SCO Skirts Nasdaq Delisting with Post-Deadline Hearing

Updated: After missing several deadlines to turn in its late financial reports, the company files an appeal and secures a March hearing with the Nasdaq Listing Qualifications Panel.

The SCO Group, unable to turn in its late financial reports, has staved off immediate delisting from the Nasdaq stock market by filing an appeal.

The SCO Group Inc. has ended up fighting for its place on the stock market because it failed to file a Form 10-K for its fiscal year ended Oct. 31, 2004, in a timely fashion, as required under Marketplace Rule 4310(c)(14).

The Lindon, Utah-based company already had missed several deadlines. Its annual report was due 90 days after Oct. 31 to the SEC (Securities and Exchange Commission). SCO was granted an extension until Jan. 31, but it missed that deadline as well.

SCO also hasnt filed its first-quarter report for 2005. This report was due Feb. 15.

Then, on Feb. 16, Nasdaq informed SCO that it would be delisted from the exchange at the opening of business Feb. 25 unless the company appealed or submitted its late report.

Beginning Feb. 18, Nasdaq added an "E" to the end of SCOs trading symbol, making it SCOXE, to warn investors that the stock is in danger of being delisted.

The Unix and IP (intellectual property) litigation company, as of the morning of Feb. 25, still has not filed its 2004 annual report.

SCO, as expected, submitted a request for a hearing on Feb. 21 with the Nasdaq Listing Qualifications Panel. The next day, SCO was told by Nasdaq that its application for a hearing had been approved. The hearing is scheduled to take place March 17.

In addition, SCO CEO Darl McBride said the matter was unrelated to ongoing litigation involving the former management of its parent company, The Canopy Group.

"The delay in the filing of our 10K is due to a matter related to the employee stock purchase program. It has absolutely nothing to do with Canopy," McBride said.

"More SEC filings will come in the next week or two, and it all will become clear," said Blake Stowell, SCOs director of corporate communications.

There may be other, related causes, though.

"These are lingering issues left from last CFO [chief financial officer], and the new CFO is making sure that the ts are crossed and is are dotted," said Dion Cornett, managing director of Decatur Jones Equity Partners LLC, an equity research firm that focuses on SMBs (small to midsized businesses).

Bert Young, the new CFO, joined SCO last April. He replaced Bob Bench, who was then named vice president of corporate development until he retired later in 2004.

Young came on board just as SCO was becoming locked in a disagreement with one of its financial backers, BayStar Capital II LP.

BayStar, which had been led to invest in SCO by Microsoft, threatened to pull its investment of $40 million (reported at the time as $50 million), from the Unix company.

BayStar claimed that SCO had violated its agreement and misled the company about the financial prospects of SCOs IP lawsuits and Unix IP licensing. BayStar also wanted SCO to abandon its Unix business and focus all of its energies on its IP lawsuits against IBM and other companies.

After threatening a lawsuit, the investment company was unsuccessful in its attempt to gain control of SCO and had to settle for $13 million and 2.1 million shares of SCO common stock certificates for its $40 million worth of SCO Series A-1 shares.

Cornett expressed concern, though, that SCOs delays could be related to stock options. "Now, if they cant get their reports in before theyre delisted, thats a big red flag and raises additional questions," Cornett added.

"They should be pushing 20 hours a day prior to their being delisted. I think the management team appreciates the seriousness of the situation, so Im inclined to give them the benefit of the doubt," Cornett said.

SCOs management certainly does appreciate it, according to Stowell.

"Our people are working hard with our auditors, KPMG LLP, to resolve the situation as fast as possible."

In the meantime, "its business as usual," Stowell said.

"I think the issues will be resolved. I think it will end up not being a big deal," Cornett said.

Editors Note: This story was updated to include a response from SCO CEO Darl McBride.


Check out eWEEK.coms for the latest open-source news, reviews and analysis.