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A Number of Folks Who May Want to Sell SCO Stock Now Can - Updated
Monday, June 05 2006 @ 01:24 PM EDT

The SEC has posted two notices of effectiveness regarding The SCO Group. Here's an explanation (item 2) of what notices of effectiveness are. It's a new policy the SEC has as of May 22, 2006, of electronically posting instead of mailing these notices. It's a new Special-Purpose search category on EDGAR. Here are SCO's:
Friday's [scroll down]
May 25th's

This page shows them both, and if you click on the links on the right, File/Film No., you'll see all the relevant filings and amendments for each notice. Here's the page for Friday's notice of effectiveness, and this is the page for May 25th's.

Friday's is regarding BayStar and SDS Capital Group (Steven Derby) and 2,105,263 shares they'd presumably like to sell (actually it's less, as you will see, because SCO already bought some back and some shares have already been sold pursuant to a previously effective registration statement). And the May 25th one has to do with the Stock Agreement with Scoggin, Darcy Mott, Chesapeake Partners, Glenn Krevlin, and the gang and 2,852,449 shares they are now able to sell.

Here's that November 29, 2005 stock purchase agreement, with its very long indemnification paragraph. BayStar's initial filing in its protracted effort to scrape SCO off its shoes began in June of 2004. So I'm guessing this is their Happy Day.

The May 8, 2006 S-3 Registration Statement regarding BayStar and SDS explains some math:

SELLING STOCKHOLDERS

The following table sets forth the names of the selling stockholders, the number of shares of common stock known by us to be beneficially owned by the selling stockholders as of April 24, 2006 (based on each selling stockholder’s representations regarding its ownership) and the number of shares of common stock being registered for sale or distribution. The term “selling stockholders” includes the stockholders listed below and their transferees, assignees, pledgees, donees or other successors. We are unable to determine the exact number of shares that will actually be sold or distributed because the selling stockholders may sell or distribute all or some of the shares and because we are not aware of any agreements, arrangements or understandings with respect to the sale or distribution of any of the shares. The following table assumes that the selling stockholders will sell or distribute all of the shares being offered for their account by this prospectus. The shares offered by this prospectus may be offered from time to time by the selling stockholders. The selling stockholders are not making any representation that any shares covered by this prospectus will or will not be offered for sale or distribution. The selling stockholders reserve the right to accept or reject, in whole or in part, any proposed sale or distribution of shares. The selling stockholders also may offer and sell, or distribute, less than the number of shares indicated.


Name of Selling Stockholder Number of Shares of Common Stock Beneficially Owned Before the Offering Shares of Common Stock Being Offered in the Offering Number of Shares of Common Stock Beneficially Owned After the Offering(1)
BayStar Capital II, L.P. (2) 223,000 223,000 (3)
SDS Capital Group SPC, Ltd. (4) 700,019 700,019


(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) Lawrence Goldfarb is the managing partner of Bay Star Capital II, L.P. Mr. Goldbarb has voting and/or investment power over the shares held by this selling stockholder.

(3) Represents shares issued to this selling stockholder pursuant to the Stock Repurchase Agreement dated May 31, 2004 between the selling stockholder and us pursuant to which we repurchased 40,000 shares of our previously issued Series A-1 convertible preferred stock from the selling stockholder. We issued a total of 2,105,263 common shares to this selling stockholder in connection with the stock repurchase transaction, but this selling stockholder has subsequently sold 1,182,244 shares pursuant to this previously effective registration statement (SEC File No. 333-116732) and 700,019 shares in a private transaction with SDS Capital.

(4) Stephen Derby is the sole managing member of SDS Management, LLC, the investment manager of this selling stockholder, SDS Capital Group SPC, Ltd. Mr. Derby has voting and/or investment power over the shares held by this selling stockholder.


Footnote 3 is the interesting one. BayStar started with 2,105,263 common shares, but it subsequently sold 1,182,244 shares and then sold 700,019 shares in a private transaction to SDS Capital. All BayStar has left are 223,000 shares out of an original 2 million+. So while the document says there's no telling if BayStar wishes to unload the rest, the graph is pointing all one way, judging from this filing. It doesn't say when the deal went down with Derby and SDS, but the 700,000+ they got from BayStar are still there.

If you like exhibits, the document to focus on is this one, their S-1 dated March 1, 2006. It's about the 2,852,449 shares deal, but it is very detailed, and it tells the BayStar story, in part, like this:

Contributions From (Dividends On) Redeemable Convertible Preferred Stock

In October 2003, we issued 50,000 shares of our Series A Convertible Preferred Stock for $1,000 per share. In connection with completing the February 5, 2004 exchange of shares of Series A-1 Convertible Preferred Stock for outstanding Series A shares, we removed the carrying value of the Series A shares and related derivative and recorded the fair value of the Series A-1 shares issued in the exchange transaction. The difference between these two amounts was $6,305,000 and was recorded as a non-cash dividend during the year ended October 31, 2004.

With the completion of the repurchase transaction with BayStar Capital II, L.P. (“BayStar”) during the year ended October 31, 2004, as a result of which no Series A-1 shares remain outstanding, we will not be required to continue to accrue or pay any dividends on the Series A-1 shares. As a result of completing the repurchase transaction with BayStar, we recorded a capital contribution classified as a preferred stock dividend in the amount of $15,475,000, which represented the difference in the carrying value of the Series A-1 shares and accrued dividends less the fair value of the 2,105,263 shares of common stock and the $13,000,000 in cash. No dividends were paid on the Series A or Series A-1 shares.

If you want to see a list of agreements or stock plans, this is your document. The Asset Purchase Agreement dated June 6, 2003 between Vultus and SCO, for example is there, attached as an exhibit, the Letter Agreement between SCO and BayStar and the Royal Bank of Canada, RBC's exchange agreement with BayStar, various stock option grant agreements, incentive bonus plans, the Rights Agreement dated August 10, 2004 between SCO and ComputerShare Trust Company, their transfer agent, you name it. There are 48 exhibits filed with this document. We've seen lots of it before, such as the ComputerShare Trust agreement. But it's a very thorough collection, a check list for reference purposes.

This solves the mystery many of us have been wondering about, I think, as to why so many trolls were suddenly showing up telling all about how great SCO's chances are in its litigation.

I thought it might be worth memorializing what SCO told the SEC about the Novell dispute and SCOsource in a couple of these documents. In this Registration Statement that the 48 exhibits are attached to, filed on Dec. 22, 2005, titled Registration Statement for Face-Amount Certificate Companies, for example, they say this:

As a further response to our SCOsource initiatives and claim that our UNIX source code and derivative works have inappropriately been included in Linux, Novell has publicly asserted its belief that it owns certain copyrights in our UNIX source code, and it has filed 15 copyright applications with the United States Copyright Office related to UNIX. Novell also claims that it has a license to UNIX from us and the right to authorize its customers to use UNIX technology in its internal business operations. Specifically, Novell has also claimed to have retained rights related to legacy UNIX SVRx licenses, including the license with IBM. Novell asserts it has the right to take action on behalf of SCO in connection with such licenses, including termination rights. Novell has purported to veto our termination of the IBM, Sequent and SGI licenses. We have asserted that we obtained the UNIX business, source code, claims and copyrights when we acquired the assets and operations of the server and professional services groups from The Santa Cruz Operation (now Tarantella, Inc.) in May 2001, which had previously acquired all such assets and rights from Novell in September 1995 pursuant to an asset purchase agreement, as amended. In January 2004, in response to Novell’s actions, we brought suit against Novell for slander of title seeking relief for Novell’s alleged bad faith effort to interfere with our copyrights and contract rights related to our UNIX source code and derivative works and our UnixWare products. ...

Our future SCOsource licensing revenue is uncertain.

We initiated the SCOsource licensing effort in the year ended October 31, 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements and generated $25,846,000 in revenue. During the year ended October 31, 2004, our SCOsource licensing revenue declined significantly and was only $829,000 and during the nine months ended July 31, 2005, our SCOsource licensing revenue was only $132,000. Due to a lack of historical experience and the uncertainties related to SCOsource licensing revenue, we are unable to estimate the amount and timing of future SCOsource licensing revenue, if any. If we do receive revenue from this source, it may be sporadic and fluctuate from quarter to quarter. Our SCOsource initiatives are unlikely to produce stable, predictable revenue for the foreseeable future. Additionally, the success of these initiatives may depend on the strength of our intellectual property rights and contractual claims regarding UNIX, including the strength of our claim that unauthorized UNIX source code and derivatives are prevalent in Linux.

And in this March 1, 2006 S-1 filing, they described SCOsource like this:

We initiated the SCOsource licensing effort in the year ended October 31, 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements and generated $25,846,000 in revenue during the year ended October 31, 2003. During the year ended October 31, 2004, our SCOsource licensing revenue declined significantly to only $829,000 and during the year ended October 31, 2005, our SCOsource licensing revenue declined further to $166,000. Because of a lack of historical experience and the uncertainties related to SCOsource licensing revenue, we are unable to estimate the amount and timing of future SCOsource licensing revenue, if any. If we do receive revenue from this source, it may be sporadic and fluctuate from quarter to quarter. Additionally, the success of these initiatives may depend on the strength of our intellectual property rights and contractual claims regarding UNIX, including the strength of our claim that unauthorized UNIX source code and derivative works are prevalent in Linux.

Whatever they tell the court in SCO v. Novell regarding what were and were not SCOsource licenses has to match these representations, one assumes.

Update:

SCO has now filed a Prospectus Pursuant to Rule 424(B)(3) which uses new and different language altogether, which we will probably see from this day forward. This is comical:

SCOsource Business

During the year ended October 31, 2003, we became aware that our UNIX code and derivative works had been inappropriately included by others in the Linux operating system. We believe the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. The Linux operating system competes directly with our OpenServer and UnixWare products and has taken significant market share from these products.

In an effort to protect our UNIX intellectual property, we initiated our SCOsource business. The initiatives of this business include defending our UNIX intellectual property, seeking to enter into license agreements with UNIX vendors and offering SCOsource IP agreements to Linux and other end users allowing them to continue to use our UNIX source code and derivative works found in Linux. We believe that our SCOsource revenue opportunities have been adversely impacted by our outstanding dispute with Novell over our UNIX copyright ownership, which may have caused many potential customers to delay or forego licensing until an outcome in this legal matter has been reached.

In addition to our other SCOsource initiatives, in March 2003, we filed a complaint against International Business Machines Corporation, alleging, in part, that IBM had breached its license agreement with us by, among other things, inappropriately contributing UNIX source code and derivative works to the open source community and seeking to use its knowledge and methods related to UNIX source code and derivative works and modifications licensed to it to decrease the value of the UNIX operating system in favor of promoting the Linux operating system, of which it has been a major backer. Based on these alleged breaches, we delivered to IBM notice of termination of our license agreement with IBM that permitted IBM’s use of our UNIX source code in developing its AIX operating system. Based on similar violations, we also sent termination letters to Sequent Computer Systems, Inc. and Silicon Graphics, Inc. We have also commenced litigation against Novell and others to protect our intellectual property and contractual rights.


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