Reverse Merger Does Not Benefit The SCO Group

Original title was: Reverse Merger May Benefit The SCO Group

UPDATE 23 July 2005: I am leaving the below up so that anyone following a link to here will see the original thoughts regarding a SCO windfall out of the reverse merger. However, Al Petrofsky wrote Bert Young, SCO CFO, on 13 May 2005 asking about SCO's investments. You can see the complete e-mail from Bert Young, which includes the complete e-mail from Al. Bert indicates that SCO owned no stock of any kind by Q4 2003. So, the speculations below, while interesting, are completely incorrect.

27 April 2005

Recently, I noticed that was doing a reverse merger with Energy Source. Of course, I didn't understand the concept at the time. I correctly recognized that it was a way to avoid an IPO and still take a company public. What I did not realize was its signifigance to the SCO story. It turns out that there are a number of indications that's revers merger is an attempt to get another cash infusion into SCO--likely a successful one. Below, I have a slightly edited version of something that Yahoo! Finance poster stats_for_all wrote. For those who stumbled on this page from another source, there is an active group of people who follow and investigate the SCO story on the SCOX Yahoo! Finance bulletin board Discussions there can cover all aspects of the story, but with a lot of noise. Groklaw also covers the story, but with more of a focus on the legal arena. With that, I will turn it over to (a slightly edited) stats_for_all:

Bob Bench was CFO of The SCO Group when the fiaSCO first started. He stepped down in April of last year and was replaced by Bert Young. According to John Wall's website, it seems that Bob Bench landed a job as's CFO.

Now, what people need to keep in mind is that last year Ralph Yarro was in control of Canopy's empire. He had more than just SCO to play with. Unfortunately for Ralph, last year saw a fight break out over control of Canopy. Appearances are that Ralph was paid some money to go away quietly, but he is basically left only with SCO to play with. Well, SCO likely still owns Vista shares. Given what Stats_for_all dug up below, those Vista shares are likely not worth very much right now. Worse for Ralph, they are private shares. However, if they could be turned into public shares, then they might be worth something--or might be a way for SCO to get another cash infusion.

When SCO did a deal with John Wall and,'s shares were basically valued at $1.00/share. Energy Source is now trading for $3.00 share up from near $1.00 since the merger announcement was made., this means the reverse merger has created at least 11MM shares *$3= $33MM in paper capital for Vista.

1. SCOX owns a least a "10% undiluted" share of In Dec 2002 SCOX entered an agreement to purchase 3,312,737 shares for $500k. (p. 49 of the 2002 10K) They restructured the Vista deal in 2003 and wrote off $250k in the 2003 10K. If they had subsequently sold the investment, they would of booked an asset, since they had already zeroed the value on the balance sheet.

2. SCOX had a $1,000,000 note receivable 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. SCOX paid $100K for the note and gave Wall 800K shares of stock. As the Morgan Keegan registration statement noted: "We sold the shares of our common stock being offered by this prospectus to Mr. Wall in exchange for a promissory note that was payable to Mr. Wall that is now payable to us." This means "someone else" was originally on tap to pay the $1MM+interest, not Wall. Wall is simply a conduit for a debt due from another payer. ** I find no record that the promissory note, due August 2003 was ever paid. It was speculated that the bump in 2003 Q3 revenues were due this payment, but I don't see a 10Q note to verify that.

3. SCOX also had an option (originally set to expire in 2003) to acquire complete ownership of Vista. No record of an extension or other adjustment to this option. These may of expired.

The SCOX ownership share in Vista was in series C preferred shares, not mentioned in the Vista//Source energy press release which gives 10,550,000 shares of common stock and 2,800,000 options, warrants and convertible securities. Some sort of conversion may of happened which has since increased the SCOX stake in Vista common shares. SCOX registration statements state that in January 2003, another $250K was paid to Vista to complete the stock purchase in In January and April 2003, two loans totaling $200K were made to by SCOX.

Total cash payments by SCOX >>Vista 100K License roalty 100K purchase of 1MM Promissary Note security was 20% ownership in Vista. 250K Stock purchase of 10% stake, Oct-Dec 2002 250K second tranche in stock purchase Jan 2003 100K loan Jan 2003 due April 30, 2003 security 5% stake in Vista 100K loan April 2003 due April 30, 2003 security 5% stake in Vista ====== $900K SCOX >> Vista + 800K shares of SCOX (registered for sale April 2003, 200K shares reported sold August 2003 by Lyon, no further reporting, no accounting requirements)

Total payments by Vista >> SCOX $1,000K Promissory Note due August 2003 from ?XXX? transfered by Wall to SCOX 3.3MM shares of Class C preferred Vista stock

The 2003 2Q 10Q notes the Vista loans were in default on April 30, 2003, but SCOX had not yet decided whether to exercise conversion rights. The 10Q records $1,259 as Note Recievable and Accrued interest from Vista in "other current assets of the balance sheet" The 2003 10K records the other current assets as 1,072K and records a $250K write down with a note about "restructuring the investment" indicating that no payment on the Promissary Note had been made as of 10/31/03, and the loans had been discounted. The other asset item increased to $ 1,311 in January 2004, indicating to me that the note Wall had sold was still outstanding.

The 2004 10K notes that the company accounts for "non-marketable" securities under the equity method if the Company owns more than 20 percent but less than 50 percent of the outstanding voting securities. In the past, filings SCOX notes it accounts for Vista using the equity method, indicating that its ownership was between 20 and 50%.

Other Assets line item April 2003 $1,259 (entirely attributed to Vista value by filing) Oct 2003 $1,072 (write down of $250 for Vista recorded) January 2004 $1,311 ( + change not detailed) April 2004: $1,347 (delta change is entirely consistent with 8% interest rate) July 2004: $1,390 Oct 2004: $1,098 *report says $561 is a China joint venture and other securites have no book value. Jan 2005 $1,115 (delta change is entirely consistent with 8% interest rate)

The April 2003 filing explicitly listed the full value of this line item as the Vista loans, the line item has accumulated value in a way consistent with 8% interest being booked on an unpaid promissary note. Since the note may be unpaid, it is still convertible to at least 20% ownership of Vista as per the original contract, in addition to the 20% ownership purchase for 500K + 200K in loans.

This means the reverse merger of Vista//Source energy is very much a Stealth SCOX capital deal, since at any point SCOX can convert its promissary note to ownership of a newly capitalized Vista.

earlier I had noted:

SCO's 10Q represents Wall as the majority stockholder in Other sources indicate that "MGN Opportunity Group LLC" was the major stockholder. MGN is a subsidiary of "Matthew G. Norton, Co.", a Seatle area investment bank. MGN is named after the founder of Weyhauser, the source of its funds.

A lawyer named Carter R. Mackley represented Vista, and MGN in the the debt restructuring, and purchase by SCOX. Mackley is an alumni of BYU (1985) and additionally serves as the representative for Microsoft in its private (PIPE) investments. Mackley represented MS in a deal with Dell Computer. He also advised Canadian companies on private placements Mackley is an associate at PrestonGatesEllis.

The MGN CEO at the time of the Wall-SCOX trade was Erik J. Anderson. He is now President of WestRiver Capital and VC of Mongomery & Co. Anderson's investments contiunue to parallel MGN's, so the independence of this new partnership is uncertain.

Vista today. is a shared server web host running linux in Kirkland/Redmond,. Washington. In many ways business model resembles uSight's. It sells a ebusiness service collocation service to small businesses combined with a merchant site builder application. It appears to be free of the marketing scam associated with uSight.

The number of businesses actually using the service appears small. Netcraft only tracked 10 domains before I started adding others. (and some of these were test sites rather than real business). The toll free tech number offered by vista for subdomains 877-497-9909 only googles up a handful of hits. Business use of the site by Smith and Wesson is evidently predicated on Colton R. Melby (of Kent Wash) who is the major shareholder of Smith and Wesson. The other legitimate domain found by netcraft is founded and run by ex-MS Cameron Myhrvold VP in the Developer Relations Group. "where this group initiated the "platform marketing" effort at Microsoft."

A press release by vista from the August 2002 SCOX deal claims 60,000 customers. The site builder package may be independent of the collocation service as some of the claimed customers are hosted on independent net-blocks.

A press release announcing a Sam's Club / partnership from July 2004 has not created visible new business.

To summarize: Wall and SCOX were involved in a complicated stock swap negotiated by the Microsoft attorney for PIPE deals. No tangible business derived from the vista licensing deal. The Wall stock sale of SCOX was coordinate with Morgan Keegan sales for investments to benefit SCOX.

See all the long boring stock discussions.

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