SCO Has Its Day in Nasdaq Court

 
 
By Steven Vaughan-Nichols  |  Posted 2005-03-18
 
 
 
SCO made its case on Thursday before the Nasdaq Listing Qualifications Panel in Washington for staying on the Nasdaq SmallCap Market stock market, but no decision was announced immediately by the panel.

The SCO Group Inc. was placed in this position because it had failed to file its Form 10-K for its fiscal year ending Oct. 31, 2004, in a timely fashion, as required under Market Place Rule 4310(c)(14).

While SCO was not immediately delisted, its trading symbol, SCOX, was given an E—making it SCOXE—to show would-be stock buyers that the Lindon, Utah-based company was not in compliance with Nasdaq regulations.

The Unix company, which has been involved in a bitter fight with IBM and other companies over contract violations and IP (intellectual property) issues revolving around Unix and Linux, still has not filed its 10-K or its first quarter report for 2005.

Darl McBride, CEO of SCO, has stated that, "The delay in the filing of our 10-K is due to a matter related to the employee stock purchase program."

According to SCOs 8-K report of March 3, SCO stated that "these shares may have been issued under SCOs 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."

These were not options, according to SCO sources. Rather, they were shares that had been purchased through the employee stock purchase program.

Click here for more details about the accounting errors that are forcing SCO to restate its 2004 earnings.

In addition, SCO must reclassify accrued dividends related to its previously issued Series A and Series A-1 Convertible Preferred Stock from equity to current liabilities, in the amounts of about $879,000 and $1,619,000 for the first quarter and the second quarter respectively.

These dividends came from stock that was issued in connection with SCOs $50-million private placement from BayStar Capital II LP and the Royal Bank of Canada. BayStar eventually assumed the Banks shares and then failed in an attempt to gain control of SCO.

After a fight for control of SCO, 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.

With 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. But counting these dividends as equity was an error. Instead, SCO must reclassify these dividends as current liabilities.

Finally, SCO expects that it will have to restate about $233,000 of stock-based compensation, aka stock options, an expense which was recorded in the second quarter but incurred in the first quarter. The net result will be that there will be no change to the total stock-based compensation expense for the fiscal year 2004.

Both the dividend and the stock option restatements, according to a SCO source, will result in no net change to the companys bottom line.

In addition, SCO sources stated that the 10-K and first quarter report would be filed shortly. Less than a week ago, SCOs founding company, the Canopy Group gave over its shares of SCO to SCO chairman of the board and former Canopy CEO Ralph Yarro, as part of a settlement concerning Mr. Yarrows dismissal from Canopy.

On Friday morning, SCO stock has dropped 4 cents (-1.06 percent) on light trading.

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