As many of you know, I have been following the Vista.com angle as it relates to the SCO story. There are a number of intriguing points to Vista's investment in The SCO Group nee Caldera. I had first written about it nearly two years ago when I found that John Wall was then listed as the second biggest shareholder of SCO stock, as the result of a deal from August 2002. Some additional investigation revealed that Wall lived in Redmond and had founded a company (since sold) that worked very closely with Microsoft. I really hadn't followed it much more beyond that until this year when I stumbled upon the fact that Vista was doing a reverse merger to go public and that Bob Bench--former SCO CFO was now CFO of Vista.com. Since I knew that SCO had gotten some Vista shares during the 2002 Vista deal, I thought that this was a way to get funds into SCO. However, that assumption was shown to be wrong, when Al Petrofsky received an e-mail response from SCO's current CFO indicating that SCO owned no Vista.com stock. I'm not sure that my thoughts below add anything new to the SCO story. I did feel a need to bring together what we know of the Vista story from separate sources. I don't think that SCO is getting money out of recent Vista moves, but I do feel that there are some unanswered questions regarding the relationship between Vista and SCO.
So, in the paragraphs below, I will attempt to lay out what we know of Vista.com from SEC filings and other digging, try to help clarify some of the SEC regulations relating to REGDEX filings, and point out some additional questions that are raised by all of this. I have to express my thanks to minorcanon2k from the Yahoo SCOX board for picking up the REGDEX filings and to stats_for_all who has helped me interpret them, helped me make sense of all of this, and offered a goal to strive for in his many posts to the Yahoo SCOX board.
Vista is not currently a publically traded company, unless their reverse merger with Source Energy completes soon. As such, the filing requirements with the SEC are severely limited when compared with a public company such as The SCO Group. If you click the following link to see Vista's SEC filings. Although they now have their own CUSIP number, I believe that they were once a part of Community IQ, and so we should also examine the Community IQ SEC filings. (The question I am not able to answer is did Community IQ spin Vista off or has Community IQ ceased to exist and are they now Vista?) All you will find looking at either are a series of REGDEX filings. Clicking for details, you will see something like:
<DOCUMENT> <TYPE>REGDEX <SEQUENCE> 1 <FILENAME> 9999999997-03-039157.paper <DESCRIPTION>AUTO-GENERATED PAPER DOCUMENT <TEXT> This document was generated as part of a paper submission. Please reference the Document Control Number 03035612 for access to the original document. </TEXT> </DOCUMENT>
which obviously, doesn't tell us very much. What it means is that you cannot view this file online. You must either order it from the SEC or take a trip to the SEC's reading room and have it brought up from the records section. Luckily, minorcanon2k from the Yahoo SCOX board was able to take a trip to the SEC reading room and locate these REGDEX filings.
But before we look at them, let's talk about what a REGDEX is. First of all, as should be obvious to anyone who has read these pages (particularly, my initial, uninformed, alarmist note when I first saw the info the the Vista/Source Energy reverse merger) I am not a financial analyst. There is much more that I do not understand than what I do understand. I would be very surprised to learn that the explanation that follows were complete because I do not have a financial background and am looking to publically available SEC documents to understand what all of this means.
All of that bein said, REGDEX stands for "Regulation D Exemption." The clearest explanation of Regulation D Exemptions was handed to me by another Yahoo poster stats_for_all. He pointed to the SEC's May 1999 Q&A: Small Business and the SEC: A guide to help you understand how to raise capital and comply with the federal securities laws. Question VI of that FAQ is Are There Legal Ways To Offer and Sell Securities Without Registering With the SEC? Reading through the myriad ways, we come to the Regulation D exemptions, specifically Rule 506 exemptions (because those are the ones Vista/Community IQ are using):
D. Regulation D
Regulation D establishes three exemptions from Securities Act registration. Let's address each one separately.
As we discussed earlier, Rule 506 is a "safe harbor" for the private offering exemption. If your company satisfies the following standards, you can be assured that you are within the Section 4(2) exemption:
- You can raise an unlimited amount of capital;
- You cannot use general solicitation or advertising to market the securities;
- You can sell securities to an unlimited number of accredited investors (the same group we identified in the Rule 505 discussion) and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated - that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- It is up to you to decide what information you give to accredited investors, so long as it does not violate the antifraud prohibitions. But you must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If you provide information to accredited investors, you must make this information available to the non-accredited investors as well;
- You must be available to answer questions by prospective purchasers;
- Financial statement requirements are the same as for Rule 505; and
- Purchasers receive "restricted" securities. Consequently, purchasers may not freely trade the securities in the secondary market after the offering.
Since the SEC definitions for Rule 506 reference Rule 505, here is the Rule 505 information from the same page:
Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, you may sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are "restricted." Consequently, you must inform investors that they may not sell for at least a year without registering the transaction. You may not use general solicitation or advertising to sell the securities.
An "accredited investor" is:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person with a net worth of at least $1 million;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person.
It is up to you to decide what information you give to accredited investors, so long as it does not violate the antifraud prohibitions. But you must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If you provide information to accredited investors, you must make this information available to the non-accredited investors as well. You must also be available to answer questions by prospective purchasers.
Here are some specifics about the financial statement requirements applicable to this type of offering:
- Financial statements need to be certified by an independent public accountant;
- If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet, to be dated within 120 days of the start of the offering, must be audited; and
- Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.
20 August 2002We know that Vista's owner John Wall has SCO shares from an 8-K filed 21 August 2002 announcing the name change from Caldera to The SCO Group, which shows The Canopy Group with 47.4% and John Wall with 800,000 shares at 7.1%. Oddly, that is the first mention I can find of a brand new owner of 1/14th of the company. The late 10-Q for Caldera's third quarter ending 31 July 2002 does not mention anything about the investment, which it would not need to since Wall's investment came in August. Though, the 10-Q is filed in late September. There must have been some prior relationship since the 10-Q does mention (on page 28) " In August 2002, we announced SCObiz, an e-business solution for creating, listing, maintaining supporting, and marketing web sites for small businesses. This product is based on our exclusive license agreement with Vista.com."
13 August 2002 We actually find out in a 6 November 2002 SCO Schedule 13D filing dated 24 October 2002 that Wall acquired his shares on 13 August 2002.
Sometime in August 2002 We don't really find out any details of the deal until SCO's 10-K filing for fiscal 2002. On page 50 it describes the Vista deal in more detail as follows:
During August 2002, the Company entered into a license agreement with Community IQ.com d/b/a Vista.com ("Vista"). Under the agreement, the Company acquired an exclusive license from Vista to sell and market Vista's web services solutions for the small business market. The Company prepaid $100,000 of royalties under the license agreement and also advanced another $250,000 to Vista in connection with a right to purchase 3,312,737 shares of Vista's Series C convertible preferred stock for $500,000 (see below). Additionally, the Company acquired a $1,000,000 convertible note receivable payable by Vista from Vista's founder in exchange for 800,000 shares of the Company's common stock with an estimated fair market value of $900,000 and $100,000 in cash. The $1,000,000 note receivable is due on August 15, 2003, bears interest at 8 percent payable at maturity and is convertible at the Company's option into a 20 percent fully diluted interest in Vista.
Also in August 2002 We have the initial engagement letter between SCO and Morgan Keegan dated 16 August 2002 which I've discussed in mind-numbing detail in the context of Michael Anderer and David Boies. However, this letter shows that SCO, or someone working on SCO's behalf, had been shopping deals in Seattle. You see, the Morgan Keegan engagement letter lays out the work Morgan Keegan will do in trying to get money for SCO. There is a clause in that letter which says, "For those potential investors listed on Appendix A, the Contingent Placement Fee otherwise owing to Morgan Keegan shall be reduced by 50%," and Appendix A lists the following BroadMark Capital related investors IDG Ventures, Group Atlantic Partners, LLC, Paladin Capital Group, Pequot Capital, and Technology Crossover Ventures. Bob Bench, SCO's CFO at the time, is quoted on Broadmark's website saying:
"Caldera International, Inc., now The SCO Group, Inc. engaged Broadmark Capital at a challenging time in our company's history. They took our assignment with enthusiasm and provided needed focus with professional direction and care. The time and effort spent by Broadmark's professional team was above and beyond expectations. They were able to develop a clear message and target the appropriate opportunities for our company's best financial interest. Within a few short months from the engagement of Broadmark we had identified investors and options that were right for the company at its current stage. They scheduled and accompanied us to many face to face meetings that allowed us to develop long lasting relationships. They assisted management in preparing appropriate materials and presentations to articulate the company's message. They were effective in assisting our negotiating process and structuring appropriate financing and equity instruments. We found that Broadmark gave us the critical attention and personal time commitment to accomplish the objectives we required. The Broadmark team assigned to our company were professional and personally motivated to accomplish the task."
16 December 2002 Vista.com files an amended REGDEX filing (dated 13 December 2002 on the signature page) under the Community IQ CUSIP. This is listed on the SEC website as an amended filing, but we do not have the original, so we do not know what was amended. We do know that it relates to purchases by accredited investors of about $2.25 million Series B preferred stock and of roughly $1.87 million 8% convertible notes--and no common stock. We know from the filing that the bulk of that money came from Washington State investors and we know from the filing that the following Washington State investors were listed at 10% owners:
What we do not see in that REGDEX filing is any SCO investment because we see no investors from Utah and The SCO Group is a Lindon, Utah based company. Oddly, though, the REGDEX lists Series B investors and it lists people purchasing 8% warrants. That 8% warrant could match the description of the $1 million promissory note that SCO got from Vista's founder John Wall in August 2002--and the REGDEX describes $1.39 million in 8% warrants sold to Washington State investors--but since the REGDEX is dated December 2002, these must be new--or amended. It could be that Wall is getting his promissory note registered that he already sold to SCO. Oddly, there is no mention of Series C shares of Vista in the December filing, unless that is what the 8% warrants are. I say oddly, because in December 2002, according to page 50 of SCO's 2002 10-K, SCO purchased $500K worth of Series C shares. From SCO's Fiscal 2002 10-K:
In December 2002, the Company and Vista entered into the Stock Purchase Agreement, pursuant to which the Company acquired 3,312,737 shares of Vista's Series C preferred stock for $500,000. The 3,312,737 shares of Series C preferred stock of Vista represent a 10 percent fully diluted interest in Vista. The $250,000 advance as of October 31, 2002 was applied toward the purchase. Additionally, the Company and Vista entered into an Agreement and Plan of Merger pursuant to which the Company received an option through March 31, 2003 for no additional consideration to acquire the remaining 70 percent ownership interest of Vista in exchange for 2,500,000 shares of the Company's common stock. The Company also received the right to representation on Vista's board of directors.
Now, we could assume that the 8% warrants are the Series C shares and that SCO purchased them from one of the investors who is listed in Community IQ's (VISTA) December 2002 REGDEX filing. We could also assume that the Series B investors were making sure paperwork was in order so that they could sell common shares to SCO if SCO exercised its options to buy out the company by 31 March 2003. If we assume that all paperwork has been filed correctly and that we have all REGDEX filings from December 2002 on, these are the only possibilities that makes sense to me.
Year End 2002 Summary So, as 2002 came to a close, SCO had paid out
In exchange for all of this, SCO had
Vista had an additional $600,000 dollars. Wall had $100,000 dollars and 800,000 shares of SCO, which by the end of 2002 was worth not much more than it was in August. Of course, I strongly suspect that Boies and Morgan Keegan were already in active negotiations with MicroSoft and SUN for their "licensing" deals by this point. I also suspect that Wall knew about this.
January 2003 According to page 10 of SCO's 2nd Quarter 10-Q, SCO "advanced Vista $100,000 in the form of a promissory note due on April 14, 2003. . . . This promissory note bears interest at 8 percent payable at maturity and is convertible at the Company?s option into a 5 percent fully diluted interest in Vista."
03 February 2003 SCO files an S-3 to register Wall's 800K shares of common stock and 200K shares for Morgan Keegan using the end of January closing price of $1.28/share--which is almost definitely under what Wall's shares were worth when he got them the August earlier.
13 February 2003 Morgan Keegan writes SCO to amend their engagement letter. This letter indicates that they get a cut of the SUN and MS deals. No mention of exactly what the 200K shares were for.
27 March 2003 Apparently, neither Wall nor Morgan Keegan had sold yet, because there is an amendment to the initial S-3 filed. I've not closely examined the differences between the two, but the one that stand out, of course, is that the IBM lawsuit is mentioned because it has now been filed.
31 March 2003 SCO right to convert 2.5 million shares of SCO into 70% ownership of Vista.com (thus giving SCO 100% ownership) expire unerxercised.
02 April 2003 According to page 10 of SCO's 2nd Quarter 10-Q, "the maturity date on [the $100,000 January 2003] promissory note was extended to April 30, 2003." Also, "[o]n April 2, 2003, the Company advanced Vista an additional $100,000 in the form of a promissory note due on April 30, 2003. The promissory note bears interest at 8 percent payable at maturity and is convertible at the Company?s option into a 5 percent fully diluted interest in Vista."
07 April 2003 Another amended S-3 for Wall and Morgan Keegan filed.
30 April 2003 According to page 10 of SCO's 2nd Quarter 10-Q, "[a]s of April 30, 2003, both $100,000 notes were outstanding and in technical default; however, the Company had not demanded repayment pending management's decision whether or not to exercise the conversion rights for an additional equity interest in Vista. The Company and Vista continue to work together under [their] license agreement."
Q2 (April 2003) Summary SCO is out $900,000 and 800,000 shares of common stock. ($700,000 as of the end of 2002 plus the two additional promissory notes). They have Series C shares worth 10% of the company. They have board representation. They have a $1,000,000 promissory note that pays interest at 8% as ins convertible into 20% of Vista. They have 2 $100,000 promissory note that pay 8%, are convertible into an additional 10% of the Vista and are currently past due and uncalled. According to their Q2 10-Q, SCO had accounting losses attributable to Vista of $25,000 in Q1 and $75,000 in Q2. Interestingly, that same 10-Q says, "We did not have an investment in Vista during the 2002 periods," in the "Equity in Loss of Affiliate" section, which is technically true, but they had made a $250,000 downpayment on the 500,000 Series C shares in fiscal 2002.
31 July 2003 Things were relatively quiet during Q3. There were no new deals with Vista. Based on later evidence, John Wall did not sell any of his shares of SCO, despite sky-rocketing valuation. Perhaps that is why SCO put the following in pages 10 and 11 of SCO's Q3 10-Q, "As of July 31, 2003, the $1,000,000 convertible note receivable discussed above as well as both $100,000 notes receivable were outstanding and in technical default; however, the Company had not demanded repayment. No allowance for the past due notes receivable was recorded as of July 31, 2003 since the Company and Vista continue to work together under the license agreement discussed above and the Company is evaluating its option to convert the notes receivable to equity in Vista." SCO had accounting losses of $71,000 for their Vista investment in Q3.
Q2 (July 2003) Summary No real change from three months earlier. The only real difference is that the $1,000,000 note is now past due. SCO can exercise that at any point for 20% of Vista. They can exercise their other two notes for an additional 10%. They already have 10%, so at any point, they can kick it up to 40%. Of course, they've already passed up the chance to get 70% in exchange for SCO shares--and it seems clear that Vista is losing money at an accelerating pace. SCO's accounting losses are nearly 3 times what they were for the first quarter they had a Vista investment. It's clear that Vista is also not repaying SCO money due on their promissory notes. It is not clear whether they have made any of their interest payments on their notes. What is also interesting, is that based on the current SCO shareprice, Wall could sell his 800k SCO shares at any point and either redeem or buy back the promissory notes, but he doesn't.
Interestingly, there has been language in 10-K's and 10-Q's for a year mentioning the fact that SCO is reselling Vista's product. That language does not exist with the Q2 2003 quarterly filing.
During the Summer, there were a series of S-3 filings for the Vultus deal, but no more related to the John Wall and Morgan Keegan shares. SCO weathered a few ups and downs, including the odd point when SCOForum code purporting to be proof of infringement is decimated in 24 hours and SCO's share price spikes, but other than occasional discussion on SCO's Yahoo Finance Board, there is no news of John Wall or Vista.
September 2003 I suspect that by September 2003, SCO was likely working on the PIPE deal. By this point, they have already written off $171,000 on Vista. Vista has not paid back any of its promissory notes. This is when SCO decides to cut their losses. In SCO's 2003 10-K on page 68, they settle the Vista deal:
In September 2003, the Company's board of directors determined that the current operating relationship with Vista should be restructured. As a result of this decision, the Company and Vista reached an agreement whereby the Company would transfer the $1,000,000 note receivable plus accrued interest and the two $100,000 notes receivable plus accrued interest back to Vista's founder and majority shareholder, in exchange for 100,000 shares of the Company's common stock held by Vista's founder and majority shareholder. Additionally, the Company and Vista's founder and majority shareholder agreed to transfer two notes receivable the Company had outstanding from a third party. As a result of the above transaction, the Company has removed all notes receivable and related accrued interest due from Vista as well as any outstanding amounts characterized as an investment in Vista, and recorded a loss on disposition of the investment of $250,000 in its statement of operations for the year ended October 31, 2003.
Looking at just the closing prices for SCO's shares in September 2003, those 100,000 shares could have been worth anywhere from a low of $1.38 million at the end of the month to a high of just over $2 million in the middle of the month. SCO has spent $900,000 dollars. Written off $171,000. They have given away 800,000 shares and they are holding $1.2 million in Vista notes plus 3,312,737 Series C preferred shares. SCO exchanges all of that plus two other (worthless?) promissory notes to John Wall for 100,000 shares of SCO, which are certainly worth much more than they were, but which SCO has some difficulty converting into cash. It may simply have been housecleaning to get ready for the PIPE, but it doesn't strike me that SCO made out too well on the deal, at least on paper.
16 October 2003 Now, this is an interesting date in SCO history. This is when SCO files an 8-K announcing the $50,000,000 PIPE deal with the Royal Bank of Canada and BayStar Capital. Of course, this is also the day that the SEC stamps the receipt of another Community IQ.com REGDEX filing showing a Utah investor purchasing $500,000 Series C shares. Despite the SEC stamp on 16 October 2003, the only thing this can be is the REGDEX filing for SCO's Series C investment from December 2002. I do note that there is no date by John Wall's signatures at the end of the REGDEX. One explanation is that the SEC rejected the PIPE deal because there was no paperwork on the Vista shares and once that was filed, the PIPE deal was permitted by the SEC. Another possibility is that it was RBC/BayStar who insisted that this get cleared up and they would not complete the deal until the paperwork was filed. Of course, since SCO had "disposed" of these shares in September, it seems odd to register them in October on the same day the PIPE deal closes.
16 April 2004 The strain between BayStar and SCO is growing as BayStar sends SCO a letter demanding immediate redemption of the Series A preferred shares because BayStar believes that SCO has violated terms of the amended agreement.
21 April 2004 SCO announces that CFO Bob Bench will retire to be replaced by Bert Young. "[T]he company announced that Bob Bench will assume the responsibilities of acting Vice President of Corporate Development. . . . As the company fills this position on a permanent basis, Bench plans to retire from SCO later this year."
We hear no more from Vista, Community IQ or Bob Bench for some time. If Bench has any success as VP of Corporate Development, he is not mentioned in any SCO press releases.
13 April 2005 There are REGDEX filings for Vista.com. Both are dated 13 April 2005 on the signature page. One, stamped 15 April by the SEC, shows the issuance of common shares worth $328,393 and the other, stamped 19 April 2005, shows $5.5 million in Series A financing. Notably, these REGDEX filings are under the name Vista.com. The 2002 and 2003 filings were under the company name of Community IQ. These filings also use a different CUSIP number than the earlier Vista filings.
23 April 2005 Being an idiot and never having come across the concept of a reverse merger berfore, when I stumbled on a now-expired press-release showing a reverse merger between Vista.com and Utah based Source Energy corporation, I thought it sounded quite odd for a shell company to buy out a larger company that had a product.
25 April 2005 I quickly learned how much of an idiot I was for not understanding reverse mergers, but as I looked into the Vista reverse merger--and having forgotten or missed the ending of the Vista association with The SCO Group, I thought that this would be a way for SCO to get cash at a time when its prospects for cash infusion were looking dim. It seemed to me that if SCO owned part of Vista, then Vista going public would give SCO something to sell. I was also a bit surprised to find that Bob Bench is now CFO of Vista.com.
17 May 2005 As discussion on the Yahoo SCOX board began to heat up about this, Al Petrofsky e-mailed Bert Young, SCO's current CFO, for clarification. Young made it clear in his response that SCO owns no Vista.com shares.
01 July 2005 There are two REGDEX filings for Vista.com The first showing $213,434 in common shares is dated 29 June 2005 on the signature page and is stamped 01 July 2005 by the SEC. The second shows $7 million in bridge financing. That one is dated 12 July 2005 on the signature page and probably 13 July 2005 on the SEC stamp. Curiously, neither of these two REGDEX filings are signed by John Wall.
23 August 2005 There is another REGDEX filings for Vista.com for $150,000 in common stock. Signature date is 18 August 2005 and SEC stamp is 23 August 2005. This contains a different signature than either the April or July batches.
I do not think there is any benefit to SCO in these 2005 Vista.com events. However, I find it very odd that SCO does not seem to have made out well on their deal with Vista and that SCO's former CFO ends up at Vista.com. Then of course, there is the potential windfall that Vista.com may have coming to it from Microsoft's recent decision to name their next version of Windows VISTA.
I can be contacted at email@example.com.