decoration decoration
Stories

GROKLAW
When you want to know more...
decoration
For layout only
Home
Archives
Site Map
Search
About Groklaw
Awards
Legal Research
Timelines
ApplevSamsung
ApplevSamsung p.2
ArchiveExplorer
Autozone
Bilski
Cases
Cast: Lawyers
Comes v. MS
Contracts/Documents
Courts
DRM
Gordon v MS
GPL
Grokdoc
HTML How To
IPI v RH
IV v. Google
Legal Docs
Lodsys
MS Litigations
MSvB&N
News Picks
Novell v. MS
Novell-MS Deal
ODF/OOXML
OOXML Appeals
OraclevGoogle
Patents
ProjectMonterey
Psystar
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v IBM
SCO v Novell
SCO:Soup2Nuts
SCOsource
Sean Daly
Software Patents
Switch to Linux
Transcripts
Unix Books

Gear

Groklaw Gear

Click here to send an email to the editor of this weblog.


You won't find me on Facebook


Donate

Donate Paypal


No Legal Advice

The information on Groklaw is not intended to constitute legal advice. While Mark is a lawyer and he has asked other lawyers and law students to contribute articles, all of these articles are offered to help educate, not to provide specific legal advice. They are not your lawyers.

Here's Groklaw's comments policy.


What's New

STORIES
No new stories

COMMENTS last 48 hrs
No new comments


Sponsors

Hosting:
hosted by ibiblio

On servers donated to ibiblio by AMD.

Webmaster
SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Monday, July 05 2004 @ 09:05 AM EDT

SCO has been buying back their own stock, to the tune of 290,000 shares just between March 10 and April 30, at a cost to them of nearly $2 1/2 million, according to the latest SCO SEC filings, both the 10Q and the S3. The S3 tells this part:

"On March 10, 2004, our board of directors authorized management, in its discretion, to purchase up to 1,500,000 shares of our common stock over a 24-month period. Shares may be purchased in open market transactions, block purchases or privately negotiated transactions. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the second quarter of fiscal year 2004, a total of 290,000 shares of our common stock were repurchased for a total of $2,414,000. If we continue to repurchase a substantial number of shares during this 24-month period, and we do not generate off-setting revenue form our UNIX and SCOsource businesses, our cash position could decrease significantly and our ability to fund future operations could be adversely impacted. Purchases under stock repurchase program are subject to the discretion of management based on market conditions and other factors including the trading price of our common stock, availability of stock, alternative uses of capital and our financial condition."

The 10Q says the shares were bought on the open market:

"During the quarter ended April 30, 2004, we purchased 290,000 shares of our common stock in open market purchases for a total cost of $2,414,000."

That might help to explain certain mysteries some have observed about the stock. You might wish to read Melanie Hollands' latest column on thinly traded stocks.

Of course, what's a couple of million to SCO? They are awash in money. No?

As I have been slogging through their recent filings, I found some other interesting details.

The Vultus Deal

A year ago this month, Groklaw covered a story about Vultus. In June of 2003, SCO acquired Vultus for some stock. SCO's latest quarterly filing tells us the rest of the story. First, to refresh our memories, here is what Groklaw wrote last July:

"SCO has filed, on July 8, a Registration Statement on Form S-3, relating to 'the public offering or distribution by selling stockholders of up to 305,274 shares of common stock, par value $0.001 per share, of The SCO Group, Inc.' The shares will be sold by Vultus, Inc., The Canopy Group, Inc., Angel Partners Inc., Michael Meservy, Bruce K. Grant Jr., Ty D. Mattingly and R. Kevin Bean. Only Canopy Group, in this list, will retain any SCO stock. SCO 'will not receive any proceeds from the sale or distribution of the common stock by the selling stockholders. ... On July 3, 2003, the last price for our common stock, as reported by the Nasdaq National Market, was $10.71.'"

Wait a sec. Isn't Vultus the company Frank Hayes wrote about in his article called "SCO's Shell Game"? Why, yes. Yes, it is:

"So, what do you do when you have no real business but your stock price keeps going up? We all learned that lesson during the dot-com bubble: You use that stock as currency. . . . It turns out SCO didn't simply use stock to buy another company. SCO printed up about $3 million in new stock. Then, in the complicated deal in which SCO acquired Vultus, the stock was cashed out, with most of the proceeds going to Canopy. Some went to Canopy as a Vultus shareholder; the rest went to Canopy as compensation for taking on Vultus' debt, some of which was presumably owed to Canopy.

"Got all that? If it sounds like a shell game, well, that's the way Canopy likes to move its companies around. But in effect, Canopy used SCO's stock price, boosted by SCO's Linux threats, to rake in a couple of million dollars in cash behind the scenes. And apparently it worked. Which means we can expect that as long as Canopy can find ways of cashing in on SCO's threats against Linux users, those threats will keep coming -- no matter how little sense they make."

Poor SCO. After buying the company, it seems it proved a poor investment. Who'd a thunk it? There is a tidbit about the Vultus writeoff in the latest 10Q for the quarter ending April 30, 2004 and filed with the SEC June 2004:

"The Company recorded a loss on impairment of long-lived assets totaling $2,139,000, which related to an impairment on intangible assets of $973,000 and an impairment of goodwill of $1,166,000 for the three and six months ended April 30, 2004. The impairment related to goodwill and intangible assets acquired in connection with the acquisition of Vultus, Inc. ('Vultus') in June 2003. The Company concluded that an impairment-triggering event occurred during the three months ended April 30, 2004 as an impending partnership that would solidify the Vultus revenue and cash flow opportunities did not materialize. Additionally, the Company had a reduction in force that impacted the Company's ability to move the Vultus initiative forward on a stand-alone basis. Consequently, the Company has concluded that no significant future cash flows related to its Vultus assets would be realized. The Company performed an impairment analysis of its recorded goodwill related to the Vultus reporting unit in accordance with SFAS No. 142. Additionally, an impairment analysis of the intangible assets was performed in accordance with SFAS No. 144. As a result of these analyses, the Company wrote-down the carrying value of its goodwill related to the Vultus acquisition from $1,166,000 to $0 and wrote-down intangible assets related to its Vultus acquisition from $973,000 to $0."

And now you know the rest of the Vultus story. Angel Partners is listed on Guidestar as a charity that isn't required to file IRS returns because:

"EIN: 87-0647451 - This organization is not required to file an annual return with the IRS because its income is less than $25,000. It is a 501(c)(03) public charity"

But that last year's S3 shows that Angel Partners had 36,656 shares of SCO it intended to sell. They'd have to be bumbling idiots not to have made $25,000 if they sold that stock, judging from this chart of daily prices between June and December of 2003. I have seen a lot of speculation about this, and I'm not familiar with 501(3)(c) regulations in detail. [ PDF of booklet 557] The IRS has another booklet, "Compliance Guide for 501(c)(3) Tax Exempt Organizations" [pdf], and on page 11, it confirms that most such organizations must file a form 990 on their income annually, but organizations whose "annual gross receipts", however they define that, are "normally" less than $25,000 are exempt from this requirement. I gather that means you don't lose your exemption for one fabulous windfall year.

These accounting and investing guys are so creative, I think they should copyright their work. Wait, no. These are *ideas*, so I guess a patent would be better. You think I'm horsing around, don't you? Actually, according to the Wall St. Journal, that's exactly what is now happening, investment advisers and estate planners are patenting their strategies. Of course, you need a subscription to read the copyrighted article, and I surely can't share it with you on pain of boiling oil being poured on my web site, but it's about these new patents, which represent a further reduction of ideas in the world you can use. And bear in mind that using the idea is verboten even if you independentlly think of it yourself. Once it's patented, you can't use it unless you cross someone's palm with silver or have a patent yourself to cross-license with. Now there's a concept. I'll let you use my patent on 2 + 2 = 4 if you'll let me use the multiplication tables. They claim this is all to promote innovation and creativity, but I can't see how reducing the ideas the world can work with results in progress.

Ralph Yarro is on the board of a number of companies besides SCO and Canopy. In his bio blurb for Power Innovations, it tells us this:

"Under Ralph's direction, the Canopy Group has identified and invested in promising open source and Internet infrastructure technologies. Canopy's greatest strength lies in providing the companies that produce these technologies a sheltered environment in which they can grow and develop. Canopy companies are strongly encouraged to work with each in synergistic partnerships.

"Ralph is the Chairman of the Board for the Canopy Group. He also serves as Chairman of the Board of Trustees of Angel Partners, a 501(c)3 support organization for the Church of Jesus Christ of Latter-Day Saints and a Trustee for the Noorda Family Trust, the Scenic View Center, and the Worth of a Soul Foundation. He is the Chairman of the Board of Directors of Altiris, AP Software, Caldera Systems, Center 7, Coresoft, and Helius. He sits on the Board of Directors for: the Canopy Group, 2NetFX, Arcanvs, Cogito, DataCrystal, Expressware, Global Prime, The Guy Store, HomePipeLine, Interworks, Lineo, MTI, ManageMyMoney, Nombas, Profit Pro, Recruit Search, Troll Tech and TugNut."

Synergy seems too small a word. That info needs updating. Altiris recently tossed him overboard, so they claim in Forbes. I hate to direct any hits to Forbes, because they endlessly attack Linux, but that is who reported it:

"Chief Executive Gregory Butterfield says some potential customers have confronted him saying they would not do business with anyone affiliated with Canopy or SCO. . . .

"All in all, Butterfield says, the SCO affiliation is 'not positive' and 'a nuisance.' So Butterfield is quietly trying what lots of other people would love to do--get away from his family. He did a stock offering that diluted Canopy's share in the company to 8% from 18%. Then in April Altiris dumped its chairman, Ralph Yarro, who happens to be head of both Canopy and SCO, and another Canopy director."

For that matter, I wondered if there was an angle to reporting it, like getting a story in the record that says folks are boycotting SCO. That could come in handy in a law suit down the road, I'm guessing. Altiris' most recent SEC filing says Yarro and Darcy Mott resigned:

"In April 2004, we announced changes to our Board of Directors made to enhance the overall effectiveness of our Board and maintain sound corporate governance practices. We named Gregory S. Butterfield, our President and Chief Executive Officer, to the additional title of Chairman, replacing the resigning chairman, Ralph J. Yarro III (a Board member since 1998). Darcy G. Mott (a Board member since 2000) also resigned at that time."

The August 2003 stock offering alluded to in the Forbes report did reduce Canopy holdings, because Canopy sold off 2 million shares. There is a picture of Darcy Mott and Yarro on the Power Innovations site, if you are curious, by the way.

If thoughts of piercing the corporate veil are flooding your brain, the year-old Groklaw story has some information on that subject.

BayStar

SCO's S3, filed on June 22, lays out the offering of 2,105,263 shares of common stock, and that would be BayStar this time:

"All of these shares are issuable to the selling stockholder in connection with an agreement between the selling stockholder and us under which we have agreed to repurchase from the selling stockholder all outstanding shares of our Series A-1 Convertible Preferred Stock. The price at which the selling stockholder may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any proceeds from the sale or distribution of the common stock by the selling stockholder.

"Our common stock is quoted on the Nasdaq SmallCap Market under the trading symbol "SCOX." On June 18, 2004, the last price for our common stock, as reported by the Nasdaq SmallCap Market, was $5.03."

The SEC has to approve the SCO/BayStar deal, by the way:

"On May 31, 2004, we entered into an agreement with BayStar to repurchase and retire BayStar's 40,000 Series A-1 shares. Terms of the agreement require us to pay to BayStar $13,000,000 in cash and issue 2,105,263 shares of our common stock, which consideration will be payable and issuable upon the effectiveness of a registration statement covering the resale of the common stock issued to BayStar, of which this prospectus is a part. In the event that the SEC does not declare the registration statement effective, the repurchase transaction with BayStar will not be completed. Upon completion of the repurchase transaction, all Series A-1 shares will be cancelled and retired and the rights and preferences of the Series A-1 shares will be terminated. The transaction will also eliminate BayStar's contractual rights and will include a general release by both parties. . . .

"Although we do not believe we are obligated to redeem BayStar's Series A-1 shares pursuant to the redemption notice, if we were required to pay cash to redeem BayStar's Series A-1 shares pursuant to the redemption notice or otherwise pursuant to the Certificate of Designation for the Series A-1 shares, it would have a material and adverse impact on our liquidity, which may require us to obtain additional sources of cash to sustain operations.

 "On May 31, 2004, we entered into an agreement with BayStar to repurchase and retire BayStar's 40,000 Series A-1 shares for $13,000,000 in cash and the issuance to BayStar of the 2,105,263 shares of our common stock that are covered by this prospectus. The repurchase transaction will not close unless the registration statement, of which this prospectus is a part, is declared effective by the SEC. If we fail to cause such registration statement to be declared effective, then our repurchase agreement with BayStar may terminate. If the agreement terminates, BayStar may attempt to enforce its redemption notice, unless it is otherwise rescinded."

The SEC has to approve it because what's good for BayStar may not be good for the rest of the shareholders. I'm starting to sound like SCO: "may not be". I think I may safely say that these documents indicate that what's good for BayStar is decidedly not so good for the rest of the shareholders. That is particularly true if the SEC doesn't approve the deal and BayStar starts to flex its muscles, and do you doubt they would?

"Depending on the amount of assets we have available for distribution to stockholders upon a liquidation event when Series A-1 shares remain outstanding, we may be required to distribute all such assets or a portion of such assets that exceeds BayStar's pro rata ownership of our common stock assuming full conversion of the Series A-1 shares into common stock, which could eliminate or limit the assets available for distribution to our common stockholders. Our potential obligation to pay to the law firms representing us in our efforts to establish our intellectual property rights a contingent fee of 20 percent of the proceeds we receive from a sale of our company, subject to certain limitations, could also contribute to eliminating or limiting the assets available for distribution to our common stockholders."
BayStar would also then retain its veto power over SCO taking on any new indebtedness or selling or transferring "any material assets or intellectual property to a third party" not to mention this:

"The Certificate of Designation also provides that BayStar, as a holder of Series A-1 shares, has a participation right entitling it to purchase its 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. Additionally, we have agreed with BayStar that we will not complete a transaction or take any action that could result in a claim for a contingency payment by the law firms representing us in our efforts to establish our intellectual property rights, other than contingency payments related to certain license transactions, without first obtaining the consent of BayStar, as it currently holds all outstanding Series A-1 shares. This right of consent, and the participation right and other approval rights described above, may make it more difficult for management, our board of directors or our stockholders to reach a settlement in our litigation with IBM, 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."

One would think. I suggest reading that entire section, actually. One odd thing is that while they mention that BayStar asked for a redemption, they still aren't telling us why. Since the SEC has not yet approved the agreement, I would think that would be a risk factor that ought to be disclosed, no? How else can a person thinking of purchasing the stock evaluate the associated risks? The 10Q says that BayStar's notice didn't state a reason for their allegation of a breach of the agreement, but surely by now SCO knows why BayStar thought they saw a breach. But this is all it says, both in the 10Q and the S3 that I could find:

"On April 15, 2004, we received a redemption notice from BayStar requesting that we immediately redeem 20,000 Series A-1 shares then held by BayStar. The redemption notice asserted that BayStar is entitled to redemption of its the Series A-1 shares under the Certificate of Designation, Preferences and Rights for the Series A-1 shares because we allegedly had breached certain provisions of our February 5, 2004 exchange agreement. BayStar's redemption notice did not provide specific information regarding the factual basis for our alleged breaches of the exchange agreement, but we do not believe we have breached the exchange agreement. As a result, we do not believe we are obligated to redeem BayStar's Series A-1 shares."
Surely during the negotiations, the reasons for BayStar's action must have come up, but this pretends they got a notice and that is all they know. If the SEC does approve the agreement, then BayStar is contractually free from SCO and they agree not to sue each other, I gather, from this in the 10Q:

"Upon completion of the repurchase transaction, all Series A-1 shares will be cancelled and retired and the rights and preferences of the Series A-1 shares will be terminated. The transaction will also eliminate BayStar's contractual rights and will include a general release by both parties."

If you are curious as to how many shares of common stock there are, there is an answer:

"This prospectus relates to the sale or distribution of up to 2,105,263 shares of common stock by the selling stockholder. We will not receive any proceeds from the sales of these shares. The shares subject to the prospectus represent approximately 12.1 percent of our issued and outstanding common stock."

The 10Q says:

"As of June 11, 2004, there were 15,335,432 shares of the Registrant's common stock, $0.001 par value per share, outstanding."

Does that math compute? I'm no math whiz, so maybe you can make that reach 12.1 per cent.

SCO can buy back their own shares. They can also issue tons more preferred stock, as they wish:

"Our board of directors currently has the right, with respect to the 4,920,000 shares of our preferred stock not designated as 80,000 Series A-1 shares, 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 BayStar as the holder of our outstanding Series A-1 shares 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."

On BayStar, there is a footnote 2 that tells us a bit more about them:

"BayStar Capital Management, LLC, a Delaware limited liability company, is the general partner of BayStar Capital II, L.P. Steven Derby, a managing member of BayStar Capital Management, LLC, has voting and dispositive power over the shares of our common stock held by BayStar Capital II, L.P. Neither BayStar Capital Management, LLC nor BayStar Capital II, L.P. is an affiliate of a registered broker-dealer."

On the Litigation Front

SCO also details some recent developments on the litigation front, but the important part is that they say they are going to file an amended claim for special damages in the Novell matter. They remind us that August 4 is the date for the next hearing in the IBM matter, on IBM's noninfringement summary judgment motion, and July 21 for a hearing in DaimlerChrysler. The date listed for AutoZone in this SEC filing was later changed, as you know.

AutoZone

They view the AutoZone case as a DMCA action:

"Additionally, we have begun notifying selected Linux end users in writing of violations we allege under the Digital Millennium Copyright Act related to our copyrights contained in Linux. In concert with these notification efforts, in March 2004, and we brought suit against DaimlerChrysler Corporation for its alleged violations of its UNIX software agreement with us by failing to certify its compliance with such agreement as required by us. We also brought suit against AutoZone, Inc. for its alleged violations of our UNIX copyrights through its use of Linux."

Then in the 10Q, it describes AutoZone as being sued for "use" of Linux:

"On or about March 2, 2004, we brought suit against AutoZone, Inc. for its alleged violations of our UNIX copyrights through its use of Linux. Specifically, the lawsuit alleges that AutoZone is infringing our UNIX copyrights by, among other things, running versions of the Linux operating system that contain code, structure, sequence and/or organization from our proprietary UNIX System V code in violation of our copyrights. The lawsuit filed in U.S. District Court in Nevada requests injunctive relief against AutoZone's further use or copying of any part of our copyrighted materials and also requests damages as a result of AutoZone's infringement in an amount to be proven at trial. "

They are suing to block AutoZone from being able to continue to *use* Linux? Under what legal theory? They certainly aren't direct infringers. As the Grokster decision [pdf] points out, contributory infringement requires more than just use:

". . . Defendants correctly point out that in order to be liable under a theory of contributory infringement, they must have actual knowledge of infringement at a time when they can use that knowledge to stop the particular infringement. In other words, Plaintiffs' notices of infringing conduct are irrelevant if they arrive when Defendants do nothing to facilitate, and cannot do anything to stop, the alleged infringement."

Boies may have some personal concept in mind that no one has ever tried before, using the DMCA at its most outstretched interpretation, but it brings to mind Eben Moglen's illustration of Barnes and Noble, that no one sues you for reading a book you bought that turns out to have copyright-infringing material in it. You sue the party that put the infringing material in the book, not the reader of the book who bought and paid for it in good faith. And of course it all depends, regardless of the theory, on there actually being infringing material in Linux, which must be proved, and that you also have ownership of the copyrights involved. More likely, they intend to rely on their contract. Last year, in an SEC filing, they said this:

"UNIX System V was initially developed by AT&T Bell Labs and over 30,000 licensing and sublicensing agreements have been entered into for the use and distribution of UNIX. These licenses led to the development of several derivative works based on UNIX System V, including our own SCO UnixWare and SCO OpenServer, Sun's Solaris, IBM's AIX, SGI's IRIX, HP's UX, Fujitsu's ICL DRS/NX, Siemens' SINIX, Data General's DG-UX, and Sequent's DYNIX/Ptx. These operating systems are all derivative works based upon, or modifications of the original UNIX System V source code currently owned by us. As such, we retain the right to control certain uses of all UNIX-based derivative works and to prohibit use of UNIX and UNIX-based derivative works for others and to prohibit the unauthorized disclosure of UNIX and UNIX-based derivative works to third parties, including open source developers."

So maybe they have some kind of DMCA/contract offspring idea. Boies is nothing if not interesting.

Novell

But by far the most interesting part of the litigation story in this S3 is the positioning you can see in their story about the copyright dispute with Novell and their perception of why nobody wants to do business with them:

"As a further response to our SCOsource initiatives and claim that our UNIX source code and derivative works have inappropriately been included in Linux, Novell has publicly asserted its belief that it owns certain copyrights in our UNIX source code, and it has filed 15 copyright applications with the United States Copyright Office related to UNIX. Novell also claims that it has a license to UNIX from us and the right to authorize its customers to use UNIX technology in their internal business operations. Specifically, Novell has also claimed to have retained rights related to legacy UNIX SVRx licenses, including the license with IBM. Novell asserts it has the right to take action on behalf of SCO in connection with such licenses, including termination rights. Novell has purported to veto our termination of the IBM, Sequent and SGI licenses. We have repeatedly asserted that we obtained the UNIX business, source code, claims and copyrights when we acquired the assets and operations of the server and professional services groups from The Santa Cruz Operation (now Tarantella, Inc.) in May 2001, which had previously acquired all such assets and rights from Novell in September 1995 pursuant to an asset purchase agreement, as amended. In January 2004, in response to Novell's actions, we brought suit against Novell for slander of title seeking relief for Novell's alleged bad faith effort to interfere with our copyrights related to our UNIX source code and derivative works and our UnixWare products.

        "Notwithstanding our assertions of full ownership of UNIX-related intellectual property rights, as set forth above, including copyrights, and even if we are successful in our legal action against Novell and end users such as AutoZone and DaimlerChrysler, the efforts of Novell and the other Linux proponents described above may cause Linux end users to be less willing to purchase from us our SCOsource intellectual property licenses authorizing their use of our intellectual property contained in the Linux operating system, which may adversely affect our revenue from our SCOsource initiatives. These efforts of Linux proponents also may increase the negative view some participants in our marketplace have regarding our legal actions against IBM, Novell and end users such as AutoZone and DaimlerChrysler and regarding our SCOsource initiatives and may contribute to creating confusion in the marketplace about the validity of our claim that the unauthorized use of our UNIX source code and derivative works in Linux infringes on our copyrights. Increased negative perception and potential confusion about our claims in our marketplace could impede our continued pursuit of our SCOsource initiatives and negatively impact our business. Additionally, if we fail in our lawsuit against Novell and end users such as AutoZone and DaimlerChrysler, the negative perception and confusion in our marketplace about our intellectual property rights and claims likely would increase significantly, and the effectiveness of our SCOsource initiatives could be materially harmed.. . .

"The decline in our UNIX business may be accelerated if industry partners withdraw their support from us as a result of our SCOsource initiatives and in particular any lawsuit against end users violating our intellectual property and contractual rights, such as our lawsuits against AutoZone and DaimlerChrysler."

That second to last sentence is so funny, because it indicates that even if they lose all their law suits, they will view that as "confusing" the marketplace. True believers, indeed. I don't think the rest of us will find such an outcome the least bit confusing as to their IP rights and claims.

There is also this craftily worded acknowledgement that "other regulators or others in the Linux community have initiated or in the future may initiate legal actions against us, all of which may negatively impact our operations or future operating performance." Other regulators? Other than which regulator? They also caution potential investors (and if any are still reading this deep into the S3 with that goal I can't help but marvel) that there are these further factors to consider: the contingency fees they may pay to their law firms and "changes in attitudes of customers and partners due to our aggressive position against the inclusion of our UNIX code and derivative works in Linux and our lawsuits against end users violating our intellectual property and contractual rights." Think they'll tell the judge in the Novell case that this is why they are sinking like a stone? Or will they say it's all Novell's fault? Three guesses. Well, you only need one.

Paying the Piper

And speaking of careful wording, what do you make of this? ". . . our agreement with the law firms may also be construed to include contingency fee payments in connection with issuances of our equity securities." May be construed? Does it or doesn't it? Inquiring minds want to know. Here is what they said on that subject in October 17, 2003 in their 8K:

"Arrangement with Counsel

"SCO announced that it is in the process of finalizing a modification of the engagement with the law firm representing SCO in the protection of SCO's intellectual property rights. As part of this modification, which is subject to a definitive agreement, the law firm would receive a contingent fee of 20 percent of the proceeds from certain events related to is protection of SCO's intellectual property rights, including certain licensing fees, settlements, judgments, equity financings or a sale of SCO during the pendancy of litigation or through settlement, subject to certain agreed upon credits for amounts received as discounted hourly fees or prior contingency payments. In addition, this modification may result in the payment to such law firm of up to $1,000,000 and the issuance of up to 400,000 shares of SCO's common stock."

How would you say they construed it themselves back then? Links to all the contracts and more information can be found in an article I did last December.

Of course, there could be some huge payoffs to their lawyers ahead, they warn:

"During fiscal year 2003, we expanded our efforts with the law firms assisting us with our pursuit of our intellectual property claims and currently expect to devote substantially more financial resources to this effort. In addition to paying fees at reduced hourly rates to these firms, our agreement with the law firms provides that we will pay the law firms a contingency fee of 20 percent of the proceeds from specified events related to the protection of our intellectual property rights. These events may include settlements, judgments, certain licensing fees, subject to certain exceptions, and a sale of our company during the pendancy of litigation or through settlement, subject to agreed upon credits for amounts received as discounted hourly fees and unused retainer fees. Additionally, our agreement with the law firms may also be construed to include contingency fee payments in connection with our issuance of equity securities, which may harm our results of operations as we anticipate that these costs to the law firms will be expensed as incurred."

The 10Q does say, after reporting the dismal SCOSource revenue for the quarter that they "anticipate that revenue from vendor licenses and IP licenses will increase during the last two quarters of fiscal year 2004."

The Taxman Cometh

Oh, and SCO shuttered its UK presence and has applied for "administrative relief", transferring its base to Ireland:

"In March 2003, in connection with management's decision to establish strategic European headquarters in Dublin, Ireland, and our United Kingdom ("UK") subsidiary, SCO Group, Ltd., not performing at expected levels, we determined that SCO Group, Ltd would be wound up. On March 26, 2003, the board of directors of SCO Group, Ltd., obtained administrative relief in accordance with Rule 2.2 of the Insolvency Rules 1986 of the UK. In connection with the approved administrative relief, the operations of SCO Group, Ltd. were transferred to an administrator that was appointed by the court to complete the winding-up process. As of April 30, 2003, the operations of SCO Group, Ltd. were no longer under our control. The winding-up of SCO Group, Ltd. resulted in a net restructuring charge during the quarter ended April 30, 2003 of $136,000. The net reversal for the first two quarters of fiscal year 2003 was a result of the restructuring charge discussed above related to our UK subsidiary and additional adjustments to previously recorded restructuring charges for actual payments made."

What is the difference between the UK and Ireland? Not lower rents. This may give you some insight, from the 10Q:

"During the three months ended April 30, 2004, the Indian branch received a withholding tax assessment from the Government of India Income Tax Department ('Tax Department') for the period of April 2000 through March 2001. During the April 2000 through March 2001 period, SCO Group, Ltd. was owned by The Santa Cruz Operation (now Tarantella, Inc.), and not us. We acquired SCO Group, Ltd. in May 2001 as part of an asset purchase.         "The Tax Department assessed SCO Group, Ltd. with a 15 percent withholding tax on certain revenue transactions in India that the Tax Department deemed royalty revenue under the Indian Income Tax Act. The total amount of the withholding tax is $396,000. We were not aware of this liability until March 2004, when we received the formal tax assessment from the Tax Department, as we believed that we had been appropriately accounting for the revenue and related taxes on transactions in India.         "We have filed an appeal with the Tax Department and believe that our packaged software does not qualify for 'royalties' treatment and would therefore not be subject to withholding tax. Additionally, as described above in this Item 2., under the caption 'Restructuring Charges (Reversals),' SCO Group, Ltd, the company on which the assessment was levied, has filed for bankruptcy in the UK. Although we intend to vigorously defend this tax assessment, there can be no assurance we will prevail against the Tax Department.        

"We have recorded the charge for $396,000 in the in the second and first two quarters of fiscal year 2004 as a component of our provision for income taxes. In addition, we believe that the Tax Department probably will pursue similar assessments on SCO Group, Ltd. for taxable periods subsequent to March 2001. Because of this probability, and our inability to determine at this point if we may prevail against the Tax Department, we have accrued the full amount of the estimated withholding tax of $314,000 for these subsequent periods as provision for income taxes in our statements of operations for the second quarter and first two quarters of fiscal year 2004."

Talk about running for the hills. And how do you like them distinguishing themselves from Santa Cruz? Now, when the tax man is calling, they aren't Santa Cruz after all and aren't celebrating their 25th year in the UNIX business? They have that slogan on their web site: "1979 - 2004 Celebrating 25 years of UNIX® Solutions". And SCOForum this year is supposedly about celebrating that anniversary. Woops. I think they need to rewrite their complaint in the IBM law suit too. Here they've been telling the world they are Santa Cruz, and somebody in India is taking them up on it. Go figure. If the tax man doesn't get them, they think they have enough to pay off BayStar, if the SEC agrees, and then last about 12 months:

"We believe that we will have sufficient cash resources to complete the Series A-1 repurchase transaction and fund our current operations for at least the next 12 months."

Sometimes I think about the folks who bought the licenses. How will they feel when SCO loses at trial, I wonder? Like a dope, I imagine. Ever play a shell game? If you've never been to NYC, maybe not. But on the streets of the big city, there are hustlers ready to play, if you are foolish enough to think it's a fair game and agree to turn over your money and then studiously try to follow the pea's transit from shell to shell. Of course, real New Yorkers won't play, because they know how the game comes out. Only the guys running the shell game win. So the hustlers look for tourists, simple folk from Dubuque or Kansas, who never heard of the game and think they can make some easy money.

There is no way to read these documents without realizing that the company appears to be in a tight spot, fighting for its very life, as I read it, and a lot of things would have to turn around for them to even survive. They gambled everything on the IP claims that now don't look so strong. Not that they ever looked strong. It was always a long shot. They assumed maybe that Linux was loosely managed and vulnerable. Those proprietary dudes all steal other peoples' code, I gather, and so they assumed that Linux was the same. They were wrong. And they seriously miscalculated the world's reaction to their scheme, as it has been called in several legal documents so far.

And now, unless they have some ace in the hole, they are left swinging in the breeze. Which may be better than what happens to them next.


  


SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3 | 438 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Errors and Corrections
Authored by: eamacnaghten on Monday, July 05 2004 @ 05:38 PM EDT
so PJ knows where they are

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: eamacnaghten on Monday, July 05 2004 @ 05:44 PM EDT
I confess I have always believed that the buy-back program was just a means for laundering the BayStar cash by using it for the buy-back to artificially keep the stock price up, then selling the management issued shares into the price.

The guys at SCO are clever though. They tried to make a billion by attempting to get IBM (and others) to "pay up for Linux", but as soon as they realized that would fail (or likely to fail) they still managed to make millions - and from people who should no better!

Web Sig:Eddy Currents

[ Reply to This | # ]

OT and links, please
Authored by: overshoot on Monday, July 05 2004 @ 05:44 PM EDT
Just for neatness' sake.

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: drh on Monday, July 05 2004 @ 05:44 PM EDT
"These are *ideas*, so I guess a patent would be better.
You think I'm horsing around, don't you? Actually,
according to the Wall St. Journal, that's exactly what is
now happening, investment advisers and estate planners are
patenting their strategies."

Information was tried as a commodity (dot com boom), but
it didn't work, because all the information cashed in just
generated more information. Without a limit on the market,
the value simply dropped as the market became flooded, and
there was no way to stop it (dot com crash). Now ideas
have become the latest commodity, because through
patenting they can be protected, a limit can be put on the
market thereby limiting the amount of ideas available, and
prices will go up until nobody can afford them anymore.



---
Just another day...

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: Anonymous on Monday, July 05 2004 @ 05:47 PM EDT
The Ship looks like it is definately sinking now, however as long as SCO has a
nuisance potential, Microsoft will find some way of funnelling cash to it.

[ Reply to This | # ]

DMCA
Authored by: Anonymous on Monday, July 05 2004 @ 05:50 PM EDT
Did i miss something? When did this come in? Surely not that ridiculous ABI
claim is it?

[ Reply to This | # ]

That's $8.32 per share
Authored by: gvc on Monday, July 05 2004 @ 05:54 PM EDT
$8.32 for shares that are now worth 5 bucks. I'm sure the shareholders are
thrilled.

[ Reply to This | # ]

The maths, an explanation
Authored by: Jonathan Bryce on Monday, July 05 2004 @ 05:59 PM EDT
You say
[If you are curious as to how many shares of common stock
there are, there is an answer:


"This prospectus relates to the sale or distribution of
up
to 2,105,263 shares of common stock by the selling
stockholder. We will not receive any proceeds from the
sales of these shares. The shares subject to the
prospectus represent approximately 12.1 percent of our
issued and outstanding common stock."

The 10Q says:


"As of June 11, 2004, there were 15,335,432 shares of the
Registrant's common stock, $0.001 par value per share,
outstanding."

Does that math compute? I'm no math whiz, so maybe you
can
make that reach 12.1 per cent.]


How does the maths work?

The 15,335,432 shares currently in issue plus the
2,105,263 about to be issued in the prospectus comes to
17,440,695 shares.

2,105,263 / 17,440,695 = 12.07% which is near enough
12.1%

[ Reply to This | # ]

Skousen...
Authored by: paul_cooke on Monday, July 05 2004 @ 06:10 PM EDT
They got themselves an expert on the SEC immediately before launching this whole charade...

press announcement dated June 2003

SCO Announces Appointment of K. Fred Skousen to Board

SCO Strengthens Board With Accomplished New Board Member

The SCO Group, Inc. (Nasdaq: SCOX), the owner of the UNIX operating system, today announced the appointment of K. Fred Skousen, PhD., CPA, to its board of directors. Mr. Skousen is currently Advancement Vice President at Brigham Young University. He has previously served as the Dean of the Marriott School of Management and the Director of the School of Accountancy at Brigham Young University. Mr. Skousen has been a consultant to the Financial Executive Research Foundation, the Controller General of the United States, the Federal Trade Commission, and a number of large companies. Mr. Skousen has been a visiting Professor at the University of California at Berkeley, and the University of Missouri, as well as a faculty resident on the staff of the Securities and Exchange Commission and a faculty fellow at Price Waterhouse & Company.

(My emphasis above)

Mr. Skousen has also received several teaching and research awards and is the author or co-author of more than 50 articles, research reports, and books. He served as the Director of Research and was a member of the Executive Committee of the American Accounting Association, is a member of the American Institute of CPAs, and is a past president of the Utah Association of CPAs.

"Fred Skousen brings a wealth of knowledge and experience to the Board of Directors," said Ralph Yarro, Chairman of the Board of Directors of the Company. "He adds significantly to the financial expertise of the Board, and will be a welcome addition in this era of increased responsibilities under Sarbanes-Oxley."

"We are extremely pleased to have Fred join our Board of Directors at this time," said Darl McBride, President and CEO of the Company. "Fred's outstanding credentials in the financial arena will be highly valuable to SCO. His appointment will provide additional leadership and guidance that will add depth to an already talented and exceptionally strong board."

I'll bet you're pleased...

---
Use Linux - Computer power for the people: Down with cybercrud...

[ Reply to This | # ]

Isn't this illegal?
Authored by: davidwr_ on Monday, July 05 2004 @ 06:34 PM EDT
Aren't monetary shell games like this illegal?

Where's the SEC, IRS, and New York Attorney General when you need them?

[ Reply to This | # ]

Hmmm, did they mention AutoZone looking for relief from SCO using consumer law?
Authored by: Anonymous on Monday, July 05 2004 @ 06:36 PM EDT
AutoZone said (found in Groklaw's "
AutoZone's Reply Memorandum in Support of Motion to Stay or For More Definite
Statement - as text"...

AutoZone said this:
" 7. This Case Should Be Stayed Pending Resolution of the Red Hat Case
Because The Law Favors Declaratory Judgment Actions By a Product manufacturer or
Distributor Over Infringement Actions Against Customers or End Users.

Federal Courts have long recognized in the analogous context of patent
infringement litigation that a declaratory judgment action by a product
manufacturer or distributor against a patent owner should proceed before
infringement actions by the patent owner against the manufacturer's customers or
end users. See, e.g., Ricoh C. v. Aeroflex Inc., 279 F. Supp. 2d 554, 557 (D.
Del. 2003) ("A manufacturer's declaratory judgment suit should be given
preference over a patentee's suit against the manufacturer's customers when
those customers are being sued for their ordinary use of the manufacturer's
products"); see also Katz v. Lear Siegler, Inc., 909 F.2d 1459, 1464 (Fed.
Cir. 1990) ("[L]itigation against or brought by the manufacturer of
infringing good takes precedence over a suit by the patent owner against
customers of the manufacturer."); Codex Corp. v. Milgo Elecs. Corp., 553
F.2d 735, 737-38 (1st Cir. 1977); Whelen Techs., Inc. v. Mill Specialties, Inc.,
741 F. Supp. 715, 715 (D. Ill. 1990) ("In patent infringement actions,
stays are appropriate where the first action is brought against the customer of
an offending manufacturer and a subsequent action is brought involving the
manufacturer itself.").

This rule "acknowledges that a patentee's election to sue customers,
rather than a manufacturer itself, is often based on a desire to intimidate
smaller businesses." Ricoh, 279 F. Supp. 2d at 557.

The rule set forth in these patent cases applies with equal force in the present
case. This case involves an infringement action brought by the copyright holder
(SCO) against the product customer or end user (Autozone) merely on the basis of
the customer's or end user's normal use of the manufacturer's or distributor's
(Red Hat's) product. The Red Hat case is a declaratory judgment action by the
"manufacturer" and distributor of Red Hat Linux (Red Hat) against
the purported copyright holder (SCO). Autozone therefore submits that this case
should be stayed while Red Hat's claims against SCO proceed to resolution.
Ricoh, F. Supp. 2d at 557; Katz, 909 F.2d at 1464; Whelen Techs., 741 F. Supp.
at 715. "
-------------------------------------------------------
Q: So - in their Federal Filing did SCO even mention the above...? If AutoZone
wins on this #7 as written above (even a stay or whatever else can be thrown out
with the trash) then, SCO's actions against customers of manufacturer's (aka
ready-mix kernel compilers), well the customers are free of any SCO actions.
DMCA or not... DMCA should take a back seat to exiting case law!

[ Reply to This | # ]

SCO doublespeak
Authored by: brian on Monday, July 05 2004 @ 06:41 PM EDT
Let me start this of with IANAA but every time I read
these filings they are full of doublespeak. It is amazing
to me that anyone would be able to follow it. I thought
SEC filings were supposed to be clear but this filing is
anything but. It is no wonder Enron, Worldcom, and SCO are
able to fleese its investors with reports like these. Is
this typical of SEC filings that they are this muddy?

B.

---
#ifndef IANAL
#define IANAL
#endif

[ Reply to This | # ]

The Real Question is...
Authored by: maco on Monday, July 05 2004 @ 06:49 PM EDT
from whom did SCOX buy the stock? From the market, or from an individual or
corporation? If the latter, then I might venture a guess. $8 a share is a very
sweet price.

[ Reply to This | # ]

UK company shuffling.
Authored by: tintak on Monday, July 05 2004 @ 06:55 PM EDT
"In March 2003, in connection with management's decision to establish strategic European headquarters in Dublin, Ireland, and our United Kingdom ("UK") subsidiary, SCO Group, Ltd., not performing at expected levels, we determined that SCO Group, Ltd would be wound up."

Searching for THE SCO GROUP LIMITED at Companies House takes you to this page. link

The current address of SCOG's UK agent is given on the SCOG web site as.....

SCO Software (UK) Ltd Titan Court 3 Bishop Square Hatfield Herts AL10 9NA

Searching for SCO SOFTWARE (UK) LIMITED at Companies House takes you to this page. link

THE SCO GROUP LIMITED are under administration by an order dated 03/26/2003.
SCO SOFTWARE (UK) LIMITED was incorporated 04/17/2003.
So it seems that the reason given in their 10Q for winding up The SCO Group Ltd. might not have told the whole story.


---
Darl's folly.
"Somebody said it couldn't be done, and he knew it. So he tackled this thing that couldn't be done,... and he found that he couldn't do it!"

[ Reply to This | # ]

Fascinating and dull, all at once!
Authored by: freeio on Monday, July 05 2004 @ 06:59 PM EDT
I can see how one could hide quite a bit in a 10Q and S3 filing, since even excerpted and highlighted well, it is terribly dry and dull.  Unless one knows what the facts actually are, and a bit of what to expect, and is willing to slog through all of the text with an eye for small deatils, this is indeed ugly stuff.

On the other hand, there are probably not a lot of cases where such things are read quite this thoroughly and openly.  Thanks for putting your skills to the task, and helping our way through this.

Marty

---
Tux et bona et fortuna est.

[ Reply to This | # ]

Stockholder suit?
Authored by: Anonymous on Monday, July 05 2004 @ 06:59 PM EDT
Unfortunately, I don't have standing to file such a suit since I was never
daring/foolish enough to buy SCOX. But I would think that there might be among
our readers someone who did, particularly when SCO was predicting great
windfalls of cash from their scheme. If so, would one of our lawyer readers
find this an interesting challenge in the form of a class-action stockholder
suit over the issues revealed by PJ's digging? Perhaps the two could get
together offline? I will charge only a nominal royalty for the use of this idea
;^)

[ Reply to This | # ]

Shell Game?
Authored by: a_dreamer on Monday, July 05 2004 @ 07:29 PM EDT
Actually, to use the shell gam analogy one would have to note that the hustler
is uncoordinated, poorly practiced, and losing his shirt each time he plays. To
draw a parallel between newSCO and the street hustlers is a rather strong insult
to the latter.

Craig

[ Reply to This | # ]

Two comments on 10Q and/or S3
Authored by: micheal on Monday, July 05 2004 @ 08:16 PM EDT
"Our potential obligation to pay to the law firms representing us in our efforts to establish our intellectual property rights..."

My Emphasis. And here I thought the law firms were hired to protect SCO's IP.

"The decline in our UNIX business may be accelerated if industry partners withdraw their support from us as a result of our SCOsource initiatives and in particular any lawsuit against end users violating our intellectual property and contractual rights, such as our lawsuits against AutoZone and DaimlerChrysler."

Looks like SCO's industry partners are not too happy about the end user lawsuits.

---
LeRoy -
What a wonderful day.

[ Reply to This | # ]

Again It's System V??
Authored by: Steve Martin on Monday, July 05 2004 @ 08:27 PM EDT

On or about March 2, 2004, we brought suit against AutoZone, Inc. for its alleged violations of our UNIX copyrights through its use of Linux. Specifically, the lawsuit alleges that AutoZone is infringing our UNIX copyrights by, among other things, running versions of the Linux operating system that contain code, structure, sequence and/or organization from our proprietary UNIX System V code in violation of our copyrights.

Hey, Darl... what about Heise telling the court that the case wasn't about System V? What about your failure to answer IBM's interrogatories on this point? At the risk of sounding like Senator McCarthy, did Heise lie in court, or are you lying in this SEC filing? They certainly can't both be accurate.

---
"When I say something, I put my name next to it." -- Isaac Jaffee, "Sports Night"

[ Reply to This | # ]

DMCA claim
Authored by: gmp on Monday, July 05 2004 @ 08:31 PM EDT
...no one sues you for reading a book you bought that turns out to have copyright-infringing material in it. You sue the party that put the infringing material in the book, not the reader of the book who bought and paid for it in good faith.

This is not correct when it comes to the way software companies deal with pirated software (probably the closest analogy to what SCO pretends to be doing). With pirated software, the BSA and others routinely go after end users, whether or not those end users have reason to believe their software is pirated. You can find more details in this paper from a couple of years ago.

[ Reply to This | # ]

OT: Other filings
Authored by: Anonymous on Monday, July 05 2004 @ 08:36 PM EDT
At the risk of being even more of a bore than usual

Any sign of DC's reply memo in support of their summary disposition motion?

Any sign of Red Hat's reply memo in support of their motion for
reconsideration?

Any sign of the letters/exhibits to the recent IBM filings. Plus I notice 2
attorney conferences are on the docket as transcripts?

If anybody has any of these, a link would be greatly appreciated

Thanks in advance

Quatermass

[ Reply to This | # ]

Direct vs. contributory
Authored by: Lev on Monday, July 05 2004 @ 08:54 PM EDT
They are suing to block AutoZone from being able to continue to *use* Linux? Under what legal theory? They certainly aren't direct infringers. As the Grokster decision [pdf] points out, contributory infringement requires more than just use:
My impression is that under SCO's theory, they are direct infringers. Unless I'm mistaken, contributory infringement occurs when you help someone else infringe. SCO isn't accusing AutoZone of helping anyone infringe, but of infringing on its own (through using Linux). Now, "use" isn't one of the exclusive rights of a copyright owner, so its unclear how "use" is infringing. We don't know yet if SCO is going to say that by "use" it refers to making internal copies that (according to SCO's theory) always accompanies the use of Linux, or if it will argue some novel theory under which running a program is also an exclusive right of the copyright owner. But in either case, it's going to be direct infringement or no infringement, not contributory infringement.

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: entre on Monday, July 05 2004 @ 08:54 PM EDT
It looks so easy now to calculate the path so far taken and ahead as Pamela
Jones has documented so well.
Being paid a million a year for his experience and knowledge, how could Darl be
so misguided.
Enjoy the crash scenery ahead, all. Learn from this, invest wisely in the
future. Cheers...,
Thank you Pamela for the microscope and hard work.



[ Reply to This | # ]

Troll Tech?....hmmmmm
Authored by: Anonymous on Monday, July 05 2004 @ 09:04 PM EDT
"Ralph is the Chairman of the Board for...Troll Tech and TugNut."

Isnt that the company that develops QT, the framework which KDE is based on??? http://www.trolltech.com/ ....Any else feel uneasy with this guy on the board of Troll Tech and the Canopy Group???

[ Reply to This | # ]

Your first Boies article
Authored by: rjamestaylor on Monday, July 05 2004 @ 09:52 PM EDT
At least I think that was the first article to which you linked as showing howinteresting Boies is...) Good show, PJ, keeping the pro-Boies story up for posterity. I know it must gall you sometimes in the post-SCOX age, that you wrote a positive piece on DavidBoies. But that it remains shows your consistency and integrity.

I think it rather unlike the Orwellian spinmeisters hired by politicians, large proprietary software companies and other suspect characters, who would rather make such articles disappear.

I write this note just to draw attention to the link you made to your pre-SCO article on Boies. Perhaps that article will do much to humiliate the scoundrels calling Groklaw an IBM agent. Indeed, your blog would be like most others -- never causing a Grok-out of db servers, that's for sure -- were it not for the fortunate (but not chance) convergence of Open Source, Frivolous Litigation, and a paralegal with a passion for truth, appreciation for Free software and its developers and insight-laced eloquence.

And those accusing me of fawning -- nuts. This isn't fawning, it's appreciation. I am not aware of a story like that of Groklaw. It, by itself, is worthy of a book or two. (Not to take away anything from the importance of Free and Open Source Software standing up to nefarious tricks and malicious litigation.)

---
SCO delenda est! Salt their fields!

[ Reply to This | # ]

OT: inSCOnsistencies - on communications and when infringing code *invented* or discovered
Authored by: Anonymous on Monday, July 05 2004 @ 10:10 PM EDT
A. INFRINGING CODE TIMELINE

1. I think there is strong evidence that the idea that Linux contains infringing SCO code was invented in mid-2002 by Darl McBirde himself. The evidence for this comes for Darl McBride himself (see BusinessWeek quote below).

http://yahoo.businessweek.com/magazine/content/04_ 05/b3868104_mz063.htm

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."


I realize the alleged conversation between Ransom Love and Darl McBride is not connected to a direct Darl McBride quote in the above. But it is here:

http://yahoo.businessweek.com/magazine/content/04_05 /b3868109_mz063.htm

Q: You're in an odd situation. How often does a little tech company end up looking like the bad guy because it's suing the largest tech company in the world?
A: It is an odd situation, I think, if you look at this open-source community. I asked the previous CEO, "Have you thought about enforcing your Unix IP rights?" He said, "Yeah, but if you do, the Linux community is going to get really mad." That's what was governing his thinking. In the meantime, the market cap was below $6 million.


(The market cap below $6 million clearly dates this to Summer 2002, check SCO's stock chart).

A further direct quote, from Darl McBride himself, further suggests that the idea came up within 30 days of Darl McBride arriving at Caldera (later renamed The SCO Group, Inc.), or at the latest by December 2002:

http://yahoo.businessweek.com/magazine/content/0 4_05/b3868109_mz063.htm

Q: When did you decide to go down that path?
A: It was more of a gradual process. When I joined the company, we did a 30-day analysis and review. I interviewed the top managers inside the company and a handful of people outside and asked, "Where do we go with this thing?" [SCO] had come down from being $1 billion in value down to about $5 million, it was a few quarters from being out of cash, and what became very clear to me early on was that there was a lot of value in the Unix intellectual property that wasn't being optimized.

...

In concept it was great, it wasn't until December when we came out and said here's where the problems are with Linux, and we have a program where you can deal with that.

Q: What was the reception to that?
A: It seemed everyone in the industry was either positive or neutral to that, except for IBM. IBM had a violent reaction to it, even though it wasn't targeted directly at them. Their whole issue was, "We don't want you out there implicating there are IP issues involved." We were going to make an announcement last Dec. 11 [2002], and then we grounded that. We spent two weeks talking to IBM about how we could work together, and that didn't get anywhere. Then we started looking into the contractual issues we had with IBM, and then we started to see that there were some potential problems there.



2. Yet in contrast Darl McBride himself told the press that supposed the examination of the Linux for infringing code, by three separate teams, including the alleged MIT rocket scientists (which now seem to have gone missing, as do all of their alleged reports which SCO have declined to produce to the court or use in the IBM case), took place in the spring of 2003 (see quote below for example).

http://news.com.com/2008-1082-1017308.html
< BR> So at that point in time, we tried to work through the issues with IBM. We came to an impasse, and that's what led to our filing our lawsuit against IBM on March 7. Concurrent with filing our lawsuit against IBM, we put them on notice that we were going to be revoking our AIX (IBM's Unix distribution) license. Under the contract, we have to give them 100 days notice. That notice was due on Friday, June 13, and if we hadn't had the issues resolved then, we would revoke their AIX license.

We're talking about line-by-line code copying. That includes not just the function but the exact, word-for-word lines of code. During the period of time we were focused on the IBM issues, it came to our attention that we had our code, our Unix System 5 code, showing up directly inside of Linux. So that, in turn, led us to send out letters to 1,500 of the largest companies around the world, to let them know we had these substantial intellectual-property violations and to notify them that we had these problems. We didn't think that necessarily they were the ones that generated the problems, but they had been passed a hot potato they were holding.

...

When we filed against IBM, they were supposed to respond in 30 days, and they filed an extension for another 60 days. So we had about 60 days where we were waiting for IBM to respond. So we turned a group of programmers loose--we had three teams from different disciplines busting down the code base, the different code bases of System 5, AIX and Linux. And it was in that process of going through the deep dive of what exactly is in all of these code bases that we came up with these more substantial problems.


(The bold section indicates they claim to have analyzed the code in the 60 days after filing the lawsuit against IBM. They filed against IBM on March 7th 2003. So the analysis supposedly should have been during March to May of 2003).

You can further date SCO's alleged discovery of infringing code, by reference to the 1500 letters sent in May 2003. From the same article:

What prompted the 1,500 letters? Couldn't you have found a more informal way to tell these companies what was going on?
Those letters had to do with the fact we had just uncovered these issues, and with the legal requirements...we felt we had to go out and let the world know we had come across these problems.


So in May 2003, SCO says "we had just uncovered these issues".

The questions are:
  • How could Darl have known in June 2002, prior to any examination, that examination would uncover these issues? Does he have a time machine?
  • How could Darl have been allegedly discussing IP issues in Linux, with IBM (see next part, B) all thru the 2nd half of 2002, if they only "just uncovered these issues" in May 2003?
  • How could SCO have sued IBM for "trade secret" violations (among other things - see SCO's original complaint) in March 2003, if they had only "just uncovered these issues" in May 2003?



Conclusion: It seems to me that even if we accept Darl's account of the sequence of events, that the idea that Linux contained infringing code, and indeed SCO filing a lawsuit (against IBM) on that basis, preceded any examination.


B. ALLEGED SCO CONTACTS WITH IBM

1. In a number of places, SCO have claimed to have contacts with IBM prior to the lawsuit. For example:

http://yahoo.businessweek.com/magazine/content/04 _05/b3868109_mz063.htm

Q: So when did you first contact IBM?
A: The first time I had a discussion with IBM was shortly after I sent out the shareholder's letter. In August [2002], we went to LinuxWorld in San Francisco, and I met with their senior Linux executive at the time. It was just sort of a get-to-know-you session.... I laid out to him that we've got all this intellectual property, and you guys have done well with your IP rights. He said, "Oh yeah. We do over a billion dollars in business with that. Protecting your IP is a great idea."

...

Q: What was the reception to that?
A: It seemed everyone in the industry was either positive or neutral to that, except for IBM. IBM had a violent reaction to it, even though it wasn't targeted directly at them. Their whole issue was, "We don't want you out there implicating there are IP issues involved." We were going to make an announcement last Dec. 11 [2002], and then we grounded that. We spent two weeks talking to IBM about how we could work together, and that didn't get anywhere. Then we started looking into the contractual issues we had with IBM, and then we started to see that there were some potential problems there.



2. IBM have of course repeatedly said they had no contact with SCO prior to the lawsuit. For example:

http://yahoo.businessweek.com/magazine/content/04 _05/b3868109_mz063.htm

[An IBM spokesman said in a written statement that IBM will not debate through the media a matter that's in litigation. He added that as IBM said in its answer to SCO's amended complaint, SCO's claims are without merit, and SCO did not give IBM any notice or warning of them prior to filing its lawsuit.]


3. Now who is right? Did SCO discuss with IBM in August or December 2002 as Darl McBride has claimed? When did SCO first contemplate action against IBM - it seems hard to square Darl's claims about contacts with IBM in 2002 (to BusinessWeek), with Darl's claims (to Salt Lake Tribune) about Bench's stock sales planning being initiated in January 2003 "months before any legal action against IBM was contemplated"

http://166.70.44.66/2003/Aug/08142003/busine ss/83770.asp

Bench submitted a sale plan in January, months before any legal action against IBM was contemplated, McBride said. His agreement called for the sales to begin on March 8. He planned to sell 5,000 shares a month for the next 12 months, according to the plan.


January being "months before any legal action against IBM was contemplated" seem particularly hard to square with Darl's claims about what SCO did after an alleged meeting with IBM on December 11th 2002: "Then we started looking into the contractual issues we had with IBM, and then we started to see that there were some potential problems there"


Conclusion: IBM have consistently stated that IBM received no prior notice from SCO before the lawsuit. Some might say this is a similar picture to the Daimler Chrysler suit (where SCO declined to contact Daimler Chrysler after their December 2003 and just turned up in court). SCO, and Darl McBride in particular, on the other hand, appear to have some difficulty in reconciling their alleged accounts of prior contact with IBM, with what they have told us about the timeline for initiating their executive stock sales plans.


C. ALLEGED SCO CONTACTS WITH GOOGLE

1. As with IBM, SCO claims to have talked with Google:

http://yahoo.businessweek.com/magazine/content/04_ 05/b3868109_mz063.htm

Q: Have you talked with Google?
A: Some discussions have been initiated there.

Q: Which would mean?
A: We don't know where that goes yet. It's very premature to say what's going to happen there.

Q: So your lawyers are talking to their lawyers?
A: We've got a team that's engaged in going back and forth. We do have legal counsel on our side. We have marketplace experts that we've kind of trained.... We're not targeting just Google per se. But anybody who is using 10,000 boxes, that's an elephant on a table. There's a lot of reasons you wouldn't [go after Google]. But to say we're going to ignore them doesn't make any sense either. I think it's going to be a function of what happens over the next few weeks.



2. Oddly enough, just like IBM, Google claims never to have spoken to SCO, in the very same article in which Darl said SCO has been talking with Google.

http://yahoo.businessweek.com/magazine/content/04_ 05/b3868109_mz063.htm

[A Google spokesman says the search giant has not discussed with SCO its demands.]



Conclusion: Google (rather similarly to IBM) say they've never discussed SCO's demands. In the very same article in which Google says this, Darl McBride says there has been contact. Draw your own conclusions. Compare to section B.


D. NOVELL AND COPYRIGHTS

1. In court SCO is now arguing this Linux thing ain't about copyrights. Let's see what Darl said back in February 2004:

http://yahoo.businessweek.com/magazine/content/04_05 /b3868109_mz063.htm

Q: You bought the Unix business from Novell, but it took you a while to find an amendment to that contract that says you also bought the underlying intellectual property as well. Where was that amendment?
A: First of all, we weren't spending a lot of time looking for it. Our case against IBM was purely grounded in contract. It wasn't until Jack Messman [CEO of] Novell came out in an open letter to us saying, "Novell owns those copyrights, and we are going to make these all available and bless the Linux community, and there will be no problems there."

Well, that was the first day we started looking for the amendment. We weren't seriously concerned about it before that. My executive secretary, to her credit, she went through a ton of files. She found this thing, it was maybe four days later. I called Messman that night and dropped the news on him.... When we had those copyrights in hand, that's what made the whole case on the Linux side much stronger.


2. As one little aside, you will note the above quote attributes finding Amendment 2 to Darl's "executive secretary". This is a rather odd contrast to what SCO told us previously ("paralegal"):

http://news.com.com/2100-1016_3-1013865.htm l

A SCO paralegal found the amendment Thursday in a filing cabinet, Stowell said. It's titled "Amendment No. 2"; Amendment No. 1 is "completely immaterial" to the issue of copyrights and trademarks, said Stowell, who said he believes there are no other amendments.



Conclusion: Draw your own. I won't even bother getting into the interpretation of Amendment 2 and what SCO claims it means, as opposed to how Novell and Judge Kimball interpret it.


[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: fxbushman on Monday, July 05 2004 @ 10:16 PM EDT
The SEC report (this one, and also some previous reports) mentions more than
once that revenues are likely to decline because the world and dog find SCO
increasingly loathesome. Doesn't it occur to these guys that maybe what they are
doing is ethically questionable? That there is a reason why no one likes them?
Presumably Yarro, McBride and the gang are devout Mormons. This confuses me,
because the Mormons I know tend to take ethical strictures very seriously. If
the SCO bunch are renegades who are putting their religious community in a bad
light, can we expect the Church to take them aside for a talking-to? In many
ways it is a close-knit community that tries to police itself.

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: Anonymous on Monday, July 05 2004 @ 11:28 PM EDT
Is anyone else reminded of the plot from "The Producers". Certainly
seems like there is a lot of contempt for the individual investor here.

[ Reply to This | # ]

What? No mention of Groklaw...
Authored by: MajorDisaster on Monday, July 05 2004 @ 11:55 PM EDT
...In the S3?!?!?!!
SCO is like an ant on the sidewalk and Groklaw is the kid with the magnifying
glass(think Gary Larson's "Far Side")

---

Death twitches my ear, "Live", he says "I am Coming."

--Virgil--

[ Reply to This | # ]

Differences in statements about Novell between 10Q and S3 statements
Authored by: Anonymous on Tuesday, July 06 2004 @ 12:02 AM EDT
We'll find out for sure after this Friday, July 9, when the deadline for SCO filing an amended complaint in the Novell case passes, but note these statements:

In the 10Q, SCO says:
However, the court granted Novell's motion to dismiss regarding our allegations of special damages, but granted us 30 days leave to amend our complaint to plead special damages with more specificity. We plan to continue to vigorously pursue our claims against Novell.

While, in the S3, filed a few days later, SCO says:
However, the court granted Novell's motion to dismiss regarding our allegations of special damages, but granted us 30 days leave to amend our complaint to plead special damages with more specificity. Accordingly, we are in the process of amending our complaint.

This second statement is far less aggressive than the first one, and gives SCO considerably more wiggle room if they decide not to file the amended complaint. As I said at the top, we'll see on July 9. I can't wait!

Thad Beier

[ Reply to This | # ]

Where are the Form 4s?
Authored by: Anonymous on Tuesday, July 06 2004 @ 12:33 AM EDT
Am I the only one who missed seeing the form 4s when scox bought it's own stock?
How does scox get away with this?

[ Reply to This | # ]

Maybe just sterilizing optoins exercise?
Authored by: tz on Tuesday, July 06 2004 @ 10:16 AM EDT
This is a game played by most - I remember a lot of this at Cisco.

Company issues options for 1M shares to exec or employee for pennies.

Stock goes up so exec exercises option. This would cause dilution if the 1M
shares were added to the float.

Company "buys back" 1M shares (with trumpets, Press Releases, and a
CNBC appearance).

Net, there are the same number of shares outstanding today as last week, but
there was a bookkeeping change.

I don't know if this is the case with SCO, but it should be simple to match the
insider trading or options exercises with the stock buyback.

[ Reply to This | # ]

OT-ish, but it amused me
Authored by: David on Tuesday, July 06 2004 @ 10:22 AM EDT
I at first mis-read the Yarro quote:

"Under Ralph's direction, the Canopy Group has identified and invested in promising open source and Internet infrastructure technologies. Canopy's greatest strength lies in providing the companies that produce these technologies a sheltered environment in which they can grow and develop. Canopy companies are strongly encouraged to work with each in synergistic partnerships."

...to mean that the Canopy Group didn't actually invest in delivering open source and Internet infrastructure technologies, just in promising it.

:-)

[ Reply to This | # ]

Article in PC Plus August 2004
Authored by: Anonymous on Tuesday, July 06 2004 @ 10:55 AM EDT
An article in PC Plus this month mentions Groklaw and the GL's Linux help files.

[ Reply to This | # ]

Echos of the past
Authored by: Anonymous on Tuesday, July 06 2004 @ 11:48 AM EDT
When I saw this :"what's good for BayStar may not be good for the rest of
the shareholders."
I immediatly thought of Hirohito's speach that ended WW2:
"The was has turned out not neccesarily to Japan's benefit".

Somebody been taking history lessons? :)

[ Reply to This | # ]

SCO, Canopy, Churches... This is why SCO is doing what it is doing
Authored by: Anonymous on Tuesday, July 06 2004 @ 11:55 AM EDT
This is not a guess, I heard this from someone whom I consider knowledgable and
reputable. Apparently, and some may already know this, SCO views this entire
debacle as them "saving the software industry". They consider this a
holy mission to rescue the software industry from OpenSource. They can't
understand why the rest of us don't see the problem clearly, don't see that
Linux HAD to steal from Unix to be as robust as it is. It sounds utterly
rediculous, but apparently McBride said as much to someone whom repeated this at
a conference earlier this year.

You have to understand regarding Canopy, their members are heavily affiliated
with the Church of LDS. Many execs are devout mormons (McBride claims to be one,
so does Yarro), and as I understand it, the mormon community in Utah can tend to
be somewhat self contained with regards to business. They tend to do busienss
with each other, keep their money within the mormon community, tend to view
others as outsiders and will not do business with them if there is a choice to
use a mormon owned/run business.

Now you would think that a group of businesses run by mostly mormon memebrs of
the Chruch of LDS would in fact consider the moral ramifcations of their actions
carefully, and I can only conclude that they really view OpenSource software,
particularly the GNU GPL, as some evil blight upon capitalism that has to be
stopped because it doesn't play by the rules.

The problem we see is that such behavior is indicitave of people who are
zealots, ones who will not back away from their chosen position. I believe they
are getting caught up in the tactical approach to their fight and not looking at
the big strategic picture, or they would never have taken this approach. They
have thrown in with Microsoft as the means to their end which has cumulatively
resulted in them being despised by just about everyone. There was a right way to
go about this and a wrong way to do it, and they defintely found the wrong way.

[ Reply to This | # ]

OT: Judging a partry by it's software
Authored by: Anonymous on Tuesday, July 06 2004 @ 01:47 PM EDT
Interesting article on News.com

http://news.com.com/Judging+a+party%27s+politics+by+the+software+it+uses/2100-10
32_3-5258430.html?tag=nefd.top

BigTex

[ Reply to This | # ]

Angel Yarro is Tithing
Authored by: DMF on Tuesday, July 06 2004 @ 02:47 PM EDT
Let me guess! Angel Partners' primary beneficiary (of charitable contributions)
is the Church of Latter-Day Saints. Thus Ralph can use it as a vehicle for his
tithe, technically earning no personal income, but freeing himself from having
to cough up.


Mmmm. Am I cynical enough yet?

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: Anonymous on Tuesday, July 06 2004 @ 03:29 PM EDT
AutoZone is infringing our UNIX copyrights by, among other things, running versions of the Linux operating system that contain code, structure, sequence and/or organization from our proprietary UNIX System V code in violation of our copyrights.

the "or" inplies that it might be only one of these. You would think that after a year and a half of investigation they would know in exactly what ways System V is being infringed.

[ Reply to This | # ]

Don't forget state taxes
Authored by: joef on Tuesday, July 06 2004 @ 04:02 PM EDT
The charitable donation may not be fully deductible for state income tax
purposes. At least it's not in NC where I live

[ Reply to This | # ]

12 months ... hmmm...
Authored by: Anonymous on Tuesday, July 06 2004 @ 05:09 PM EDT
So, they have enough money to buy back the A1 shares from BayStar and continue
operations for about 12 months -- anybody else see a scheduling conflict here? I
mean, they need to be in court in 13 months -- maybe the judge for SCO v. IBM
and SCO v. Novell should speed up the schedule so that they can finish up their
trials before they run out of money. I know I'd be mad if my tax dollars went to
pay for the costs of trial etc. and SCO came up saying "Sorry, this case
took too long. We don't have any more money to keep fighting, we must raise the
white flag"

[ Reply to This | # ]

REDEMPTION of Series A-1
Authored by: AntiFUD on Tuesday, July 06 2004 @ 06:34 PM EDT
PJ - I am totally in awe of your analysis and insight into SCO machinations in
their SEC Filings.

I am well aware that SCO have a hard time reading documents to which they may or
may not be party to, but I find it very difficult to believe that they are not
guilty of being exceedingly ecomonical with the truth when it comes to the
reason(s) that Baystar found cause to send SCO a redemption notice.

First a quote from PJ's story:

One would think. I suggest reading that entire section, actually. One odd thing
is that while they mention that BayStar asked for a redemption, they still
aren't telling us why. Since the SEC has not yet approved the agreement, I would
think that would be a risk factor that ought to be disclosed, no? How else can a
person thinking of purchasing the stock evaluate the associated risks? The 10Q
says that BayStar's notice didn't state a reason for their allegation of a
breach of the agreement, but surely by now SCO knows why BayStar thought they
saw a breach. But this is all it says, both in the 10Q and the S3 that I could
find:
"On April 15, 2004, we received a redemption notice from BayStar
requesting that we immediately redeem 20,000 Series A-1 shares then held by
BayStar. The redemption notice asserted that BayStar is entitled to redemption
of its the Series A-1 shares under the Certificate of Designation, Preferences
and Rights for the Series A-1 shares because we allegedly had breached certain
provisions of our February 5, 2004 exchange agreement. BayStar's redemption
notice did not provide specific information regarding the factual basis for our
alleged breaches of the exchange agreement, but we do not believe we have
breached the exchange agreement. As a result, we do not believe we are obligated
to redeem BayStar's Series A-1 shares."

Now an excerpt from SCO's February 9, 2004 8-K SEC Filing Exhibit 4.1:
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS
of
SERIES A-1 CONVERTIBLE PREFERRED STOCK
of
THE SCO GROUP, INC.

VIII. RANK
All shares of the Series A-1 Preferred Stock shall rank (i) prior to the
Corporation’s Common Stock and any class or series of capital stock of the
Corporation hereafter created (unless, with the consent of the Majority Holders
obtained in accordance with Article XII hereof, such class or series of capital
stock specifically, by its terms, ranks senior to or pari passu with the Series
A-1 Preferred Stock) (collectively with the Common Stock, “Junior Securities”);
(ii) pari passu with any class or series of capital stock of the Corporation
hereafter created (with the written consent of the Majority Holders obtained in
accordance with Article XII hereof) specifically ranking, by its terms, on
parity with the Series A-1 Preferred Stock (the “Pari Passu Securities”); and
(iii) junior to any class or series of capital stock of the Corporation
hereafter created (with the written consent of the Majority Holders obtained in
accordance with Article XII hereof) specifically ranking, by its terms, senior
to the Series A-1 Preferred Stock (collectively, the “Senior Securities”), in
each case as to distribution of assets upon liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary.

XII. PROTECTION PROVISIONS
So long as any shares of Series A-1 Preferred Stock are outstanding, the
Corporation shall not take any of the following corporate actions (whether by
merger, consolidation or otherwise) without first obtaining the approval (by
vote or written consent, as provided by the DGCL) of the Majority Holders:
(i) alter or change the rights, preferences or privileges of the Series A-1
Preferred Stock, or increase the authorized number of shares of Series A-1
Preferred Stock;
(ii) alter or change the rights, preferences or privileges of any capital stock
of the Corporation so as to affect adversely the Series A-1 Preferred Stock;
(iii) create or issue any Senior Securities or Pari Passu Securities;
(iv) issue any shares of Series A-1 Preferred Stock other than pursuant to the
Exchange Agreement or as a Dividend (as described in Article III);
(v) redeem, repurchase or otherwise acquire, or declare or pay any cash dividend
or distribution on, any Junior Securities. Notwithstanding the foregoing, the
Corporation shall, without the prior approval of the Majority Holders, be
entitled to repurchase Junior Securities from employees of the Corporation in
connection with employee compensation plans approved by the Corporation’s Board
of Directors;
(vi) increase the par value of the Common Stock;
(vii) issue any debt securities, (b) incur any indebtedness or (c) enter into
any other agreement or arrangement that would, in the case of this clause (c),
entitle any third party to any preferences over the Series A Preferred Stock
upon the occurrence of a Liquidation Event, a Change of Control Event or
otherwise, or redeem, repurchase, prepay or otherwise acquire any outstanding
debt securities or indebtedness of the Corporation, except as expressly required
by the terms of such securities or indebtedness. Notwithstanding the foregoing,
the Corporation shall, without the prior approval of the Majority Holders, be
entitled to incur indebtedness, in each case approved in good faith by the Board
of Directors upon the exercise of its reasonable business judgment, in an amount
not to exceed (x) $8,000,000 in the aggregate for general purposes or (y)
$10,000,000 in the aggregate in connection with strategic acquisitions;
(viii) issue any of the Corporation’s equity or equity-linked securities on
floating conversion rate terms, or at a price or with a conversion or exercise
price, as applicable, below (A) the Conversion Price (calculated as of the date
of such issuance of such security), or (B) the Closing Sales Price for the
Common Stock on the date of such issuance of such security;
(ix) except for exclusive or non-exclusive licenses of intellectual property on
an arm’s-length basis, sell or otherwise transfer any independently-significant
asset or intellectual property to any other person(s) or entity(ies) (including,
without limitation, any subsidiary(ies) of the Corporation);
(x) enter into any agreement, commitment, understanding or other arrangement to
take any of the foregoing actions; or
(xi) cause or authorize any subsidiary of the Corporation to engage in any of
the foregoing actions.
Notwithstanding the foregoing, no change pursuant to this Article XII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series A-1 Preferred Stock then outstanding.


I was, until reading PJ's story on the stock buyback, unaware of the the
possible trigger that Baystar had found for redemption, and also the reason that
the took over the 20,000 Series A-1 Preferred from RBC.

I now believe that clause (v) above goes to the issue of a redemption trigger.
When read in conjunction with the definition of 'Junior Securities' (also
excerpted above) you can hardly blame Baystar for being somewhat miffed when the
found that SCO had been using their cash assets to effectively redeem, by means
of a stock buyback, Common Stock - thereby supporting their stock price - in
prefernce to redeeming Baystar's Preferred. The whole idea of having Preferred
is that the holder has a preference (or a first right) to the companies assets,
and it appears that SCO blatantly defied Baystar in this respect.

As to wondering why on earth Baystar would even consider taking over RBC's
interest in the Preferred I can only assume that the 'Notwithstanding the
foregoing, no change pursuant to this Article XII shall be effective to the
extent that, by its terms, it applies to less than all of the holders of shares
of Series A-1 Preferred Stock then outstanding.' sentence, that follows clause
(xi) above, meant that unless either Baystar or RBC owned all outstanding Series
A-1 they wouldn't have the power to exercise their redemption rights.

What remains to be seen is whether SCO is sucessful in obtaining the SEC's
approval of the Stock Registration upon which all of SCO's hopes for continued
liquidity (and hope for continuing their legal forays) hang by a slender
thread.

A final question: Is there such a thing as 'corporate dyslexia'? Because if
there is, I would hold that SCO suffers from it, as they seem to be unable to
read documents the way that 90% of the english speaking world appears to be able
to read them.

---
IANAL - But IAAAMotFSF - Free to Fight FUD

[ Reply to This | # ]

Tax Losses worth something?
Authored by: ChrisP on Tuesday, July 06 2004 @ 09:12 PM EDT
From the recent 10-K, Y/E 31st Oct 2003:

" Provision for Income Taxes

The provision for income taxes was $774,000 in fiscal year 2003,
$483,000 in fiscal year 2002 and $578,000 in fiscal year 2001. The provision for
income taxes is primarily related to earnings in foreign subsidiaries. As of
October 31, 2003, we had net operating loss carry-forwards for U.S. federal and
state income tax reporting purposes of approximately $88,642,000 that expire at
various dates between 2018 and 2023. We had net deferred tax assets, including
net operating loss carry-forwards and other temporary differences between book
and tax deductions, totaling approximately $53,474,000 as of October 31, 2003.
We also had net deferred tax liabilities of approximately $566,000 related to
taxes on foreign earnings. A valuation allowance in the amount of $52,908,000,
the difference between our deferred tax assets and liabilities, has been
recorded as of October 31, 2003 as a result of uncertainties regarding the
ultimate realizability of the net deferred tax asset balance."

Ok, so the company is unsaleable until the litigation issues are settled. The
liabilities if they lose the suits are just too uncertain. However, could
another profitable company as a result of a takeover of or merger with TSG use
the $88m or $53M to reduce their own tax bill? Would this make TSG worth
something even if they have no viable assets, products or customers remaining?

---
SCO^WM$^WIBM^W dammit, no-one paid me to say this.

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: brian on Tuesday, July 06 2004 @ 10:14 PM EDT
Something that caught my eye...

"BayStar's redemption notice did not provide specific
information regarding the factual basis for our alleged
breaches of the exchange agreement, but we do not believe
we have breached the exchange agreement. As a result, we
do not believe we are obligated to redeem BayStar's Series
A-1 shares."

This whole thing sounds familiar....Oh yeah, I know where
it was....

"Based upon SCO's failure to come forth with evidence to
demonstrate infringement, summary judgment should be
entered in favor of IBM on its claim that IBM's Linux
activities do not infringe SCO's alleged copyrights
relating to UNIX. After more than a year of litigation,
two orders to compel and two affidavits from SCO
certifying that it has provided complete responses to
IBM's interrogatories, SCO admits - by its silence and
failure to provide evidence - that IBM's Linux activities
do not infringe SCO's alleged copyrights. Although SCO has
identified certain materials in Linux to which it claims
rights (albeit without the required specificity), SCO
fails altogether to show how IBM's Linux activities
infringe SCO's alleged copyrights concerning the UNIX
software." (IBM's Motion for summary judgement)


Looks to me like Baystar is giving SCO a taste of their
own medicine...

B.

---
#ifndef IANAL
#define IANAL
#endif

[ Reply to This | # ]

SCO Spent $2,414,000 Buying Back Its Own Shares Last Quarter --Sifting Through SCO's 10Q and S3
Authored by: blacklight on Thursday, July 08 2004 @ 01:22 AM EDT
"During the quarter ended April 30, 2004, we purchased 290,000 shares of
our common stock in open market purchases for a total cost of $2,414,000."
SCOG

Trying to buy luv, SCOG?

[ Reply to This | # ]

Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )