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SCO's Missing Risk Factor
Wednesday, January 07 2004 @ 10:40 PM EST

The impact of the Novell letters, letters Novell last month made public after Groklaw broke the story that Novell had registered copyrights on UNIX with the US Copyright Office, is starting to show up in the media. Here is a commentary in Australia's The Age today, "Did SCO actually buy what it thought it bought?" The conclusion the author reaches after looking carefully at the letters' discussion of Amendment 2, is that the Novell claim leaves the rest of us "probably a little safer than we thought we were."

Speaking of the Novell letters, I have a question. Did SCO neglect to list them as a risk factor in its recent SEC filings?

Here is why Deutsche Bank's Brian Skiba on November 18 said he confirmed his buy rating and $45 price target on SCOX:

Reason 1: Our core investment proposition remains intact. We continue to view SCOX as synthetic call option on a very large intellectual property issue around Linux adoption and a lawsuit against IBM.

Reason 2: Near term catalysts exist. Over the very near term, we believe the company will finalize the contract with its tenacious law firm, Boies, Schiller and Flexner. This will set the backdrop for a stepped up litigious game plan against corporate Linux end users, which we believe could occur as soon as the end of this month. These lawsuits could encourage other corporate end-users to sign license arrangement with SCOX.

Of course, Mr. Skiba might not have known about Novell's registering for copyrights on UNIX when he wrote those words. For that matter, did he know that the SCO-Novell dispute over who has valid copyright on UNIX was still ongoing? Did he know Novell had sent SCO those letters?

Here's why he, and you, might not have known. If you look through the SCO SEC filings as I have been doing, you may find, as I have been finding so far, that SCO appears not to have listed receiving those letters from Novell or mentioned that Novell was still contesting SCO's copyright claims on UNIX as a risk factor in their recent filings.

That seems like a singular omission. SCO did have those letters since last summer and knew their copyright claims were being contested, as Novell points out. Isn't that a risk factor that ought to be listed?

How is a girl supposed to know whether to invest in a company without all the risk factors being revealed? For that matter, how is an analyst supposed to accurately rate a stock without being told all the risk factors?

I don't know if Mr. Skiba was informed of those letters from Novell challenging SCO's copyright claims, but I don't see any reference to them in his November report. I'm guessing it will all come out in the wash in the IBM trial, at a minimum, which by now I'm thinking SCO may be dreading like a trip to the dentist for a root canal.

By the way, SCO has a new page for analysts covering SCO. There are three of them listed, Skiba, Dion Cornett and Matthew Kelly, CF, also at DB. Here is what SCO would like to say about them:

Disclaimer: SCO is followed by the analyst(s) listed on this page. Please note that any opinions, estimates or forecasts regarding SCO's performance made by these analysts are theirs alone and do not represent opinions, forecasts or predictions of SCO or its management. SCO does not by its reference above or distribution imply its endorsement of or concurrence with such information, conclusions or recommendations.

Here's my list of all the opportunities SCO had to mention the Novell letters they received contesting SCO's copyright claim. I searched all of them for 'Novell' and 'copyright' and I couldn't find any mention of the conflict between Novell and SCO over copyright or that SCO had received letters from Novell contesting SCO's rights to copyright of Unix in any of these documents or events:

1. I found no mention of it in the Dec. 8, 2003 8K;

2. I couldn't find any mention of it during the November 19 teleconference;

3. I couldn't find any mention of it in the November 18 8K;

4. I couldn't find any mention of it in the November 17, 2003 S-3;

5. I couldn't find any mention of it in the November 17, 2003 8K. Here is what it did say:

As part of the expanded scope, the firm has been engaged to support SCO regarding issues relating to copyrighted UNIX code incorporated into Linux without authorization or appropriate copyright notices. Code that has been identified includes Unix System V code as well as copyrighted code included in the 1994 settlement between Unix Systems Laboratories, Inc. and Berkeley Software Design, Inc. SCO acquired this code and associated copyrights in 1995 from Novell.[emphasis added]

6. I couldn't find any mention of it in the October 16, 2003 8K, but here is what it says about copyright in an exhibit attached to the 8K, the agreement between SCO and BayStar and Royal Bank of Canada, on pages 8 and 9:

(l) Intellectual Property. Each of the Company and its Subsidiaries owns or is duly licensed (and, in such event, has the unfettered right to grant sublicenses) to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, permits, inventions, discoveries, processes, scientific, technical, engineering and marketing data, object and source codes, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, “Intangibles”) necessary for the conduct of its business as now being conducted and as presently contemplated to be conducted in the future. Section 3(l) of the Disclosure Schedule sets forth a list of all material patents, patent applications, trademarks, trademark applications, copyrights, licenses, sublicenses, and copyright applications owned and/or used by the Company in its business. Neither the Company nor any Subsidiary of the Company infringes or is in conflict with any right of any other person with respect to any third party Intangibles. Neither the Company nor any of its Subsidiaries has received written notice of any pending conflict with or infringement upon such third party Intangibles. Purchaser is aware of and acknowledges the pending and threatened litigation regarding Company’s intellectual property rights disclosed in the Select SEC Documents. Neither the Company nor any of its Subsidiaries has entered into any consent agreement, indemnification agreement, forbearance to sue or settlement agreement with respect to the validity of the Company’s or its Subsidiaries’ ownership of or right to use its Intangibles. The Intangibles of the Company and its Subsidiaries are valid and enforceable and no registration relating thereto has lapsed, expired or been abandoned or canceled or is the subject of cancellation or other adversarial proceedings, and all applications therefor are pending and in good standing, except where such abandonment or cancellation would not result in a Material Adverse Effect. The Company and its Subsidiaries have complied, in all material respects, with their respective contractual obligations relating to the protection of the their respective Intangibles used pursuant to licenses. Except as set forth in Section 3(l) of the Disclosure Schedule or in the Select SEC Documents, to the Company’s knowledge, no person is infringing on or violating the Intangibles owned or used by the Company or its Subsidiaries." [emphasis added]

7. I found nothing mentioned in the SCO-Bay Star-Royal Bank of Canada Registration Rights Agreement, filed October 16. It says this:

The Company shall make available for inspection by (i) each Investor, (ii) any underwriter participating in any disposition pursuant to any Registration Statement, (iii) one firm of attorneys and one firm of accountants or other agents retained by the Investors, and (iv) one firm of attorneys retained by all such underwriters (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector to enable such Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence;. . .[emphasis added]

8. I found nothing mentioned in their October 14, 2003 Amendment No. 2 to Form S-3;

9. I couldn't find any mention of it in their August 5 teleconference;

10. I couldn't find any mention of it in their July 31, 2003 10Q, which was certified by McBride and Bench, each of whom certified the following:

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

11. I couldn't find any mention of it in their July 31, 2003 10Q;

12. I couldn't find any mention of it in their July 8, 2003 S-3.

I struck out on SEC filings. So, then I checked the Groklaw quote database and Google. Maybe McBride or somebody mentioned it to the media. Nothing. Except for the original spat between SCO and Novell in May, with SCO producing Amendment 2, which it said trumped Novell's claim, with a threat of taking Novell to court, I couldn't find a single quotation later where McBride acknowledged that this issue was still ongoing or that SCO had received the letters from Novell after the May incident. Instead, here is what he said, from our Quote Database, so scroll to the dates listed:

"We stopped our battle with IBM for basically four days; we stamped out the Novell attack and put that one behind us. Now we're back on what our original focus was, which is resolving the issues we have with IBM."-- Darl McBride, CNET News, 2003-06-16

"It threw Novell out in front of the bus a couple of weeks ago and Novell got run over. It's a unique situation when a company as powerful as IBM has somebody coming at it with such strong claims as we have in a very public forum."-- Darl McBride, interview, 2003-06-30

"Yeah well, the Novell thing. They came out and made a claim that held up for maybe four days and then we put that to bed. If you go back and talk to Novell I guarantee what they'll say, which is they don't have a claim on those copyrights anymore."-- Darl McBride, ZDNet interview by Dan Farber, video, 2003-07-21

Yet, In Novell's statement, it said that "SCO has been well aware that Novell continues to assert ownership of the Unix copyrights." Novell sent the first letter June 26, 2003, the second on August 4, 2003, and SCO responded on September 10, 2003, suggesting Novell look at Amendment 2.

Here are the letters, if you want to review them.

I can't explain the apparently missing risk factor. I am providing the entire list so that others can review and check my research, but I've been unable to find SCO listing the Novell letters or mentioning that this dispute was still ongoing after they received the letters from Novell. Maybe some of you can find something I have overlooked. If you do, please let me know and I'll put it up here as an update.

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