UTStarcom: Lack Of Financial Filings May Be The Least Of Its Worries

The UTStarcom (UTSI) saga has taken some new twists. Based in Alamdea, California, but with most of its operations in China, the telecommunications equipment provider is coping with a variety of investigations, both internal and external, involving stock options backdating, accounting and other issues.

In the latest chapter in the story, the company Tuesday disclosed that it has begun “an independent review of historical sales contracts with some of its customers in China.” In an interview with Tech Trader Daily, Chesha Kamieniecki, director of investor relations, says the issues revolve around revenue recognition. Kamieniecki explains that the company is looking at whether in some cases revenue was recorded prematurely, resulting in orders being booked in the wrong quarter (the company books revenue on “final acceptance” by its customers, but in some cases deals may have been declared final when they actually weren’t).

She says there has been “no determination” as to whether the revenue recognition issues were intentional or not. Kamienicki notes that some of the contracts being examined are 3, 4 or 5 years old, and involved managers in China who are no longer with the company.

Also Tuesday, the company disclosed some basic balance sheet information for the first time in a year - the company’s last 10-Q was for the June 2006 quarter. The company said as of June 30 it had $528 million in cash, $416 million of that in China, down from $658 million, with $380 million in China, at June 30, 2006.

The company also had $380 million in long- and short-term debt as of June 30, $275 million of that related to subordinated convertible notes due March 2008. Short-term debt was $105 million of the total. A year ago, debt totally $398 million, including the $275 million convert; short-term debt was $123 million of the total.

Oh, and UTStarcom Tuesday also said that it will take a $28 million non-cash charge related to the issuance of stock options. Of course, the company hasn’t filed any financials in a year; this may be the least of its worries.

A couple of other things: As noted in an 8-K filing with the SEC last week, UTStarcom has asked holders of the converts for a waiver of a clause in the notes that triggers a default from a failure to make timely filings with the SEC. The consent period for the solicitation expires on Thursday after the close. If the company fails to get the consents, it could allow holders of the converts to demand repayment. Kamienicki says she can’t say at this point whether the company will win the needed consents. The company has enough cash to repay the converts, but unfortunately most of that cash is in China; in last week’s 8-K the company notes that moving more than $200 million out of China requires “the consent of the Chinese government.”

One small irony: in last week’s 8-K, the company noted that it has “historically experienced difficulty finding qualified accounting personnel knowledgeable in both U.S. and Chinese accounting standards who are Chinese residents.” So maybe the new investigation shouldn’t be that surprising.

Several other investigations involving the company are still ongoing. The SEC is conducting a formal investigation into financial disclosures, among other issues; the Justice Department has been looking to possible violations of the Foreign Corrupt Practices Act in Mongolia, Southeast Asia, India and China. Kamienicki says there is nothing new to report on either front.

Finally, one other mystery remains. Last December, UTStarcom CEO Hong Lu received a Wells Notice from the SEC indicating that “the SEC staff intends to recommend that the Commission file a civil action against him “in connection with an ongoing investigation into trading activities by third parties.” But as Kamienicki notes, no SEC charges have ever been filed.

UTStarcom Tuesday is down 65 cents, or nearly 14%, to $4.08. The company’s market cap is down to $493 million, or less than its cash position. But bargain hunters beware; this is a messy story with the potential to get messier still.

Note: I’ve updated the story slightly to clarify the circumstances concerning the issues surrounding the China contracts.

UTSI 1-yr chart:

Comments

[tom havens]

goldman is largest holder...they had interest in a deal at 10 to 11 so at 4 it is very conceivable that something will be done....just for china business....