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SCO's Motion to Give Stock Options to 4 Executives - Updated - Why Might They Want Options?
Thursday, August 28 2008 @ 03:56 PM EDT

SCO has filed a motion [PDF], titled Debtor's Motion for (1) a Determination that Stock Options Granted to Executives Were Awarded in the Ordinary Court of Debtors' Business and (2) Continuing Authority to Grant Ordinary Course Stock Options. SCO says it consulted with the US Trustee's Office and it says it takes no position on this motion. But SCO says they are filing the motion "in an abundance of caution." And it has filed a motion [PDF] to be able to file evidence and give testimony about the stock plan under seal.

Well. I would want that too, I'm thinking, all things considered. It's comforting to know there are still people on earth who still want SCO stock. Relax. Just joking around.

The first motion has to do with stock options granted under the SCO 2004 Omnibus Stock Incentive Plan, attached as Exhibit A [PDF], options that SCO granted on August 26, 2008. That was Tuesday. So they granted them and now they are asking the court to say it's OK and to let them do it again in the future.

The plan "is designed to promote the interests of SCO and its stockholders by incentivizing and rewarding employees who make a long-term contribution to the success of the company," SCO says. But trust me, if you want to know just how incentivized the SCO executives have been, you probably want to read their 2008 Proxy Statement, filed with the SEC on March 5, 2008. Looking at both documents together brings them both into a more nuanced context.

You can read about the 2004 Stock Option Plan in this Proxy Statement from that year, which described the Plan for shareholders to consider voting for it at the upcoming meeting on April of 2004. The plan is also included as an exhibit, in case you'd find it easier to read as text online, instead of as a PDF. The Plan says this is its purpose:

The Plan is intended to promote the interests of the Company and the stockholders of the Company by providing officers, other employees of the Company, directors who are not employees of the Company, consultants and other persons who are expected to make a long-term contribution to the success of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ of the Company and/or to acquire a proprietary interest in the long-term success of the Company, thereby aligning their interest more closely to the interest of stockholders.

There is also a hearing set on the quarterly bills from SCO's many little helpers. The bills covering April 1 through June 30th from Pachulski, Stang, Berger Singerman, Mesirow, Tanner, and Dorsey & Whitney will be heard on September 16. The motion about the stock options might come up then too, if anyone objects. That's going to be quite a hearing. But let's get back to those stock grants.

This draws the eye, on page 5 of the motion:

12. On August 26, 2008, the Committee approved the award of 580,000 shares of SCO's common stock to SCO's four executives (chief executive officer, chief operating officer, general counsel and chief financial officer). The award to the executives was at the exercise price of $0.24 per Option, which was the trading price of the Common Stock as of the date of the grant.

13. The timing of the filing of SCO's bankruptcy petition coincided with the close of the company's fourth quarter and its fiscal year end. SCO and its Board were rightfully and understandably focused on ensuring that the filing had as minimal a disruption as possible to operations. Accordingly, the Committee did not consider or approve the award of Options for the Debtors' executives for fiscal year ending October 31, 2007 until August 26, 2008.

The price is as of August, but it's for the year that ended October 31, 2007. So does that mean the four executives would be the ones back then? Like Bert Young? Wait. No. SCO announced in a press release dated September 28, 2007 that he'd left and been replaced by Ken Nielsen. So, if it's an incentive bonus, to encourage employees to continue in the employ of SCO, I'd say it should go to Nielsen, as it's too late to incentivize Young. But Nielsen was described in the headline as the "Interim Financial Officer," so I'm not sure how incentivized he can get.

SCO Proxy Statement lists these four as the SCO executives: Darl McBride, Ken Nielsen, Jeff Hunsaker, and Ryan Tibbits. Is that all they have left? Perhaps this list means they are the ones. Except the Proxy Statement says Hunsaker "has served as President and Chief Operating Officer of SCO Operations since December 2007." So he wasn't COO in October of 2007. My, this is confusing. Here's what the Proxy Statement says about executives:

In reviewing and setting the total compensation of our Chief Executive Officer for the year ended October 31, 2007, the Compensation Committee sought to make that compensation competitive, while at the same time assuring that a significant percentage of compensation was tied to our performance. The Company did not adjust the base salary for the Chief Executive Officer as a result of our cash constraints. Consequently, the base salary for Darl McBride, our Chief Executive Officer, remained unchanged at $265,000 for the fiscal year ended October 31, 2007. The base salary level for the other executive officers was established for the year ended October 31, 2007 on the basis of the following factors: personal performance and experience and the estimated salary levels in effect for similar positions. The Compensation Committee reviews the other executive officers’ base salaries periodically and makes adjustments accordingly. We did not benchmark the salaries of our executive officers against the salaries of other companies.

Bonuses. Each Named Executive Officer is eligible to receive quarterly and annual performance-based bonuses by participating in either the Employee Incentive Bonus Program or the Sales Compensation Plan, both as described below. These bonuses are intended to motivate participating executives to achieve both short-term and long-term strategic and financial objectives. Mr. McBride received bonus payments of $144,691 for the year ended October 31, 2007 as a result of the attainment of personal management performance objectives, which included, but were not limited to establishing new business channels and partnerships for mobile technologies, launching new digital mobile services, and leading our operations to preserve and maximize cash resources. During the year ended October 31, 2007, our other Named Executive Officers collectively received bonus payments of $186,756 (excluding the discretionary bonus of $84,408 paid to Mr. Tibbitts as described below), based on the personal attainment of their management performance objectives and/or achieving a certain level of sales. The Compensation Committee adjusted the performance goals for the fourth quarter for Messrs. McBride, Tibbitts and Hunsaker, because of unforeseen changes to our business, including our bankruptcy filing. The Compensation Committee then awarded bonuses to these individuals that were based upon the adjusted performance goals, which adjusted performance goals were, in the opinion of the Compensation Committee, more indicative of such officer’s actual performance. In addition, in recognition of the significant contributions Mr. Tibbitts has made to our company, the Board also approved a discretionary bonus of $50,000, net of taxes, to be paid to Mr. Tibbitts. The total bonus amount equaled $84,408. Mr. Young, our former Chief Financial Officer, received a transition fee of $60,000 for continuing to assist us for a period of time after he resigned.

There's a chart of compensation earned during the fiscal year ended October 31, 2007. Darl got:

Salary: 265,000
Bonuses: 46,375
Option Awards: 161,529
Non-Equity Incentive Plan Compensation: 98,316
Total: 571,220

There's a footnote 3 on the category Non-Equity Incentive Plan Compensation:

This amount constitutes the cash bonuses made to certain Named Executive Officers. Darl McBride, Ryan Tibbitts and Bert Young participated in the Employee Incentive Bonus Program; Chris Sontag participated in the Sales Compensation Plan; and Jeff Hunsaker and Sandeep Gupta participated in both plans. Mr. Hunsaker received $24,710 pursuant to the Sale Compensation Plan and $2,880 pursuant to the Employee Incentive Bonus Program; Mr. Gupta received $35,555 pursuant to the Sales Compensation Plan and $8,211 pursuant to

There's a footnote 2 also, regarding the category of Option Awards:

(2) The amounts reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended October 31, 2007, in accordance with SFAS 123(R) of stock option awards issued pursuant to our equity incentive plans and include amounts from outstanding stock option awards granted during and prior to fiscal 2007. Assumptions used in the calculation of these amounts are included in the notes to our audited consolidated financial statements for the fiscal year ended October 31, 2007 as included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 29, 2008. The amounts shown disregard estimated forfeitures related to service-based vesting conditions. During the fiscal year ended October 31, 2007, Mr. Sontag forfeited 84,792 options and Mr. Young forfeited 181,875 options. See the “Grant of Plan-Based Awards—Fiscal 2007” table for information on stock option grants made in fiscal 2007. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that may be recognized by the Named Executive Officers.

Ken Nielsen is listed as getting only his salary in 2007, $9,545, Ryan Tibbitts did almost as well as Darl:

Salary: 165,769
Bonuses: 100,408
Option Awards: 253,789
Non-Equity Incentive Plan Compensation: 33,920
Total: 553,886

Again there is an explanatory footnote:

(5) Of this amount, $16,000 represents a bonus awarded to Mr. Tibbitts as further described above in Footnote 1 to this table and $84,408 represents a discretionary cash bonus awarded to Mr. Tibbitts for services rendered during fiscal 2007 as further described above in the “Compensation Discussion and Analysis” section of this Proxy Statement.

Bert Young did well too:

Salary: 170,000
Bonuses: ---
Option Awards: 333,406
Non-Equity Incentive Plan Compensation: 36,040
All Other Compensation: 60,000 Total: 599,446

That's a higher total than Darl. There's a footnote explaining the "All Other Compensation":

(7) Represents a payment made to Mr. Young for transition services rendered during fiscal 2007 as further described above in the “Compensation Discussion and Analysis” section of this Proxy Statement.

Another footnote, 6, says Young departed SCO October 9th. Sandeep Gupta's total was 308,923; Chris Sontag 263,758 (which includes $24,000, "the payment of the taxes due on the vesting of Mr. Sontag’s restricted stock"); and Jeff Hunsaker 257,112. There's a chart also showing what they all got in the way of options on November 13, 2006, but a footnote says, " (2) All option grants were made pursuant to the 2002 Omnibus Stock Incentive Plan..." Hmm. It shows, in footnote 5, Young forfeiting 80,000 options during the fiscal year ended October 31, 2007. Next follows a chart, "Outstanding Equity Awards at Fiscal Year-End—2007". Quite a number of unexercised options are listed on that chart, but there are years to go before they expire.

There's one more list of interest, the percentage of shares owned by the principal stockholders and executives:

Ralph Yarro: 5,684,355 shares, 26.1%
AmTrust Capital Management, Inc.: 1,328,731 shares, 6.2%
Darl C. McBride: 990,912 shares, 4.4%
Ryan E. Tibbitts: 349,581 shares, 1.6%
Chris Sontag: 245,947 shares, 1.1%

The true believers. Young has zero. So does Nielsen. The two financial officers. Oh, I don't want to forget Kevin McBride:

As part of the Engagement Agreement entered into on October 31, 2004, the Company started paying directly to Kevin McBride (a licensed attorney who is working on the SCO Litigation and who is the brother of the Company’s Chief Executive Officer, Darl McBride) service fees and reimbursable expenses associated with the SCO Litigation, which primarily included document management, outsourced technical and litigation assistance, and travel expenses. During the fiscal years ended October 31, 2006 and 2005, Kevin McBride’s legal fees were paid by Boies, Schiller & Flexner LLP. Prior to October 31, 2004, Kevin McBride’s costs for both legal fees and reimbursable expenses were paid by Boies, Schiller & Flexner LLP in connection with the initial engagement agreement. During the fiscal year ended October 31, 2007, the Company incurred expenses of approximately $415,000 for the reimbursable expenses of document management, outsourced technical and litigation assistance and travel expenses.

I'll tell you the truth, I had no idea bankruptcy could be so remunerative.

Here are all the PACER filings:

535 - Filed & Entered: 08/27/2008
Notice of Hearing (B)
Docket Text: Notice of Hearing to Consider Approval and Allowance of Quarterly Fee Applications (related document(s)[534], [526], [530], [528] ) Filed by The SCO Group, Inc.. Hearing scheduled for 9/16/2008 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. (Attachments: # (1) Exhibit A # (2) Certificate of Service and Service List) (Makowski, Kathleen)

536 - Filed & Entered: 08/27/2008
Motion to Approve (B)
Docket Text: Motion to Approve (1) a Determination That Stock Options Awarded to Executives Were Awarded in the Ordinary Course of Debtors' Business and (2) Continuing Authority to Award Ordinary Course Stock Options Filed by The SCO Group, Inc.. Hearing scheduled for 9/16/2008 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 9/9/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Proposed Form of Order # (4) Certificate of Service and Service List) (Makowski, Kathleen)

537 - Filed & Entered: 08/27/2008
Motion to Authorize (B)
Docket Text: Motion to Authorize to Present Evidence and Testimony Related to Certain Awards Under the 2004 Omnibus Stock Incentive Plan Under Seal Filed by The SCO Group, Inc.. Hearing scheduled for 9/16/2008 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 9/9/2008. (Attachments: # (1) Notice # (2) Proposed Form of Order # (3) Certificate of Service and Service List) (Makowski, Kathleen)

Update:

From your comments, I began to comprehend why the executives might want the stock options, which earlier was a mystery to me. Thinking about what SCO has said about possible future plans, including maybe taking the company private, reminded me of what happened to Tarantella. When it was acquired by Sun Microsystems in 2005, it was no longer a public company, so what happened to the shares, I wondered.

Here's the SEC filing that tells us what happened, and in a nutshell what happened is the executives, directors, and other main shareholders, including some names familiar to us, cleaned up, if I may be permitted to put it that way. They got paid cash for their shares, along with other benefits, and any outstanding options vested immediately. SCO has such a change of control agreement also, if you recall.

Here's the red meat of the filing, but note that the merger agreement is included in the filing as well, if you are interested:

Interests of Tarantella’s Directors and Management in the Merger

When considering the recommendation by our board of directors, you should be aware that a number of our officers and directors have interests in the merger that are different from yours, including, among others:

  • certain indemnification arrangements for our current and former directors and officers will be continued if the merger is completed;
  • Sun Microsystems has agreed to maintain directors’ and officers’ liability insurance for persons who are covered by our directors’ and officers’ liability insurance as of the date of the merger agreement for six years after the effective time of the merger for events occurring prior to the effective time on terms comparable to those currently in effect;
  • options and restricted stock issued to directors will accelerate and vest in full; and
  • Alok Mohan, our Chairman, and Francis E. Wilde, John M. Greeley, E. Joseph Vitetta and Steven Bannerman, our executive officers, will be entitled to other change in control benefits in connection with the merger....

Voting by Tarantella’s Directors and Executive Officers

At the close of business on the record date, our directors and executive officers and their affiliates owned and were entitled to vote 1,342,143 shares of our common stock, which represented approximately 4.8% of the shares of our common stock outstanding on that date. ...

Background to the Merger

In the course of evaluating the direction of our business, our management and board of directors have periodically considered various strategic alternatives to enhance our markets and customer opportunities, including possible acquisitions of complementary businesses, commercial partnering arrangements and strategic combinations with other companies.

Our board of directors consists of Alok Mohan, our Chairman of the Board, Francis E. Wilde, our President and Chief Executive Officer, Douglas Michels, our former Chief Executive Officer and consultant, and four non-employee directors.

On March 11, 2004, we entered into an agreement with Sun Microsystems, requiring the two companies to preserve the confidentiality of business information shared in connection with certain discussions. ....At the end of October 2004, Jon Williams, Director, Corporate Development, of Sun Microsystems, informed Mr. Wilde that Sun Microsystems might be interested in acquiring Tarantella. Shortly thereafter, the parties discussed possible strategies for integrating their product lines and Sun Microsystems conducted customer reviews of our installations. During the next few months, no discussions were held regarding a possible acquisition by Sun Microsystems.

On January 13, 2005, Brian Sutphin, Executive Vice President, Corporate Development, of Sun Microsystems, contacted Mr. Wilde to inform him that Sun Microsystems wished to discuss a possible acquisition of Tarantella.....

Mr. Wilde and Brian Moriarty, Vice President of Business Affairs of Sun Microsystems, held a series of meetings between February 4 and February 8, 2005 to outline the set of circumstances surrounding an acquisition proposal by Sun Microsystems. On February 8, Sun Microsystems began discussing principal terms of a possible transaction with us through its counsel, Wilson, Sonsini, Goodrich & Rosati, and with Page Mill Partners and O’Melveny & Myers LLP....

On March 14, 2005, Mr. Moriarty telephoned Mr. Wilde to inform him that Sun Microsystems had decided not to proceed with the transaction for a variety of reasons. In the ensuing days, Mr. Wilde discussed Sun Microsystems’ decision with Mr. Moriarty. Tarantella attempted to address the issues raised by Sun Microsystems.

In April, we began discussions with Sun Microsystems on a development agreement that would enable Sun Microsystems to commercialize our technology. We agreed to continue discussions on such a development agreement on April 7, 2005 in a meeting with Alan Brenner, Vice President, and other representatives of Sun Microsystems.

On May 4, 2005, Mr. Moriarty contacted Mr. Wilde to inform him that Sun Microsystems wanted to restart discussions concerning a merger with Tarantella instead of entering into a development agreement. On May 4 and May 5, Mr. Wilde held numerous discussions with board members, including Mr. Mohan, Mr. Ryan and Mr. Michaels, and our financial advisers. Mr. Wilde requested Page Mill Partners contact Mr. Moriarty to renew discussions regarding Tarantella’s valuation and to also solicit interest from other possible acquirors. ...

On the morning of May 9, 2005, following continued negotiations of the draft merger agreement between representatives of the two companies, our board of directors, with all members and our financial adviser and legal counsel present, convened by telephone conference call. During this meeting, counsel noted that all major issues under the merger agreement had been resolved subject to board approval and reviewed the proposed terms of the merger agreement and the fiduciary duties of the board of directors with respect to the merger. After discussion, our financial adviser delivered to our board their oral opinion, subsequently confirmed in writing, that, as of such date, the purchase price of $0.90 per share in cash consideration to be received by holders of our common stock, pursuant to the merger agreement, was fair from a financial point of view to the holders of our common stock. Our board of directors, with all members present and voting, then unanimously adopted resolutions approving the merger agreement, authorizing the transaction and recommending that our shareholders adopt and approve the merger agreement and approve the principal terms of the merger.

The merger agreement and related agreements for the acquisition were finalized and executed by the parties during the evening of May 9, 2005, and we and Sun Microsystems publicly announced the signing of a definitive agreement early in the morning of May 10, 2005. ...

In the course of its deliberations, our board of directors also considered, among other things, the following positive factors:

  • the fact that the $0.90 per share to be paid as the consideration in the merger represents a premium of approximately 8.5% over the average closing sales price for our common stock on the OTC Bulletin Board during the 30 trading days prior to and including May 6, 2005, and a premium of approximately 17.6% over the $0.765 closing sale price for our common stock on the OTC Bulletin Board on May 6, 2005, the last trading day prior to the board’s approval of the merger agreement;...

In the course of its deliberations, our board of directors also considered, among other things, the following negative factors: ...

  • the interests that certain of our directors and executive officers may have with respect to the merger in addition to their interests as shareholders of Tarantella generally as described in “The Merger—Interests of Tarantella’s Directors and Management in the Merger.”...

Interests of Tarantella’s Directors and Management in the Merger

In considering the recommendation of our board of directors in favor of the merger, you should be aware that members of our board of directors and certain of our officers and employees have interests in the merger that are different from, or in addition to, the interests of our shareholders.

These interests are described below, to the extent material, and except as described below, such persons have, to our knowledge, no material interest in the merger apart from those of our shareholders generally. Our board of directors was aware of, and considered the interests of, our directors, officers and employees in approving the merger agreement and the merger.

Change in Control Agreements with Our Directors. Pursuant to change of control agreements with directors Douglas Michels, Ninian Eadie, Bruce Lachman, Gilbert Williamson and Bruce Ryan entered into in February 2005, all stock options and restricted stock held by each of those directors will fully vest immediately prior to a change in control of Tarantella. A “change of control” is defined in the agreements to include, among other things, the occurrence of any person, directly or indirectly, becoming the beneficial owner of securities representing 50% or more of the combined voting power of our then outstanding securities entitled to vote generally in the election of directors, or the merger or consolidation of us with any other corporation, other than a merger or consolidation which would result in our voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by our voting securities or such surviving entity outstanding immediately after such merger or consolidation. Messrs. Michels, Eadie, Lachman, Williamson and Ryan each hold 388,349, 129,597, 89,200, 125,397 and 23,625 options, respectively, of which 68,891 in-the-money options held by Mr. Michels may be cashed out at the effective time for $31,450.95. Messrs. Eadie, Lachman, Williamson and Ryan do not hold any in-the-money options. Messrs. Michels, Lachman and Ryan each hold 16,447 shares of unvested restricted stock awarded in lieu of compensation that will fully vest as paid-in-full at the effective time and may be cashed out at that time for $14,802.30.

Amendments to a Change in Control Agreement with Francis E. Wilde. On February 11, 2005, we entered into an amendment to a change in control agreement with Mr. Wilde dated as of March 16, 2004. Pursuant to the amendment, if Mr. Wilde is involuntarily terminated in connection with a change in control, he is entitled to receive a termination payment. Under the terms of the merger agreement, however, all employees with benefits triggered in whole or in part by a change in control will be entitled to such benefits upon the closing regardless of any termination provisions in the agreements. Therefore, if there is a change in control as defined above for an amount equal to or less than $48 million, Mr. Wilde will be entitled to receive a payment equal to 12 times his total monthly compensation including targeted bonuses at 100% attainment. In addition, all stock options granted to Mr. Wilde will vest and become fully exercisable upon the closing of the merger. If that payment constitutes a “parachute payment” within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended, and would result in all or a portion of the payment being subject to excise tax under the Internal Revenue Code, then Mr. Wilde would receive a lesser payment so that no portion of the payment would be subject to the excise tax. Mr. Wilde and his dependents will also be entitled to continue to be eligible to participate in health benefit plans on the same terms and conditions as in effect prior to the change in control for up to 12 months. Under the amendment, Mr. Wilde will be entitled to receive cash in the amount of $225,000 in addition to an estimated $15,600 for health care. Mr. Wilde holds 475,000 options, of which unvested options to purchase 394,375 shares will accelerate and vest in full at the effective time. None of those options are in-the-money.

Change in Control Agreements with John M. Greeley, Stephen Bannerman and E. Joseph Vitetta, Jr. On February 11, 2005, we entered into amendments to change in control agreements with each of Messrs. Greeley, Bannerman and Vitetta dated as of March 16, 2004. Pursuant to the agreements, if either Mr. Greeley, Mr. Bannerman or Mr. Vitetta, respectively, is involuntarily terminated in connection with a change in control, he is entitled to receive a termination payment. Under the terms of the merger agreement, however, all employees with benefits triggered in whole or in part by a change in control will be entitled to such benefits upon the closing regardless of any termination provisions in the agreements. Therefore, if there is a change in control as defined above for an amount equal to or less than $48 million, each of Messrs. Greeley, Bannerman and Vitetta will be entitled to receive a payment equal to 12 times his total monthly compensation including targeted bonuses at 100% attainment. In addition, all stock options granted to each of Messrs. Greeley, Bannerman and Vitetta will vest and become fully exercisable upon the closing of the merger. If that payment constitutes a “parachute payment” within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended, and would result in all or a portion of the payment being subject to excise tax under the Internal Revenue Code, then each of Messrs. Greeley, Bannerman and Vitetta would receive a lesser payment so that no portion of the payment would be subject to the excise tax. Each of Messrs. Greeley, Bannerman and Vitetta and their dependents will also be entitled to continue to be eligible to participate in health benefit plans on the same terms and conditions as in effect prior to the change in control for up to 12 months. Under their respective agreements, Messrs. Greeley, Bannerman and Vitetta will be entitled to receive cash in the amounts of $300,000, $315,000 and $366,000, respectively, in addition to an estimated $15,600, $16,800, and $16,800, respectively, for health care. Messrs. Greeley, Bannerman and Vitetta hold 347,500, 145,000 and 222,500 options, respectively, of which unvested options to purchase 278,125, 118,500 and 186,250 shares, respectively, will accelerate and vest in full at the effective time. None of those options are in-the-money.

Change in Control Agreement with Alok Mohan. We entered into a change in control agreement with Mr. Mohan dated as of February 11, 2005. Under this agreement, if there is a change in control as defined above for an amount equal to or less than $48 million, Mr. Mohan’s change in control payment will be equal to the aggregate of (i) the target incentive payment contemplated under his 2005 Consulting Agreement on the basis of 100% attainment and (ii) one times the annual compensation contemplated under his 2005 Consulting Agreement in an amount of $90,000 payable in cash, as adjusted to reflect any amounts and stock (based on the original value of the stock on the date of grant) already earned under the 2005 Consulting Agreement to ensure that Mr. Mohan receives a payment equal to two full year’s annual compensation. In addition, all stock options and restricted stock granted to Mr. Mohan will vest and become fully exercisable immediately prior to the change in control. Under his change in control agreement, Mr. Mohan will receive approximately $150,000 in cash although the actual amount of cash compensation that Mr. Mohan will receive will depend on the amount of unearned restricted stock under his Consulting Agreement that was accelerated at the effective time. The value of this accelerated, unearned restricted stock (based on the original value of the stock on the date of grant) is deducted from the cash payable for the annual compensation component of $90,000. Mr. Mohan will also receive an estimated $20,400 for health care. Mr. Mohan holds 373,603 options and 75,658 shares of unvested restricted stock awards of which 16,447 shares relate to deferred director compensation and 59,211 shares relate to deferred consulting compensation. Mr. Mohan’s unvested options to purchase 142,750 shares will accelerate and vest in full at the effective time, of which 21,600 options are in-the-money and may be cashed out at the effective time for $9,720. The unvested restricted stock awards will fully vest as paid-in-full at the effective time and may be cashed out at that time for $68,092.20.

Change in Control Agreements with Certain Other Employees. Pursuant to change in control agreements with certain of our employees, each such employee will be eligible to receive any benefits triggered by a change in control of Tarantella upon the closing of the merger. All of our employees who are directors and non-executive officers are also entitled to certain change in control benefits. These benefits vary depending on title, but range from six to twelve months of severance based on current base salary plus target incentives on the basis of 100% attainment. In addition, these employees are entitled to certain payments in lieu of health care benefits for a period consistent with their severance payments. Any unvested options will also vest and become fully exercisable.

Indemnification and Insurance. The merger agreement provides that all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the effective time of the merger (and rights for advancement of expenses) now existing in favor of our current and former directors or officers as provided in our articles of incorporation or by-laws and any indemnification agreements between us and our directors and officers in effect immediately prior to the effective time of the merger will be assumed by the surviving corporation in the merger without any further action by Sun Microsystems, Cha Cha Acquisition Corporation or us. Sun Microsystems will and will cause the surviving corporation to fulfill and honor those obligations. The articles of incorporation and by-laws of the surviving corporation will contain provisions with respect to exculpation and indemnification that are at least as favorable to our current and former directors and officers as those presently in effect. The merger agreement further provides that for six years after the effective time of the merger, Sun Microsystems will use best efforts to cause the surviving corporation to maintain directors’ and officers’ liability insurance for events occurring prior to the effective time of the merger covering those persons who were, as of the date of the merger agreement, covered by our directors’ and officers’ liability insurance policies, on terms comparable to those in effect on the date of the merger agreement. Sun Microsystems’ obligation to provide this insurance coverage is subject to a cap of 150% of the current annual premium paid by us for our existing insurance coverage. If Sun Microsystems cannot maintain the existing or equivalent insurance coverage without exceeding the 150% cap, Sun Microsystems is required to maintain as much insurance coverage as can be obtained by paying an annual premium equal to the 150% cap.

Stock Options. Under the merger agreement, at the effective time of the merger, each then outstanding employee stock option held by an employee who is continuing with Sun Microsystems, whether or not exercisable at the effective time of the merger and regardless of the exercise price, will be assumed by Sun Microsystems and will continue to have and be subject to the same terms and conditions set forth in the applicable option. However, each such outstanding employee stock option will be exercisable for that number of shares of Sun Microsystems’ common stock equal to the product of the number of shares of our common stock issuable upon exercise of such option multiplied by the option ratio, which is the ratio of the value of the per share merger consideration over the average of the closing prices for a share of Sun Microsystems’ common stock on the ten trading days prior to the closing date. The per share exercise price for the shares of Sun Microsystems’ common stock issuable upon exercise of the assumed employee stock options will be equal to the amount determined by dividing the exercise price per share of our common stock at which the option was exercisable immediately prior to the effective time of the merger by the option ratio. Prior to the effective time, each of our employee stock purchase plans will be terminated. Each employee stock option that is assumed by Sun Microsystems will be vested immediately after the effective time of the merger in a percentage amount equal to the percentage of shares vested prior to the effective time, except to the extent that the terms of the option provides for acceleration of vesting upon the effective time. See “The Merger—Effect on Awards Outstanding Under Tarantella’s Stock Plans.”

The 2003 Directors Stock Option Plan, which was originally adopted by our board of directors in March 1993 and approved by our shareholders in May 1993, provides that immediately prior to the occurrence of a change in control, as defined above, any options outstanding on the date such change in control is determined to have occurred that are not yet exercisable and vested on such date will become fully exercisable and vested. Under the change in control agreements discussed above, all stock options and restricted stock granted to our directors and executive officers will accelerate and vest in full immediately prior to a change in control of Tarantella and they will receive cash representing the difference between $0.90 per share and the exercise price of their vested options in the amounts described above.

Employment Agreements. It is not currently anticipated that any of our current executive officers will be employed by Sun Microsystems after the merger is completed....

Merger Consideration At the effective time of the merger, each outstanding share of our common stock, other than treasury shares, shares held by Sun Microsystems, shares held by a subsidiary of Sun Microsystems or us, and shares held by shareholders who perfect their appraisal rights (as described in “The Merger—Dissenters’ Rights”), will be canceled and extinguished and automatically converted into the right to receive $0.90 in cash, without interest, upon surrender of the certificate representing such share(s) of our common stock. Treasury shares and shares held by Sun Microsystems or Cha Cha Acquisition Corporation will be canceled immediately prior to the effective time of the merger. The price of $0.90 per share was determined through arm’s-length negotiations between Sun Microsystems and us. ...

Delisting and Deregistration of Tarantella’s Common Stock

If the merger is completed, our common stock will no longer be quoted on the OTC Bulletin Board and will be deregistered under the Securities Exchange Act of 1934. ...

Five percent shareholders, directors, and

certain executive officers


Common stock

outstanding


Options/Warrants

excercisable within

60 days


Common stock

beneficially owned


Approximate

percentage

owned


Austin W. Marxe and David M. Greenhouse (1) 153 E. 53rd St. 55th Floor New York, NY 10022

6,492,271 2,462,500 8,954,771 29.4%

Renaissance Funds

2,142,858 428,571 2,571,429 9.05%

Douglas L. Michels (2)

719,515 388,349 1,107,864 3.90%

Francis Wilde (3)

300,000 141,875 441,875 1.57%

Alok Mohan

202,625 237,853 440,478 1.56%

Ronald Lachman

49,597 83,575 133,172 *

Edmundo Costa

11,857 111,729 123,586 *

Stephen Bannerman

45,138 75,263 120,401 *

Ninian Eadie

115,448 115,448 *

Gilbert P. Williamson

110,948 110,948 *

John M. Greeley

81,250 81,250 *

E. Joseph Vitetta

8,821 50,071 58,892 *

Joseph Makoid

46,092 46,092 *

Bruce Ryan

16,447 17,225 33,672 *

Christopher Scheybeler

All directors and current executive officers as a group

1,342,143 1,301,857 2,664,000 8.63%

* Less than one percent of common stock outstanding
(1)

MGP Advisors Limited (“MGP”) is the general partner of Special Situations Fund III, L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP and the general partner of and investment adviser to the Special Situations Cayman Fund, L.P. SST Advisors, L.L.C. (“SSTA”) is the general partner of and investment adviser to the Special Situations Technology Fund, L.P. and the Special Situations Technology Fund II, L.P. MG Advisers, L.L.C. (“MG”) is the general partner of and investment adviser to the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are the principal owners of MGP, AWM, SSTA and MG and are principally responsible for the selection, acquisition and disposition of the portfolio securities by each investment adviser on behalf of its fund.

(2) Includes 15,000 shares gifted to the J3D Family Limited Partnership, of which Douglas Michels is the general partner; Mr. Michels is also a general partner in the Lawrence Michels Family Limited Partnership, of which he disclaims any voting or dispositive power.
(3) Includes 250,000 shares owned by Starlight Technology Partners LLC, an investment group in which Mr. Wilde, our President, Chief Executive Officer and Director, acts as Managing Director, and Joseph Makoid, our Vice President of OEM Sales, is an investor.

Update: Note that there is a video of Doug Michels at around this same time period, being interviewed in Europe right after the sale. Note also that Renaissance Funds was a shareholder.


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