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SCO's 10Q - Oops!
Tuesday, September 20 2005 @ 01:42 PM EDT

SCO's 10Q for the third quarter is now filed, and there appears to have been some kind of unfortunate miscommunication between SCO Legal (litigation) and SCO Legal (corporate), and they need to hurry and get on the same page quick, before Judge Kimball notices.

Here's hoping Judge Kimball doesn't read Groklaw.

Or the SEC, for that matter.

I'd send an email to SCO to warn them, but I worry that then they'd try to trace my whereabouts and do heaven-knows-what next. Not that character assassination isn't fascinating. Anyhow, I know *SCO* reads Groklaw, so they can take this as their heads up.

You'll remember that in SCO's Answer to Novell's Counterclaims, SCO denied Novell's claim that the Sun and Microsoft licenses were part of their SCOsource program and claimed that "SCO announced that initiative in January 2003 but did not enter into a SCOsource agreement until August 2003".1

Oh, really? What did SCO tell the SEC in their 10-Q for the quarterly period ended April 30, 2003?

Our fiscal year ended October 31, 2003 was the first full year we were profitable in our operating history. Our profitability in fiscal year 2003 resulted primarily from our SCOsource licensing initiatives. . . .

We initiated the SCOsource licensing effort in fiscal year 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements during fiscal year 2003 and generated $25,846,000 in revenue. . . .

The SCOsource revenue generated in the third quarter and first three quarters of fiscal year 2003 was from two contracts executed with Sun Microsystems (“Sun”) and Microsoft Corporation (“Microsoft”).

In its latest 10Q, SCO says this:

The Company’s SCOsource revenue to date has been primarily generated from agreements to utilize the Company’s UNIX source code as well as from intellectual property compliance agreements. . . .

In an effort to protect our UNIX intellectual property, we initiated our SCOsource business. The initiatives of this business include seeking to enter into license agreements with UNIX vendors and offering SCOsource IP agreements to Linux and other end users allowing them to continue to use our UNIX source code and derivative works found in Linux. . . .

Our year ended October 31, 2003 was the first full year we were profitable in our operating history. Our profitability for the year ended October 31, 2003 resulted primarily from our SCOsource initiatives. . . .

Our future SCOsource licensing revenue is uncertain.

We initiated the SCOsource licensing effort in the year ended October 31, 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements and generated $25,846,000 in revenue.

In their 10-Q for the quarterly period ended April 30, 2005, they said this:

We initiated the SCOsource licensing effort in the year ended October 31, 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements and generated $25,846,000 in revenue.

And here's what they said in their 10-Q/A for the quarterly period ended January 31, 2004:

To offset the decline in our UNIX business and review the status of our UNIX licensing and sublicensing agreements, we initiated our SCOsource licensing initiatives in January 2003. These initiatives now include, among others, seeking to enter into license agreements with UNIX vendors and implementing a worldwide program offering SCOsource intellectual property (“IP”) licenses to Linux end users allowing them to continue to use our UNIX source code and derivative works found in Linux. Our SCOsource efforts resulted in the execution of two significant vendor license agreements during fiscal year 2003.

As you can see, they are telling the SEC that the millions they took in from Sun and Microsoft was "SCOsource revenue".

(Memo to SCO: August isn't in the first two quarters of the year.)

Oh dear. Poor SCO. What to do? What to do?

Here's an idea. Let's all just tell the truth. My mom always told me that was the best policy, because then you don't have to keep track of things, like what you said two years ago to the SEC, because when you tell the truth, all you have to do is remember the way it really was. Here's what SCO told the SEC in its 10-Q for the quarter ending April 30, 2003:

During the quarter ended April 30, 2003, the Company recognized its first licensing revenue from its intellectual property initiative, SCOsource. . . .

And that's not all they wrote.

Here's the rest about SCOsource from the 2003 10Q:

Warrant Agreement

During the quarter ended April 30, 2003, the Company issued a warrant to a SCOsource licensee. The warrant allows the licensee to acquire 210,000 shares of the Company’s common stock at an exercise price of $1.83 per share for a term of five years from the date of grant. Because the warrant was issued for no consideration to the SCOsource licensee, the Company has recorded the fair value of the warrant of $500,000, as determined using the Black-Scholes option-pricing model, as a warrant outstanding during the quarter ended April 30, 2003 and reduced license revenue accordingly. Assumptions used in the Black-Scholes option-pricing model to estimate fair value were the following: estimated fair value of common stock of $2.40 per share; risk-free interest rate of three percent; expected dividend yield of 0 percent; volatility of 236 percent; and term of 5 years. . . .

Recent Developments

During recent quarters, we have experienced a decline in our product and services revenue primarily attributed to the worldwide economic slowdown, lower information technology spending and increased competition in the operating system market. However, we have implemented cost reduction measures to decrease personnel and excess facilities and have significantly reduced our overall operating expenses. These measures, combined with the revenue from our SCOsource licensing initiative, have resulted in the first profitable quarter in our history.

Over 95 percent of our revenue has been derived from UNIX related products and services. During the quarter ended April 30, 2003, we recognized $8,250,000, or 39 percent of our quarterly revenue, from our intellectual property licensing initiative, SCOsource, launched in January 2003.

One of the assets we acquired from Tarantella was the intellectual property rights to UNIX. These rights had initially been developed by AT&T Bell Labs and over 30,000 licensing and sublicensing agreements have been entered into with approximately 6,000 entities. These licenses led to the development of several proprietary UNIX-based operating systems, 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. We believe these operating systems are all derivatives of the original UNIX source code owned by us.

We initiated the SCOsource effort to review the status of these licensing and sublicensing agreements and to identify others in the industry that may be currently using our intellectual property without obtaining the necessary licenses. This effort resulted in the execution of two license agreements during the April 30, 2003 quarter. The first of these licenses was with a long-time licensee of the UNIX source code which is a major participant in the UNIX industry and was a “clean-up” license to cover items that were outside the scope of the initial license. The second license was to Microsoft Corporation (“Microsoft”), and covers Microsoft’s UNIX compatibility products, subject to certain specified limitations. These license agreements will be typical of those we expect to enter into with developers, manufacturers, and distributors of operating systems in that they are non-exclusive, perpetual, royalty-free, paid up licenses to utilize the UNIX source code, including the right to sublicense that code.

The amount that we receive from any such licensee will generally depend on the license rights that the licensee previously held and the amount and level of our intellectual property the licensee desires to license. The two licensing agreements signed by us to date resulted in revenue of $8,250,000 during the April 30, 2003 quarter and provide for an aggregate of an additional $5,000,000 to be paid to us over the next three quarters. These contracts do not provide for any payments beyond 2003, except that Microsoft was granted the option to acquire expanded licensing rights, at its election, that would result in additional payments to us if exercised. In connection with the execution of the first license agreement, we granted a warrant to the licensee to purchase up to 210,000 shares of our common stock, for a period of five years, at a price of $1.83 per share. This warrant has been valued, using the Black-Scholes valuation method, at $500,000. Because the warrant was issued for no consideration, $500,000 of the license proceeds have been recorded as warrant outstanding and the license revenue reduced accordingly.

SCO needs better paralegals, I think. Someone who can keep track of all the pukey details, like remembering that SCO called Sun a "SCOsource licensee" and when SCOsource licenses were first entered into.

Nope. Thanks, loads. But I'm waaaay too busy helping SCO from afar.

So, how is a girl supposed to know which story is true? Here's how I figure: if you tell the SEC something that turns out not to be true, you can get in big trouble. Doing the same thing to a court doesn't seem to have immediate consequences, so I am guessing what they told the SEC is the truth, the whole truth, and nothing but the truth.

Oh, wait. That expression is for when you are testifying in a court of law. Sheesh. You're supposed to tell the truth there too. Now what can SCO do? Just throw themselves on the mercy of the court, I guess. Nah. That's for criminal cases. This is still just civil.

Well, I don't know what SCO can do, but I doubt fancy schmancy legal wordsmithing can resolve this problem. Unless I am missing plenty, there is no way you can match up the two writings, and for the life of me, I don't see how both can be true.


1See Groklaw's side-by-side chart of Novell's Counterclaims and SCO's Answers:

Novell: 37. As part of Caldera's rebranding efforts and shift in business strategy, Caldera purportedly initiated a review of its intellectual property rights. This effort culminated in the launching of a licensing initiative, which it called SCOsource, in January 2003. SCOsource, as described in further detail below, was an effort by Caldera to expand the revenue base of a company that had never before been profitable.

SCO: 37. Admits that SCO launched the SCOsource initiative to review, enforce, and defend SCO's ownership of its UNIX intellectual property (including copyrights); admits that SCO announced that initiative in January 2003 but did not enter into a SCOsource agreement until August 2003; and denies each and every other allegation of ¶37. . . .

Novell: 50: As part of the SCOsource program, SCO entered into at least two license agreements. These licenses related to the use of UNIX technology by the licensees. The first of these licenses was with Sun Microsystems, Inc. ("Sun"). The second license was with Microsoft Corporation ("Microsoft") and purportedly covers Microsoft's UNIX compatibility products. On information and belief, through these licenses SCO broadened the rights of Sun and Microsoft to use SVRX code.

SCO: 50. Admits that SCO, through its SCOsource division, entered into agreements related to UNIX and Unixware with Sun Microsystems, Inc., and Microsoft Corporation (in that order) and that the Microsoft agreement covered UNIX compatibility products; but denies each and every other allegation of ¶50, including the allegation that the Sun and Microsoft agreements were part of the SCOsource licensing program.


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