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To read comments to this article, go here
"Some Foreign Regulators Have Initiated Or ... May Initiate Legal Actions Against Us..."
Wednesday, May 18 2005 @ 07:17 PM EDT

SCO would like somebody to buy some stock, so it has filed a prospectus with the SEC, and after reading their tales of woe, I'm sure you will not hesitate to give them a hand. The document is called "A Post-Effective Amendment No. 1 to Form S-3 on Form S-1." But what I found stood out the most was this simple sentence, which I don't recall seeing earlier:

 In addition, regulators or others in the Linux market and some foreign regulators have initiated or in the future may initiate legal actions against us, all of which may negatively impact our operations and future operating performance.

Do you remember seeing that before? I don't.

[UPDATE: I see some are jumping off a cliff over on Slashdot. Don't overread. Groklaw, for those who are new, is a working research site. We work in public. This is a request for volunteers to check earlier filings. Note that the word SEC does not appear in this article anywhere. The wording that was new to me is "and some foreign regulators". If you cross check it with the wording here, for example, you will see the difference.]

[2nd UPDATE: SCO has put out a statement that there is no SEC investigation, and it added this about the language that seemed new to me:

"About two years ago, there was some initial legal activity in Germany and in Australia," said SCO spokesman Blake Stowell. "Because of that, for about the last six quarters or so, we have put those exact words in our quarterly SEC filings."

So I checked. I believe Mr. Stowell is mistaken. Similar language first appeared in quarterlies in the January 31, 2005 10Q, as far as our investigation can find, not earlier. Here is the previous language we have found so far, with urls so you can do your own checking:

  • 10Q For the quarterly period ended July 31, 2004 --
    In addition, 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.
  • 10Q/A For the quarterly period ended July 31, 2004 (filed 04/01/2005) --
    In addition, 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.
  • 10Q For the quarterly period ended April 30, 2004 --
    In addition, 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.
  • 10Q/A For the quarterly period ended April 30, 2004 (filed April 1, 2005) --
    In addition, 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.
  • 10Q For the quarterly period ended JANUARY 31, 2004 --
    In addition to these above-mentioned actions, other regulators or others in the Linux community may initiate legal actions against us, all of which may negatively impact our operations or future operating performance.
  • 10Q/A For the quarterly period ended January 31, 2004 (filed 4/1/2005 ) --
    In addition to these above-mentioned actions, other regulators or others in the Linux community may initiate legal actions against us, all of which may negatively impact our operations or future operating performance.
  • 10Q For the quarterly period ended JULY 31, 2003 --
    In addition to these above-mentioned actions, other regulators or others in the Linux community may initiate legal actions against us, all of which may negatively impact our operations or future operating performance.

So, it seems the exact words about foreign regulators did not appear in all their 10Qs for the last 6 quarters or so, unless I'm missing something. If you can find it, send it to me and I'll gladly post it. But I can't find anything prior to January of 2005. The question is, what does it mean, if anything? Only SCO can explain. I'm just noting the language. And my eternal question is this: why not just tell us the truth, the whole truth, and nothing but the truth? If SCO did that, who'd need Groklaw?]

Some other new elements I noted:

The resale of common shares by BayStar Capital II, L.P., the selling stockholder ("BayStar"), may have an adverse impact on the market value of our stock and the existing holders of our common stock.

        We previously had an effective registration statement on Form S-3 relating to the sale or distribution by BayStar as a selling stockholder of the 2,105,263 shares of common stock issued to BayStar in connection with our repurchase completed in July 2004 of all Series A-1 shares previously held by BayStar. When we failed to file our Form 10-K in a timely fashion, we became ineligible to use Form S-3, our registration statement ceased to be effective and BayStar's ability to resell shares pursuant to that registration statement terminated. This prospectus is part of this registration statement on Form S-1, which is a post-effective amendment to the previous Form S-3, to register the resale of BayStar's shares. Upon this registration statement being declared effective by the SEC, BayStar will again be able to resell its shares. The shares that may be sold or distributed pursuant to this registration statement, upon being declared effective by the SEC, will represent approximately 6 percent of our issued and outstanding common stock. The sale of the block of stock to be covered by this registration statement, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market.

Our stock price could decline further because of the activities of short sellers.

        Our stock has attracted the interest of short sellers. We believe the activities of short sellers have in the past and could in the future further reduce the price of our stock or inhibit increases in our stock price.

There is also this:

Recent Developments. 

   As described elsewhere in this prospectus, we issued shares and granted options under our Equity Compensation Plans without complying with registration or qualification requirements under federal securities laws and the securities laws of certain states. As a result, certain plan participants have a right to rescind their purchases of shares under the Equity Compensation Plans or recover damages if they no longer own the shares or hold unexercised options, subject to applicable statutes of limitations. Although we are evaluating the possible actions we may take in response to these securities law compliance issues, we may make a rescission offer to certain plan participants entitled to rescission rights subject to obtaining required regulatory approvals. If our potential rescission offer is made and accepted by all plan participants holding certain ESPP shares and all shares acquired from the exercise of stock options, or such participants otherwise make rescission claims against us, we could be required to make aggregate payments to these plan participants of up to $893,000. This amount is based on shares issued pursuant to the ESPP and shares issued upon the exercise of stock options that have been retained by plan participants as of January 31, 2005 and excludes interest and other charges we may be required to pay. We may face additional rescission liability to plan participants holding unexercised stock options in California, Georgia and possibly other states, and regulatory authorities also may require us to pay fines or impose other sanctions on us.

The gloom of the filing is punctuated throughout with guesses as to what the problem might be. It's all Linux's fault, don't you know, but Novell is to blame too, they say, and others in the Linux community. That's why their SCOsourse offer isn't being snapped up. They so lack any self-awareness, these guys. They spent money on lawyers like a drunken sailor, and now it's Novell and Linux's fault they are running out of money. I can say amen to this part, though:

We are unlikely to generate significant revenue from our SCOsource business unless and until we prevail in our SCO Litigation. Additionally, the success of these initiatives may depend on the strength of our intellectual property rights and contractual claims regarding UNIX, including the strength of our claim that unauthorized UNIX source code and derivative works are prevalent in Linux.

Finally. They understand. It's the bottom line. Unless their claims are backed up with proof and they prevail in the courtroom, it's unlikely anyone will be interested in a SCOsource license. That's how it works. You have to actually have a legal claim, for starters. Then you have to demonstrate that you have a legitimate claim. If you don't, there is a very good chance that no one will take your bullying seriously. And that is exactly what happened. No one did this to SCO. They did it to themselves. And that is the horrific part. It's been like watching a kidnapping, followed by a suicide by cops. It is sad and it makes no sense, but you can't stop watching. But watching doesn't cause or assist in the destruction, not even if you shared your thoughts with the neighbors while you were watching.

Nobody made SCO follow this course. Now that it hasn't worked out well for them so far, a sane response would be to stop and alter course. Isn't that what you do when a plan fails in your life? But no. SCO is looking around for someone to blame, instead. That is how this filing reads to me. But read it for yourselves. You can form your own impressions.


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