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What's It All About? - Some Restatement Details
Friday, March 04 2005 @ 11:00 AM EST

I had occasion to interview Decatur Jones' Dion Cornett about the SCO restatement announcement. I asked him what is it all about, and he tells me this, "The issue arose because the company did not register as many shares with the SEC as it authorized in its stock plan in 2000."

Woops.

Here is the S-8 I found that I believe is the one in question, and Dion agrees it appears to be the one. As you can see, there were only 500,000 shares registered with the SEC in that S-8 related to the 2000 stock plan. Cornett explains, "They issued $1M in stock beyond 500k shares authorized." 

What happens now? "Now they basically have to buy back the shares that were granted as if they were never issued in the first place to clean things up.  The other option would be to file an amended S-8 which is messier. I suspect that they’ll earn an SEC inquiry letter in any event."

However, he also says that it's important to remember that accounting isn't a black and white thing:

"The second issue was a judgment call that in hindsight could have been better but wasn’t necessarily wrong.  What some people may not appreciate is that accounting is not black and white.  CFOs continuously have to make rather grey judgments – e.g. percentage of completion accounting, impairment tests, pension liability assumptions, tax treatment of NOL’s based on likelihood of continued profitability, allowance for bad debt, amortization vs expensing, recognition policies, depreciation schedules, FIFO or LIFO…  Two very different decisions could both be right but depending on other circumstances one more optimal than the other.  The general philosophy is to be conservative and consistent.   "The third issue was clean-up of something that was caught and fine if left alone but better if fixed.  

"On the timing of 10k filing, a decision first had to be made whether or not to restate, again a grey decision.  The rule is to err conservatively, which they did, despite the fact that no CFO wants to sign a restatement, and the 10k had to wait for the new numbers."

I also asked about the company buying back the shares that were not authorized. Could it be a kind of sweet deal for the executives?

"It's something to watch, the price and terms under which they are rebought.  To cover themselves I suspect that they’ll get a credible third-party valuation and pay some discount to that value.  Given the scrutiny, they would be foolish to play games here, but we’ll all be watching."

Cornett doesn’t own SCOX, Decatur Jones does not engage in investment banking, and none of his views expressed are related to his compensation. A few more details from Bob Mims here. Did you note who signed that SEC filing, the 2000 S-8, by the way? That "keen businessman" Ralph Yarro, Ransom Love and Ray Noorda too.


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