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SCO Downsizing, Worries About Hostile Takeover, Caps Legal Fees
Tuesday, August 31 2004 @ 07:34 PM EDT

SCO's 3rd quarter teleconference is eye-opening. Participants were Darl McBride and CFO Bert Young. They are having to do some belt-tightening, poor things. They have been bleeding money to their lawyers. $7.3 million in the last quarter alone. And SCOSource is not bringing in anything like what they are spending to try to get income from it.

Boies Schiller has agreed to a cap on their fee, all the way through appeals, which was mentioned a few times, which I take as foreshadowing. They have entered into a letter of intent with Boies Schiller and other firms that there will be a cap, but what they get from contingencies will go up, on a sliding scale from 20% up to 33%.

Here's SCO's press release telling the news their way, with details. The Unix products business, they say, is now profitable. They are, however, downsizing and some offices are moving to smaller offices. They are closing the Spain and Italy offices. They expect "restructuring" costs in the 4th quarter. I gather there have been layoffs and they expect more. They currently have 230 employees. They have, they said, implemented a Shareholder Rights Plan that will help protect the company from any potential undervalued takeover attempt. Darl McBride specifically mentioned IBM, saying the plan is designed to block any company like IBM from taking them over for less than what they would view as fair value. He mentioned that there plan was not in response to any current takeover attempt.

Darl McBride characterized the quarter as the company "firing on all cylinders." He and I never see things quite the same way, I must say. If this is all their cylinders, I'd say they may not make it all the way up to the top of the hill.

SCOSource took in $678,000, but that is one that actually happened in a prior quarter. Is that EV1 finally showing up? I read they had one in the UK recently, didn't they? So that is all. Of course, we are not allowed to know details, because of "confidentiality reasons." Also, we might make fun of them. One new license in the entire quarter is the takeaway, as those corporate dudes like to say.

One questioner asked, considering how many legal experts quoted in the media say that their legal strategy is flawed, whether SCO had considered approaching another firm and getting a second opinion. The answer was, No. The fact that it was asked at all is amazing. Another requested that they detail any positive developments in the legal case. Mr. McBride was "happy" to do that. Pause. Um. Well, Judge Wells said they had made a good faith effort to comply with discovery. And then IBM was ordered to turn over versions of AIX and Dynix. (He didn't mention they were ordered to turn over only what IBM had already offered and they were not ordered to turn over all that SCO had asked for, which is why SCO is having to ask for it again on September 14.) It was pitiful, his list.

He also listed the fact that they can pursue DaimlerChrysler for damages for not responding within 30 days. That's a howler. What would the damages on that be, pray tell?

And Autozone's "positive development" was that although the case was stayed (you know, Autozone, the case SCO told Judge Kimball in Utah IBM's 10th counterclaim should have to wait to be heard until everything was resolved in Autozone -- woops, that's not positive -- SCO lost that argument), but the positive part he listed was that they got 90 days for discovery and can ask maybe for an injunction. That's not negative, maybe, but it's just normal in a court process to do discovery.

They said they are looking forward to the Novell hearing on Novell's motion to dismiss. He didn't say why. He did say that SCOSource licencing should pick up (though probably not next quarter, they said) if one of two things happens:

1. any action showing that Novell's copyrights are unfounded

2. any positive development in any court anywhere. He mentioned risks in the Linux development process, which they claimed are responsible for their IP showing up in Linux, something they have yet to prove, I might point out. Perhaps they need to tell IBM with specificity where they might find such SCO IP. I'm sure we are all positively panting in anticipation.

He mentioned the OSRM patent study, which he naturally mischaracterized. He portrayed it as demonstrating problems in the Linux development process. Actually, no. The 283 patents were not valid patents necessarily. I'm sure you've seen patents granted that you know are ridiculous. The 283 could all be ridiculous. We don't know yet, because they are not yet tested in any court of law. So they don't represent "problems" in the Linux development process. They represent problems in the patent-granting process, and problems in the martketplace, where greedo, dying companies think patents can be misused as an anticompetitive weapon or as a gravy train. I asked PubPat's Dan Ravicher to comment:

"To the extent any problems exist, they are due to the patent and copyright systems, not the free software development process. SCO's case shows that proprietary software has as much, if not more, to fear from patents, as IBM has asserted four patents against SCO's proprietary software. That's four more patents than have ever been asserted in court against ANY free software.

"If we calculated the number of copyright and patent cases brought against proprietary versus free software, the results would be many to a couple (those couple being all brought by SCO) and many to none, respectively."

This may be why McBride said they don't intend to get into any "shouting match". Losing over and over must be very annoying.

If you'd like to read a commentary today on how patents are destructive to innovation, here's a particularly clear one, by Martin Brampton, entitled "Devil's Advocate: Patents are killing software innovation." All software patents do is prevent small companies from being able to compete with large companies, he says:

"Patents are brutal. Even though a number of people may have independently had the same idea, only the first to register a patent gains protection. The rest lose everything. Copyright is a much more flexible right, with no penalties for mere lack of originality. . .

"Imagine patents being applied to works of literature. If the works of Shakespeare or the Bible were to be patented, it would become extraordinarily difficult to write anything. We all commonly use phrases from both without even realising their source. . . .

"Patents are a means to stifle competition, while much of the real innovation comes from individuals and groups outside the major companies, which are already well placed to withstand competition. . . .

"The argument that the new software was invented independently is no defence against a patent-infringement claim.

"Evading the problem may be possible through insurance, which is a direction pioneered by Open Source Risk Management. But the real solution is a fundamental rethink of the role of patents in a world of global corporations. We want creative individuals to be justly rewarded but a system that protects giant companies against competition is in few people's interests."

Here is another article about the OSRM study, which explains it very well, on

More reports on the teleconference: Stephen Shankland; The Register's Ashlee Vance; and even Forbes.

There is more info on the shareholders rights plan in eWeek's report by Steven J. Vaughan-Nichols:

"It is SCO's fear that with a current market cap of slightly more than $58 million, IBM -- or an opportunistic group -- might try to take over SCO.

"'The plan will not prevent a takeover attempt, but should encourage anyone seeking to acquire the company to negotiate fair value directly with the board of directors,' SCO chairman Ralph Yarro III said in a statement.

"The plan will be triggered if a person or group acquires, or attempts to acquire, ownership of 15 percent or more of SCO's common stock. In the event of a takeover attempt, the board would decide whether the offer being made is fair to common SCO stockowners."

He points out that the recent BayStar fight could be characterized as a hostile takeover attempt, but that McBride said the plan was not a result of that battle.

Robert McMillan reports a few more details:

"In an apparent response to industry rumors that SCO may become the target of a hostile takeover bid, SCO's Board of Directors has implemented a 'shareholders rights plan' designed to deter unsolicited takeover attempts, McBride said. 'We believe that this will basically keep any outside offers or potential takeovers that are not in the best interest of the shareholders at bay,' he said.

"The plan, which was adopted by the board on Aug. 10, gives SCO's board the right to determine the 'fair value' of the company in the event of a takeover attempt, McBride said.

"SCO's stock, which was trading in the $20 range in September 2003, has dropped below $4 in recent weeks. 'We are very concerned about the current price of the stock vis-a-vis what we think the long-term value of the company is,' McBride said. 'The disparity between these two is definitely at the core of what we put in place.'"

And a bit more from StockHouse USA:

"Under the terms of the rights plan, preferred stock purchase rights will be distributed as a dividend at the rate of one Right for each share of SCO's common stock held by stockholders of record as of the close of business on August 30, 2004. The plan would be triggered if a person or group acquires beneficial ownership of 15% or more of the Company's common stock other than pursuant to a board-approved tender or exchange offer or commences, or publicly announces an intention to commence, a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock.

"Details of the shareholder rights plan are outlined in a letter that will be mailed to all SCO shareholders as of the record date. In addition, a copy of the rights plan will be filed with the Securities and Exchange Commission as an exhibit to the Company's Current Report on Form 8-K."

All in all, it was a sad day in SCOville.

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