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BayStar Repurchase and the SCO Restatement
Saturday, March 05 2005 @ 05:15 PM EST

According to CRN's Alexander Wolf's story, Bay Star seems to be involved in the restatement story:

"One impetus for the restatement appears to be the way SCO handled the accounting when it repurchased a high-profile $50 million investment made in the company by Baystar in 2003.

"Baystar no longer holds any preferred shares, according to SCO spokesman Blake Stowell. 'All of their preferred shares were converted to common shares,' Stowell says. 'They had 2.1 million shares of SCO stock. I believe they [now] hold something around 900,000 shares.'

"At $4.10 a share, the price SCO was trading on the NASDAQ exchange at press time, that's worth $3.69 million. Under the terms of Baystar's holdings, should the investment firm wish to further divest its holdings, it can only sell stock worth up to 10 percent of the average trading volume on any given day, Stowell says. SCO currently has no special relationship with Baystar, Stowell adds."

Vnunet has a few more details, and amusingly calls SCO a "Linux company", which is, I dare say, the very last thing on earth this company can rightfully and accurately be called in 2005. I believe SCO declined that honor some time ago.

Here's what they tell us:

"The financial restatement will also see the firm reclassifying accrued dividends for the first and second quarters related to 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.

"For the first and second quarters, SCO expects to restate approximately $233,000 of stock-based compensation expense recorded in the second quarter, but incurred in the first quarter.

"SCO stated that as soon as it has completed it accounting review with KPMG it will file amendments to its quarterly reports with the US Securities and Exchange Commission and will file its annual report for the year ended 31 October 2004."

Bob Mims' article in the Salt Lake Tribune adds:

"Specifically, SCO intends to reclassify from permanent equity to temporary equity † amounts totaling $272,000 for first quarter 2004, $231,000 for the second quarter, and $557,000 for the third quarter. The company also plans to reclassify some $2.5 million in accrued dividends from preferred stocks in the first and second quarters of last year, and will restate $233,000 of stock-based compensation expense related to the same period."

Steven J. Vaughan-Nichols gives more details with respects to BayStar:

"After an acrimonious series of exchanges, BayStar agreed to sell its outstanding shares back to SCO in July 2004 for $13 million and 2.1 million shares of SCO common stock certificates for its shares.

"Because of this, SCO no longer had to pay dividends on the BayStar shares. The accrued dividends were never paid and were recorded as equity when the BayStar repurchase transaction finally went through in August 2004.

"It turned out that recording those dividends as equity was an error. So, SCO will be reclassifying these dividends as current liabilities instead of equity."

He also interviewed analyst Stacey Quandt, who raises some questions:

"'While SCO states that the pending restatement of financial statements to correct certain accounting errors will not impact the net loss or earnings for the fiscal year ended October 31, 2004,' said Stacey Quandt, senior business analyst with the Robert Frances Group, 'the question remains how this restatement will impact future earnings.'

"For example, because SCO expects to reclassify amounts related to its employee stock purchase shares and to reclassify dividends from equity to current liabilities, 'a change from equity to liability may have a negative impact on SCO's future financial statements,' said Quandt.

"Quandt also raised the question of whether 'SCO's agreement with its legal council [sic] to provide payment with SCO stock instead of cash has any relation to the restatement of earnings. For example, why does SCO need to restate approximately $233,000 of stock-based compensation expense which was recorded in the second quarter?'"

The Santa Cruz Sentinel, quoting the Business Week article, "A Linux Nemesis on the Rocks," outlining SCO's declining fortunes, says SCO laid off a third of their staff last year:

"Last year, SCO cut about 100 jobs. Thatís a third of its work force. SCO maintains an office in Santa Cruz where the company, formerly known as Santa Cruz Operation, was born.

"Decatur Jones Equity Partners told Business Week that it predicts SCO will report an $11 million loss on $38 million in sales this fiscal year.

"SCO has suffered a number of setbacks recently calling into question its finances, its $3 billion lawsuit against IBM over copyright infringement and its management.

"In December, SCOís largest investor, Canopy Group, fired two of its top executives, who also serve as chairman and director on SCOís board. Canopy sued the former executives alleging they overpaid themselves by at least $20 million. The Canopy executives deny those charges."

Hmm. All these big numbers. I think I'm getting confused. And I may not be the only one. Mims quotes Rob Enderle as saying this:

"'The delay, as the company had indicated, appears to have to do with the restatement of equities offered to employees. It is not uncommon, particularly now, for the external audit firm to find mistakes like this, particularly when accounting rules are changing,' Enderle added."

Perhaps Mims will follow up by asking him what accounting rules, related to registration of securites, have changed since 1934. Oh, and how do you restate an equity? I always like to learn new things.

You might enjoy a laugh at Humorix's fake news story about trading on the litigation futures market:

"It's long been said that SCO is nothing more than a 'publicly traded lawsuit.' Thanks to the new Chicago Board of Lawsuit Trade, that isn't so far from the truth. Now investors and traders will be able to buy and sell shares in ongoing lawsuits, hoping for a massive payday. . . .

"Just one week into operations, shares of lawsuits in the Asbestos sector have risen 54%, while shares of Hot Coffee Spills have dropped 5% in response to the new Federal law limiting class-action lawsuits. The Software Patents sector briefly jumped 500% after word spread that Europe was ready to roll over and play dead for its American masters.

"'This is much more fun than buying stock. After all, companies don't earn money, lawsuits do,' explained one day trader . . ."

I guess that depends.

UPDATE:

Groklaw's eagle-eyed Mouse spotted this intriguing article about KPMG, and it also mentions Deutsche Bank. It seems Senate investigators are criticizing their practices regarding tax shelters:

"In particular, investigators criticized the KPMG audit firm, two law firms and several investment banks, saying they worked together to promote shelters that featured paper losses and sham charitable contributions.

"Investigators said KPMG made more than $124 million by aggressively marketing the deeply flawed shelters to wealthy investors while taking 'steps to conceal its tax-shelter activities' from federal tax authorities.

"KPMG allegedly paid the law firm known now as Sidley Austin Brown & Wood $23 million to provide supportive legal opinions on more than 600 shelters. It allowed one former Sidley Austin lawyer, R.J. Ruble, to bill it at the equivalent rate of $9,000 an hour. . . . "KPMG spokesman George Ledwith said the firm 'regrets its participation' in the now-discredited tax shelters and cited 'fundamental changes that KPMG vigorously undertook in its tax practice.' In January 2004, the firm replaced three top tax executives. It also dismantled much of its shelter business. It remains subject to a federal grand jury probe and civil lawsuits. . . .

"Senate investigators also criticized Deutsche Bank, HVB Bank, UBS and the former First Union National Bank, now part of Wachovia Bank, for advancing more than $15 billion in credit to KPMG tax-shelter clients. It said Deutsche Bank earned $44 million, First Union $13 million and HVB $5.45 million for financing shelters the banks knew posed 'reputational risk.'

"Investigators particularly criticized KPMG and the banks for working together when the firm audited the banks' books. The report says KPMG knew the relationship 'raised auditor-independence concerns,' concluding that the firm was 'auditing its own work.'"


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