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New SCO S-3: Boies' Firm Will Represent SCO in the Red Hat Lawsuit and the BayStar/RBC Register for Sale 3,850,000 Shares
Monday, November 17 2003 @ 08:53 PM EST

The SCO Group just filed an S-3 form with the SEC, which informs us that Royal Bank of Canada and BayStar Capital II are registering for sale of up to 3,850,000 shares. The Registration Statement also reveals that Boies will now be representing SCO in the Red Hat lawsuit in Delaware, as well as in the IBM case in Utah, and in connection with other matters having to do with protecting SCO's IP, whatever "other matters" turns out to mean. Details of the payment for these legal services are provided. They only mention two licensees under the SCOSource program.

First, here is what it says about Boies:

"We have agreed to pay to Boies, Schiller & Flexner LLP and other firms representing us in the protection of our intellectual property rights $1 million and register the issuance, pursuant to an effective registration statement, to Boies, Schiller & Flexner by March 1, 2004 of 400,000 shares of our common stock. Subject to the registration statement covering such shares being declared effective by the Securities and Exchange Commission, we would issue such shares under our current equity incentive plans. As a result of the issuance of this consideration to Boies, Schiller & Flexner LLP and other firms, SCO anticipates recording an additional charge to earnings of approximately $8,956,000 in its fourth quarter that ended October 31, 2003. This $8,956,000 charge to earnings is comprised of non-cash expense of $7,956,000 related to the issuance of the 400,000 shares of common stock and $1,000,000 in cash expense. We also have agreed with Boies, Schiller & Flexner LLP and the other law firms to expand the scope of their representation to include representing us in the Red Hat litigation, defending us in IBM's counterclaim against us and representing us in other matters relating to the protection of our intellectual property."

With respect to the shares being offered, it says this, among other things:

"This offering may have an adverse impact on the market value of our stock.

        "This prospectus relates to the sale or distribution of up to 3,850,000 shares of common stock by the selling stockholders. We will not receive any proceeds from these sales and have prepared this prospectus in order to meet our contractual obligations to the selling stockholders. The shares subject to this prospectus represent approximately 28 percent of our issued and outstanding common stock as of October 31, 2003. The sale of this block of stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market.

"Risks associated with the potential exercise of our options outstanding.

        "As of October 31, 2003, we have issued and outstanding options to purchase up to 3,629,568 shares of common stock with exercise prices ranging from $0.66 to $28.00 per share. The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. The possible future sale of shares issuable on the exercise of outstanding options could adversely affect the prevailing market price for our common stock. Further, the holders of the outstanding rights may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

"Our private placement and this offering may adversely impact the holders of our common stock.

       "This prospectus relates to the sale or distribution by the selling stockholders of up to 3,850,000 shares of common stock issuable by us upon conversion of shares of our nonvoting Series A Convertible Preferred Stock, including shares of Series A Convertible Preferred Stock issued in our private placement and shares that may be issued to the selling stockholders as accrued dividends. We will not receive any of the proceeds from these sales and have prepared this prospectus to meet our contractual obligations to the selling stockholders. The shares of common stock subject to this prospectus will, upon issuance, dilute the equity ownership percentage of the holders of our common stock. The market price of our common stock also could decline as a result of a large number of shares of our common stock in the market, or the perception that such sales could occur.

"The holders of shares of Series A Convertible Preferred Stock have preferential rights upon liquidation that could adversely affect the holders of our common stock.

       "If the selling stockholders choose not to convert shares of Series A Convertible Preferred Stock, then, as holders of shares of Series A Convertible Preferred Stock, among other rights, they will be entitled to receive a preferential distribution of our assets prior to any distribution to our holders of common stock upon a liquidation, dissolution, winding up or other change in control transaction in which we sell all or substantially all our assets or merge or consolidate or otherwise combine with another company or entity. Upon the occurrence of a liquidation event, the holders of Series A Convertible Preferred Stock will be entitled to receive the greater of:

• the value of the shares of Series A Convertible Preferred Stock held by them determined by multiplying the closing sale price of our common stock on the Nasdaq SmallCap Market on the date of the liquidation event by the number of shares of common stock into which the preferred shares could be converted at the time of the liquidation event; or

• up to $50 million, the aggregate purchase price paid by the selling stockholders for shares of Series A Convertible Preferred Stock in our private placement, plus eight percent of that amount less the amount of any dividends paid to the preferred stockholders in the calendar year in which the liquidation event occurs.

"Depending on the amount of assets we have available for distribution to stockholders upon a liquidation event when shares of Series A Convertible Preferred Stock remain outstanding, we may be required to distribute all such assets or a portion of such assets that exceeds the preferred stockholders' pro rata ownership of our common stock assuming full conversion of their preferred shares into common stock, which could eliminate or limit the assets available for distribution to our common stockholders.

"The rights of the selling stockholders as holders of shares of Series A Convertible Preferred Stock may prevent or make it more difficult for us to raise additional funds or take other significant company actions.

        "The Certificate of Designation creating our Series A Convertible Preferred Stock requires us to obtain the approval of the holders of a majority of the then outstanding Series A Convertible Preferred Stock to take the following actions, among others:

• change the rights, preferences or privileges of the Series A Convertible Preferred Stock or issue additional shares of Series A Convertible Preferred Stock;

• create or issue any other securities that are senior or equal in rank to the Series A Convertible Preferred Stock;

• create or issue any convertible securities having have floating conversion rate terms or a fixed conversion price below $16.93 or the closing sale price of our common stock on the Nasdaq SmallCap Market on the date of such issuance;

• incur any indebtedness, subject to limited exceptions; or

• sell or transfer any material asset or intellectual property to a third party.

       "Additionally, the Certificate of Designation provides that the holders of our Series A Convertible Preferred Stock have a participation right entitling them to purchase their pro rata share of any future equity securities, or debt that is convertible into equity, on the same terms offered by us to other purchasers of such securities. This participation right, and the right to approve the company actions described above, may make it more difficult for management, our board of directors or our stockholders to raise capital in the future in either equity or debt financing transactions or to take other significant company actions. These provisions could also limit the price that some investors might be willing to pay for shares of our common stock in the future.

"Our board of directors' right to authorize additional shares of preferred stock could adversely impact the rights of holders of our common stock.

       "Our board of directors currently has the right, with respect to the 4,950,000 shares of our preferred stock not designated as Series A Convertible Preferred Stock, to authorize the issuance of one or more additional series of our preferred stock with such voting, dividend and other rights as our directors determine. The board of directors can designate new series of preferred stock without the approval of the holders of our common stock, subject to the approval rights of our holders of Series A Convertible Preferred Stock as described above. The rights of holders of our common stock may be adversely affected by the rights of any holders of additional shares of preferred stock that may be issued in the future, including without limitation further dilution of the equity ownership percentage of our holders of common stock and their voting power if we issue preferred stock with voting rights. Additionally, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock."

Notice particularly footnote 2 in the chart below; there is no equivalent footnote for BayStar:

Name of Selling Stockholder

  Number of Shares of
Common Stock
Beneficially Owned
Before the Offering
(With Limitations)

  Shares of
Common Stock
Being Offered
in the Offering

  Number of Shares of
Common Stock
Beneficially Owned
After the Offering(1)

Royal Bank of Canada(2)   732,110 (3) 2,310,000 (4)
BayStar Capital II, L.P.   732,110 (5) 1,540,000 (6)
TOTAL   1,464,220   3,850,000  


"(1)Assumes the sale of all shares offered in this prospectus and no other purchases or sales of our common stock by the selling stockholders.

"(2)Royal Bank of Canada is the affiliate of RBC Dominion Securities Corporation and RBC Dain Rauscher, Inc., each a broker-dealer. This selling stockholder has represented to us that the shares of our equity securities held by it were purchased in the ordinary course of business, and that at the time of purchase of our shares held by it, it did not have any agreements or understandings, directly or indirectly, with any person to distribute the shares held by it.

"(3)Represents shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement. As described more fully below, the Certificate of Designation for our Series A Convertible Preferred Stock prevents this selling stockholder from converting any shares of Series A Convertible Preferred Stock, and prevents us from issuing shares of our common stock in connection with the conversion of shares of Series A Convertible Preferred Stock, into shares of common stock exceeding an amount that would result in the selling stockholder and its affiliates together beneficially owning more than 4.99 percent of our then-outstanding common stock.

"(4)Includes 1,772,002 shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement and 537,998 shares issuable upon conversion of shares of Series A Convertible Preferred Stock that may be issued from time to time as dividends on the Series A Convertible Preferred Stock.

"(5)Represents shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement. As described more fully below, the Certificate of Designation for our Series A Convertible Preferred Stock prevents this selling stockholder from converting any shares of Series A Convertible Preferred Stock, and prevents us from issuing shares of our common stock in connection with the conversion of shares of Series A Convertible Preferred Stock, into shares of common stock exceeding an amount that would result in the selling stockholder and its affiliates together beneficially owning more than 4.99 percent of our then-outstanding common stock.

"(6)Includes 1,181,335 shares issuable upon conversion of shares of Series A Convertible Preferred Stock issued in our October 16, 2003 private placement and 358,665 shares issuable upon conversion of shares of Series A Convertible Preferred Stock that may be issued from time to time as dividends on the Series A Convertible Preferred Stock."
What About the Risks Section?

In addition to the usual, dilution of percentage ownership interest and value, there are some differences I noted from earlier such filings. First, they are attributing their business failures in part to the improper use of their Unix code by competitors. They also claim "several" attacks on their servers, whereas there have only been two announced publicly, one of which is in dispute. And the indemnification of officers, executives and directors section is expanded. Here is the indemnification section:

"ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

        "The registrant's Amended and Restated Certificate of Incorporation (the 'Certificate') provides that, except to the extent prohibited by the Delaware General Corporation Law, as amended (the 'DGCL'), the registrant's directors shall not be personally liable to the registrant or its stockholders for monetary damages for any breach of fiduciary duty as directors of the registrant. Under the DGCL, the directors have a fiduciary duty to the registrant that is not eliminated by this provision of the Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director's duty of loyalty to the registrant, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. The registrant maintains a policy of liability insurance for its officers and directors. . . .

 "Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the question has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue."

As for the risks section generally, here are some snips:

"In our quarterly results of operations, we recognize revenue from agreements for support and maintenance contracts and other long-term contracts that have been previously invoiced and are included in deferred revenue. Our deferred revenue balance has declined from $10.1 million as of October 31, 2002 to $6.8 million as of July 31, 2003. . . .

"In addition to these above-mentioned actions, other regulators or others in the Linux community may initiate legal actions against us, all of which may negatively impact our operations or future operating performance. . . .

 "Our revenue from the sale of UNIX-based products has declined over the last eight quarters. This decrease in revenue has been attributable to the worldwide economic slowdown, lower information technology spending, and increased competitive pressures from alternative operating systems. As explained elsewhere in this filing, we claim that much of this competition is in violation of our contractual and intellectual property rights. If the demand for UNIX-based products continues to decline, and we are unable to develop new products and services that successfully address a market demand, our business will be adversely affected. . . .

"During the last several quarters the U.S. and European economies have experienced an economic slowdown that has affected the purchasing habits of many consumers across many industries and across many geographies. This has caused the delay, or even cancellation of technology purchases. The ultimate impact of the slowdown in the United States and Europe is difficult to predict, but it has contributed, together with the unauthorized use of our UNIX code, to decreased sales of our products, longer sales cycles and lower prices. If the economic slowdown and the unauthorized use of our UNIX code continue, our revenue and results of operations may continue to be lower than expected. In addition, the slowdown may also affect the end-user market making it more difficult for our reseller channel to sell our products.

"This prospectus relates to the sale or distribution of up to 3,850,000 shares of common stock by the selling stockholders. We will not receive any proceeds from these sales and have prepared this prospectus in order to meet our contractual obligations to the selling stockholders. The shares subject to this prospectus represent approximately 28 percent of our issued and outstanding common stock as of October 31, 2003. The sale of this block of stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market."

Here is how they describe the IBM lawsuit this time:

"The complaint alleges that IBM obtained information concerning the UNIX source code from us and inappropriately used and distributed that information in connection with its efforts to promote the Linux operating system.

 "On or about June 16, 2003, we filed an amended complaint in the IBM case. The amended complaint essentially restates and realleges the allegations of the original complaint and expands on those claims in several ways. Most importantly, the amended complaint raises new allegations regarding IBM's actions and breaches through the products and services of Sequent, which IBM acquired. We allege that IBM breached the Sequent agreement in several ways similar to those set forth above and we are seeking damages flowing from those breaches. We are also seeking injunctive relief on several of our claims."

Here is how much of the $50 million they actually got themselves:

"Our competitive position could decline if we are unable to obtain additional financing.

        "We recently completed the private placement of $50 million of our Series A Convertible Preferred Stock, for which we received approximately $47.8 million in net proceeds."

There is, of course, a great deal more, so take a look yourselves.


  


New SCO S-3: Boies' Firm Will Represent SCO in the Red Hat Lawsuit and the BayStar/RBC Register for Sale 3,850,000 Shares | 61 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
The reson for business failure? yeah, sure.
Authored by: Tsu Dho Nimh on Monday, November 17 2003 @ 09:10 PM EST
"The ultimate impact of the slowdown in the United States and Europe is
difficult to predict, but it has contributed, together with the unauthorized use
of our UNIX code, to decreased sales of our products, longer sales cycles and
lower prices. If the economic slowdown and the unauthorized use of our UNIX code
continue, our revenue and results of operations may continue to be lower than
expected. In addition, the slowdown may also affect the end-user market making
it more difficult for our reseller channel to sell our products."

Sheesh. It's an obsolete product, doesn't even support USB ports, and they
are blaming their crappy results on everything else.

[ Reply to This | # ]

Considering ...
Authored by: overshoot on Monday, November 17 2003 @ 09:18 PM EST
the relative quality of the most recent filings in Delaware and Utah, it makes
perfect sense that SCO would put Boies, Schiller in charge of the Delaware
proceedings. Can't have the new guy there making the home team look bad, after
all.

[ Reply to This | # ]

Legal Fees completely smoked out by this one
Authored by: sco_lurker on Monday, November 17 2003 @ 09:23 PM EST
I posted this to yahoo finance earlier today, but I'll paraphrase it here.

First, I don't think this necessarily means Baystar/RBC has begin their
conversion. SCOX has to file this registration statement because their
convertible preferred stock could be converted for sale into common
stock at any time. In fact, if you read the fine print, RBC/Baystar would
only get about 3M of the shares if they converted now. The balance is
reserved for dividends.

What's interesting is how this will allow them to demonstrate consistent
earnings and a profit, despite burgeoning legal fees. The S-3 discloses a
bunch of neat stuff:

1) Apparently, Boies et al isn't getting 20% cut for the Baystar equity
financing.

2) They will take a charge of $8.956M for legal fees. This should give
them a loss for this quarter, right? After all, they only made $3M last
quarter with (apparently) larger SCOSource revenue from MSFT and
SUNW.

Nope. See the next item- this is not in the portion of the S-3 quoted in
this article, but it's on Page 11 near the bottom. Enter the accountants
and financial "engineers".

       " We anticipate recording a beneficial conversion feature related
to
the issuance of the Series A Convertible Preferred Stock in our private
placement of approximately $8,741,000. The beneficial conversion
feature represents the intrinsic value of the difference in the Series A
conversion price and the closing market price of our common stock on
October 16, 2003."

3) Basically, SCO is going to record $8.74M of INCOME based on the
equity financing they received from Baystar. When used to offset their
legal fees ($8.96M), they end up cancelling. The net result is that their
next quarter income statement will look fairly good.

This result shows that either there is a huge coincidence or the Baystar
deal and Boies' contract were very, very carefully coordinated.

The preferred stock contains an option favorable to SCOX. Basically if
the stock trades over 150% of its conversion price ($16.93 if memory
serves) for a specified period, the preferred stock must convert. SCOX
gains value because they don't have to pay dividends.

It's fairly easy to quantify the value of this option using the Black Scholes
- it has a strike price of around $24 and you can fairly easily use SCOX's
volatility to get a value. I have no doubt the $8.74M number will fully
stand up to scrutiny.

Baystar's options are not linked to the stock price - and therefore can't
be recorded as an expense.

This "Income", of course, will need to be amortized over future
earnings
periods, but it's probably beyond the time period people are concerned
with.

Deals with convertible securities are very carefully structured - in this
case both Baystar and SCOX both seem to come out ahead, and SCOX
has avoided having legal fees hit their income statement. (Well, until this
payment runs out and they (Boies) comes back for more)

It's still a house of cards. And now that they have resorted to complex
accounting to boost their profits, they open themselves to much more
rigorous standards. "Pump and Dump" may be hard to prove, but I
doubt KPMG will put themselves out on a limb for SCOX, especially with
everybody watching.

Disclaimer: I am not an accountant, and would welcome any corrections
/ advice. Hopefully someone more knowledgeable can pull on this string
a little harder and see what pops out.

Lurker
(This is a rewrite of a post I put on Yahoo finance earlier this evening)

[ Reply to This | # ]

Footnote 2 explained
Authored by: Anonymous on Monday, November 17 2003 @ 09:24 PM EST
PJ: "Notice particularly footnote 2 in the chart below; there is no
equivalent footnote for BayStar:"

Footnote 2 for RBC is saying RBC also has brokerage businesses, which are not
involved in this offering

There is no footnote 2 for BayStar, because AFAIK, BayStar does not have a
brokerage business.

[ Reply to This | # ]

So what is their litigation burn rate?
Authored by: freeio on Monday, November 17 2003 @ 09:33 PM EST
"As a result of the issuance of this consideration to Boies, Schiller
& Flexner LLP and other firms, SCO anticipates recording an additional
charge to earnings of approximately $8,956,000 in its fourth quarter that ended
October 31, 2003."

Their burn rate is hidden by the fact that it is divided into several categories
(cash, stock, etc.) but nevertheless this would indicate that they are
time-limited in what they can do with their current round of so-called
financing. Their biggest risk looming out past the upcoming court dates is that
without enough positive publicity, they will cash-out before the litigation is
done.

Thus the PR is crucial to insure that there is more money available to them to
throw at this mess. If their stock falls, if some major public financial guru
bad-mouths them, or if the litigation expanbds into other fronts, they have a
real problem.

So, expect their PR machine and talking-head shills to go into high gear as much
as is possible. They need to talk up their position, possibilities, and
potentialities if they are to "monitize" that mere talk into more
financial backing.

---
73 de w4ti

[ Reply to This | # ]

They dont claim to own "the" UNIX OS this time
Authored by: Anonymous on Monday, November 17 2003 @ 09:55 PM EST
jog

[ Reply to This | # ]

SCO admits total of legal winnings so far: negative 10,000 Euros
Authored by: Anonymous on Monday, November 17 2003 @ 10:52 PM EST
Something that I just noticed in this filing, but which they actually changed in
their last S-3 on October 23: they have given up on even debating their 10,000
Euro loss in the German courts.



The October 14 S-3/A says "SCO GmbH has received an administrative fine of
10,000 Euro for a technical violation of one of the temporary restraining
orders. We are currently negotiating with the various claimants in Germany over
the temporary restraining orders and are evaluating whether we will appeal the
administrative fine."



The October 23 S-3/A and November 17 S-3 have the same two sentences, but with
the "and are evaluating whether we will appeal the administrative
fine" removed.



Apparently they finished their evaluation, and the result was "Hey, I
think that's our ass they just handed us".



P.S. If someone in Germany could get a hold of a court document showing that
the 10,000 Euros have been paid, that would be fun for us to look at.

[ Reply to This | # ]

Boies Will Represent SCO
Authored by: Anonymous on Monday, November 17 2003 @ 11:31 PM EST
Oh Good, Boies is staying involved. SCO's sure to lose now!

Seriously, I know that there is some protection for lawyers representing
clients, but if the whole lawsuite is found to be a scam, could there be any
reprecussions for the laywers? I mean, is a lawyer allowed to take a case
KNOWING that it is baseless (or continue after it is clearly revealed to be
baseless)?

I've heard about something called "Barritry" (sp?), but from what I
gather it's more to protect clients from being conned by lawyers into taking
unwinnable cases or something (IOW, it's to protect the client from a bad
lawyer, not to protect the defendant from a bad lawyer/client combination). Is
there any way that Boies could share in the outcome of this case when SCO goes
down in flames?

[ Reply to This | # ]

New SCO S-3: Boies Will Represent SCO in the Red Hat Lawsuit and the BayStar/RBC Register for Sale 3,850,000 Shares
Authored by: Anonymous on Tuesday, November 18 2003 @ 01:07 AM EST
"If we do not prevail in our action against IBM, or if IBM is successful
in its counter claim against us, our business and results of operations could be
materially harmed. The litigation with IBM and others could be costly, and our
costs for legal fees may be substantial and in excess of amounts for which we
have budgeted. In addition, we may experience a decrease in revenue as a result
of the loss of sales of Linux products and initiatives previously undertaken
jointly with IBM and others affiliated with IBM or sympathetic to the Linux
movement. We are informed that participants in the Linux industry have attempted
to influence participants in the markets in which we sell our products to reduce
or eliminate the amount of our products and services that they purchase. They
have been somewhat successful in those efforts and similar efforts and success
will likely continue. There is also a risk that the assertion of our
intellectual property rights will be negatively viewed by participants in our
marketplace and we may lose support from such participants. Any of the foregoing
could adversely affect our position in the marketplace and our results of
operations. "

I couldn't have said it better.

[ Reply to This | # ]

The investor represented by RBC Dominion Securities...
Authored by: beast on Tuesday, November 18 2003 @ 02:40 AM EST
... would, from this filing, appear to be none other than the Royal Bank of
Canada.

A question just occurred to me. I presume that TSG didn't approach just
Baystar - they must have been talking to others about investing in TSG.
Wouldn't this mean that there potentially were other investment offers and that
the Baystar deal was the best they could get?

[ Reply to This | # ]

New SCO S-3: Boies' Firm Will Represent SCO in the Red Hat Lawsuit and the BayStar/RBC Register for Sale 3,850,000 Shares
Authored by: Anonymous on Tuesday, November 18 2003 @ 10:42 AM EST
If the demand for UNIX-based products continues to decline, and we are unable to develop new products and services that successfully address a market demand, our business will be adversely affected. . . .

If. . .IF?!?! As far as I know, demand for SCO Unix has been declining steadily for years now. And, as far as I know, SCO Unix is very out of date and hasn't kept up with technology. And, as far as I know, SCO massively cut back the number of actual software engineers they have working on UNIX, so that it is almost guaranteed that "the demand for UNIX-based products continues to decline."

And, as far as I can tell, since SCO is more interested in litigating than innovating, as witnessed by the aforementioned technical staffing cuts, it's almost guaranteed that SCO will be "unable to develop new products and services that successfully address a market demand."

So, by their own logic it stands to reason that "our business will be adversely affected. . ."

I couldn't have said it better myself.

[ Reply to This | # ]

New SCO S-3: Boies' Firm Will Represent SCO in the Red Hat Lawsuit and the BayStar/RBC Register
Authored by: hutcheson on Tuesday, November 18 2003 @ 12:09 PM EST
Another jounalist discovers The Source: "interesting speculation at groklaw.net" says The Register at a href="http://theregister.co.uk/content/4/34049.html">http://theregister.co.uk /content/4/34049.html

[ Reply to This | # ]

With S-3 Info: Q4 and 2003 Revenue/Earnings Summary
Authored by: stdsoft on Tuesday, November 18 2003 @ 01:30 PM EST
With the info contained in the S-3, it is now possible to estimate earnings for
Q4 and 2003. Apparently, SCO is trying to take all the lumps at once in 2003
and specifically in Q4. The next few quarters are going to be losers, so SCO
wants to minimize future losses by moving the attorney costs up to Q4 to
coincide with the charge taken as a result of the Beneficial Conversion Feature
(BCF). Many thanks to radicimo (Yahoo Finance) for clearing up the BCF issue.
The bottom line is that SCO has a BIG GAAP loss in Q4 and loses money in 2003.

GAAP EPS for Q4: ($0.88) loss per share
Pro Forma EPS for Q4: $0.32 per share

GAAP EPS for 2003: ($0.34) loss per share

Revenue Estimates
---------------------------------------------------------------
SCO reiterated revenue guidance in SEC filings of between 22K and 25K. Here are
my prior estimates of revenue components (Yahoo Finance MSG 53586).

Q403 Core Product Revenue: 9,532
Q403 Services Revenue: 1,753
Q403 SCOsource Revenue: 8,000 (Microsoft payment)

Q403 Total Revenue: 19.3MM
Q403 SCO Revenue Guidance (low end): 22MM
Difference: 2.7MM

My estimate differs from the low end of SCO’s guidance by 2.7MM, almost exactly
the amount of the Sun payment. This makes me wonder if perhaps SCO talked Sun
into paying in Q4. This would be a surprise since Microsoft is mentioned in the
S-3 but Sun is not.

Beneficial Conversion Feature (BCF)
---------------------------------------------------------------
For those who are thinking this amounts to REVENUE for SCO… No!. This is an
EXPENSE item (Yahoo Finance MSG 62491). Since the notes are immediately
convertible, the charge will not be amortized. SCO has indicated they
“anticipate recording a non-cash charge for the beneficial conversion feature
related to the issuance of the Series A Convertible Preferred Stock of
approximately $8,741,000 in the fourth quarter.”

Attorneys Fees
---------------------------------------------------------------
The cash portion of compensation, $1MM, will effect Pro Forma results. The
remainder, $7.956MM, is a one time non-cash charge that impacts GAAP results.

Other estimates (Yahoo Finance MSG 53586)
---------------------------------------------------------------
Cost of revenue: $4.5MM
Operating Expenses: $12MM

GAAP Income Statement
---------------------------------------------------------------
Revenue: $22MM
Cost of revenue: $4.5MM
Usual Operating Expenses: $12MM
Legal Expense: $1MM
One-time legal expense: $7.956MM
One-time BCF expense: $8.741MM
EBITDA: ($12.2MM) loss
EPS: (0.88) loss per share

Pro Forma Income Statement
---------------------------------------------------------------
Excluding one time charges…

Revenue: $22MM
Cost of revenue: $4.5MM
Usual Operating Expenses: $12MM
Legal Expense: $1MM
EBITDA: $4.5MM
EPS: 0.32 per share

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