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
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

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


To read comments to this article, go here
When you come to a fork in the road...
Sunday, May 21 2006 @ 10:23 PM EDT

Yogi Berra said once, "When you come to a fork in the road, take it."

It's funny, until someone actually takes that advice literally and tries to go down two conflicting roads at once. For example, take SCO's Reply to Novell's Counterclaims. In paragraph 50, SCO tells the court this:

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.

Say, what?

Now, I hate to embarrass anybody, but love for truth compels me to point out that SCO said something that sounded very much like the Sun and Microsoft agreements were indeed SCOsource licenses in a 10Q filed for the quarterly period ended April 30, 2003. Now, knowing as I do that there are laws about telling the truth to the SEC and that when you go to court you are supposed to tell the truth, the whole truth and nothing but the truth so help you God, I'm puzzled as to how SCO will explain what seems to be a direct contradiction. Here's what SCO filed with the SEC for the quarter ending April 20, 2003:

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.

During the course of the review of our intellectual property rights, we became concerned generally about the existence of UNIX source code in the Linux operating system. We have discovered that UNIX source code and unauthorized derivatives of UNIX source code are prevalent in the Linux kernel. In March 2003, we filed a complaint against IBM alleging, in part, that it had breached its license agreement with us by, among other things, inappropriately contributing UNIX source code to the open source community and seeking to use its knowledge and methods with respect to UNIX source code and derivative works and modifications licensed to it to destroy the value of the UNIX operating system in favor of promoting the adoption by businesses of the Linux operating system, of which it has been a major backer. Unless IBM cures the breaches we have identified, we will terminate the license agreement we have with it that permitted the use of our UNIX source code in the development of its AIX operating system. In May, 2003, we sent letters to approximately 1,500 large corporations notifying them that the use of the Linux operating system may be a violation of our intellectual property rights.

The success of our SCOsource licensing initiative, at least initially, will depend to a great extent on the perceived strength of our intellectual property and contractual claims and our willingness to enforce our rights. Many, particularly those in the open source community, dispute the allegations of infringement that we have made.

While our SCOsource initiative has already resulted in significant revenue during the April 30, 2003 quarter and we continue negotiations with other industry participants that we believe will lead to additional contracts, as a result of the factors outlined above, we are unable to predict the level or timing of future revenue from this source, if any.

THREE AND SIX MONTHS ENDED APRIL 30, 2003 AND 2002

Revenue

Revenue was $21,369,000 for the second quarter of fiscal year 2003, and $15,476,000 for the second quarter of fiscal year 2002, representing an increase of $5,893,000, or 38 percent. This increase was attributable to $8,250,000 in licensing revenue, which we generated for the first time, offset by a decline in product revenue of $1,484,000 and a decline in services revenue of $873,000. Revenue was $34,909,000 for the first two quarters of fiscal year 2003, and $33,389,000 for the first two quarters of fiscal year 2002, representing an increase of $1,520,000, or 5 percent. This increase was attributable to $8,250,000 in licensing revenue, offset by a decline in product revenue of $5,300,000 and a decline in services revenue of $1,430,000.

As discussed above in Recent Developments, we are unable to predict the level of licensing revenue we may recognize in future periods. During the first two quarters of fiscal year 2003, our product and service revenue continues to be adversely impacted by the continuing worldwide economic slowdown and from the related decrease in information technology spending, as well as from increased competition from other operating system products. Excluding licensing revenue from SCOsource, revenue from international customers accounted for 48 percent of operating system platform revenue for the second quarter of fiscal year 2003 and 50 percent for the second quarter of fiscal year 2002, and revenue from international customers accounted for 47 percent of operating system platform revenue for the first two quarters of fiscal year 2003 and 50 percent for the first two quarters of fiscal year 2002. The decrease in international revenue for the second quarter and first two quarters of fiscal year 2003 compared to the second quarter and first two quarters of fiscal year 2002 is primarily attributable to decreased revenue in our Europe, Middle East and Africa (“EMEA”) region.

Products.

Products revenue was $11,122,000 for the second quarter of fiscal year 2003 and $12,606,000 for the second quarter of fiscal year 2002, representing a decrease of $1,484,000, or 12 percent, and representing a slight increase in products revenue from our first quarter of fiscal year 2003. Products revenue was $22,212,000 for the first two quarters of fiscal year 2003 and $27,512,000 for the first two quarters of fiscal year 2002, representing a decrease of $5,300,000, or 19 percent.

The decrease in products revenue during the second quarter of fiscal year 2003 from the second quarter of fiscal year 2002 as well as during the first two quarters of fiscal year 2003 from the first two quarters of fiscal year 2002 was attributable to decreased sales of OpenServer and UnixWare products primarily resulting from a decrease in information technology spending caused by the worldwide economic slowdown. This impact was largely felt in our distribution channel in the Americas and Europe. Our UNIX-based products revenue has also declined due to increased competition in the operating system market from other software offerings.

OpenServer and UnixWare products are the largest components of the Company’s products revenue. For the second quarter of fiscal year 2003, OpenServer revenue was $5,750,000, or 52 percent of total products revenue and UnixWare revenue was $3,017,000, or 27 percent of total products revenue. For the first two quarters of fiscal year 2003, OpenServer revenue was $10,491,000, or 47 percent of total products revenue and UnixWare revenue was $7,181,000, or 32 percent of total products revenue.

Licensing.

Licensing revenue was $8,250,000 for the second quarter and first two quarters of fiscal year 2003 as compared to no revenue for the second quarter and first two quarters of fiscal year 2002. This revenue is the result of our intellectual property licensing program, SCOsource, launched in January 2003. We initiated SCOsource for the purpose of protecting the significant intellectual property rights we own surrounding the UNIX source code. The licensing revenue in the second quarter of fiscal year 2003 represents a portion of the fees associated with two licenses executed during the quarter. Under the terms of one of these agreements, we will receive an additional $5,000,000 over the next three quarters. The agreements also grant the right to one of the licensees to acquire an expanded license upon the payment of additional fees. We are in discussions with additional potential licensees, but are unable to predict the amount or timing of the revenue we might expect from this source in future periods. . . .

Our SCOsource licensing revenue to date has been generated from license agreements that are non-exclusive, perpetual, royalty-free, paid up licenses to utilize our UNIX source code, including the right to sublicense. We recognize revenue from licensing agreements when a signed contract exists, the fee is fixed and determinable, collection of the receivable is probable and delivery has occurred. If the payment terms extend beyond our normal payment terms, then revenue is recognized as cash is received.... Our future SCOsource licensing revenue is uncertain.

We initiated the SCOsource licensing effort in January 2003 to review the status of UNIX 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. These two 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. Due to a lack of historical experience and the uncertainties related to SCOsource licensing revenue, we are unable to estimate the amount and timing of future licensing revenue, if any. If we do receive revenue from this source, it may be sporadic and fluctuate from quarter to quarter. SCOsource licensing revenue is unlikely to produce stable, predictable revenue for the foreseeable future.

Well. If what SCO is telling the court now is true, I certainly hope that no one bought any stock from SCO Group under the false impression that Microsoft and Sun Microsystems executed two SCOsource licensing agreements during the April 30, 2003 quarter. Unless I don't understand what I'm reading, which is always possible, I suppose, I got the distinct impression that the SEC filing says those two licenses were SCOsource licenses. Now, I'm no lawyer and surely no expert on SEC filings, but I can read. Perhaps SCO needs to file an amended April 30, 2003 filing? How does that work?

But, if they wish to start correcting, I think they might need to fix this 10-K for the fiscal year ended October 31, 2003 too:

SCOsource Business

Background

We acquired our rights relating to the UNIX source code and derivative works and other intellectual property rights when we purchased substantially all of the assets and operations of the server and professional services groups of The Santa Cruz Operation, Inc. in May 2001. The Santa Cruz Operation (now known as Tarantella, Inc.) had previously acquired such UNIX source code and other intellectual property rights from Novell in September 1995, which were initially developed by AT&T Bell Labs. Through this process, we acquired all UNIX source code, source code license agreements with thousands of UNIX vendors, all UNIX copyrights, all claims for violation of the above mentioned UNIX licenses and copyrights and other claims, and the control over UNIX derivative works. The UNIX licenses we obtained have led to the development of several proprietary UNIX-based operating systems, including but not limited to our own UnixWare and OpenServer products, Sun's Solaris, IBM's AIX, SGI's IRIX, Hewlett-Packard's UX, Fujitsu's ICL DRS/NX, Siemens' SINIX, Data General's DG-UX, and Sequent's DYNIX/Ptx. These operating systems are all derivatives of the original UNIX source code owned by us.

The success of our SCOsource business depends on our ability to protect our proprietary UNIX source code as well as our copyrights and other intellectual property rights. To protect our proprietary rights, we rely primarily on a combination of copyright laws, contractual rights and a detailed legal strategy. We have dedicated internal personnel and other resources to our SCOsource business and intend to dedicate additional SCOsource sales personnel in fiscal year 2004.

In January 2003, we commenced our first SCOsource initiative in which, as described in more detail below, we began reviewing the status of our existing UNIX license agreements with UNIX vendors and to identify those in the software industry that may be using our intellectual property without obtaining the necessary licenses. As part of this process, we became aware that parts of our proprietary UNIX source code and derivative works have been included in the Linux operating system without attribution or our authorization in violation of our intellectual property rights. To respond to this concern, we have instigated additional SCOsource initiatives related to end users of Linux, which are described in more detail below. Additionally, we filed a complaint against IBM in March 2003 alleging that IBM breached its license agreement with us related to its efforts to promote and support the Linux operating system. We describe our legal action against IBM in more detail below under Part I, Item 3 of this Form 10-K.

SCOsource Initiatives

Reviewing and Evaluating Existing UNIX Licenses. As mentioned above, in January 2003, we began reviewing the status of our existing UNIX license agreements with UNIX vendors. This review is continuing and we will continue to expand our efforts in fiscal year 2004. During fiscal year 2003, we entered into two significant license agreements. The first of these licenses was with Sun, a long-time UNIX licensee and a major participant in the UNIX industry. The second license was to Microsoft and covers Microsoft's UNIX compatible products, subject to certain specified limitations. The Sun and Microsoft license agreements accounted for $25,846,000 of our revenue in fiscal 2003, representing approximately 33 percent of our total revenue for such period.

Warning Letters to Linux End Users. In response to our belief that parts of our UNIX source code and derivative works have been inappropriately included in the Linux operating system, in May 2003, we sent letters to approximately 1,500 large corporations notifying them that using the Linux operating system may violate our asserted intellectual property rights. Subsequently, we began contacting Linux end users about their use of Linux, and in December 2003, we began sending additional letters to selected Fortune 1000 Linux end users specifically asserting that using the Linux operating system in a commercial setting violates our rights under the United States Copyright Act, including the Digital Millennium Copyright Act, because certain copyrighted application binary interfaces, or "ABI Code," have been copied from our copyrighted UNIX code base and derivative works and contributed to Linux without proper authorization and without copyright attribution. In the letter we also warned Linux end users that we intend to take appropriate actions to protect our rights and that they may not use our copyrighted code except as authorized by us.

Linux End User Intellectual Property ("IP") License Initiative. In August 2003, we first offered to Linux end users our IP license in the United States and recently began offering the license in countries outside the United States. The license permits the use of our intellectual property, in binary form only, as contained in the Linux operating system. By purchasing the license, customers will properly compensate us for our UNIX intellectual property as currently found in Linux.

Requiring UNIX Licensees to Certify Full Compliance with License Agreements. Beginning in December 2003, we began delivering written notice to a large number of our UNIX licensees that they must certify in writing to us that they are in full compliance with their license agreements, including certification that they are not using our proprietary UNIX code and derivative works in Linux, have not allowed unauthorized use of our licensed UNIX by their employees or contractors and have not breached confidentiality provisions relating to licensed UNIX code.

Intellectual Property Protection Generally

Our SCOsource initiatives rely primarily on a combination of contract rights, copyright laws and a detailed legal strategy. We also require that our employees and consultants sign confidentiality and nondisclosure agreements. We also regulate access to, and distribution of, our documentation and other proprietary information.

We cannot guarantee the success of our SCOsource initiatives and other efforts to protect our intellectual property rights, but we will continue to seek to enforce and pursue these rights through public awareness and the legal system, if necessary. Additionally, we cannot be certain that we will succeed in preventing the future misappropriation of our copyrights or that we will be able to prevent the unauthorized use of our technology in the future.

Current Status and Strategy

In fiscal 2004, we will continue to pursue our SCOsource initiatives. We will continue to review and evaluate our UNIX license agreements and pursue large vendor contracts similar to those completed in fiscal year 2003 with Sun and Microsoft. Additionally, we will further pursue our SCOsource IP license initiative with end users of Linux. To accomplish this objective, we plan to increase our SCOsource sales team in fiscal year 2004, and may also make the SCOsource IP license available through select SCO resellers. ...

Risk Factors

We do not have a history of profitable operations.

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 initiative. If we do not receive SCOsource licensing revenue in future quarters and our revenue from the sale of our operating system platform products and services continues to decline, we will need to further reduce operating expenses to maintain profitability or generate positive cash flow. ...

Our future SCOsource licensing revenue is uncertain.

We initiated the SCOsource licensing effort in January 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. Due to a lack of historical experience and the uncertainties related to SCOsource licensing revenue, we are unable to estimate the amount and timing of future SCOsource licensing revenue, if any.

So, if the Sun and Microsoft licenses were not SCOsource licenses, they certainly fooled me. Not only did the SEC filings give me the impression those two licenses were SCOsource licenses, my memory was that this is what SCO executives told us at the time that they were. So I started out searching Groklaw's Quote Database, using the keyword SCOsource, and this is what I found:

  • Darl McBride, quoted in eWeek February 26, 2003:

    McBride said SCO expected revenue for the second quarter, ending April 30, 2003, to be in the range of $23 million to $25 million. That forecast was based on anticipated revenue from its current operating platforms of $13 million to $15 million, and from $10 million in revenue from its SCOsource licensing initiative.

  • Darl McBride and Robert Bench, May 28, 2003 2003 Q2 earnings conference call:

    McBride: OK, so let's go ahead and dive into it. As we announced today, for the second quarter of fiscal 2003 ended April 30th, The SCO group reported net income of 4.5 million, or 33 cents per diluted share, on revenue of 21.4 million, compared to a net loss of 6.6 million, or 47 cents per diluted share, on revenue of 15.5 million for the comparable quarter of the prior year. The company reported a net loss of 724,000, or 6 cents per diluted share, on revenue of 13.5 million for the first fiscal quarter of 2003.

    Revenue for the second quarter of fiscal 2003 from the company's Operating System platforms was 13.1 million, and revenue from its ... from our SCOsource licensing initiative was 8.3 million. During the quarter ended April 30th, 2003 the first two licensing agreements relating to our SCOsource initiative, our division for the licensing and protecting the company's Unix intellectual property, derived the company of 8.8 million in cash and added 6.1 million to gross margin.

    We have over six thousand source code licensees of our Unix Operating System, and we believe the SCOsource initiative will continue to gain momentum as we pursue enforcement of the company's intellectual property rights. ...

    Bench: This past quarter marked the completion of our consolidation and restructure of the company's worldwide operations. With thirteen offices and sales activities in 82 countries, our ability to support large and small customers is unequaled for a company our size. We continue to expand our support and product offerings to more than 11 thousand solution provider partners who serve small businesses. Of the 21.4 million in revenue, 61 percent or 13.1 million, was related to our core Unix operating system platforms, of which 11.1 million was products, and 2 million was services. 39 percent, or 8.3 million, of revenues was generated through the SCOsource initiative....

    McBride: Now let's shift gears and talk about the SCOsource part of the business. Two quarters ago when we did our conference call we had, I believe seven people on the call. They just told me now that we have two hundred and forty-four on the call today. My guess is that a number of you tuned it today to hear a number of things we're gonna talk about now of respect to this new licensing division that we created during the second quarter. SCOsource is set up to go out and take our Unix source code, continue to move it forward, continue to propagate it and to protect the property rights that we have there. As we said earlier, we have six thousand licensees of our Unix source-code. During the second quarter we had two big deals that we signed. The two large companies -- one is unnamed at this point based on contractual obligations that we have. I wasn't sure if we were going to be talking about that today or not, but as it stands contractually we will not be talking about that on this call.

    The second licensee is the Microsoft Corporation. We announced that deal last week. In that announcement we essentially said that Microsoft has licensed the Unix source code to ensure compatibility for Windows and Unix customers. The Unix source code license will help with Microsoft's product called Services for Unix. And Microsoft reinforced in their statements that they value the intellectual property that we hold and the source-code license that they took will help them, as they move forward, with integrating the Unix products into Windows. ...

    Operator: Moving on we'll take our next question from Robert Mina (sp??) of Copper Beech Capital.

    Mina: Yes, Thank You. Can you please comment on the visibility of SCOsource revenue stream? How long can we anticipate that to be a contribution to revenue based on the two contracts you've signed? And can you tell us updates on any other contracts that you are in negotiation with right now. Thank you.

    McBride: Sure. Great Question. We started this initiative just this last quarter. As we now sum here, we had 8.2 million of revenue that showed up, and as we said for the coming quarter we see SCOsource contributions being roughly a third. And so far we have only signed two contacts. We see we have visibility currently, even on the contracts we signed that go several quarters out from where we sit right now. As we look at the other deals that are in the pipeline, that we have not signed yet, you know the opportunity on the SCOsource side I would describe as being significant. ...

    Jackson: Sort of a follow-up on the SCOx, as it relates to the two big contracts with Microsoft and the other one. Can you apportion what value of the total contract size relates to the SCOsource type licenses in arrears vs. product sales going forward? Wait, maybe I should rephrase. What portion of the contract value in either or both instances relates to new products that might be tied in to SCOx?

    McBride: Yeah. The deals that have been done on SCOsource side relate more, not too much to our direct lines under SCOx product line, but more to taking our core thread of Unix that we own and giving access to portions of that to these other companies to be able to integrate their product lines better from a Unix operability standpoint. So ....

    Jackson: And I guess what I'm asking is it on a one shot deal or is it ....

    McBride: Yeah. So, what we have here is the first few SCOx deals that we've targeted, we've chosen to bring more money in over several quarters as opposed to a longer term type of royalty stream if you will. So we've got multiple quarters, several quarters of revenue recognition from these original deals. We were last, if you remember on our last call, we were looking at trying to raise some equity capital from the financial markets. We actually had people stepping up ready to invest in the company. We decided not to take those investments, because we were able to generate significantly larger amounts of cash through SCOsource that was non-dilutive. So, the first part was to go ahead and shore up the balance sheet, as we have done. We are debt-free now, cash is growing, we are in good shape on the cash side. As we go forward we expect to start looking at SCOsource licensing deals that will have even a longer term impact, than this over several quarters.

  • Darl McBride, August 14, 2003 conference call on 2003 Q3 Earnings:

    McBride: OK, thank you. And thank all of you for joining our call today. Our quarter that ended July 31, 2003, marked the second consecutive quarter of strong positive earnings. Revenue attributed to our SCOsource intellectual property licensing initiative has generated positive operating margins and has contributed to positive case flows from operations. These activities during the past two quarters have nearly tripled our cash balance and thus strengthening our balance sheet. Over the past four quarters our market cap has gone from under 10 million dollars to over 140 million dollars making SCOX one of the top performing stocks on the NASDAQ market.

    In a moment, Bob Bench, our CFO will give a detailed analysis of the quarter. However, before that analysis, I'd like to review the actions we've taken over the last year since my joining SCO as the Chief Executive Officer that have made the significant accomplishments possible and that will continue to drive greater success in the future.

    We restructured the company to reduce expenses and better manage our assets.

    We reestablished the SCO brand. The SCO brand is 20 plus years old, known worldwide and strongly associated with Unix.

    We formed SCOsource to monetize our Unix intellectual property. ...

    What I'd like to do now is throw the ball over to Bob and have him run with it a bit with respect to more detailed analysis on how the quarter went.

    Robert Bench: Thanks Darl.

    The company has continued to adhere to a viable operating model that will create additional efficiencies in our worldwide operations. We increased the percent of revenue invested in product development this past quarter, while slightly decreasing our other operating costs.

    Of the 20.1 million in revenue, 12.8 million of 64% was related to our core Unix operating system platform. And of the 12.8 million, 10.8 million was product related and 2 million was from services. The other 36% of our 20 million in revenue, or 7.3 million in revenue, was generated from our SCOsource initiatives. Our gross margin of 15.5 million or 77% was slightly higher than last quarter and in line with our operating model....

    Our SCOsource activities and initiatives and our recent announcements regarding Linux may also be causing customers to lengthen their purchase and implementation cycle as they contemplate the appropriate operating platform of the future and asses the current risks related to Linux. Our products are continuing to be used in new businesses and our present cutomers are expanding their current operations. ...

    Operator: And next we'll go to Robert McMillan from IDG. Please go ahead.

    McMillan: Yeah. Actually my question was pretty much what Maureen was ... just asked you. Could you ... maybe you could just tell me a little bit more about this SCOsource revenue, then. Could you tell me where's that going to be coming from? I mean do you have new licensee technology coming, licensing the Unix source source code or ... how are you going to get 10 to 12 million dollars from SCOsource?

    McBride: Well, as we said in our last call, Robert, a quarter ago, we modeled this thing out and we wanted to... pull out and sign up big industry partnerships, and we would choose to model that in a way that we would have more revenue coming in in bigger blocks over multiple-quarter periods of time as a mechanism to shore up our balance sheet. And then, as we got in to the ... more of the end-use licensing part, we would put in the, you know, the more of the blocking and tackling, per-unit royalty licensing that we would roll out.

    And that's, that's really on-track with where we are. We continue to go down the path of having big deals that are done with big companies that provides more of an up-front set of cash payments that come in over multiple quarters, and then this licensing program we just kicked off here over the last couple weeks is something we expect to ramp up, and the the first part in the revenue line-item there with the big blocks coming in isn't something that goes on forever, but on the, you know you get multiple quarter coverage out of that, and then, over time we see the ramp really coming, that shows significant run-up, over time, coming from more of this end-use type of a licensing program.

  • Sun Microsystems VP John Loiacono quoted in eWeek, March 7, 2003:

    Sun Microsystems Inc., whose Solaris operating system is based on Unix, moved quickly Thursday to assure its customers that its licenses are all in order. John Loiacono, vice president of Sun's operating platforms group, told eWEEK Thursday that the company has assured its customers and partners that it has licensing rights to Unix for both SPARC and the recently available x86 systems.

    "As part of a series of licensing agreements, Sun acquired rights to make and ship derivative products based on the intellectual property in Unix. This forms the foundation for the Solaris operating system that ships today," Loiacono said. "Sun's complete line of Solaris and Linux products—including Solaris for the SPARC and x86 platforms, Trusted Solaris, the highly secure operating system, and Sun Linux—are all covered by Sun's portfolio of Unix licensing agreements. As such, Solaris and Sun Linux represent safe choices for those companies that develop and deploy services based on Unix systems."

  • Darl McBride, February 26, 2003, eWeek:
    SCO CEO Darl McBride on Wednesday declined to confirm or deny reports eWEEK has received that SCO is preparing to launch such legal action. But he did confirm that the Lindon, Utah-based firm is expecting to make at least $10 million in revenue in the current financial quarter from its SCOsource licensing initiative.

    SCO, formerly Caldera International Inc., recently created the SCOsource division to create new licensing programs and products for its intellectual property.

    That move followed news last month that the firm was planning to make some users pay for some Unix software they were running, unlicensed, on Linux.

    The first deliverable from SCOsource was the licensing of its Unix shared libraries under a new product license called SCO System V for Linux. That product lets Linux customers run Unix applications, originally written for SCO OpenServer and SCO UnixWare, under Linux in an Intel environment....

    McBride said SCO expected revenue for the second quarter, ending April 30, 2003, to be in the range of $23 million to $25 million. That forecast was based on anticipated revenue from its current operating platforms of $13 million to $15 million, and from $10 million in revenue from its SCOsource licensing initiative.

  • Darl McBride, August 15, 2003, in ZDNET:
    The company said it earned $3.1m (£1.94m), or 19 cents per share, during its fiscal third quarter, compared with a loss of $4.5m, or 35 cents a share, in the year-ago quarter. The company said third-quarter revenue was $20.1m, up from $15.4m a year ago.

    The company said $7.3m of its revenue for the quarter, which ended on 31 July, came from its SCOsource licensing division, which is charged with protecting SCO's Unix-related intellectual property. The company also said it expected fourth-quarter revenue to grow to between $22m and $25m due to expected growth of the SCOsource licensing plan.

    "The magnitude of our SCOsource licensing opportunities and our confidence in the SCOsource revenue pipeline is growing each quarter," the company's chief executive, Darl McBride, said in a statement.

  • Darl McBride, July 10, 2003, ZDNET:
    Speaking to the press in Tokyo Wednesday, Darl McBride, the CEO of SCO Group, repeated his claims that the Linux operating system has source code lifted from Unix.

    He also denied reports that he had come to Japan specifically to meet members of the newly-formed Consumer Electronics Linux Forum.

    "I am here to speak to large Linux vendors about their businesses, so that both sides can find mutually acceptable solutions for the alleged Linux IP infringement issues," said McBride in response to the question about the purpose of his visit to Japan.

    He referred to the lawsuit that SCO filed against IBM as a weapon of last resort, and that he would like to avoid using it again.

    "Actually, Microsoft and Sun Microsystems discussed with us, and got licenses from us. I expect we can repeat it with some Japanese counterparts," said McBride.

    He added that SCO and Hewlett-Packard were in discussions about Unix licensing. However, he did not reveal the names of companies he would meet during the visit.

  • Microsot's Brad Smith, quoted on May 18, 2003 in ZDNET, Microsoft to license Unix code:
    Microsoft will license the rights to Unix technology from SCO Group, a move that could impact the battle between Windows and Linux in the market for computer operating systems.

    According to a statement from Microsoft, the company will license SCO's Unix patents and the source code. That code is at the heart of a $1 billion lawsuit between SCO and IBM, which is aggressively pushing Linux as an alternative to Windows in corporate back shops....

    Late Sunday, Microsoft general counsel Brad Smith said acquiring the license from SCO "is representative of Microsoft's ongoing commitment to respecting intellectual property and the IT community's healthy exchange of IP through licensing. This helps to ensure IP compliance across Microsoft solutions and supports our efforts around existing products like services for Unix that further Unix interoperability." The pact was first reported by the Wall Street Journal.

  • Robin Bloor, IT Director:
    Now Microsoft has stepped in and licensed the source code and patents associated with the Unix operating system from SCO. The stated purpose is to ensure that Microsoft's software complies with SCO's intellectual-property rights and that it can ensure compatibility with Unix software. However, few people believe that to be the major reason for the deal. Most probably, Microsoft wants to stir up the whole argument in the hope of stemming the Linux tide.

    Chris Sontag of SCO immediately claimed that the Microsoft licensing agreement reflected the strength of its intellectual-property suit against IBM. I'm not sure how his logic works here. If IBM already has a license - irrevocable, fully paid up, perpetual etc. then the real implication is that Microsoft was worried that it might have infringed intellectual property. This is possible as Microsoft developed its own version of Unix in the 1980s.

  • Stephen Shankland, July 10, 2003, News.com Sun expands Unix deal with SCO:
    A previously secret licensee of SCO Group's Unix intellectual property has revealed its identity: Unix leader Sun Microsystems.

    SCO's Unix licensing plan got a major boost of publicity in May when Microsoft announced its decision to license Unix from SCO, but Sun actually was the first company to sign on. SCO and Sun confirmed the licensing deal on Wednesday. The pact, signed earlier this year, expanded the rights Sun acquired in 1994 to use Unix in its Solaris operating system. But there's more to the relationship: SCO also granted Sun a warrant to buy as many as 210,000 shares of SCO stock at $1.83 per share as part of the licensing deal, according to a regulatory document filed Tuesday.

    Sun, the No. 1 seller of Unix servers, declined to comment on the option to take a stake in SCO Group. Fortune on Monday published news of the expanded Sun contract.

    Sun's expanded license permits Sun to use some software from Unix System V Release 4 for software components called drivers, which let computers use hard drives, network cards and other devices. Sun needed the software for its version of Solaris that runs on Intel servers, Sun spokesman Brett Smith said. A source familiar with the deal said the new contract was signed in February, but neither Sun nor SCO would comment. ...

    Sun's Smith said the company is being careful to ensure that its Unix intellectual property is "very clean."

    "We've always made sure we're very aboveboard," Smith said. "We've made sure the i's are dotted, the t's are crossed." Before the newest contract was signed, Sun had spent $82 million acquiring rights to use Unix, Smith said. Among Sun's privileges is the right to show Solaris' underlying source code to customers, SCO said....

    Details of Sun's license appeared in a regulatory document that SCO filed to permit various investors to sell 305,000 SCO shares. Of those, 174,000 would be sold by SCO's biggest investor, the Canopy Group, which would see its stake in SCO drop from 41.1 percent to 39.9 percent, according to the filing.

If the Microsoft and Sun licensing agreements were not SCOsource licenses, SCO certainly convinced a lot of people otherwise at the time. By the way, SCO Group didn't have any patent for Microsoft to license, not that has ever come to light that I am aware of. But then, what's a few million between friends? And did you notice that Sun's license covered Linux too, to hear them tell it? So, why isn't that the end of the methods and concepts story right there? If SCO intended to protect methods and concepts, that's a mighty funny way of going about it.

And as long as we're on a truth mission, remember this from Trevor Marshall's interview with Chris Sontag for Byte Magazine, June 16, 2003?

So Why is Linux Being Targeted First?

SCO is targeting Linux first primarily because the Linux source code is open. SCO's lawyers have been poring over the Linux code for much of the past year, looking for fragments and routines which are substantially identical to code from the various releases of UNIX. SCO's "experts" have also found sections of code which SCO believes have been obfuscated—where the order of code execution has been rearranged in a direct attempt to hide its SCO pedigree.

But SCO has been even more thorough. After sifting through e-mails from the Linux developers' mailing list, Sontag says SCO has examples of programmers from AT&T licensees offering to write UNIX code into Linux, and can identify where those UNIX fragments turned up in the codebase.

The lawyers were sifting through emails from LKML for a year? Which lawyers? That takes us back to the summer of 2002, which is when McBride was hired, not January of 2003, as they told the SEC, above, and which is the date Boies Schiller was retained. So, when McBride told Bloomberg News, as reported in the Salt Lake Tribune, the following in August of 2003, was it accurate?

Chief Financial Officer Robert Bench began the selling by SCO insiders, four days after SCO filed the suit against IBM. Bench is selling to help pay a $150,000 tax bill, McBride said. Under the Sarbanes-Oxley law, companies are no longer able to loan executives money to pay taxes or other expenses.

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.

Just exactly when did SCO begin contemplating legal action, if its lawyers were sifting though Linux kernel message boards looking for evidence in 2002? And are these the emails that SCO just filed in December with the court, their "evidence" of allegedly misused materials? After all the code that SCO got the court to order IBM to turn over, they end up filing a bunch of emails it seems they had before discovery began?

But might I inquire, if they told Byte Magazine in 2003 that they could trace from the emails precisely where code ended up in Linux, why aren't they telling the court now by file, line and version?

Man, it gets confusing when their story keeps changing. At some point, SCO will have to pick a story and not only stick to it, it will have to prove it. And then the words of Robert Frost will be more applicable than Yogi's: that when you came to a fork in the road, the direction you took ends up being what makes all the difference.

That's poetry for you reap what you sow.


PS: Here's Robert Bench's certification attached to the April 2003 SEC filing. Darl's certification.

And Rule 11 of the Federal Rules of Civil Procedure requires the following:

(b) Representations to Court.

By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,--

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;

(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and

(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

(c) Sanctions.

If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation....

Subdivisions (a) through (c) of this rule do not apply to disclosures and discovery requests, responses, objections, and motions that are subject to the provisions of Rules 26 through 37.


  View Printable Version


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 )