decoration decoration
Stories

GROKLAW
When you want to know more...
decoration
For layout only
Home
Archives
Site Map
Search
About Groklaw
Awards
Legal Research
Timelines
ApplevSamsung
ApplevSamsung p.2
ArchiveExplorer
Autozone
Bilski
Cases
Cast: Lawyers
Comes v. MS
Contracts/Documents
Courts
DRM
Gordon v MS
GPL
Grokdoc
HTML How To
IPI v RH
IV v. Google
Legal Docs
Lodsys
MS Litigations
MSvB&N
News Picks
Novell v. MS
Novell-MS Deal
ODF/OOXML
OOXML Appeals
OraclevGoogle
Patents
ProjectMonterey
Psystar
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v IBM
SCO v Novell
SCO:Soup2Nuts
SCOsource
Sean Daly
Software Patents
Switch to Linux
Transcripts
Unix Books
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

Click here to send an email to the editor of this weblog.


To read comments to this article, go here
New SCO S-3: Boies' Firm Will Represent SCO in the Red Hat Lawsuit and the BayStar/RBC Register for Sale 3,850,000 Shares
Monday, November 17 2003 @ 08:53 PM EST

The SCO Group just filed an S-3 form with the SEC, which informs us that Royal Bank of Canada and BayStar Capital II are registering for sale of up to 3,850,000 shares. The Registration Statement also reveals that Boies will now be representing SCO in the Red Hat lawsuit in Delaware, as well as in the IBM case in Utah, and in connection with other matters having to do with protecting SCO's IP, whatever "other matters" turns out to mean. Details of the payment for these legal services are provided. They only mention two licensees under the SCOSource program.

First, here is what it says about Boies:

"We have agreed to pay to Boies, Schiller & Flexner LLP and other firms representing us in the protection of our intellectual property rights $1 million and register the issuance, pursuant to an effective registration statement, to Boies, Schiller & Flexner by March 1, 2004 of 400,000 shares of our common stock. Subject to the registration statement covering such shares being declared effective by the Securities and Exchange Commission, we would issue such shares under our current equity incentive plans. As a result of the issuance of this consideration to Boies, Schiller & Flexner LLP and other firms, SCO anticipates recording an additional charge to earnings of approximately $8,956,000 in its fourth quarter that ended October 31, 2003. This $8,956,000 charge to earnings is comprised of non-cash expense of $7,956,000 related to the issuance of the 400,000 shares of common stock and $1,000,000 in cash expense. We also have agreed with Boies, Schiller & Flexner LLP and the other law firms to expand the scope of their representation to include representing us in the Red Hat litigation, defending us in IBM's counterclaim against us and representing us in other matters relating to the protection of our intellectual property."

With respect to the shares being offered, it says this, among other things:

"This offering may have an adverse impact on the market value of our stock.

        "This prospectus relates to the sale or distribution of up to 3,850,000 shares of common stock by the selling stockholders. We will not receive any proceeds from these sales and have prepared this prospectus in order to meet our contractual obligations to the selling stockholders. The shares subject to this prospectus represent approximately 28 percent of our issued and outstanding common stock as of October 31, 2003. The sale of this block of stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market.

"Risks associated with the potential exercise of our options outstanding.

        "As of October 31, 2003, we have issued and outstanding options to purchase up to 3,629,568 shares of common stock with exercise prices ranging from $0.66 to $28.00 per share. The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. The possible future sale of shares issuable on the exercise of outstanding options could adversely affect the prevailing market price for our common stock. Further, the holders of the outstanding rights may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

"Our private placement and this offering may adversely impact the holders of our common stock.

       "This prospectus relates to the sale or distribution by the selling stockholders of up to 3,850,000 shares of common stock issuable by us upon conversion of shares of our nonvoting Series A Convertible Preferred Stock, including shares of Series A Convertible Preferred Stock issued in our private placement and shares that may be issued to the selling stockholders as accrued dividends. We will not receive any of the proceeds from these sales and have prepared this prospectus to meet our contractual obligations to the selling stockholders. The shares of common stock subject to this prospectus will, upon issuance, dilute the equity ownership percentage of the holders of our common stock. The market price of our common stock also could decline as a result of a large number of shares of our common stock in the market, or the perception that such sales could occur.

"The holders of shares of Series A Convertible Preferred Stock have preferential rights upon liquidation that could adversely affect the holders of our common stock.

       "If the selling stockholders choose not to convert shares of Series A Convertible Preferred Stock, then, as holders of shares of Series A Convertible Preferred Stock, among other rights, they will be entitled to receive a preferential distribution of our assets prior to any distribution to our holders of common stock upon a liquidation, dissolution, winding up or other change in control transaction in which we sell all or substantially all our assets or merge or consolidate or otherwise combine with another company or entity. Upon the occurrence of a liquidation event, the holders of Series A Convertible Preferred Stock will be entitled to receive the greater of:

• the value of the shares of Series A Convertible Preferred Stock held by them determined by multiplying the closing sale price of our common stock on the Nasdaq SmallCap Market on the date of the liquidation event by the number of shares of common stock into which the preferred shares could be converted at the time of the liquidation event; or

• up to $50 million, the aggregate purchase price paid by the selling stockholders for shares of Series A Convertible Preferred Stock in our private placement, plus eight percent of that amount less the amount of any dividends paid to the preferred stockholders in the calendar year in which the liquidation event occurs.

"Depending on the amount of assets we have available for distribution to stockholders upon a liquidation event when shares of Series A Convertible Preferred Stock remain outstanding, we may be required to distribute all such assets or a portion of such assets that exceeds the preferred stockholders' pro rata ownership of our common stock assuming full conversion of their preferred shares into common stock, which could eliminate or limit the assets available for distribution to our common stockholders.

"The rights of the selling stockholders as holders of shares of Series A Convertible Preferred Stock may prevent or make it more difficult for us to raise additional funds or take other significant company actions.

        "The Certificate of Designation creating our Series A Convertible Preferred Stock requires us to obtain the approval of the holders of a majority of the then outstanding Series A Convertible Preferred Stock to take the following actions, among others:

• change the rights, preferences or privileges of the Series A Convertible Preferred Stock or issue additional shares of Series A Convertible Preferred Stock;

• create or issue any other securities that are senior or equal in rank to the Series A Convertible Preferred Stock;

• create or issue any convertible securities having have floating conversion rate terms or a fixed conversion price below $16.93 or the closing sale price of our common stock on the Nasdaq SmallCap Market on the date of such issuance;

• incur any indebtedness, subject to limited exceptions; or

• sell or transfer any material asset or intellectual property to a third party.

       "Additionally, the Certificate of Designation provides that the holders of our Series A Convertible Preferred Stock have a participation right entitling them to purchase their pro rata share of any future equity securities, or debt that is convertible into equity, on the same terms offered by us to other purchasers of such securities. This participation right, and the right to approve the company actions described above, may make it more difficult for management, our board of directors or our stockholders to raise capital in the future in either equity or debt financing transactions or to take other significant company actions. These provisions could also limit the price that some investors might be willing to pay for shares of our common stock in the future.

"Our board of directors' right to authorize additional shares of preferred stock could adversely impact the rights of holders of our common stock.

       "Our board of directors currently has the right, with respect to the 4,950,000 shares of our preferred stock not designated as Series A Convertible Preferred Stock, to authorize the issuance of one or more additional series of our preferred stock with such voting, dividend and other rights as our directors determine. The board of directors can designate new series of preferred stock without the approval of the holders of our common stock, subject to the approval rights of our holders of Series A Convertible Preferred Stock as described above. The rights of holders of our common stock may be adversely affected by the rights of any holders of additional shares of preferred stock that may be issued in the future, including without limitation further dilution of the equity ownership percentage of our holders of common stock and their voting power if we issue preferred stock with voting rights. Additionally, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock."

Notice particularly footnote 2 in the chart below; there is no equivalent footnote for BayStar:

Name of Selling Stockholder

  Number of Shares of
Common Stock
Beneficially Owned
Before the Offering
(With Limitations)

  Shares of
Common Stock
Being Offered
in the Offering

  Number of Shares of
Common Stock
Beneficially Owned
After the Offering(1)

Royal Bank of Canada(2)   732,110 (3) 2,310,000 (4)
BayStar Capital II, L.P.   732,110 (5) 1,540,000 (6)
TOTAL   1,464,220   3,850,000  


"(1)Assumes the sale of all shares offered in this prospectus and no other purchases or sales of our common stock by the selling stockholders.

"(2)Royal Bank of Canada is the affiliate of RBC Dominion Securities Corporation and RBC Dain Rauscher, Inc., each a broker-dealer. This selling stockholder has represented to us that the shares of our equity securities held by it were purchased in the ordinary course of business, and that at the time of purchase of our shares held by it, it did not have any agreements or understandings, directly or indirectly, with any person to distribute the shares held by it.

"(3)Represents shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement. As described more fully below, the Certificate of Designation for our Series A Convertible Preferred Stock prevents this selling stockholder from converting any shares of Series A Convertible Preferred Stock, and prevents us from issuing shares of our common stock in connection with the conversion of shares of Series A Convertible Preferred Stock, into shares of common stock exceeding an amount that would result in the selling stockholder and its affiliates together beneficially owning more than 4.99 percent of our then-outstanding common stock.

"(4)Includes 1,772,002 shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement and 537,998 shares issuable upon conversion of shares of Series A Convertible Preferred Stock that may be issued from time to time as dividends on the Series A Convertible Preferred Stock.

"(5)Represents shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement. As described more fully below, the Certificate of Designation for our Series A Convertible Preferred Stock prevents this selling stockholder from converting any shares of Series A Convertible Preferred Stock, and prevents us from issuing shares of our common stock in connection with the conversion of shares of Series A Convertible Preferred Stock, into shares of common stock exceeding an amount that would result in the selling stockholder and its affiliates together beneficially owning more than 4.99 percent of our then-outstanding common stock.

"(6)Includes 1,181,335 shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement and 358,665 shares issuable upon conversion of shares of Series A Convertible Preferred Stock that may be issued from time to time as dividends on the Series A Convertible Preferred Stock."
What About the Risks Section?

In addition to the usual, dilution of percentage ownership interest and value, there are some differences I noted from earlier such filings. First, they are attributing their business failures in part to the improper use of their Unix code by competitors. They also claim "several" attacks on their servers, whereas there have only been two announced publicly, one of which is in dispute. And the indemnification of officers, executives and directors section is expanded. Here is the indemnification section:

"ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

        "The registrant's Amended and Restated Certificate of Incorporation (the 'Certificate') provides that, except to the extent prohibited by the Delaware General Corporation Law, as amended (the 'DGCL'), the registrant's directors shall not be personally liable to the registrant or its stockholders for monetary damages for any breach of fiduciary duty as directors of the registrant. Under the DGCL, the directors have a fiduciary duty to the registrant that is not eliminated by this provision of the Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director's duty of loyalty to the registrant, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. The registrant maintains a policy of liability insurance for its officers and directors. . . .

 "Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the question has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue."

As for the risks section generally, here are some snips:

"In our quarterly results of operations, we recognize revenue from agreements for support and maintenance contracts and other long-term contracts that have been previously invoiced and are included in deferred revenue. Our deferred revenue balance has declined from $10.1 million as of October 31, 2002 to $6.8 million as of July 31, 2003. . . .

"In addition to these above-mentioned actions, other regulators or others in the Linux community may initiate legal actions against us, all of which may negatively impact our operations or future operating performance. . . .

 "Our revenue from the sale of UNIX-based products has declined over the last eight quarters. This decrease in revenue has been attributable to the worldwide economic slowdown, lower information technology spending, and increased competitive pressures from alternative operating systems. As explained elsewhere in this filing, we claim that much of this competition is in violation of our contractual and intellectual property rights. If the demand for UNIX-based products continues to decline, and we are unable to develop new products and services that successfully address a market demand, our business will be adversely affected. . . .

"During the last several quarters the U.S. and European economies have experienced an economic slowdown that has affected the purchasing habits of many consumers across many industries and across many geographies. This has caused the delay, or even cancellation of technology purchases. The ultimate impact of the slowdown in the United States and Europe is difficult to predict, but it has contributed, together with the unauthorized use of our UNIX code, to decreased sales of our products, longer sales cycles and lower prices. If the economic slowdown and the unauthorized use of our UNIX code continue, our revenue and results of operations may continue to be lower than expected. In addition, the slowdown may also affect the end-user market making it more difficult for our reseller channel to sell our products.

"This prospectus relates to the sale or distribution of up to 3,850,000 shares of common stock by the selling stockholders. We will not receive any proceeds from these sales and have prepared this prospectus in order to meet our contractual obligations to the selling stockholders. The shares subject to this prospectus represent approximately 28 percent of our issued and outstanding common stock as of October 31, 2003. The sale of this block of stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market."

Here is how they describe the IBM lawsuit this time:

"The complaint alleges that IBM obtained information concerning the UNIX source code from us and inappropriately used and distributed that information in connection with its efforts to promote the Linux operating system.

 "On or about June 16, 2003, we filed an amended complaint in the IBM case. The amended complaint essentially restates and realleges the allegations of the original complaint and expands on those claims in several ways. Most importantly, the amended complaint raises new allegations regarding IBM's actions and breaches through the products and services of Sequent, which IBM acquired. We allege that IBM breached the Sequent agreement in several ways similar to those set forth above and we are seeking damages flowing from those breaches. We are also seeking injunctive relief on several of our claims."

Here is how much of the $50 million they actually got themselves:

"Our competitive position could decline if we are unable to obtain additional financing.

        "We recently completed the private placement of $50 million of our Series A Convertible Preferred Stock, for which we received approximately $47.8 million in net proceeds."

There is, of course, a great deal more, so take a look yourselves.


  View Printable Version


Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )