Committee was unaware of any evidence causing it to
conclude that there was any intentional wrongdoing in the recording
of the sale or the $64,500 payment by the Company.
ITEM 304(B).
Other than as detailed in the circumstances underlying the disagreement within
the Company and KPMG as set forth above, the Company is not aware of any
transactions or events similar to those which involved such disagreement or
circumstances. Further, other than as expressly set
forth above, the Company is currently unable to accurately comment on whether
the transactions or events described above were material or what the effect of
such transactions and events will have on the financial statements of the
Company.
REPORTABLE EVENTS.
Other than as described above, there have been no "reportable events" (as that
term is used in Item 304(a)(1)(v) of Regulation S-K) during the Company's two
most recent fiscal years and the subsequent interim period.
LETTER FROM KPMG.
The Company has requested that KPMG furnish a letter addressed to the Securities
and Exchange Commission stating whether KPMG agrees with the statements in the
Company's Form 8-K/A filed on May 1, 2003. A copy of such letter has been filed
by the Company as Exhibit 16.2 to this Form 8-K/A.
APPOINTMENT OF ERNST & YOUNG LLP.
The Company's board of directors, upon recommendation of the Audit Committee,
approved the appointment of Ernst & Young LLP ("E&Y") as the Company's new
independent accountant, effective April 1, 2003, subject to E&Y's customary new
client acceptance procedures. During the two most recent fiscal years of the
Company and the subsequent interim period prior to the appointment of E&Y, the
Company did not consult with E&Y regarding any of the matters set forth in Item
304(a)(2)(i) or (ii) of Regulation S-K.
The Company intends to file its audited financial statements as promptly as
possible. There can be no assurance, however, as to when E&Y's audit and review
of such financial statements will be completed or that, at the conclusion of
E&Y's audit and review, E&Y will give an opinion, unqualified or otherwise, on
such financial statements without adjustment or restatement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
16.1* Letter from KPMG LLP, dated March 14, 2003.
16.2 Letter from KPMG LLP, dated May 14, 2003.
*Previously filed as Exhibit 16.1 to the Form 8-K filed on March 14, 2003.
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.
ENDOCARE, INC.
Date: May 15, 2003 By: /s/ Katherine Greenberg
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Katherine Greenberg
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
16.1* Letter from KPMG LLP, dated March 14, 2003
16.2 Letter from KPMG LLP, dated May 14, 2003.
*Previously filed as Exhibit 16.1 to the Form 8-K filed on March 14, 2003.