Amendment to Annual Report — Form 10-K Filing Table of Contents
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Preferred Stock Purchase Rights
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge,
in definitive proxy or information statements incorporated by reference on Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” and “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) YES o NO þ
The aggregate market value of the common stock held by non-affiliates of the Registrant was
approximately $1,548,000 based on the reported last sale price of common stock on April 30, 2008,
which was the last business day of the Registrant’s most recently completed second fiscal quarter.
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends The SCO Group, Inc.’s (the
“Company”) Annual Report on Form 10-K for the fiscal year ended October 31, 2008, (the “Original
Filing”) which was originally filed with the Securities and Exchange Commission (the “SEC”) on
January 29, 2009. We are refiling Part III to include information required by Items 10, 11, 12, 13
and 14 because our definitive proxy statement containing such information will not be filed within
120 days after our fiscal year ended October 31, 2008. In addition, in connection with the filing
of this Amendment and pursuant to the rules of the Securities and Exchange Commission, we are
including with this Amendment certain currently dated certifications. Accordingly, Item 15 of Part
IV has also been amended to reflect the filing of these currently dated certifications.
Except as described above, no other changes have been made to the Original Filing. This
Amendment continues to speak as of the date of the Original Filing and we have not updated the
disclosures contained therein to reflect any events that occurred subsequent to the date of the
Original Filing. The filing of this Form 10-K/A is not a representation that any statements
contained in items of Form 10-K other than in Part III, Items 10 through 14 and Part IV Item 15 are
true or complete as of any date subsequent to the Original Filing.
Ralph J. Yarro III has served as the Chairman of our Board of Directors since August 1998. Mr.
Yarro has served as President and Chief Executive Officer of ThinkAtomic, Inc., a high-tech
development and venture group, since 2005. Mr. Yarro has served as the President and Chief
Executive Officer of SurfRecon, Inc., since 2006. Mr. Yarro has served as the President and
Chief Executive Officer of Voonami Inc., and Xymbiot, Inc. since 2007 and Orbiteer, Inc. since
2008. Mr. Yarro is a member of the board of Utah Valley University. Mr. Yarro has also served as
the Chairman of the Board of Trustees and President of The CP80 Foundation, a 501(c)(4) non-profit
organization dedicated to the protection of children, families and businesses from the constant
threat of internet pornography, since 2005. Mr. Yarro previously served as the President and Chief
Executive Officer of The Canopy Group, Inc., a management and resource company (“Canopy”), from
August 1998 to December 2004. Mr. Yarro also served as a director of Canopy from August 1998 to
March 2005. Mr. Yarro holds a B.A. degree in Political Science from Brigham Young University.
R. Duff Thompson has served as a member of the Board of Directors since May 2001. Mr. Thompson
is a Managing General Partner of EsNet, Ltd., an investment group that is active in both technology
and real estate ventures, from 1996 to the present. From June 1994 to January 1996, Mr. Thompson
served as Senior Vice President of the Corporate Development Group of Novell, Inc. Prior to that
time, he served as Executive Vice President and General Counsel for WordPerfect Corporation, and
before joining WordPerfect Corporation in 1986, he was a partner with the Salt Lake City law firm
of Callister, Nebeker & McCullough. Mr. Thompson holds a B.S. degree in Economics, a Masters degree
in Business Administration and a J.D. degree, all from Brigham Young University.
Darcy G. Mott has served as a member of the Board of Directors since March 2002. Mr. Mott has
served as Senior Vice President and Chief Financial Officer of HealthEquity, Inc., a Healthcare
Financial Services company, since March 1, 2007. Mr. Mott previously served as an independent
investor and business consultant from December 2004 to February 2007 and as a part-time employee of
ThinkAtomic, Inc., a high-tech development venture group, from July 2006 to February 2007. Mr. Mott
previously served as Vice President, Treasurer and Chief Financial Officer of Canopy from May 1999
to December 2004. Mr. Mott is a certified public accountant and holds a B.S. degree in Accounting
from Brigham Young University.
Darl C. McBride has served as our President and Chief Executive Officer and as a member of the
Board of Directors since June 2002. Before joining our company, Mr. McBride was the president of
Franklin Covey Co.’s online planning business from May 2000 to May 2002. From April 1999 to May
2000, Mr. McBride was the CEO of Pointserve. From November 1997 to August 1998, Mr. McBride was the
Chairman, President and CEO of SBI. From February 1996 to October 1997, Mr. McBride served as the
Senior Vice President of IKON Office Solutions. From 1988 to 1996, Mr. McBride held several
positions at Novell, Inc. and concluded his service as Vice President and General Manager of
Novell’s Embedded Systems Division (NEST). Mr. McBride holds a B.S. degree from Brigham Young
University and holds a Masters degree in Labor & Industrial Relations from the University of
Illinois at Urbana-Champaign.
Daniel W. Campbell has served as a member of our Board of Directors since November 2003. Mr.
Campbell is a Managing General Partner of EsNet, Ltd., an investment group that is active in both
technology and real estate ventures, from July 1994 to the present. From 1992 to July 1994, Mr.
Campbell worked at WordPerfect Corporation as Senior Vice President and Chief Financial Officer.
Prior to that, Mr. Campbell was a partner with Price Waterhouse, an international accounting firm.
Mr. Campbell also serves as the lead independent director of Nu Skin Enterprises, Inc., where he is
the Chairman of the Audit Committee. Mr. Campbell received an Accounting degree from Brigham Young
University in 1979.
Omar T. Leeman has served as a member of our Board of Directors since June 2005. Mr. Leeman
has served as Senior Partner of Firm44, LLC, a provider of strategic advisory services designed to
cover the full spectrum of business and investment options and alternatives, since 2008. Mr.
Leeman has held senior management positions in technology, telecommunications, and software
development companies, both public and privately held. Previously, Mr. Leeman founded Pinebrook
Management Group, LLC specializing in providing consultancy services to various businesses. Prior
to Pinebrook, Mr. Leeman was President, CEO, and Chairman of the Board of Talk2 Technology, Inc.
From February 1983 to January 2001, Mr. Leeman held several senior management positions at MCI
Telecommunications, Inc., including President, MCI Business Markets. He also served as a Regional
Vice President at NEC America Inc., and held management positions at OC Tanner Company and Xerox
Corporation. Omar received a B.S. degree in Business Administration from the University of Hawaii.
Mr.
3
Leeman previously served on the Board of Directors of Telegea, Inc. and AccessData, Corp. Mr.
Leeman also served on the Board of Visitors of MD Anderson Cancer Center; Rotary Club of Houston
Lombardi Trophy Committee; Houston Convention Fund; Kick Drugs Out of America Foundation; and Vice
Chairman, Hurricane Katrina Relief Effort, The Woodlands, Texas.
J. Kent Millington has served as a member of our Board of Directors since June 2005. Mr.
Millington has served as a business consultant and President of IPDevPro, a company specializing in
evaluation and commercialization of intellectual property, since 2005. He was President and Chief
Executive Officer of AccessData Corp. from January to December 2007, where he oversaw a turn around
and brought in significant new equity capital and management. Mr. Millington served as Entrepreneur
in Residence at Utah Valley State College (“UVSC”) from August 2004 to May 2007, where he taught
courses in entrepreneurship and new venture finance. Prior to joining UVSC, Mr. Millington was a
Vice President for Verio, Inc., a subsidiary of NTT Communications from January 1998 to July 2004.
From October 1996 to December 1997 he was President of Internet Servers Inc., a web hosting
start-up that was sold to Verio in December 1997. Mr. Millington holds a B.A. degree in History
from the University of Utah, an MBA from Brigham Young University, and a Doctorate of Business
Administration from California Coast University.
The following table presents information regarding the current executive officers of the
Company:
Name
Age
Position
Darl C. McBride
49
Chief Executive Officer, Director
Kenneth R. Nielsen
49
Chief Financial Officer
Jeff F. Hunsaker
43
President and Chief Operating Officer of SCO
Operations, Inc. (“SCO Operations”), a wholly
owned subsidiary of the Company.
Ryan E. Tibbitts
52
General Counsel and Corporate Secretary
Set forth below is the business background of each of our executive officers. Information on
the business background of Darl C. McBride is set forth above.
Kenneth R. Nielsen has served as interim Chief Financial Officer since October 1, 2007. Prior
to joining the Company, Mr. Nielsen was Chief Financial Officer of Forward Foods, LLC, a
manufacturer and marketer of high protein snack, energy and meal replacement bars, from April 2007
to August 2007. From June 2001 to March 2007, Mr. Nielsen served as Corporate Controller of Mrs.
Fields’ Companies, Inc., a retailer of cookies and baked goods. From August 2000 to June 2001, Mr.
Nielsen was the Director of Financial Operations of Echopass, a provider of advanced IP-based call
and contact center solutions. From 1999 to 2000, Mr. Nielsen was a Senior Manager at Ernst & Young
LLP. Mr. Nielsen is a certified public accountant and holds a B.A. degree in Accounting from Weber
State University and an M.B.A. from Brigham Young University.
Jeff F. Hunsaker has served as President and Chief Operating Officer of SCO Operations since
December 2007. Prior to that, he served as Senior Vice President and General Manager of SCO’s
mobile business since May 2006. From August 2005 to April 2006, he served as the Senior Vice
President of Worldwide Sales. Prior to that, Mr. Hunsaker served as the Senior Vice President and
General Manager of the UNIX Division, from January 2004 to July 2005. From February 2003 to
December 2003, Mr. Hunsaker served as Senior Vice President of Worldwide Sales and Marketing for
the Company and prior to that Mr. Hunsaker served as Vice President and General Manager, Americas
Division, from January 2000 to January 2003. Upon joining the Company, Mr. Hunsaker had worked for
several high-tech companies from 1989 through 2000, in a senior sales or marketing role including
WordPerfect Corporation, Novell Inc., Corel Corporation and Baan Corporation. Mr. Hunsaker holds a
B.A. degree in Business Finance from Utah State University.
Ryan E. Tibbitts joined the Company in June 2003 as General Counsel and became the Corporate
Secretary in September 2003. Mr. Tibbitts is responsible for all legal aspects of the Company’s
worldwide operations. Prior to joining the Company, Mr. Tibbitts worked as General Counsel at
Center 7, Inc. from October 2001 to August 2003 and at Lineo, Inc. from January 2001 to September
2001. Mr. Tibbitts worked in private practice with a law firm in Utah from 1985 until 2001. Mr.
Tibbitts is a member of the Utah State Bar and American Bar
Association and received his J.D. and B.S. degrees from Brigham Young University.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our directors and officers, and persons who own more than ten percent of a registered
class of our equity securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of our equity securities. Officers, directors, and
greater than ten percent stockholders are required to furnish us with copies of all Section 16(a)
forms they file. During the year ended October 31, 2008, we did not timely file Form 4 related to
the issuance of stock options to our directors on March 17, 2008, April 23, 2008, June 16, 2008,
and September 15, 2008. The Form 4 related to the issuance of these stock options was filed
subsequent to October 31, 2008. Otherwise, we believe that during the year ended October 31, 2008
all reporting persons complied with all applicable filing requirements.
Code of Conduct and Ethics
We have adopted a code of conduct and ethics that applies to all employees, including
employees of our subsidiaries, as well as each member of our Board of Directors. The code of ethics
is available at our website at www.sco.com.
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of this code of ethics by posting such information on our
website, at the address specified above.
Audit Committee
The Company has a separately-designated standing audit committee (the “Audit Committee”)
established in accordance with Section 3(a)(58) of the Exchange Act. The Audit Committee assists
the Board in the oversight of our financial statements, legal compliance, qualifications of our
independent registered public accounting firm, and engagement and oversight of our independent
registered public accounting firm. The members of the Audit Committee are Messrs. Campbell
(Committee Chair), Mott and Millington. The Audit Committee has determined that Messrs. Campbell,
Mott and Millington are Audit Committee financial experts as such term is defined in Regulation S-K
promulgated by the Securities and Exchange Commission. All members of the Audit Committee are
independent directors. For a discussion regarding director independence, see “Affirmative
Determinations Regarding Director Independence” below. The Audit Committee is responsible for,
among other things:
•
reviewing the Company’s annual financial statements, the audit report and other
relevant financial reports,
•
reviewing the internal financial reports prepared by management,
•
recommending engagement of the Company’s independent registered public
accounting firm,
•
approving the services performed by the independent registered public accounting
firm,
•
meeting with the independent registered public accounting firm and reviewing
with them the results of their audit and other services, and
•
reviewing and evaluating the Company’s systems of internal controls.
5
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The following discussion and analysis provides information regarding our executive
compensation objectives and principles, procedures, practices and decisions, and is provided to
help give perspective to the numbers and narratives that follow in the tables in this section. This
discussion will focus on the Company’s objectives, principles, practices and decisions with regards
to the compensation of Darl C. McBride, Jeff F. Hunsaker and Ryan E. Tibbitts, our named executive
officers (“Named Executive Officers”). A discussion of our directors’ compensation is set forth
below under “Director Compensation.”
Executive Compensation Objectives and Principles
The compensation policy for our Chief Executive Officer and other executive officers is to
provide compensation opportunities that are based upon our financial performance, their
contribution to that performance, their personal performance, and competitive enough to attract and
retain highly skilled individuals.
Executive Compensation Procedures
We believe that compensation paid to our executive officers should be closely aligned with our
performance and the performance of each individual executive officer on both a short-term and a
long-term basis, should be based upon the value each executive officer provides to our company, and
should be designed to assist us in attracting and retaining the best possible executive talent,
which we believe is critical to our long-term success. To attain our executive compensation
objectives and implement the underlying compensation principles, we follow the procedures described
below.
Role of the Compensation Committee. It is the duty of the Compensation Committee to review and
recommend to the entire Board of Directors for approval the salary, bonus and equity compensation
of our Chief Executive Officer. In addition, the Compensation Committee reviews and recommends the
general compensation policies for our other executive officers, after receiving recommendations
from our Chief Executive Officer. The Compensation Committee also reviews and recommends to the
entire Board of Directors discretionary option grants for our Chief Executive Officer, other
executive officers and employees in accordance with the 1999 Stock Option Plan and the 2002 and
2004 Omnibus Stock Incentive Plans.
The Compensation Committee believes that the compensation program for our Chief Executive
Officer should reflect our performance and the value created for our stockholders. In addition, the
compensation program for the Chief Executive Officer should support our short-term and long-term
strategic goals and values and should reward our Chief Executive Officer for his contribution to
our success. We are engaged in a very competitive industry, and our success depends, in part, upon
our ability to retain our executive officers.
Compensation Consultant. We have not retained the services of a compensation consultant.
Elements of Compensation
Our executive compensation objectives and principles are implemented through the use of the
following elements of compensation, each discussed more fully below:
•
Base Salary
•
Bonuses
•
Stock-Based Compensation
•
Other Benefits
In addition to benefits broadly available to our employees, the Chief Executive Officer and
other executive officers’ compensation packages are comprised of three elements: (i) base salary
that is competitive with the market and reflects individual performance; (ii) quarterly and annual
performance awards tied to the Company’s attainment
6
of financial and management performance objectives; and (iii) long-term stock-based incentive
awards designed to strengthen the mutuality of interests between the Chief Executive Officer, other
executive officers and our stockholders. The Compensation Committee and Board of Directors have
reserved the ability to exercise discretion in applying entirely different factors, such as
different measures of financial performance, for future fiscal years.
Base Salary. The Compensation Committee approved the salaries of all of our executive officers
for fiscal year 2008. Salary decisions concerning these officers were based upon a variety of
considerations consistent with the compensation philosophy stated above. In reviewing and setting
the total compensation of our Chief Executive Officer for the year ended October 31, 2008, 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
Company did not adjust the base salary for our Chief Executive Officer for the year ended October31, 2008 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, 2008.
The base salary level for the other executive officers was established for the year ended October31, 2008 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 earned bonus payments of $69,640 for the year ended October 31, 2008, of
which $44,597 was paid, 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. During the year ended October 31, 2008, our
other Named Executive Officers collectively earned bonus payments of $67,011, of which $44,352 was
paid, based on the personal attainment of their management performance objectives and/or achieving a
certain level of sales. The amount of bonus compensation earned by the Company’s executives and
not paid for the year ended October 31, 2008 is subject to the Bankruptcy Court’s approval.
Employee Incentive Bonus Program. The Employee Incentive Bonus Program (the “Bonus
Program”) is designed (i) to reward achievement of specific revenue and operating objectives, (ii)
align employee, company and stockholder interests, and (iii) improve morale of the employees. For
fiscal 2008, Darl McBride, Ryan Tibbitts and Jeff Hunsaker participated in the Bonus Program.
The Bonus Program is approved annually by the Compensation Committee and is administered by
our Chief Executive Officer, Chief Financial Officer and the Director of Human Resources (the
“Management Incentive Committee”). The Management Incentive Committee is responsible for setting
the performance objectives and administering the Bonus Program, provided that the Compensation
Committee sets the performance objectives of the Chief Executive Officer, and the Chief Executive
Officer approves the performance objectives of the other members of the Management Incentive
Committee. The Bonus Program covers all regular employees, except employees who are covered by
sales commission or other incentive-eligible programs.
The bonus pool is comprised of three components: (1) 40% related to revenue, (2) 40% related
to operating performance, and (3) 20% related to personal objectives. We establish an executive and
employee incentive program each year, pursuant to which certain executives and employees may earn
quarterly bonuses based upon the Company’s performance. In the first quarter of each year, our
Compensation Committee identifies the plan’s participants for the year and establishes an objective
formula by which the amount, if any, of the plan’s bonus pool will be determined. This formula is
based upon quarterly revenues and quarterly operating income (loss) before provision for income
taxes. The bonus pool is subject to a 200% cap for director level and below, and is not subject to
a cap for vice presidents, executives and officers.
7
Our Compensation Committee established the following targets for the fiscal 2008 quarterly
bonus pool (dollars in thousands):
Operating
Revenues
(loss)/income
Q1 - 2008
$
4,167
$
(2,434
)
Q2 - 2008
4,076
(1,492
)
Q3 - 2008
3,990
(610
)
Q4 - 2008
4,276
112
Total
$
16,509
$
(4,424
)
The revenue and operating performance bonuses will not be paid unless the revenue and
operating performance targets are attained at 100%. The personal objectives components will pay
out each quarter based on the percentage of individual achievement. The amount payable to any
employee will depend on a percentage of such employee’s annual base salary. The applicable
percentages of annual base salary for all employees are established on an annual basis by the
Compensation Committee. For executive officers, there is no maximum amount that they may earn
pursuant to the Bonus Program. The components of the Bonus Program outlined above serve as
criteria to help the Compensation Committee determine what bonuses to pay to the executive
officers. However, the Compensation Committee has the discretion to award bonuses even if these
criteria are not met. During the year ended October 31, 2008, the Compensation Committee did not
award any bonuses that did not meet the aforementioned criteria.
Sales Compensation Plan. The sales compensation plan is a quarterly incentive based
plan. All sales representatives in the UNIX business are eligible to participate in the sales
compensation plan. For commission compensation, there is one quota containing Product, SES/SWIM,
Engineering Services, Support, Professional Services, IP Compliance Licensing, and other UNIX
products (“UNIX business”). There is also one quota containing Me Inc. products and services,
Shout, Edgeclick and other new revenue opportunities (“New business”). The quota and credit relief
for both the UNIX business and New business is based on revenue recognition for all products and
services. The sales compensation plan is rolled out quarterly to the sales field to ensure that the
objectives and deliverables outlined for traction with new mobility products is being attained.
None of our Named Executive Officers participated in the sales compensation plan during the year
ended October 31, 2008.
Stock-Based Compensation. We do not have any policies for allocating compensation between
long-term and currently paid out compensation or between cash and non-cash compensation or among
different forms of non-cash compensation. However, the Compensation Committee sets the number of
shares subject to each option grant for each executive officer at a level intended to create a
meaningful opportunity for stock ownership based on (i) the executive’s current position with the
Company, (ii) the base salary associated with the position, and (iii) the executive’s personal
performance in recent periods. The Compensation Committee also takes into account the executive’s
existing holdings of our common stock and the number of vested and unvested option shares
exercisable by the executive in order to maintain an appropriate level of equity incentive to keep
the executives’ interests aligned with our stockholders. Although we do not have any formal policy
for determining the amount of stock options or the timing of our stock option grants, we have
historically granted stock options at regularly scheduled board meetings to high-performing
employees (i) in recognition of their individual achievements and contributions to our Company, and
(ii) in anticipation of their future service and achievements. Mr. McBride received an option to
purchase 160,000 shares of our common stock at an exercise price of $0.24 per share during the year
ended October 31, 2008. This option vests over four years, although vesting accelerates upon a
change in control of the Company. This award was determined based upon Mr. McBride’s current equity
holdings in the Company and related vesting to maintain alignment of his interests with the
interests of our stockholders. During the year ended October 31, 2008, the Compensation Committee
recommended and the full Board of Directors approved stock options to purchase a total of 420,000
shares of our common stock to the other Named Executive Officers at an exercise price of $0.24 per
share, which options also accelerate upon a change in control of the Company.
Other Benefits. Our Named Executive Officers receive the same benefits that are available to
all other full-time employees, including the payment of health, dental, life and disability
insurance premiums.
8
Deductibility of Executive Compensation
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 $1,000,000 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 our executive officers for the year ended October 31, 2008 did not exceed the $1,000,000
limit per officer, and the Compensation Committee does not anticipate that the non-performance
based compensation to be paid to our executive officers for the year ending October 31, 2009 will
exceed that limit. The Company’s 1999 Stock Option Plan and the 2002 and 2004 Omnibus Stock
Incentive Plans have been structured so that any compensation deemed paid in connection with the
exercise of option grants made under those plans with an exercise price equal to the fair market
value of the options shares on the grant date are intended to qualify as performance-based
compensation which will not be subject to the $1,000,000 limitation. Because it is unlikely that
the cash compensation payable to any of our executive officers in the foreseeable future will
approach the $1,000,000 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 our executive officers.
The Compensation Committee will reconsider this decision should the individual non-performance
based cash compensation of any executive officer ever approach the $1,000,000 level.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed the foregoing Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K and discussed the Compensation Discussion and Analysis
with the Company’s management. Based on such review and discussions with management, the
Compensation Committee recommended to the Board that the foregoing Compensation Discussion and
Analysis be included in the Company’s Annual Report on Form 10-K/A.
Submitted by:
J. Kent Millington (Chair)
Omar T. Leeman
R. Duff Thompson
Members of the Compensation Committee
9
The following table shows information regarding the compensation earned during the fiscal
years ended October 31, 2008 and 2007 by our Named Executive Officers. We have not entered into
any employment agreements with our executive officers. For a discussion of the compensation of our
directors, see “Director Compensation” described below.
Summary Compensation Table
Non-Equity
Incentive Plan
All Other
Salary
Bonus
Option
Compensation(3)
Compensation
Total
Name
Year
($)
($)(1)
Awards(2)
($)
($)
($)
Darl C. McBride
2008
265,000
—
157,493
69,640
—
492,133
Chief Executive
Officer
2007
265,000
46,375
161,529
98,316
—
571,220
Ryan E. Tibbitts
2008
210,000
—
219,323
33,652
—
462,975
General Counsel and
Corporate Secretary
2007
165,769
100,408
(4)
253,789
33,920
—
553,886
Jeff F. Hunsaker
2008
200,385
—
57,472
33,359
—
291,216
President and Chief
Operating Officer
of SCO Operations
2007
160,000
13,440
56,082
27,590
—
257,112
(1)
For the fourth quarter of fiscal 2007, the Compensation Committee adjusted the performance
goals necessary for certain participants in the Employee Incentive Bonus Program to receive
bonuses. As a result of these adjustments, for the fourth quarter, Mr. McBride received a
bonus of $46,375, Mr. Tibbitts received a bonus of $16,000, and Mr. Hunsaker received a bonus
of $13,440. These awards are all discussed in further detail under the heading “Elements of
Compensation” in the Compensation Discussion and Analysis section above.
(2)
The amounts reflect the dollar amount recognized for financial statement reporting purposes
for the fiscal year ended October 31, 2008, 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, 2008 as included in our Annual Report on Form
10-K filed with the Securities and Exchange Commission on January 29, 2009. The amounts shown
disregard estimated forfeitures related to service-based vesting conditions.
(3)
This amount constitutes the cash bonuses earned by certain Named Executive Officers. For the
fiscal year ended October 31, 2008, Darl McBride, Ryan Tibbitts and Jeff Hunsaker participated
in the Employee Incentive Bonus Program.
For the fiscal year ended October 31, 2007 Darl McBride and Ryan Tibbitts participated in the
Employee Incentive Bonus Program; and Jeff Hunsaker participated in both the Employee Incentive
Bonus Program and the Sales Compensation Plan. Mr. Hunsaker received $24,710 pursuant to the
Sales Compensation Plan and $2,880 pursuant to the Employee Incentive Bonus Program. These
plans are discussed in further detail under the heading “Elements of Compensation” in the
Compensation Discussion and Analysis section above.
(4)
Of this amount, $16,000 represents a bonus awarded to Mr. Tibbitts as further described above
in Footnote 1 to this table and $84,408 represents a discretionary cash bonus awarded to Mr.
Tibbitts for services rendered during fiscal 2007.
10
Grants of Plan-Based Awards—2008
The following table sets forth information regarding grants of plan-based awards made to our
Named Executive Officers during the fiscal year ended October 31, 2008.
Estimated Future
Payouts Under Non-
All Other Option
Exercise or
Grant Date
Equity Incentive Plan
Awards: Number
Base Price of
Fair Value of
Awards
of Securities
Option
Stock and
Target
Maximum
Underlying Options
Awards
Option
Name
Grant Date
(#)(1)
(#)
(#)(2)
($/Sh)
Awards($)
Darl C. McBride
8/26/08
—
—
160,000
0.24
14,720
Chief Executive
Officer
—
185,000
N/A
—
—
—
Ryan Tibbitts
8/26/08
—
—
140,000
0.24
12,880
General Counsel and
Corporate Secretary
—
64,000
N/A
—
—
—
Jeff F. Hunsaker
8/26/08
—
—
140,000
0.24
12,880
President and Chief
Operating Officer
of SCO Operations
—
64,000
N/A
—
—
—
(1)
Darl McBride, Ryan Tibbitts, and Jeff Hunsaker participated in our Employee Incentive Bonus
Program. The target bonus for each eligible employee is comprised of three components: (i) 40%
related to revenue, (ii) 40% related to operating performance, and (iii) 20% related to
personal objectives. This bonus program does not provide for threshold or maximum payout
amounts. The actual bonus amount earned by each of these participants is shown in the
“Summary Compensation Table” above.
(2)
All option grants were made pursuant to the 2004 Omnibus Stock Incentive Plan and are
nonqualified stock options. Options expire ten years from the date of grant. The exercise
price of each option granted is equal to the fair market value of our common stock (which is
the closing price of our common stock on the date of grant) as determined and approved by the
Board of Directors. Our equity incentive plans are discussed in further detail under the
heading, “Elements of Compensation” in the Compensation Discussion and Analysis section above.
11
Outstanding Equity Awards at Fiscal Year-End—2008
The following table lists the outstanding equity incentive awards held by our Named Executive
Officers as of October 31, 2008.
Option Awards
Number of Securities
Number of Securities
Underlying
Underlying
Unexercised Options
Unexercised Options
Option
(#)
(#)
Exercise Price
Name
Exercisable(1)
Unexercisable(1)
($)
Option Expiration Date
Darl C. McBride
400,000
—
$
0.760
06/26/2012
Chief Executive Officer
50,000
—
$
0.760
06/27/2012
150,000
—
$
0.760
06/27/2012
200,000
—
$
2.070
03/17/2013
95,833
4,167
$
4.850
12/07/2014
55,000
25,000
$
3.780
01/22/2016
47,916
52,084
$
2.300
11/12/2016
—
160,000
$
0.240
08/25/2018
Ryan E. Tibbitts
30,000
—
$
8.710
05/26/2013
General Counsel and
35,000
—
$
17.99
09/10/2013
Corporate Secretary
10,000
—
$
5.050
05/24/2014
100,000
—
$
4.050
07/26/2014
143,750
6,250
$
4.850
12/07/2014
34,375
15,625
$
3.780
01/22/2016
45,520
49,480
$
2.300
11/12/2016
—
140,000
$
0.240
08/25/2018
Jeff F. Hunsaker
11,250
—
$
1.120
11/01/2011
President and Chief
22,500
—
$
1.120
11/01/2011
Operating Officer of SCO
100,000
—
$
2.070
03/18/2013
Operations
23,958
1,042
$
4.850
12/07/2014
27,500
12,500
$
3.780
01/22/2016
19,166
20,834
$
2.300
11/12/2016
—
140,000
$
0.240
08/25/2018
(1)
All of these options were granted 10 years prior to the option expiration date. The unvested
options vest 25% after the completion of one year of service and then 1/36 per month for the
remaining three years and would be fully vested at the end of four years. In addition, the
options fully vest upon the occurrence of a change in control as described below under
“Potential Payments Upon Termination or Change of Control.”
Potential Payments Upon Termination or Change in Control
On December 10, 2004, the Company entered into Change in Control Agreements with the following
Named Executive Officers who are still employed by the Company: Darl C. McBride; Jeff F. Hunsaker;
and Ryan E. Tibbitts (each, an “Officer”). Each agreement is effective as of December 10, 2004.
Pursuant to the terms of these agreements, each Officer agrees that he or she will not
voluntarily leave the employ of the Company in the event any individual, corporation, partnership,
company or other entity takes certain steps to effect a change in control of our Company, until the
attempt to effect a change in control has terminated, or until a change in control occurs.
If the Officer is still employed by the Company when a change in control occurs, any stock,
stock option or restricted stock granted to the Officer by the Company that would have become
vested upon continued employment by the Officer shall immediately vest in full and become
exercisable notwithstanding any provision to the contrary of such grant and shall remain
exercisable until it expires or terminates in accordance with its terms. Our purpose in entering
into the Change in Control Agreements was to attempt to increase the alignment of the interests of
the Chief
Executive Officer and other executive officers with the interests of our stockholders in
connection with any potential change in control of the Company.
12
Each Officer shall be solely responsible for any taxes that arise or become due pursuant to
the acceleration of vesting that occurs pursuant to the Change in Control Agreement.
The exercise price of all of the unvested stock options held by each Officer as of October 31,2008 exceeded the closing price of our common stock on October 31, 2008 ($0.11). Therefore, no
compensation would have been recognized with respect to our Officers as of October 31, 2008 if we
had experienced a change in control.
Director Compensation
The compensation and benefits for service as a member of the Board of Directors is determined
by the Compensation Committee and the Board. Directors employed by us or one of our subsidiaries
are not compensated for service on the Board or on any Committee of the Board. Beginning in
September 2007, we began awarding our non-employee directors 10,000 options per quarter in lieu of
any cash compensation; for their service on the Board and for serving on any of our committees. In
addition, Board members are reimbursed for expenses incurred in connection with attendance at Board
and committee meetings.
Prior to September 2007, our non-employee directors received $25,000 for each year of service
as a director plus an additional $5,000 per year for each committee of the Board on which such
non-employee directors served. Additionally, the chairpersons of each of the Compensation Committee
and the Nominations Committee received an additional $5,000 per year and the chairpersons of each
of the Audit Committee and the Litigation Oversight Committee received an additional $10,000 per
year. Non-employee directors also received stock option awards under our stock option plans, which
awards included an initial option to purchase 45,000 shares of common stock upon joining the Board
as a director and thereafter each non-employee director who continued to serve on the Board
automatically received an annual grant of an option to acquire 15,000 shares upon his or her
election at the annual meeting.
The following table sets forth a summary of the compensation we paid to our non-employee
directors in 2008.
Fees Earned or Paid in Cash
Options Awards
Name
($)
($)(1)
Total ($)
Ralph J. Yarro III
—
10,367
10,367
R. Duff Thompson
—
10,367
10,367
Darcy G. Mott
—
10,367
10,367
Daniel W. Campbell
—
10,367
10,367
Omar T. Leeman
—
10,367
10,367
J. Kent Millington
—
10,367
10,367
(1)
The amounts reflect the dollar amount recognized for financial statement reporting purposes
for the fiscal year ended October 31, 2008, 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 consolidated financial
statements for the fiscal year ended October 31, 2008 as included in our Annual Report on Form
10-K filed with the Securities and Exchange Commission on January 29, 2009. The amounts shown
disregard estimated forfeitures related to service-based vesting conditions. No stock options
were forfeited by any of our non-employee directors during the fiscal year. The grant date
fair value of the option granted on April 23, 2008 to each non-employee director re-elected on
that date was $1,473 per director. The grant date fair value of the option granted to each
non-employee director for quarterly compensation for the year ended October 31, 2008 was
$1,276 for the grant date of March 17, 2008; $1,473 for the grant date of June 16, 2008; and
$1,473 for the grant date of September 15, 2008. For information regarding the number of stock
options held by each non-employee director as of October 31, 2008, see the table below. These
amounts reflect our accounting expense for these awards, and do not correspond to the actual
value that may be recognized by the non-employee directors.
13
Each of our non-employee directors owned the following number of stock options as of October31, 2008.
Non-Employee Director
Stock Options Outstanding
Ralph J. Yarro III
222,500
R. Duff Thompson
185,000
Darcy G. Mott
185,000
Daniel W. Campbell
200,000
Omar T. Leeman
140,000
J. Kent Millington
140,000
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth information known to us with respect to beneficial ownership of
our common stock as of January 31, 2009 for (i) each director and nominee, (ii) each holder of 5.0%
or greater of our common stock, (iii) our Named Executive Officers, and (iv) all executive officers
and directors as a group.
Beneficial ownership is determined in accordance with the rules and regulations of the
Securities and Exchange Commission. Shares subject to options that are exercisable within 60 days
following January 31, 2009 are deemed to be outstanding and beneficially owned by the optionee for
the purpose of computing share and percentage ownership of that optionee, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other person. The
percentage of shares beneficially owned is based on 21,588,885 shares of common stock outstanding
as of January 31, 2009. Except as affected by applicable community property laws, all persons
listed have sole voting and investment power for all shares shown as beneficially owned by them.
All Named Executive Officers and Directors as a Group (10 Persons)
8,387,621
(11)
34.5
%
*
Does not exceed one percent.
(1)
Includes options to purchase 222,500 shares of common stock.
(2)
The information regarding the number of shares beneficially owned or deemed to be
beneficially owned by AmTrust Capital Management, Inc. was taken from a Schedule 13G filed
by that entity with the Securities
Includes options to purchase 185,000 shares of common stock.
(4)
Includes options to purchase 185,000 shares of common stock.
(5)
Includes options to purchase 140,000 shares of common stock.
(6)
Includes options to purchase 200,000 shares of common stock.
(7)
Includes options to purchase 140,000 shares of common stock.
(8)
Includes options to purchase 1,021,666 shares of common stock.
(9)
Includes options to purchase 213,749 shares of common stock.
(10)
Includes options to purchase 419,999 shares of common stock.
(11)
Includes options to purchase 2,727,914 shares of common stock. Included in this group
are our Named Executive Officers, directors and current executive officers.
EQUITY COMPENSATION PLAN INFORMATION
We maintain our 1998 Stock Option Plan, our 1999 Stock Option Plan, our 2002 Omnibus Stock
Incentive Plan, our 2004 Omnibus Stock Incentive Plan and our 2000 Employee Stock Purchase Plan
(the “ESPP”). We are no longer granting awards under the 1998 Stock Option Plan, which was
superseded by the 1999 Stock Option Plan. As of December 1, 2007, we suspended our ESPP.
The following table provides information about equity awards under our equity compensation
plans as of October 31, 2008:
Number of securities
remaining available for
Number of securities
Weighted-average
future issuance under
to be issued upon
exercise price of
equity compensation
exercise ofoutstanding
outstanding
plans (excluding
options, warrants
options, warrants
securitiesreflected in
Plan Category
and rights
and rights
the first column)
Equity compensation
plans approved by
security holders
5,187,933
$
2.82
1,910,057
(1)
Equity compensation
plans not approved
by security holders
—
n/a
—
Total
5,187,933
$
2.82
1,910,057
(1)
The 2004 Omnibus Incentive Plan (the “2004 Plan”) incorporates an evergreen formula pursuant
to which on each November 1, the aggregate number of shares reserved for issuance under the
2004 Plan will increase by a number of shares equal to three percent of the outstanding shares
on the day preceding (October 31).
Item 13. Certain Relationships and Related Party Transactions
Other than the transactions described below, since the beginning of the year ended October 31,2006 there has not been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or will be a party
•
in which the amount exceeds $111,460 (one percent of the average of our total
assets at year end for fiscal 2007 and fiscal 2008); and
•
in which any director, executive officer, holder of more than five percent of our
Common Stock or any member of their immediate family had or will have a direct or
indirect material interest.
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
15
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 years ended October 31, 2008 and 2007, the Company incurred expenses
of approximately $256,000 and $415,000, respectively, for the reimbursable expenses of document
management, outsourced technical and litigation assistance and travel expenses.
Affirmative Determinations Regarding Director Independence
The Board of Directors has determined each of the following directors to be an “independent
director” as such term is defined in Marketplace Rule 4200(a)(15) of the National Association of
Securities Dealers (the “NASD”): Ralph J. Yarro, III, R. Duff Thompson, Darcy G. Mott, Daniel W.
Campbell, Omar T. Leeman, and J. Kent Millington. Although our common stock is no longer listed on
The Nasdaq Stock Market, we continue to use the independence standards of The Nasdaq Stock Market
to determine the independence of our directors.
These directors are referred to individually as an “Independent Director” and collectively as
the “Independent Directors.” The Independent Directors intend to meet in executive sessions at
which only Independent Directors will be present in conjunction with each regularly scheduled
meeting of the Board of Directors.
ITEM 14. Principal Accounting Fees and Services
Principal Accountant Fees and Services
The following table presents fees for professional services rendered by Tanner LC for the
years ended October 31, 2008 and 2007 (in thousands):
2008
2007
Audit Fees(1)
$
345
$
280
Audit-Related Fees(2)
18
30
Tax Fees(3)
48
45
All Other Fees
—
—
Total
$
411
$
355
(1)
Audit Fees consist of fees billed for the annual audits and quarterly reviews.
(2)
Audit Related Fees consist of fees billed for various SEC filings and the audit of the
Company’s employee benefit plan.
(3)
Tax Fees consist of fees billed for tax consultation and tax return preparation.
Audit and Non-Audit Services Pre-Approval Policies
The Audit Committee approved all audit, audit-related and tax services performed by our
independent registered public accounting firm during the years presented. Additionally, the Audit
Committee Chair has the authority to pre-approve audit, audit-related and tax fees, which approval
is ratified by the full Audit Committee at the next scheduled meeting. The Audit Committee has
determined that the fees paid to Tanner LC are compatible with maintaining Tanner LC’s independence
as the Company’s independent registered public accounting firm.
16
PART IV.
Item 15 Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements: Reference is made to the Index to Consolidated Financial Statements
of this Annual Report on Form 10-K, as initially filed on January 29, 2009.
(2) Financial Statement Schedule. N/A
(3) Exhibits. Reference is made to the Index to Exhibits filed as part of this Amendment No. 1
to Annual Report on Form 10-K.
17
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto
duly authorized on March 2, 2009.
THE SCO GROUP, INC.
By:
/s/
Kenneth R. Nielsen
Kenneth R. Nielsen
Chief
Financial Officer/Chief Accounting Officer
18
EXHIBITS
Exhibit
Number
Exhibit Description
31.1
Certification by Darl C. McBride, President and Chief
Executive Officer, pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Kenneth R. Nielsen, Chief Financial
Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1
Certification by Darl C. McBride, President and Chief
Executive Officer, pursuant to Section 1350, Chapter 63 of
Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification by Kenneth R. Nielsen, Chief Financial
Officer, pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
19
Dates Referenced Herein and Documents Incorporated by Reference
