Build an Ark: Microsoft to Pay a Dividend

Gates & Co. roll out minuscule dividend payment. Plus: Feds lay off Fastow's stuff-- for now. Also: FASB approves new rules for SPEs...er...VIEs, while TRW Automotive plans huge junk offering.

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Microsoft Corp. became the first tech company to announce plans to pay a dividend since President Bush proposed exempting dividends from individual taxes.

The world’s largest software company announced it would pay an annual dividend of cents per share, before taking into account the two-for-one split that the company also announced on Thursday.

“Declaring a dividend demonstrates the board’s confidence in the company’s long-term growth opportunities and financial strength,” said Microsoft chief financial officer John Connors. “We are especially pleased to be able to return profits to our shareholders while maintaining our significant investment in research and development and satisfying our long-term capital requirements.”

Connors said the stock split, coupled with the annual dividend, will make Microsoft stock even more attractive to a broader range of investors. “We see enormous potential for growth in the software and technology sector, and remain committed to attracting investors who share this enthusiasm and take a long-term view of the company’s growth opportunities,” he noted.

The company also said it is introducing a direct stock purchase program and a dividend reinvestment program, offering both new investors and current stockholders the option of receiving Microsoft’s annual dividend in cash or having it automatically reinvested.

But before you go out and buy shares in Microsoft, bear in mind that the stock dividend will yield a microscopic 0.289 percent.

The payout will cost Microsoft $856 million a year. That’s small potatoes for Gates & Co. Currently Microsoft is sitting on an astronomical $43 billion in cash and short-term investments. According to CFO PeerMetrix, that’s equal to 108 days of operating expenses for the software giant.

For years, Microsoft’s management has resisted shareholder calls to funnel some of its cash cache to the owners of the company. Indeed, until yesterday’s announcement, Microsoft was the only corporation among the Dow 30 that didn’t pay a dividend.

“It makes enough sense,” Michael Holland, manager of the Holland Balanced Fund, told Bloomberg. Microsoft’s cash “can be delivered to shareholders, including Bill Gates.”

In fact, Microsoft chairman Gates, who held nearly 612 million shares as of November, will receive $97.9 million a year from the dividends. Chief executive Steve Ballmer, with more than 235 million shares as of September, will receive $37.7 million. Again, small potatoes.

Interestingly, under the Bush plan, companies will not be able to pay out retained earnings free of taxes. Hence Microsoft can’t use its cash for the dividend and have it remain tax free, according to Bloomberg.

Meanwhile, on Thursday executives at Yahoo Inc. told Bloomberg Television the company is considering paying a dividend.

And Maxim Integrated Products Inc., which makes chips for things like mobile telephones and MP3 music players, said on October 30 that it would pay a dividend for the first time.

Feds Back Off from Fastow’s Stuff

Andy Fastow’s assets are safe—at least for the time being.

It seems the government has backed off from its efforts to seize the assets of Enron Corp.’s former CFO and his wife until his criminal case is resolved, according to the Houston Chronicle.

The Fastows reportedly asked U.S. District Judge Melinda Harmon to stay the forfeiture proceeding for fear that they might wind up divulging critical evidence during their asset hearing.

Back in August the government tried to seize more than $28 million in bank accounts and other assets from Fastow, his brother, and a number of former Enron employees, arguing they were the proceeds of fraudulent activity, according to the paper.

Since then, the Fastows received the go-ahead to unload their River Oaks property, but the proceeds will probably remain frozen until a judge determines whether they are the proceeds of fraud, said theChronicle.

On Halloween Fastow was indicted on 78 counts, including fraud, money laundering, and conspiracy as part of an alleged scheme to artificially boost Enron’s earnings and enrich himself.

A hearing to begin scheduling the case is set for February 10. A trial date, however, has not yet been set.

Earlier this month, government lawyers reportedly said they would file a “superseding” indictment that could include even more charges against Fastow. That supersized indictment could come as early as next month.

SEC Charges CFO with Fraud

The Securities and Exchange Commission filed a complaint in U.S. District Court against ClearOne Communications Inc., as well as CFO and vice president of finance Susie Strohm and chairman, CEO, and president Frances Flood. The complaint stems from an alleged channel-stuffing scheme.

The commission charged the company and two executives with violating the antifraud, reporting, issuer books and records, and lying to auditors provisions of the federal securities laws.

The commission is seeking disgorgement and civil financial penalties.

The complaint alleges that from March 31, 2001, through September 30, 2002, ClearOne, Flood, and Strohm engaged in a program of inflating the company’s revenues, net income, and accounts receivable by engaging in improper revenue recognition.

“It is alleged that this course of conduct was effected primarily through a program of channel stuffing conceived and directed by Flood, assisted by Strohm,” said the SEC in its complaint.

The regulatory agency also alleged that Flood and Strohm shipped large amounts of inventory to the company’s distributors at the end of each quarter with the understanding that the distributors did not have to pay for these products until they resold them to their own customers. In some instances the SEC claims the distributors were given the right to return or exchange unwanted ClearOne products they were unable to sell.

In addition, the SEC alleged that on December 11, 2001, while this conduct was going on, ClearOne closed a $25.5 million private placement of common stock.

GE Cap Dips with U.S. Air

GE Capital Corp. will take a stake of up to 5 percent in bankrupt U.S. Airways Group Inc. in exchange for providing $830 million in financing.

The airline’s largest creditor will provide $120 million in debtor-in-possession (DIP) financing, a $360 million loan for use after the airline exits from Chapter 11 protection, and $350 million of lease equity for the leveraged lease financing of regional jet aircraft.

In return, GE Capital will receive 3.8 million warrants to buy Class A common stock of the reorganized company, representing 5 percent of the shares if all warrants issued are exercised as well as 3.8 million shares of Class A preferred stock.

In other financing news:

  • Bank of America raised $1 billion from issuing 10-year global notes in a self-led deal. The notes were priced to yield 4.947 percent, or 86 basis points above comparable Treasuries. They were rated Aa2 by Moody’s and A-plus by S&P.
  • Freddie Mac issued $5 billion of 10-year reference notes, priced to yield 4.624 percent, or 53.5 basis points over 10-year Treasuries.
  • TRW Automotive Inc. plans to raise $1.4 billion early next month in the largest U.S. junk bond sale in nearly two years, according to published reports. The offering is intended to help private equity firm Blackstone Group finance its $4.73 billion purchase of a 58 percent stake in TRW Auto from Northrop Grumman Corp.

If TRW Automotive does raise the $1.4 billion, the junk issue would be the largest since Charter Communications Inc. trotted out $1.5 billion of junk bonds in May 2001.

Then again, TRW may not want to follow exactly in Charter’s footsteps. Earlier this week, Moody’s cut its debt ratings for Charter and its subsidiaries, mostly to Ca from Caa2. Moody’s also said the rating outlook for Charter remains negative.

“The downgrades are attributed to the growing probability of expected credit losses, which Moody’s believes will be sustained in connection with an increasingly likely debt restructuring over the near-to-intermediate term,” the credit-rating agency said in a statement.

  • Last week investors poured $1.03 billion into junk bond mutual funds, according to AMG Data Services.

Short Takes

  • On Thursday Sun Microsystems Inc. said it would take a $2.125 billion charge related to the impairment of goodwill and other intangible assets.
  • The Financial Accounting Standards Board (FASB) approved new rules that would all but rein in the use of so-called special-purpose entities, or SPEs. Such off-balance-sheet vehicles enabled Enron Corp. to keep huge amounts of debt off of its balance sheet. The new rules will tighten standards on when companies must account for the assets and liabilities of SPEs, which are now being called variable interest entities, or VIEs. (To find out more about the new FASB rules—and about whether off-balance-sheet financing has a future—read our special report.)

Fannie Mae cut the value of its derivatives portfolio by a mind-boggling $1.88 billion. The expense reflects new accounting rules governing the value of so-called purchase option expenses, CEO Franklin Raines told Bloomberg TV.

Fannie Mae typically holds derivatives to maturity, meaning its only risk is default by a counterparty, not quarterly changes in their values, according to Bloomberg. Accounting rules require derivatives to be written down to market values even if they are not sold. In the third quarter Fannie Mae reduced the value of derivatives by $1.38 billion, the wire service added.

The company uses derivatives and debt that can be bought back before maturity to hedge against the chance mortgages it holds would be repaid sooner than expected if interest rates fell. The hedges, which include options and swap contracts, are also used to protect against rising interest rates that can extend the life of the mortgages longer than desired.

  • International Game Technology CFO Maureen T. Mullarkey earned nearly $2.2 million last year. This includes a salary of $266,731, a bonus of $462,500, and a little more than $1.4 million in realized gains from exercising stock options.

Mullarkey, 43, has been with IGT since 1989—except for a brief stint with Zoho Corp.—and became CFO in 1998. She directs investor relations, finance, accounting, treasury management, tax, information system, and enterprise resource planning (ERP) functions.

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