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SCO Announces Restatement
Thursday, March 03 2005 @ 04:18 PM EST

Bloomberg has the press release from SCO. SCO has announced that "due to certain accounting errors, the Company's financial statements for the quarters ending January 31, 2004, April 30, 2004 and July 31, 2004 should no longer be relied upon and should be restated."

This doesn't appear to be the entire story, as to the failure to timely file the 10K earlier, considering the reasons given for the delay. Robert McMillan tells us this:

"Last month, SCO claimed that the filing delay was due to a re-examination of stock grants made under the company's employee compensation plan. But in a statement today, the Lindon, Utah-based company said it also expects to reclassify dividends related to a $50 million October 2003 investment in the company made by BayStar Capital LP. SCO said it repurchased all shares of BayStar's A-1 Convertible Preferred stock last July.. . .

"The company may have to repurchase certain shares purchased under its employee stock purchase program that were not properly registered during the first three quarters of the company's fiscal year, which ended Oct. 31. SCO will also have to restate $233,000 in stock compensation recorded in the second quarter that actually occurred in the first quarter, the statement said."

Here's the SEC filing.

BusinessWeek says trading stopped:

"Shares of the seller of UNIX operating systems and products were halted in extended trade ahead of the news. The stock closed earlier up 6 cents at $4.17 on the Nasdaq."

And Stephen Shankland has more details:

"For the first, second and third quarters of the company's fiscal 2004 SCO issued stock as part of its compensation plans 'without complying with the registration requirements of federal and applicable state securities laws.' The company will reclassify that stock as temporary equity instead of permanent equity and may offer to reverse those share grants.

"The amounts reclassified are $272,000, $231,000 and $557,000 for the first, second and third quarters, respectively, SCO said. There could be a financial effect from the situation if SCO has to offer to buy back the stock, issued to employees through a purchase plan, and the market price of the stock is lower than the stock price when it was issued, spokesman Blake Stowell said.

"The second problem concerned incorrect classification of dividends related to the company's repurchase of preferred shares relating to a $50 million investment in the company. The company is reclassifying $879,000 from the first quarter and $1,619,000 from the second quarter as current liabilities instead of equity. . . .

"The third problem was that $233,000 in stock-based compensation was recorded in the second quarter but actually accrued in the first, SCO said."

He adds that Blake Stowell says the second problem has to do with "dividends SCO had to allocate in relation to the preferred shares but that it never had to pay because it repurchased those shares."

Of course, the stock goes up on bad news. For an overview from more rational quarters, BusinessWeek has some News Analysis, headlined "A Linux Nemesis on the Rocks -- SCO's lawsuit is floundering -- and now the struggling software company faces regulators' scrutiny and questions about its management", which tell us this:

"Well, the mouse that roared is barely squeaking these days. A string of recent setbacks raises grave questions about SCO's finances, its court case, and its management. . . .

"While the restatements won't change its net loss or cash balance for that year, they are likely to reduce its cash position by $500,000 or more in fiscal year 2005, says an insider.

"SOME STAYING POWER. 

"What once looked like a mortal threat to Linux appears to be fading. As a result, the suit has become a nonfactor in corporate buying decisions. . . .

"Thomas C. Carey, a lawyer at Boston law firm Bromberg & Sunstein who is not involved in the suit, says SCO's case is on the ropes. 'The judge gave every indication that he is prepared to throw out the case unless SCO comes up with some surprising evidence,' he says."

Here is the press release:

**********************************

The SCO(R) Group, Inc. Announces Restatement of Financial

Statements to Correct Certain Accounting Errors

No Impact to Net Loss or Earnings Per Share for the Fiscal Year Ended October 31, 2004

LINDON, Utah, March 3 /PRNewswire-FirstCall/ -- The SCO Group, Inc. (the "Company") (Nasdaq: SCOXE) announced today that on February 28, 2005, on management's recommendation, the Audit Committee of the Board of Directors concluded, and KPMG LLP, the Company's independent auditors agreed, that, due to certain accounting errors, the Company's financial statements for the quarters ending January 31, 2004, April 30, 2004 and July 31, 2004 should no longer be relied upon and should be restated.

The impact of the anticipated corrections does not impact the Company's previously reported net loss or its earnings per share for the fiscal year ended October 31, 2004 or its aggregate cash and available-for-sale securities balances as of October 31, 2004.

As of today, the Company currently intends to restate its previously issued financial statements for the above-mentioned quarters of fiscal year 2004 to correct the accounting for the following items:

* For the first, second and third quarters, the Company expects to reclassify amounts related to certain shares of common stock that the Company may have issued under its equity compensation plans without complying with the registration requirements of federal and applicable state securities laws from permanent equity to temporary equity in the amounts of approximately $272,000, $231,000, and $557,000, respectively. The Company may make a rescission offer to holders of certain shares and expects an amount to be classified as temporary equity until the completion of a rescission offer or until the Company no longer has an obligation to the holders of such shares.

* For the first quarter and the second quarter, the Company expects to reclassify accrued dividends related to the Company's previously issued Series A and Series A-1 Convertible Preferred Stock from equity to current liabilities in the amounts of approximately $879,000 and $1,619,000, respectively. In October 2003, the Company issued shares of Series A Convertible Preferred Stock in connection with its $50,000,000 private placement, which shares were subsequently exchanged for and replaced with shares of Series A-1 Convertible Preferred Stock. When the Company repurchased all outstanding shares of Series A-1 Convertible Preferred Stock in July 2004, the Company's obligation to pay dividends on such shares terminated. The accrued dividends were never paid and ultimately were recorded in equity upon the completion of the repurchase transaction. In addition, the dividends were properly captured in the calculation of earnings per share in the periods above.

* For the first and second quarter, the Company expects to restate approximately $233,000 of stock-based compensation expense which was recorded in the second quarter, but incurred in the first quarter. There will be no change to the total stock-based compensation expense for the fiscal year ended October 31, 2004.

As soon as the Company completes its analysis and KPMG LLP completes its review procedures and audit work with respect to the Form 10-K, the Company will file amendments to its quarterly reports on Form 10-Q for the above-mentioned periods and will file its annual report on Form 10-K for the year ended October 31, 2004.

As previously announced, the Company submitted a request for a hearing with the Nasdaq Listing Qualifications Panel. The Company has received notice that its request has been accepted and the hearing is scheduled for March 17, 2005.

Forward-Looking Statements

This press release contains forward looking statements related to (i) the Company's intention to restate its financial statements for the quarters ending January 31, 2004, April 30, 2004 and July 31, 2004 and (ii) the nature and amounts of the anticipated financial statement adjustments for such periods. The Company wishes to advise readers that a number of important factors could cause actual results to differ materially from those anticipated in such forward-looking statements including the fact that the anticipated adjustments to the financial statements for such periods, as well as the amendment of the quarterly reports on Form 10-Q for such periods, are subject to on-going preparation and review by the Company, the Audit Committee and KPMG, and accordingly are subject to change.

About SCO

The SCO Group (Nasdaq: SCOXE) helps millions of customers in more than 82 countries to grow their businesses everyday. Headquartered in Lindon, Utah, SCO has a worldwide network of more than 11,000 resellers and 4,000 developers. SCO Global Services provides reliable localized support and services to partners and customers. For more information on SCO products and services, visit http://www.sco.com .

SCO, and the associated SCO logo are trademarks or registered trademarks of The SCO Group, Inc. in the U.S. and other countries. UNIX is a registered trademark of The Open Group.


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