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Decatur Jones' Dion Cornett on SCO
Friday, January 30 2004 @ 07:34 AM EST

Here is the PDF of Dion Cornett's January 13 report on SCO. As you will see, the OSDL legal defense fund, the Novell indemnification, and the Open Source Risk Management vendor-neutral indemnification program seem to him meaningful events, which he believes make it unlikely end users will now want to purchase a license from SCO in 2004. "The 'safe' action for the reasonable executive has switched from license to fight," says the report. Here's a segment.

****************************************************

End-user visibility worsens as Linux community raises defenses

We believe it is now unlikely that SCO will generate meaningful end-user SCOSource revenue in 2004.

Investment Considerations:

  • Yesterday an industry consortium of Open Source-related companies (OSDL) announced an IP defense fund for endusers;
  • In conjunction with its closing of the SuSE acquisition, Novell announced an indemnification program for its customers;
  • We have cut our previous SCOSource revenue estimate of $7 million by 90%;
  • Our new FY04 GAAP EPS estimate is a loss of ($.43) down from a $.20 profit;
  • Our new target price is $5 down from $8;
  • We maintain our Underperform rating.



    Investment Summary

    Our outlook for SCO has worsened given yesterday’s news that an Open Source industry group has formed a fund that may be used to defend end-users from SCO claims. Contributors to the fund include technology giant Intel (INTC: not rated). Novell (NOVL: Market Perform) piled on late in the day by announcing an indemnification program for its customers. Coupled with Novell’s previous filing of overlapping UNIX copyrights, we believe that end-users, already reticent to license from SCO, now have three justifiable reasons to wait to pay SCO even if SCO’s claims are eventually proven valid.

    More blows to SCO’s end-user licensing efforts

    We believe yesterday’s news that an industry consortium, Open Source Developments Labs (OSDL), had established a fund to defend end-users against infringement claims, represents the third strike in SCO’s attempts to derive IP-related licensing revenue from end-users. The first couple items detailed in our prior reports include the ambiguity of SCO’s claim over header files and Novell’s copyrighting of duplicitous UNIX software code.

    Previous benefit of the doubt goes away

    Furthermore, we previously had assumed that SCO would be able to generate $7 million in SCO Source licensing revenue this year. As stated in our prior report, "The ability to win end-user settlements is based on our presumption that SCO will be very careful in choosing its initial targets. Suing the wrong end-user early on, one that is willing to fight, poses several problems for SCO. An end-user willing to fight could mean higher legal fees, management distraction, and further Linux community scrutiny of SCO’s claims. More importantly however, the end-user does not even need to fight to victory to damage SCO’s ability to collect licensing fees. In our opinion, the first end-user that successfully wins a stay of proceedings pending the outcome of the IBM (IBM: not rated) or Red Hat (RHAT: Outperform) cases effectively could shut SCO’s efforts down as detailed in prior reports."

    Legal expenses remain even as SCOSource revenue shrinks

    Now with the potential for legal costs to be borne by OSDL, whose defense fund contributors include heavyweight Intel, we now believe it may be difficult for SCO to win any settlement. Furthermore the “safe” action appears to have switched sides. Before, many organizations may have been willing to write a five-figure check to avoid legal risks and move on with business. We suspect anyone currently considering such an expenditure may now worry that they will be taken to task for wasting corporate funds. As a consequence, we have reduced our expectation for FY04 SCOSource revenue by 90%. Similarly our estimates for legal expenses have also increased in anticipation of more expensive initial end-user battles. Based on the pace of legal proceedings, it is highly unlikely SCO will be able to post a legal victory against an end-user this calendar year, even if it were to file an end-user lawsuit by mid-February as it discussed.

    More entities announce plans to oppose SCO

    Later in the day, in what might be described as piling on, it was reported after the market close that Novell would indemnify its Linux customers. The indemnification program would apply to customers purchasing SuSE Enterprise Linux 8.0 after January 13, 2004. The timing of the indemnification corresponds to Novell’s expected and announced completion of SuSE GmBH (In a separate announcement last night Novell announced that the acquisition of SuSE had closed. ) Also this morning, in an interview reported on Groklaw, Daniel Egger, chairman of the Open Source Risk Management Group, announced plans for a vendor-neutral indemnification program. The program would operate similar to insurance for companies supplying and using Open Source code and its agnostic approach is meant to eliminate the vendor lock-in, and potential fragmentation, inherent with vendor specific indemnification.

    STOCK OUTLOOK

    Increasingly binary outcome steps up risk

    With significant end-user licensing fees unlikely and cuts to the core business possibly necessary, the fortunes of SCO’s shareholders are increasingly tied to a victory or loss against IBM. Yet, with the jury stage of the IBM lawsuit not scheduled to commence until April 2005, SCO is at least two years away from a potential win against IBM. Thus, the near-term downside risk to SCO’s shareholders is greater than the upside potential as IBM could conceivably win a motion to dismiss at least portions of SCO’s complaint at almost any time during this same period. The legal doctrine that supports this assertion is that juries decide facts, while judges decide matters of law.

    Near-term catalysts lean negative

    Over the next few months a number of events offer the potential to drive SCO’s stock price. Yesterday, SCO was required by a Utah judge’s December order to provide with “specificity” to IBM a list of files that form the basis of its complaint. While the materials presented are covered by a protective order, we believe SCO may attempt to release additional details over the next few weeks to bolster its case to the IT community where it appears to be losing the public relations battle as of late based on Linux’s momentum. The risk to SCO is that the Linux community, which consists of potentially thousands of free programming experts for every one expert that SCO hires, is able to quickly counter SCO’s claims. SCO’s management also points to the likely granting of its own motion to compel discovery against IBM and positive responses from its end-user certification letter as other potential near-term catalysts. Negative near-term catalysts include the expected denial of SCO’s motion to dismiss the Red Hat lawsuit and IBM potentially filing to dismiss portions of SCO’s complaint. The filing of an end-user lawsuit will most likely be touted by both bears and bulls on the stock as a positive for their position. We believe that in total the near-term catalysts are generally negative for SCO.

    Deteriorating metrics likely to drive price in 2004

    Beyond the ebb and flow associated with a tightly-held, volatile stock, with strong opinions on each side, we believe SCO’s stock price direction over the next year, will be dominated by its expected declining financial position. As legal expenses increase with limited offsetting SCOSource revenue, the declining cash balance is likely to become a concern. Furthermore, year-over-year comparisons are likely to be poor starting in April given that the $26 million in SCOSource revenue received from Sun (SUNW: not rated) and Microsoft (MSFT: not rated) is not likely to be repeated. This begs a question for SCO bulls; if an expected $45 stock price is two years away, but that expectation may drop to single digits at any point in the interim, why assume the risk and hold the stock today when fundamentals like cash per share and revenue growth will get worse before they get better? This risk return equation does not require a judgment on whether SCO’s claims are valid and potentially produces higher returns by facilitating a lower entry point and shorter IRR period.


  


Decatur Jones' Dion Cornett on SCO | 267 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Decatur Jones' Dion Cornett on SCO
Authored by: technomom on Friday, January 30 2004 @ 08:03 AM EST
# We have cut our previous SCOSource revenue estimate of $7 million by 90%;


Wow. That has got to hurt. That means revenue dropping below $1 million.
That's not even going to pay for the pens that Darl is going to need to sign
the surrender papers.

JoAnn

[ Reply to This | # ]

OT Novel
Authored by: Anonymous on Friday, January 30 2004 @ 08:03 AM EST
Here is a story from the Boston Globe
http://www.boston.com/business/globe/articles/2004/01/30/novell_moves_headquarte
rs_to_waltham/

Jack

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: RSC on Friday, January 30 2004 @ 08:04 AM EST
"Thus, the near-term downside risk to SCO’s shareholders is greater than the upside potential as IBM could conceivably win a motion to dismiss at least portions of SCO’s complaint at almost any time during this same period. The legal doctrine that supports this assertion is that juries decide facts, while judges decide matters of law."

Even the finacial analysts are starting to think SCO has not got much chance of winning against IBM.

How much will this actually effect the stock prices tho?

RSC

---
----
An Australian who IS interested.

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: Nick_UK on Friday, January 30 2004 @ 08:04 AM EST

Just love it :D

The risk to SCO is that the Linux community, which consists of potentially thousands of free programming experts for every one expert that SCO hires, is able to quickly counter SCO’s claims.

I would put that at tens of thousands...

Nick

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: belzecue on Friday, January 30 2004 @ 08:15 AM EST
Thank you, Dion, for having clear vision when others can't see past the
imaginary dollar signs.

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: TwinDX on Friday, January 30 2004 @ 08:19 AM EST

Furthermore, year-over-year comparisons are likely to be poor starting in April given that the $26 million in SCOSource revenue received from Sun (SUNW: not rated) and Microsoft (MSFT: not rated) is not likely to be repeated.

And of that $26 million, it looks likely that Novell will be wanting $23.75 million. So that's, um, $2.25 million there. Not exactly big league stuff, Darl...

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: Greebo on Friday, January 30 2004 @ 08:25 AM EST
Hi,

If you read the PDF report you see that not only are they cutting the SCOsource
revenue by 90%, but they also cut the general revenue growth from +15% to flat
for 2005!

If you look at the Cash flow sheet it shows a year on year growth of *-24%* for
2004, and a net income of *-$11M* in 2005.

In other words they are expecting SCO to incur *heavy* losses before things get
better (How can things get better? IBM will drive them into the ground).

If I was an investor i wouldn't touch this with a barge pole, so i really
don't understand why the stock price is on the rise again ? Can any financial
types explain this to me in plain english ?

Cheers,

Greebo

[ Reply to This | # ]

Both reports
Authored by: maroberts on Friday, January 30 2004 @ 08:25 AM EST
I wasn't entirely convinced by the pro-Linux report previously posted on this
site, but I liked the write up on this one. It looked at the situation from a
purely mercenary financial standpoint, and summed up most of "SCO's
woes" in a nutshell.

Its nice to someone finally understand most of what Groklaw has been saying for
months now!

[ Reply to This | # ]

Looks like the flak has hit
Authored by: cybervegan on Friday, January 30 2004 @ 08:28 AM EST
Hopefully we're now seeing the beginning of the nose-dive that will ultimately
end in a crash that will end these rediculous cases.

As SCO's 'evidence' is gradually eroded, there will eventually be nothing
left but the assumption that there 'has to be' some of SCO's IP in Linux, and
that won't hold up in court.

The sooner the better - but it has to be decisive, otherwise another tryer will
step up to the bar to take a pot-shot. Hopefully IBM will help us to show the
world that it's simply not worth trying to steal from the F/OSS community!

-cybervegan

---
Stand and fight we do consider
Reminded of an inner pact between us
That's seen as we go
And ride there
In motion
To fields in debts of honor
Defending

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: belzecue on Friday, January 30 2004 @ 08:44 AM EST
This pretty much ensures Dion's removal from SCO's Analyst page, which will leave only the two Deutsche boys, Brian Skiba and Matthew Kelley.

[ Reply to This | # ]

OT: McBrides are everywhere...
Authored by: TerryL on Friday, January 30 2004 @ 08:50 AM EST

Aaarrrggghhhhhhh!!!!!! There's no getting away from them :-)

I came across this news article, (it's got nothing to do with SCO v the Universe), and was quietly reading away when something jumped out of the page at me....

http://www.pressi.com/int/re lease/85034.html

Brian McBride, managing director of T-Mobile UK, said: ...

Is everyone called McBride going to have to change their name due to a growing phobia of their surname... :-)

Sorry, the poor guy is probably no relation but I'm becoming conditioned to react to the name...

---
All comment and ideas expressed are my own and do not necessarily reflect those of any other idiot...

[ Reply to This | # ]

OT: www.sco.com is a weapon of mass destruction
Authored by: phrostie on Friday, January 30 2004 @ 08:52 AM EST
http://news.netcraft.com/archives/2004/01/30/wwwscocom_is_a_weapon_of_mass_destr
uction.html

Much of the commentary on the SCO distributed denial of service scenario,
including our own, has been based on the premise that SCO badly wants to keep
their web site running. This may not be the case: unlike Microsoft, which has a
real business to run and a real need to keep its web site operational, SCO
Executives may not strongly care about the availability of www.sco.com. After
all, Michael Doyle’s half a billion dollar patent win against Microsoft scarcely
hinged on the response times of the Eolas web site.

---
=====
phrostie
Oh I have slipped the surly bonds of DOS
and danced the skies on Linux silvered wings.
http://www.freelists.org/webpage/cad-linux

[ Reply to This | # ]

Judges decide law; juries decide facts
Authored by: spambait42c on Friday, January 30 2004 @ 09:02 AM EST

Quoth the raven: IBM could conceivably win a motion to dismiss at least portions of SCO’s complaint at almost any time during this same period. The legal doctrine that supports this assertion is that juries decide facts, while judges decide matters of law.

This raises a question I've been wondering about. SCOX claims that the original AT&T-vs-IBM contracts, as amended, mean one thing. IBM and the rational portion of the universe contend they mean something else.

Is this a question of fact (jury) or law (judge?)

If it's a question of law, then we could have a decision on it as soon as IBM submits a motion to dismiss.

If it's a question of 'fact', what happens? Can the judge rule on a motion based on a question of facts?

Enquiring minds want to know...

[ Reply to This | # ]

Computing (UK) comment on fiaSCO
Authored by: jmc on Friday, January 30 2004 @ 09:11 AM EST

You might want to look here: http://www.computing.co.uk/Com ment/1152359

Not a bad article IMHO except the FUD about new and old SCO and being in California has been swallowed.

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: Anonymous on Friday, January 30 2004 @ 09:13 AM EST
One thing that's missing, though probably for good reason, is Novell's claim
to 95% of the Sun & MS revenue. There's no official news of this (other
than the text of the Novell/SCO correspondence) to which Dion could attribute
this, but if Novell presses this claim and prevails (as it likely will in a
countersuit of its own), it would tend to dry up SCO's reserves.

Novell won't win such a suit fast enough to actually collect the money, but
simply filing such a suit would be sufficient for the analysts to cut that
target price from $5 to about $0.50, IMO.

[ Reply to This | # ]

SCO lying to DJ?
Authored by: Anonymous on Friday, January 30 2004 @ 09:25 AM EST
SCO’s management also points to the likely granting of its own motion to compel discovery against IBM

Mmmm, how likely is that?

SCO have to specify their case before they get any discovery from IBM. The Dec 12 order makes that clear. The Judge's comments on Dec 5 make that clear.

SCO's motion to compel discovery seeks not background to specific issues of the case, but basically all history of IBM's AIX, Dynix, etc.

All history is not relevant to the specific case (if and when SCO specify what it is). All history is not discoverable. IBM pointed that out. The Judge pointed that out to SCO, multiple times, on Dec 5.

Oh boy.

SCO either lied to DJ

Or simply weren't listening to the Judge on Dec 5.

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: hdw on Friday, January 30 2004 @ 09:39 AM EST
Looks like Groklaw has become a tool for financial analysts :)
Also this morning, in an interview reported on Groklaw, Daniel Egger, chairman of the Open Source Risk Management Group, announced plans for a vendor-neutral indemnification program.

-- hdw

[ Reply to This | # ]

Did SCO create the worm ???
Authored by: iZm on Friday, January 30 2004 @ 10:00 AM EST

I just found this interesting link on the Yahoo message board bablefish translation from the Russian SecurityLab.ru.
The original is here, just in case you speaka de lingo. :)

---
Stupidity, like virtue, is its own reward.

[ Reply to This | # ]

Russians say SCO attacked, was raided
Authored by: Anonymous on Friday, January 30 2004 @ 10:02 AM EST
Here's a link to an interesting Russian article:
http://www.securitylab.ru/42464.html

And the English translation:
http://babelfish.altavista.com/babelfish/urltrurl?lp=ru_en&url=http%3A%2F%2F
www. securityLab.ru%2F42464.html

This would be very amusing if it were true. Does anybody here know any more
about it?

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: Anonymous on Friday, January 30 2004 @ 10:29 AM EST
Here is an interesting article at BusinessWeek. Note the estimate at the end of
the article by Deutsche Bank that SCO could hit $185

http://www.businessweek.com/magazine/content/04_05/b3868104_mz063.htm

[ Reply to This | # ]

Virus author called "Andy", and "just doing his job" + virus may not be from Russia
Authored by: Anonymous on Friday, January 30 2004 @ 10:39 AM EST
I won't even attempt to guess what this means, but I found this interesting

http://biz.yahoo.com/rc/040130/tech_internet_mydoom_1.html

After dissecting the malicious program, security experts got a little closer to
unmasking the perpetrator. The author apparently signed the worm with the name
"Andy" and left the message: "I'm just doing my job, nothing
personal, sorry."

The first infected e-mails detected appear to have originated in Russia, but,
Wood said, it was unclear if they were the engineers behind MyDoom or just early
victims.

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: Jude on Friday, January 30 2004 @ 10:47 AM EST
The amazing thing is how bad SCO looks, in spite of the report giving
essentially NO consideration to the legal weaknesses in SCO's position.

[ Reply to This | # ]

Target price of $5?
Authored by: Scriptwriter on Friday, January 30 2004 @ 10:53 AM EST
Optimistic, ain't he?

:)

---
He who sells / What isn't his'n / Is headed for / Some time / In prison /
Burma-Shave

irc.fdfnet.net #groklaw

[ Reply to This | # ]

Comments on radio station
Authored by: jdg on Friday, January 30 2004 @ 11:02 AM EST
On my way into work this morning, the DJ (105.5FM in Madison, WI) was talking
about the case(!); they were almost off-the-cuff. His commentary was rather
skeptical of SCOG and positive for Linux.

---
SCO is trying to appropriate the "commons"; don't let them

[ Reply to This | # ]

SCO code found!!!
Authored by: Anonymous on Friday, January 30 2004 @ 11:14 AM EST
SCO code segments

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: swengr on Friday, January 30 2004 @ 11:20 AM EST
Not to worry... the IBM lawyer will let Darl use his pen.

*

And ask for it back...


---
Gratis is nice, Libre is an inalienable right.

[ Reply to This | # ]

SCOX dropping again
Authored by: pooky on Friday, January 30 2004 @ 11:20 AM EST
http://finance.yahoo.com/q?s=SCOX

Down to 14.65 right now, wonder if it will bounce back again like yesterday?

-pooky

---
Veni, vidi, velcro.
"I came, I saw, I stuck around."

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: cf on Friday, January 30 2004 @ 12:14 PM EST
Now with the potential for legal costs to be borne by OSDL, whose defense fund contributors include heavyweight Intel, we now believe it may be difficult for SCO to win any settlement. Furthermore the “safe” action appears to have switched sides. Before, many organizations may have been willing to write a five-figure check to avoid legal risks and move on with business. (emphasis added)
Huh??? Where are all of these companies willing to fork over five figures? SCOG certainly hasn't been able to find them, in spite of all the sabre rattling the past 3/4 year. All the evidence suggests that only Microsoft and Sun have paid any significant license fees. And their motives are so transparent that no one else in the industry are willing to play follow that leader.

Cornett's seems to be backpedaling on his original analysis here, and it does raise a curious point. Certainly there are many companies who would spend less on SCOG's licensing fees - as outlandish as they are - than mounting a legal battle. There have been reports of "ongoing discussions with important companies" about licensing, yet no one has caved in under SCOG's threats. Why is that? Even if these companies are confident of defending themselves in a legal battle, the cost of that defense would dwarf the license fees.

Cornett's original analysis covered only financial considerations (and short term at that). I think the missing factor is a moral factor. I think SCOG's failure to gain licensing revenue is because their targets are weighing more than financial issues - they are weighing right and wrong.

They believe it is wrong for SCOG to accuse IBM of stealing their property while refusing to tell them exactly what was stolen. They believe it is wrong for SCOG to refuse all attempts to mitigate alleged infractions while trying to turn them into profit. They believe it is wrong for SCOG to hold Linux users responsible for actions that - if and only if SCOG's allegations are ever proven true - they had no part in. They believe it is wrong for SCOG insiders to reap millions of dollars in personal profit by actions that guarrantee loss of millions by investors and the eventual demise of SCOG.

If the outcome of this imbroglio was to be based soley on everyone doing what is best for them financially, SCOG might have had a chance at succeeding. Thank heaven there are those left in this world who fight wrong where they see it, regardless of financial consequenses.

[ Reply to This | # ]

OT: New twist in "GPL is invalid" argument?
Authored by: belzecue on Friday, January 30 2004 @ 12:15 PM EST
Daniel Wallace of Insight Communications says the GPL is indeed invalid, and why...


[snip]... When SCO's attorney Mark Heise said copyright law "preempted" the GPL and only allowed "one copy" he was being somewhat vague. He wasn't referring to the "number of copies," he was referring to the "number of successors." SCO is indeed correct that the GPL is invalid...

[ Reply to This | # ]

Decatur Jones' Dion Cornett on SCO
Authored by: Anonymous on Friday, January 30 2004 @ 01:12 PM EST
This is not the end.

This is not even the beginning of the end.

But it is, perhaps, the end of the beginning.


(Sir Winston Churchill adressing parliament
after the victory at El-Alamain in WW 2)

[ Reply to This | # ]

OT - Microsoft's license with SCO
Authored by: pooky on Friday, January 30 2004 @ 01:48 PM EST

Okay, I was curious about the MK letters referencing a payment of 6% should Microsoft enter into a license agreement with The SCO Group. To refresh everyone, here is the quote from the MK ammendment letter:

2.SCO and Morgan Keegan agree that, in the event Sun Microsystems and/or Microsoft enters into a substantial SCOsource licensing arrangement with SCO during the term of the engagement, that such an event would fall under provision 1(b) of our Engagement Letter. As such, the aggregate amounts paid under the license agreements would be subject to the Contingent Placement Fee, calculated as six (6) percent for a license with Sun and one (1) percent for a license with Microsoft.

Here's the text of the engagement letter this references:"

b.In the event that the Company sells equity and/or debt securities, the Company will pay Morgan Keegan placement fees (the "Contingent Placement Fees") payable in cash at closing as follows:

i.Cash equal to six (6) percent of the principal amount of equity financing (common stock, preferred stock and convertible preferred stock); plus

ii.Cash equal to three (3) percent of the principal amount of mezzanine financing (convertible debt, whether subordinated or not); plus

iii.Cash equal to one (1) percent of the principal amount of senior debt provided, however, that Morgan Keegan shall not be entitled to such a fee with respect to senior debt sourced from commercial banks and other institutional lenders.

Okay, so whatever Microsoft purchased falls under a clause in SCOG's agreement with Morgan Keenan that refers to the placement of Equity and/or Debt securities. A contingent placement fee refers to an instrument that allows SCOG to engage Morgan Keenan's services without upfront payment. In other words, only if the deals are closed does MK get anything. Basic so far.

So what does this have to do with licensing? Here's a quote from an 8K filing:

During the quarter ended April 30, 2003, SCO entered into a licensing agreement with Microsoft Corporation (“Microsoft”). The initial licensing agreement allowed Microsoft, at its election, to exercise two options to allow Microsoft to acquire expanded licensing rights with respect to SCO’s UNIX source code. During the quarter ended July 31, 2003, Microsoft exercised and paid for the first of these options. During SCO’s current quarter, ending October 31, 2003, Microsoft exercised and paid $8,000,000 for the second option.

Now it's getting more interesting. The SEC filing says the license Microsoft bought allowed them to acquire expanded licensing rights to SCO's UNIX source code. That's a strange way to phrase it. The License provides the option to acquire rights. It doesn't say that the license provides the rights, which if I recall is how the Novell - SCO APA is worded with respect to both expanding existing licensing agreements and signing up new licensees. The "License" MS bought seems to provide them an option to get additional rights to UNIX, at an undisclosed fee and on undisclosed terms.

And to make things more interesting, here's a quote from Chris Sontag:

Microsoft merely licensed an "applications interface layer."

So to bring all of this together, Microsoft paid for a license, treated as a debt security or equity financing, which they exercised the 1st option of, providing them with the rights to use an application interface layer. This was reported as income by SCOG in 2003. So how can this be income if Morgan Keenan is receiving payment for it due to it being related to being a debt security or equity financing?

Well, here's one definiti on of a debt security:

A debt security is evidence of a debt. It is sold to an investor with the promise that it will be paid with or without interest at the end of a specified period. The debt's issuer, a corporation or a unit of government, uses the proceeds of its sales to finance various projects.

Some debts last as little as one day, while others last as long as forty years. Some are secured by collateral such as revenue or physical assets.

If the license is a debt security, could the "applications interface layer" be the colleteral? I would say SCO is not likely to be considered creditworthy over a long term given their current list of potential liabilities. So what if the license is equity financing? Equity financing is defined as the act of selling an interest in your business in return for capital. SO if this is equity financing, did Microsoft receive some ownership of SCO Group?

That seems unlikely, since there are more private and direct ways to achieve that goal. There are a number of scenarios that can take place in a business that would be defined as equity financing, but I cannot find any that seem to directly partake in one party purchasing something from the other. The most likely candidate would be in the terms of a partnership or strategic alliance. That would be reason indeed to hide the license terms from everyone since the public impression is otherwise. However, you have to figure that SCOG executives know that at some point the license terms will be made public through an SEC filing.

Debt security seems like the more obvious possibility to me. This raises the question as to whether selling Debt securities are treated as revenue? Well, selling a debt instrument adds a liability to your portfolio, as you are expected to repay the debt at some point. Could the "loan" be treated as income? It probably depends on certain factors that I am not privy to. This may be where the scheme lies with the license MS bought.

The license seems to be designed in such a way as to provide SCO with revenue from what is classified by MK, and paid for as by SCOG, a debt instrument. It is also designed carefully to avoid paying Novell their 95% share of what is clearly referred to as acquiring expanded rights, inferring MS already has rights and thus is an existing licensee as the APA would define.

What you have here ladies and gentlemen, is an apparent dileberate attempt on the part of SCOG to defraud Novell out of millions on contractually guaranteed monies. They are playing around with contract wording to generate something that shouldn't apply to the APA. Sounds like the general playing around with wording they do with all their contracts these days doesn't it? Anyone take bets that the contract interpretations are being done by Boies Schiller and Flexner LLP?

-pooky

---
Veni, vidi, velcro.
"I came, I saw, I stuck around."

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OT: SCO is a Weapon of Mass Destruction
Authored by: Anonymous on Friday, January 30 2004 @ 01:53 PM EST
check this out SCO is a Weapon of Mass Destruction at netcraft.com. Very funny article.

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PJ, Status update stories
Authored by: Thomas Frayne on Friday, January 30 2004 @ 02:09 PM EST


In the past, several times we have discussed how to handle ongoing stories. Top 10 lists, an anchor for a categorized list, etc, have been suggested. Here is a suggestion for a naming convention that would allow the Groklaw reader to find the versions of each ongoing story: Name each ongoing story by a name of the format: date - Current status of ... , with dates like 20040130. This would allow the existing Search facility to find all such stories or just those on a specific topic. Each ongoing story could consist of a list of abstracts of the subtopics and links to the best discussions of those subtopics.

I also suggest that you add a "recommend" button to each story and comment, usable by a signed in user. When this button is clicked, it would add to a recommended count, and the highly recommended items could be listed in the status stories. Later status stories could repeat the most highly recommended links and replace the lessor ones.

Here are some recommendations for ongoing stories:

date - Current status of SCO vs IBM date - Current status of SCO Financials date - Current status of SCO vs Novell date - Current status of SCO vs Linux and open source date - Current status of Redhat vs SCO date - Current status of SCO vs Unix customers date - Current status of SCO PR vs SCO court

I hope to submit a story later today, 20040130 - Current status of SCO vs IBM based on my responses to About SCO: Part 1 - IBM case, by: aug9_2003. I plan to tone it down, as I agreed to do here.

I still can't consistently prevent Groklaw from munging my shortcuts. I tried putting a new line after the , but it did not help. Any other suggestions? I would appreciate a link to a tutorial on how this works. The link I was trying to give above was: http://www.groklaw.net/comment.php?mode=display&sid=200401290243189& ;type=article&order=&pid=62516 To go to it, copy/paste it to a navigation toolbar and remove the ";" munge.

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Forbes's new take on Open Source
Authored by: tcranbrook on Friday, January 30 2004 @ 03:05 PM EST
I found this interesting article on Forbes, The Open Source World. It is in the context of hot areas for venture capitalist.

It seems that a growing part of the financial community disagrees with the SCO/MS party line.

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Decatur Jones' Dion Cornett on SCO
Authored by: murry on Friday, January 30 2004 @ 03:32 PM EST
Darl's using every opportunity to diss Linux. He was on CNN today (1/30/04) re
his bounty for the virus writer. Read the transcript at
http://www.cnn.com/TRANSCRIPTS/0401/30/lol.01.html.

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SCO Wins Convert to its GPL-is-Invalid Argument
Authored by: Anonymous on Friday, January 30 2004 @ 03:36 PM EST
This link needs to be noted and I do not have time to search to
see if it has already been noted.

SCO Wins Convert to its GPL-is-Invalid Argument
http://www.linuxworld.com/story/43495.htm

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OT But *VERY* Funny
Authored by: toolboxnz on Friday, January 30 2004 @ 03:38 PM EST
Posted by Netcraft: www.sco.com is a weapon of mass destruction

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OT maybe-How it all started
Authored by: Anonymous on Friday, January 30 2004 @ 03:38 PM EST
Found this interesting tidbit in Business Week:
He can't say he wasn't warned. In June, 2002, when Darl McBride was getting ready to take over as chief executive at struggling Caldera International Inc. in Lindon, Utah -- later renamed SCO Group Inc. -- he mused that claiming ownership of some of the underlying code in the popular Linux computer operating system could keep the company afloat. Even though Caldera's revenues were declining, it was losing $5 million per quarter, and its stock had slid below the $1 NASDAQ delisting price, the reaction of outgoing CEO Ransom Love was instantaneous. "Don't do it," Love says he told McBride. "You don't want to take on the entire Linux community." [Emphasis added.]
If this is true, it looks like Darl had it all planned from the moment he took over Caldera/SCO.

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Decatur Jones' Dion Cornett on SCO
Authored by: Anonymous on Friday, January 30 2004 @ 03:41 PM EST
Can anyone hear SCO's Funeral Dirge playing!!

The End is near.......

Once the Stock price begins to plummet, and the Manipulation of the market
becomes as apparent to everone else as to us, will the SEC begin an
Investigation?

Could this force them to actully come clean with some "evidence" to
Prop-up the Stock Price?

It will be interesting to see if DiDiot puts out another
"Independent" Comment this week.

What a wonderfull thing for an Aussie to read when he wakes up on a beautiful
Saturday Morning.

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A separate claim that the GPL is invalid?
Authored by: Anonymous on Friday, January 30 2004 @ 03:44 PM EST
I just noticed an article on linuxworld.com by Maureen O'Gara that is appears to present a legal basis why the GPL is invalid. Since IANAL (AIDEPOOTV) Groklaw seemed like the best place to look for an explanation.

The article is at:
http://www.linuxworld.com/sto ry/43495_f.htm

I think that Eben Moglen has refuted this claim already - but why does it reappear just now?

Liquor A.

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Decatur Jones' Dion Cornett on SCO
Authored by: PM on Friday, January 30 2004 @ 05:17 PM EST


Well, the way it works here, Miles, is to pay the reward out means that that person will be in jail. So I guess conceivably they could turn themselves in, go to jail, sit around with their $250,000 and get out. So I guess maybe that's the way to make money. Since you can't make money with Linux because it's free, maybe that's the new monetization system.


See CNN item.

Darl must have had a hard time keepng a straight face when saying this, or is he hoping that David Boies can keep him out of jail.

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OOT: Darl and Adolph
Authored by: Anonymous on Friday, January 30 2004 @ 05:31 PM EST
When all is said and done, I think children will be named "Darl" as
often as they are named "Adolph" today.

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a little humor
Authored by: Anonymous on Friday, January 30 2004 @ 05:31 PM EST

From Business 2.0's 101 Dumbest Moments in Business:

83 How to win friends and influence software sales.

"Terrorists do things designed to intimidate people, and we see a lot of that going on all the time—people trying to attack us or people that we're associated with."—SCO Group CEO Darl McBride, complaining about the backlash from hundreds of thousands of Linux users after the former Linux software vendor sued IBM, a major Linux proponent, for allegedly violating its intellectual-property rights.

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OT: Judge Robinson says to stop calling her
Authored by: Anonymous on Friday, January 30 2004 @ 05:55 PM EST

The Red Hat v. SCO docket (1:03cv772) finally had something added to it yesterday:

ORDER: effective immediately the court will not consider applications and requests submitted by letter or in a form other than a motion, absent express approval by the court; no telephone calls are to be made to chambers; emergency matters should be emailed to the court at the address provided with no attachments ( signed by Judge Sue L. Robinson ) copies to: cnsl. (rd)

I can't tell whether this is actually specific to the Red Hat case, or if she made similar orders in all of her pending cases. To those more facile with PACER than I: please try to find some of her other current cases and see if she told all the other lawyers to stop calling her too, or if it's just the Red Hat / SCO lawyers that are annoying her.

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Decatur Jones' Dion Cornett on SCO
Authored by: Anonymous on Monday, February 02 2004 @ 12:40 PM EST
There is an old saying about wishing too hard for something. You are liable to
get what you wish for.

IANAL, however, as long as there is litgation over the Unix/Linux IP, patents
and copyright issues, these issues will remain "under a cloud." If
SCO files for bankruptcy protection, the company's affairs, including
litigation, will come under the jurisdiction of the banruptcy court. This may
have the effect of prolonging the litigation - perhaps even past 2005.

Maybe even until Longhorn comes to market.

Anonymous

P. S. In an unrelated matter, is Microsoft's "license" a one-time
perpetual license, or is it an annual license? AN annual license would allow
them to pay SCO another $10 million this year.

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