Melanie Hollands has done the hard work of pulling together all the options facing SCO, including trying to stay listed, in an article for IT Manager's Journal, "What happens if SCO Group stock is de-listed on NASDAQ?"
"To become listed, and stay listed, a company must maintain certain standards. For details, see this NASDAQ site page and BristolDirect. On the NASDAQ, for example, companies must pay certain listing fees, have a minimum stockholder's equity, have a minimum number of shareholders, etc. This is understandable from the stock exchanges' point of view. Their reputation rests on the companies they allow to trade on the exchange. The exchanges therefore don't want just any company to be able to trade -- they only want the cream of the crop, the companies that have solid management and a good track record. Failure to meet these specifications set out by the exchange results in the de-listing of the stock. Some of the other factors that trigger the delisting process are a low bid price and low market capitalization. In the penny stock areas, the "fraudsters" flourish and stocks are manipulated; major exchanges don't want to be associated with this type of behavior, so they de-list the type of companies that engage in it."
It turns out that even if they are de-listed, they have some options and can still be traded in a kind of grade B way, on the Over-the-Counter (OTC) Bulletin Board (OTCBB) or on the Pink Sheets, which she explains. The real issue is, why couldn't they timely file?
"There has been chatter that the delinquency has to do with accounting treatment for stock options, and that it's possible (but this is just chatter – not confirmed) that SCO Group's auditors wouldn't sign off on the Form 10-K because of something to do with the stock options. Whatever the reasons SCO is delinquent, my instinct is that long-term this whole SCOX mess will get very, very, ugly, and many SCO people will be out of work. . . .
"The company said that the delinquency is related to accounting treatment for stock options. Recall on April 20, 2004, SCO Group filed a number of registration documents granting options to seven of its executives. The executives include the new CFO Bert Young, and the following members of the Board of Directors: Duff Thompson, Fred Skousen, Ralph Yarro, Darcy Mott, Daniel Campbell, and Edward Iacobucci.
"At the time, I thought the timing and the pricing of these options could have been a red flag -- but it also may not have been. The pricing of the April 20, 2004 options appeared, at the very least, to be favorable. Some industry chatter suggested the executives optioned themselves up in light of the stock's low levels. Some went so far as to suggest that they may have doing may have acted on "inside information" (as defined by the Securities and Exchange Act of 1934).
"In my opinion, the pricing of the options relative to SCOX price levels over the pervious 12 months was at the very least favorable. But since then, the stock fell under $3, so that's not quite so favorable. The stock option grant could also have been a red herring -- an attempt to send a positive signal to the market in order to try and drive the stock price up. And if you recall, that is, in fact, what happened for a while: the stock price moved back up to around $11. Such subtle forms of manipulation are not unheard of. The SCO executives were granted an 'option to buy' at $7.18. Although it's possible the April 20 grant was part of the compensation plan, those seven executives did get very favorable pricing on the options. The options price at $7.18 was either: 1) very, very lucky, or 2) potentially a red flag that executives were optioned up following a major stock dip."
She then goes into the best and the worst case scenarios. There is a new SCO financial fundamentals page, updated on February 17, 2005, by the way. Here's how things looked in 2001. But one thing Hollands writes struck a bell:
"Now, SCO Group has not, to the best of my knowledge, been delinquent in the past with filings. But that doesn't necessarily mean its past filings have been correct or that the auditors haven't been helping cook the books."
I thought it would be useful to go back through the Groklaw archives, and make a record of everything we've reported on those filings. It begins with this article from June of 2003 on SCO's quarterly SEC filing for the period ended April 30, 2003, that showed the company issued stock options to certain executives, a consultant, and members of the board, and to one SCOsource licensee, which I believe would be Sun Microsystems:
"During the six months ended April 30, 2003, the Company issued 218,000 shares of restricted stock to certain key employees and 150,000 shares of restricted common stock to members of the Company's board of directors. The restricted common stock issued to the board of directors was in lieu of cash compensation for their services to the Company during the 2003 fiscal year and the restrictions lapse at October 31, 2003. The restrictions on the restricted stock awards granted to key employees lapse over a period of 24 months. The fair value of the restricted stock awards granted of $549,000 was recorded as a component of deferred compensation and is amortized to stock-based compensation as the restrictions lapse or as the services are performed....
"During the six months ended April 30, 2003, the Company issued a ten-year option to acquire 100,000 shares of the Company's common stock at $1.52 per share to a consultant for services. The option vests as follows, (i) options to purchase 50,000 shares vest on a monthly basis over a 12-month period, and (ii) the remaining options to purchase 50,000 shares vest upon the achievement of certain milestones. The fair value of the options will be determined and recorded as expense in the periods the services are performed and the milestones are achieved. During the quarter ended April 30, 2003, the Company recorded $131,000 of expense related to this option. For the six months ended April 30, 2003, the Company recorded $186,000 of expense related to this option. . . .
"Warrant Agreement -- During the quarter ended April 30, 2003, the Company issued a warrant to a SCOsource licensee. The warrant allows the licensee to acquire 210,000 shares of the Company's common stock at an exercise price of $1.83 per share for a term of five years from the date of grant. Because the warrant was issued for no consideration to the SCOsource licensee, the Company has recorded the fair value of the warrant of $500,000, as determined using the Black-Scholes option-pricing model, as a warrant outstanding during the quarter ended April 30, 2003 and reduced license revenue accordingly. . . .
"Future sales of our common stock may negatively affect our stock price. Certain holders of our common stock have demand and piggyback registration rights obligating us to register their shares under the Securities Act for sale. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. This also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. . . .
"Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the audited annual financial statements and the notes thereto included in the Company's most recent annual report on Form 10-K, are adequate to make the information presented not misleading."
I also remembered an article Groklaw did on their April 24, 2003 Proxy Statement, which outlined compensation for executives and the board:
The Company's directors will receive $25,000 plus $5,000 per committee served on, for the 2003 fiscal year payable in restricted shares of the Company's common stock priced effective February 21, 2003. In addition, members will be reimbursed for expenses in connection with attendance at board and committee meetings. Directors also participate in the Company's 1999 Omnibus Stock Incentive Plan, which provides for the award of an option to acquire 45,000 shares on joining the board and an option to acquire 15,000 shares for each year the board member continues to serve once stockholder approval is obtained at the Company's Annual Meeting.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the duty of the compensation committee to review and determine the salaries and bonuses of executive officers of the Company, including the Chief Executive Officer, and to establish the general compensation policies for such individuals. The compensation committee also has the sole and exclusive authority to make discretionary option grants to the Company's executive officers under the 1999 and the 2002 Omnibus Stock Incentive Plans.
The compensation committee believes that the compensation programs for the Company's executive officers should reflect the Company's performance and the value created for its stockholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of the Company and should reward individual contribution to the Company's success. The Company is engaged in a very competitive industry, and the Company's success depends upon its ability to attract and retain qualified executives through competitive compensation packages.
General Compensation Policy. The compensation committee's policy is to provide the Company's executive officers with compensation opportunities that are based upon their personal performance, the financial performance of the Company and their contribution to that performance and that are competitive enough to attract and retain highly skilled individuals. Each executive officer's compensation package is comprised of three elements: (i) base salary that is competitive with the market and reflects individual performance; (ii) quarterly performance awards tied to performance of agreed-upon corporate objectives, and certain financial performance metrics of the Company, including but not limited to consolidated revenue, gross margin, net operating income and net income; and (iii) long-term stock-based incentive awards designed to strengthen the mutuality of interests between the executive officers and its stockholders. As an officer's level of responsibility increases, a greater proportion of his or her total compensation will be tied to the Company's financial performance and stock price appreciation rather than base salary.
Factors. The principal factors that were taken into account in establishing each executive officer's compensation package for the 2002 fiscal year are described below. However, the compensation committee has reserved the ability to exercise its discretion in applying entirely different factors, such as different measures of financial performance, for future fiscal years.
Base Salary. The base salary levels for the executive officers were established for the 2002 fiscal year on the basis of the following factors: personal performance and experience, the estimated salary levels in effect for similar positions at a select group of companies within and outside the Company's industry with which the Company competes for executive talent, and internal comparability considerations. The compensation committee made its decision as to the appropriate market level of base salary for each executive officer on the basis of its understanding of the salary levels in effect for similar positions at those companies with which the Company competes for executive talent. Base salaries are reviewed on an annual basis, and adjustments will be made in accordance with the factors indicated above. During fiscal year 2002, all executive officers of the Company took salary reductions in an effort to continue to control costs and to move towards the Company's goal to achieve profitability during fiscal year 2003.
Quarterly Performance Awards. Each executive officer (other than the Chief Executive Officer whose quarterly performance awards are described below in CEO compensation) may also earn a quarterly performance award on the basis of: (i) performance of agreed upon objectives between the executive officer and the Chief Executive Officer prior to the start of each quarter; and (ii) achievement by the Company of certain financial goals as approved by the Board of Directors and executive management. Prior to the payment of any quarterly performance award, the achievement of the financials goals must be attained in any given quarter. During fiscal year 2002 no quarterly performance awards were paid.
Equity Incentives. Equity incentives to the executive officers were provided through stock option grants and restricted stock awards under the 1999 Omnibus Stock Incentive Plan. The grants and awards are designed to align the interests of each executive officer with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an
owner with an equity stake in the business. Each grant allows the individual to acquire shares of the Company's common stock at a fixed price per share (the market price of the grant date) over a specified period of time (up to 10 years). The shares subject to each option vest in installments over a 48-month period, contingent upon the executive officer's continued employment with the Company. Accordingly, the option will provide a return to the executive officer only if the executive officer remains employed by the Company during the applicable vesting period, and then only if the market price of the underlying shares appreciates over the option term. Restricted stock awards allow the individual to receive shares of the Company's common stock with restrictions lapsing over a 24-month period.
The number of shares subject to each option grant or restricted stock award will be set at a level intended to create a meaningful opportunity for stock ownership based on the officer's current position with the Company, the base salary associated with the position, the size of comparable awards made to individuals in similar positions within the industry, the individual's potential for increased responsibility and promotion over the option term, and the individual's personal performance in recent periods. The compensation committee will also take into account the executive officer's existing holdings of the Company's common stock and the number of vested and unvested options held by that individual in order to maintain an appropriate level of equity incentive. However, the compensation committee does not intend to adhere to any specific guidelines as to the relative option holdings of the Company's executive officers.
CEO Compensation. In setting the total compensation payable to the Company's Chief Executive Officer for the 2002 fiscal year, the compensation committee sought to make that compensation competitive, while at the same time assuring that a significant percentage of compensation was tied to the Company's performance. The compensation committee reviewed industry compensation surveys for chief executive officers of comparable software companies to determine an appropriate compensation level. During fiscal year 2002, the Company hired Darl McBride, a seasoned technology veteran, to succeed Ransom Love as the Company's Chief Executive Officer. During fiscal year 2002, the base salary for Darl McBride was $250,000, which was later reduced to $230,000 as a result of salary cuts in the Company. Mr. McBride was also eligible to receive a quarterly performance award for reaching financial targets. The primary goals established for Mr. McBride included the successful attainment of revenue, and net income targets as established in his offer letter. These targets have been set very aggressively and will allow for Mr. McBride to earn from 20% to 300% of his base salary as a quarterly performance award based on attainment. During fiscal year 2002, Mr. McBride did not receive any quarterly performance award payments.
In recognition of the leadership and guidance Mr. McBride brings to the Company, he was granted 600,000 options to purchase shares under the Company's 1999 Omnibus Stock Incentive Plan. Of the options granted to Mr. McBride, 400,000 options vest 25% after one year with the remaining 75% vesting at 1/36th per month thereafter, until fully vested. Of the remaining 200,000 stock options granted to Mr. McBride, 50,000 options will vest one year from the date of the Company's first profitable quarter (as long as that profitable quarter is before Q4 of fiscal year 2003) and the remaining 150,000 options will vest one year from the date the Company achieves four consecutive quarters of profitability (as long as the fourth quarter is before Q4 of fiscal year 2004).
Compliance With Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly-held companies for compensation paid to certain of their executive officers, to the extent that compensation exceeds $1 million per covered officer in any fiscal year. The limitation applies only to compensation which is not considered to be performance-based. Non-performance based compensation paid to the Company's executive officers for the 2002 fiscal year did not exceed the $1 million limit per officer, and the compensation committee does not anticipate that the non-performance based compensation to be paid to the Company's executive officers for fiscal year 2003 will exceed that limit. The Company's 1999, and if approved 2002, Omnibus Stock Incentive
Plans have been structured so that any compensation deemed paid in connection with the exercise of option grants made under that plan with an exercise price equal to the fair market value of the options shares on the grant date will qualify as performance-based compensation which will not be subject to the $1 million limitation. Because it is unlikely that the cash compensation payable to any of the Company's executive officers in the foreseeable future will approach the $1 million limit, the compensation committee has decided at this time not to take any action to limit or restructure the elements of cash compensation payable to the Company's executive officers. The compensation committee will reconsider this decision should the individual cash compensation of any executive officer ever approach the $1 million level.
Then there was this article about changes to the corporate certificate of incorporation, filed with the SEC on July 7, 2003, but dated the 3rd of May, 2001, their Amended and Restated Certificate of Incorporation of Caldera International, Inc. Aside from trying to limit liability of the Board of Directors and any others it approved, it said this:
B. Removal of Directors. Notwithstanding any other provisions of this Certificate or the Bylaws of the Corporation, any director or the entire Board of Directors of the Corporation may be removed, at any time, but only for cause and only by the affirmative vote of the holders of not less than a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. Notwithstanding the foregoing, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the preceding provisions of this ARTICLE V shall not apply with respect to the director or directors elected by such holders of Preferred Stock.
Then on July 8, 2003, they filed their Registration Statement on Form S-3 relating to "the public offering or distribution by selling stockholders of up to 305,274 shares of common stock, par value $0.001 per share, of The SCO Group, Inc.", which Groklaw recorded in this article, which also discusses piercing the corporate veil. This was the time 305,274 shares of Common Stock were offered for sale by Vultus, Inc., The Canopy Group, Inc., Angel Partners Inc., Michael Meservy, Bruce K. Grant Jr., Ty D. Mattingly and R. Kevin Bean.
"No due diligence review of our company has been done in connection with this offering.
"No securities broker-dealer or other person has been engaged to perform any due diligence or similar review of this offering or our company on behalf of the selling stockholders, persons who may purchase common stock in this offering, or any other person. Consequently, individual investors cannot rely on such a due diligence review having been performed in making a decision to invest in our common stock.
"Risks associated with the potential exercise of our options outstanding.
"As of July 1, 2003, we have issued and outstanding options to purchase up to 4,011,975 shares of common stock with exercise prices ranging from $0.66 to $59.00 per share. The existence of such rights to acquire Common Stock at fixed prices may prove a hindrance to our future equity and debt financing 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.
"Potential for the issuance of additional common stock.
"We have an authorized capital of 45,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share. As of July 1, 2003, we have 13,334,886 shares of common stock and no shares of preferred stock issued and outstanding. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. Any such issuance will dilute the percentage ownership of shareholders and may dilute the book value of our common stock. . . .
"We will not receive any proceeds from the sale or distribution of the common stock by the selling stockholders. We anticipate that we will incur costs of approximately $20,000 in connection with the transactions described in this prospectus, including filing fees, transfer agent costs, printing costs, listing fees, and legal and accounting fees."
Then in August of 2003, Groklaw compiled a list of all insider trades from 2002 on. Remember when SCO commented on insider trading in an August 2003 press release?
"The SCO Group, Inc. (Nasdaq: SCOX) encourages its directors and executive officers to sell the stock held by them through plans designed to qualify for the protections provided by Rule 10b5-1 under the Securities Exchange Act of 1934.
"The 10b5-1 plans provide for future sales of stock, at predetermined times and in amounts and under conditions specified in the plans, without subsequent instructions from the participants. These plans have been adopted by the following individuals: Robert Bench, CFO; Jeff Hunsaker, Sr. VP Marketing; Reg Broughton, Sr. VP International Sales; and Michael Olson, VP Finance/Controller. These plans have been implemented primarily for the purpose of providing liquidity to the participants to meet sizable personal tax liabilities resulting from the vesting of restricted stock awards.
"During the three months ended July 31, 2003, individuals selling under approved 10b5-1 plans sold 88,000 shares of the Company's common stock. Two other executive officers sold 29,616 shares during the same three-month period in Company approved open trading windows. For the upcoming three-month period to end on October 31, 2003, the above-referenced executive officers may sell up to 141,000 shares of the Company's common stock under current 10b5-1 plans if the conditions of the various plans are met. No other directors or executive officers have implemented a 10b5-1 trading plan to sell shares of the Company's stock during the next three months.
"Our directors and executive officers beneficially hold approximately 6,005,000 shares and options to acquire an additional 2,016,000 shares."
Shortly after that, on August 15, 2003, we reported on the Bloomberg article, in which Darl McBride claimed that their stock sales plan was submitted in January of 2003 "months before legal action was contemplated."
"Chief Financial Officer Robert Bench began the selling by SCO insiders, four days after SCO filed the suit against IBM. Bench is selling to help pay a $150,000 tax bill, McBride said. Under the Sarbanes-Oxley law, companies are no longer able to loan executives money to pay taxes or other expenses.
"Bench submitted a sale plan in January, months before any legal action against IBM was contemplated, McBride said. His agreement called for the sales to begin on March 8. He planned to sell 5,000 shares a month for the next 12 months, according to the plan."
However, there is some circumstantial evidence in our report that certain legal steps were taken in January, including hiring Boies Schiller on January 22. Of course, SCO might claim that wasn't the point at which they were positive they would follow a litigation strategy. It was Maureen O'Gara who reported on January 10:
"A usually reliable source swears a SCO executive told him that SCO has hired the redoubtable David Boies, who prosecuted the Microsoft antitrust case for the Justice Department, to press infringement claims not against users but against the other Linux distributions."
On September 15, 2003, we reported on an article I found from 2002 that said this about how long it took to start thinking about taking steps to monetize IP:
"The then-Caldera legal team was appointed the task of coming up with a review of the history of Caldera's intellectual properties and their status. The review turned up a stack of license agreements that had gone uncollected for years. To date (remember, McBride has been on board as CEO for only a few weeks), Caldera has already come to agreements with holders of these old licenses that will generate $600,000 in recurring revenue.
"The intellectual property fishing expedition has provided The SCO Group with the legal due diligence to now lay claim to UNIX itself. According to Opinder Bawa, new Senior VP of Technology, 'we own the source to UNIX; it's that simple. If we own the source, we are entitled to collect the agreed license fees.'"
Next, we reported on SCO's quarterly report for the period ending July 31, 2003, which said this:
To approve an amendment to the 2002 Omnibus Stock Incentive Plan to provide for up to 1,500,000 shares of common stock to be subject to awards issued under the plan. This resolution was passed with 6,851,000 votes in favor, 196,000 votes against and 4,000 abstentions.
3. To approve an amendment to the 2000 Employee Stock Purchase Plan to provide for an additional 500,000 shares to be subject to awards issued under the plan. This resolution was passed with 6,877,000 votes in favor, 169,000 votes against and 4,000 abstentions.
This was the 10Q that reported the acquisition of Vultus and some investment issues with Vista.com, and it also discussed stock compensation:
Under the terms of an Asset Acquisition Agreement (the “Vultus Agreement”) dated June 6, 2003, the Company acquired substantially all of the assets of Vultus, Inc. (“Vultus”), a corporation engaged in the web services interface business, in exchange for the issuance of 167,590 shares of the Company’s common stock, of which The Canopy Group (“Canopy”), the
Company’s principal stockholder, received 36,656 shares, and the assumption of approximately $215,000 in accrued liabilities of Vultus. In addition, the Company assumed the obligations of Vultus under two secured notes payable to Canopy totaling $1,073,000. In connection with the assumption of the notes payable to Canopy, Canopy agreed to accept the issuance of 137,684 shares of the Company’s common stock in full satisfaction of the obligations. Canopy was a stockholder and significant debt holder of Vultus. The Company extended employment offers to most of the former employees of Vultus. Vultus is expected to be an integral part of the Company’s web services strategy. . . .
The $8.06 per share value of the common stock issued was determined based on the average market price of the Company’s common stock for the two days before and the day of signing the Vultus Agreement.
The Company accounted for the acquisition of Vultus as a business combination in accordance with SFAS No. 141. SFAS No. 141 requires that the total purchase price, including direct fees and expenses, be allocated to the assets acquired based upon their respective fair values. No current assets or tangible assets of significant value were acquired. Based on the nature and status of the research and development projects at the date of acquisition, none of the purchase price has been allocated to in-process research and development. . . .
During the three and nine months ended July 31, 2003, the Company granted options to purchase 375,000 and 1,488,000 shares of common stock with average exercise prices of $8.53 and $3.58, respectively, per share. None of these stock options was granted at prices below the quoted market price on the date of grant. During the three and nine months ended July 31, 2003, 776,000 and 1,023,000 options to purchase shares of common stock were exercised with average exercise prices of $1.57 and $1.41 per share, respectively. As of July 31, 2003, there were 3,724,000 stock options outstanding with a weighted average exercise price of $2.82 per share.
Amortization of stock-based compensation was $235,000 and $631,000, during the three and nine months ended July 31, 2003, respectively. Amortization (benefit) of stock-based compensation was ($287,000) and $144,000, during the three and nine months ended July 31, 2002 respectively. The benefit of stock-based compensation for the three months ended July 31, 2002 resulted from the reversal of previously recorded stock-based compensation related to non-vested options forfeited by certain employees whose employment had been terminated.
During the three and nine months ended July 31, 2003, the Company issued 7,000 and 225,000 shares, respectively, of restricted stock to certain key employees. The restrictions on the restricted stock awards granted to key employees lapse over a period of 24 months. The fair value of the restricted stock awards granted for the three and nine months ended July 31, 2003, was $61,000 and $415,000, respectively. The fair value of the restricted stock awards was recorded as a component of deferred compensation and is amortized to stock-based compensation as the restrictions lapse.
During the quarter ended April 30, 2003, the Company’s board of directors approved a resolution to receive remaining amounts owed to them for services provided during the 2002 fiscal year in the form of stock awards. The Company issued 27,500 shares of common stock with a fair value of $36,000. The fair value of the stock was recorded as stock-based compensation for the nine months ended July 31, 2003. Additionally, the Company granted 150,000 shares of restricted common stock to members of the Company’s board of directors with a fair value of $195,000. The restricted common stock issued to the board of directors was in lieu of cash compensation for their services to the Company during the 2003 fiscal year and the restrictions lapse on October 31, 2003.
In December 2002, the Company issued a ten-year option to a consultant to acquire 100,000 shares of the Company’s common stock at $1.52 per share. The option vests as follows, (i) options to purchase 50,000 shares vest on a monthly basis over a 12-month period, and (ii) the remaining options to purchase 50,000 shares vest upon the achievement of certain milestones. The fair value of the options will be determined and recorded as expense in the periods the services are performed and the milestones are achieved. During the quarter ended July 31, 2003, the Company recorded $74,000 of expense related to this option. Assumptions used in the Black-Scholes option-pricing model to determine the fair value of the options vested during the quarter ended July 31, 2003 were the following: market value of common stock of $7.34 per share; risk-free interest rate of two percent; expected dividend yield of 0 percent; volatility of 232 percent; and expected exercise life of one year. For the nine months ended July 31, 2003, the Company recorded $260,000 of expense related to this option.
During the quarter ended April 30, 2003, the Company issued a warrant to a SCOsource licensee. The warrant allows the licensee to acquire 210,000 shares of the Company’s common stock at an exercise price of $1.83 per share for a term of five years from the date of grant. Because the warrant was issued for no consideration to the SCOsource licensee, the Company has recorded the fair value of the warrant of $500,000, as determined using the Black-Scholes option-pricing model, as a warrant outstanding during the quarter ended April 30, 2003 and reduced license revenue accordingly. Assumptions used in the Black-Scholes option-pricing model to estimate fair value were the following: market value of common stock of $2.40 per share; risk-free interest rate of three percent; expected dividend yield of 0 percent; volatility of 236 percent; and term of five years.
During the quarter ended July 31, 2003, the Company issued a second warrant to the above mentioned SCOsource licensee in connection with payment of amounts owed to the Company under the initial license agreement. The warrant allows the licensee to acquire 12,500 shares of the Company’s common stock at an exercise price of $1.83 per share for a term of five years from the date of the agreement. Because the warrant was issued in connection with the advance payment, the Company has recorded the fair value of the warrant of $150,000, as determined using the Black-Scholes option-pricing model, as a warrant outstanding and reduced license revenue accordingly. Since the terms of the initial license agreement extended beyond the Company’s normal payment terms, the related revenue was not recognized until the payments
became due. Assumptions used in the Black-Scholes option-pricing model to estimate the fair value were the following: market value of common stock of $12.52 per share; risk-free interest rate of two percent; expected dividend yield of 0 percent; volatility of 137 percent; and a term of five years.
Warrant Agreement with Consultant
During the quarter ended July 31, 2003, the Company issued a warrant to a consultant, as part of an agreement to assist the Company with its SCOsource licensing initiative. The warrant allows the consultant to acquire 25,000 shares of the Company’s common stock at an exercise price of $8.50 per share for a term of two years from the date of the agreement. The Company has recorded the fair value of the warrant of $94,000, as determined using the Black-Scholes option-pricing model, as a warrant outstanding and included this cost as a cost of SCOsource licensing revenue. Assumptions used in the Black-Scholes option-pricing model to estimate the fair value were the following: market value of common stock of $12.84 per share; risk-free interest rate of two percent; expected dividend yield of 0 percent; volatility of 143 percent; and a term of 2 years.
Warrant Agreement with Morgan Keegan
In August 2002, the Company entered into an agreement with Morgan Keegan & Company (“Morgan Keegan”) to act as an exclusive financial advisor to assist the Company in its analysis, consideration and if appropriate, execution of various financial and strategic alternatives including, but not limited to, securing additional equity and/or debt capital and potential strategic transactions including mergers, acquisitions and joint ventures.
In consideration for the services provided, the Company issued to Morgan Keegan a warrant to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.01 per share. Morgan Keegan was granted demand registration rights to have the Company use its best efforts to register the shares upon exercise of the warrant. The Company expensed the fair value of the warrant of $294,000, determined using the Black-Scholes option-pricing model. Assumptions used in the Black-Scholes option-pricing model were the following: market value of common stock of $1.47 per share; risk-free interest rate of three percent; expected dividend yield of 0 percent; volatility of 145 percent; and expected exercise life of three months. In January 2003, Morgan Keegan exercised the warrant.
In the event that the Company is successful in raising equity, it will owe a contingent fee to Morgan Keegan for six percent of the principal amount of the financing. If the Company is successful in raising mezzanine financing (convertible debt) and/or senior debt, it will owe a contingent fee to Morgan Keegan of three percent and one percent, respectively, of the amounts borrowed. In the event that the Company is successful in completing an acquisition, it will owe a contingent fee to Morgan Keegan for the greater of two percent of the transaction value or $250,000.
Employee Stock Purchase Plan
On November 30, 2002, employees participating in the Company’s employee stock purchase plan acquired 87,500 shares of the Company’s common stock at a price of $0.66 per share. On May 31, 2003, 258,000 shares of the Company’s common stock were acquired at prices between $0.66 and $1.38 per share.
At those rates, even a $3 price would mean a profit. There was another stock sale in September of 2003, again reported by Groklaw, again being sold by Angel Partners, Michael Meservy, Ty D. Mattingly, Bruce K. Grant, Jr., and R. Kevin Bean. The filing included this information about Angel Partners:
"Ralph J. Yarro III, and Darcy Mott, Canopy's Chief Executive Officer and Chief Financial Officer, respectively, are both members of our board of directors. Ralph J. Yarro III is also on the board of trustees of Angel Partners, a charitable organization."
In October, we reported SCO filed an Amendment to its S3 from September, and Dr Stupid did a handy comparison [PDF], so we could easily see the changes.
Next, in November, 2003, we reported on SCO filing an S3 that, with the BayStar/Royal Bank of Canada info, and the original plan to give Boies shares, in addition to cash, and it added this tidbit on SCO's indemnification of officers and the board:
"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.
The S3 also included this information:
"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."
In January of 2004, SCO filed a 10K that included the Morgan Keegan letters and the Independent Contractor Agreement with S2 Strategic Consulting.
Then in February of 2004, another S3, filed February 11, which detailed more BayStar info, and we did a handy chart, tracking the changes in the "Certificate of Designation, Preferences and Rights" resulting from the exchange of "Series A convertible preferred stock" (attached as an exhibit to the 8-K filing with the SEC on Oct, 17th 2003) to "Series A-1 convertible preferred stock" (attached to the 8-K filing with the SEC on Feb, 9th 2004).
Here's the report on a Newsforge story that the SEC was possibly investigating SCO and possibly Microsoft's role as well. And here's when we reported on SCO's buyback. And then in March of 2004, we reported on the conversion, as noted in SCO's 10Q.
We reported on Robert Bench's retirement and his replacement by Bert Young and Bench's stock history in April of 2004. In July of 2004, we provided details on SCO's buyback of stock, from their 10Q and their S3. That article included the following bio blurb on Ralph Yarro, found on Power Innovations:
"Ralph is the Chairman of the Board for the Canopy Group. He also serves as Chairman of the Board of Trustees of Angel Partners, a 501(c)3 support organization for the Church of Jesus Christ of Latter-Day Saints and a Trustee for the Noorda Family Trust, the Scenic View Center, and the Worth of a Soul Foundation. He is the Chairman of the Board of Directors of Altiris, AP Software, Caldera Systems, Center 7, Coresoft, and Helius. He sits on the Board of Directors for: the Canopy Group, 2NetFX, Arcanvs, Cogito, DataCrystal, Expressware, Global Prime, The Guy Store, HomePipeLine, Interworks, Lineo, MTI, ManageMyMoney, Nombas, Profit Pro, Recruit Search, Troll Tech and TugNut."
An Altiris SEC filing says Yarro and Mott resigned. The article mentioned the Vultus writeoff from the SCO 10Q:
"The Company recorded a loss on impairment of long-lived assets totaling $2,139,000, which related to an impairment on intangible assets of $973,000 and an impairment of goodwill of $1,166,000 for the three and six months ended April 30, 2004. The impairment related to goodwill and intangible assets acquired in connection with the acquisition of Vultus, Inc. ('Vultus') in June 2003. The Company concluded that an impairment-triggering event occurred during the three months ended April 30, 2004 as an impending partnership that would solidify the Vultus revenue and cash flow opportunities did not materialize. Additionally, the Company had a reduction in force that impacted the Company's ability to move the Vultus initiative forward on a stand-alone basis. Consequently, the Company has concluded that no significant future cash flows related to its Vultus assets would be realized. The Company performed an impairment analysis of its recorded goodwill related to the Vultus reporting unit in accordance with SFAS No. 142. Additionally, an impairment analysis of the intangible assets was performed in accordance with SFAS No. 144. As a result of these analyses, the Company wrote-down the carrying value of its goodwill related to the Vultus acquisition from $1,166,000 to $0 and wrote-down intangible assets related to its Vultus acquisition from $973,000 to $0."
The same article reported that Angel Partners is not required to file a report with the IRS, because its income is less than $25,000, according to GuideStarEZ. In July of 2004, we told you the Wall St. Journal said BayStar was being "scrutinized" by the SEC. The settlement with BayStar is here.
If you would like to review the stock prices for every day since March of 2003, here you go. Transcripts of teleconferences are here or search the Archives by keyword "transcript". The SCO Financials page has more resources. So there you are. You should be able to find anything you are looking for now.