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Searching for Cattleback - Updated - The Acrylis Connection
Thursday, November 08 2007 @ 01:30 PM EST

I thought I'd bring you up-to-date on my search for any mention of the Cattleback Holdings patent transfer in SCO's SEC filings.

I already mentioned that I couldn't find any mention of Cattleback in SCO's 10Q for the period ending July 31, 2007. That's where I'd expect to find it, since SCO says that it decided to sell the patent in June, set up Cattleback as a wholly owned subsidiary in the middle of July, and put the patent, for no consideration, that they now wish to sell into Cattleback immediately thereafter, on July 18. So I figured it would be in that 10Q if anywhere.

It's not there, so I went looking through all of SCO's SEC filings beginning with July and working up to the present to see if I could find a word about SCO allegedly transferring a patent to a newly formed subsidiary, Cattleback Holdings. I can't find it mentioned anywhere.

I don't know what the SEC reporting requirements are, by the way, on something like this. I just know that if I were a shareholder, I'd want to know about the company setting up a subsidiary and transferring a patent without consideration they say is worth $500,000+ to that subsidiary, even if I thought it was a good idea. I'd just want the information. I'd want to know who runs Cattleback too. If I were a creditor, obviously, I'd really want to know. So you can check my work and verify it for yourself, here: look for yourself, as it's always possible I overlooked something.

Here's the latest 8K, in which SCO reports on the proposed sale of its Unix business:

On October 22, 2007, the Company entered into an agreement whereby a purchaser intends to acquire substantially all assets used by the Company in connection with its SCO UNIX Business and certain related claims in litigation, and to provide financing to the Company, pursuant to Section 363 and 364 of the Bankruptcy Code. On October 23, 2007, the Company filed a motion with the Bankruptcy Court relating to this proposal. The motion, which is on file with the Bankruptcy Court, describes the details of the proposed transaction.

Not a word about the patent or Cattleback. So I thought maybe they mentioned it in an earlier 8K, so I started to read them all. Here's their 8K report on August 13th, three days after the devastating ruling against SCO in Utah and almost a month after the alleged transfer. Not one word. And here's the 8K about the bankruptcy filing, filed on September 14, 2007:

Item 1.03. Bankruptcy or Receivership.

On September 14, 2007, The SCO Group, Inc. and its wholly-owned subsidiary, SCO Operations, Inc. (collectively, the “Company”) filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, District of Delaware. This Court has jurisdiction over this proceeding as of the date of the filing of the petition. In connection with this proceeding, the Company has filed motions with the Court requesting permission to go forward on a “business as usual” basis as a debtor in possession. Accordingly, the Company continues to have jurisdiction over its assets and business subject to the supervision and orders of the Court. The Company will continue operating and will file a plan of reorganization with the Court.

To do what? And is setting up a new subsidiary, transferring a patent to it without consideration, and without telling anyone, business as usual, particularly if it happens on the eve of bankruptcy?

One of our eyewitnesses at the recent hearing says this about Mr. Spector's representations to the court:

Mr. Spector said that SCO never said that they would keep the Unix business forever. He believes the reorganization plan can go forward without deciding the SUSE issues or the issues in Utah. There are companies out there that would be willing to take a risk in buying the assets without resolution of these issues. Unix is a legacy system that someone else might find profitable. But Unix may not be part of SCO's plans going forward.

Well, which is it? What exactly is the business going to be? We need to wait for the transcript to form permanent conclusions, of course. By the way, aren't SCO's mobile products based on Unix also? If Unix is no longer part of SCO's plans, then its only plans would be the litigation lottery? No? Is that a business plan? I can't understand SCO's explanation of the sale of the assets, but it does seem like they are keeping something to do with Me Inc. And finally here's a notification of late filing, signed by Bert Young on September 17th, which even talked about SCO's unhappy performance ending in July:

Revenue for the three and nine months ended July 31, 2007 decreased by approximately 37% and 24%, respectively, from the three and nine months ended July 31, 2006. The decrease in revenue for the three and nine months ended July 31, 2007 was attributable to continued competitive pressures on the Company’s UNIX products and services as well as from continuing negative publicity related to our lawsuits with Novell and IBM which has adversely impacted our customers’ buying decisions.

The net loss for the three and nine months ended July 31, 2007 improved over the net loss for the three and nine months ended July 31, 2006 as a result of decreased operating costs and a decrease in cost of SCOsource licensing revenue, which were offset by a decrease in revenue as mentioned above .

In short, I have been unable to find any SEC filing that informed shareholders that a patent was transferred to a wholly owned subsidiary without consideration, or even that Cattleback was established.

Update: They filed another 8K today. You'll find the attached exhibits here. Still nothing that I can see.

On the other hand, if you go to the USPTO website, you do find a patent assignment from SCO Group to Cattleback on July 18. And here we find that the patent was obtained by Caldera from Acrylis in January of 2002. The inventors who assigned their interest to Acrylis are listed on that page also, Alan Cantos, Neil Mager, Keith Erskine, Mike Vilot, and Alison Whittier. Were they paid on that sale? If not, why would they be paid on the proposed one? Or is SCO obligated to pay Acrylis? Are they employees of SCO? So what development costs might SCO have been referring to? You can follow all the steps in the early part of the chain if you go here and trace patent application 09/514,488. I gather that the patent was initially refused, and so it may be that Caldera did some work on the patent and/or the application.

You remember Acrylis. We first saw it mentioned by Mike Anderer in the infamous 2003 memo about Microsoft helping SCO that surfaced in March of 2004, where Anderer references an Acrylis-Red Hat examination. Caldera had paid a million dollars to Acrylis in May of 2001 for the assets it acquired:

On May 3, 2001, the Company acquired the WhatifLinux technology from Acrylis, Inc. WhatifLinux technology provides Open Source users and system administrators with Internet-delivered tools and services for faster, more reliable software management. In consideration for the assets acquired from Acrylis, the Company issued 1.25 million shares of common stock and paid $1.0 million in cash.

The shares were valued at $1.95, so that's another 2.4 million.

Let's guess. Here's mine: SCO realized some time around June that the copyright infringement hustle was about over. Utah was on to them, and they had nothing to put on the table worth anything. So what to do? They had had this patent. Could it be resurrected and give new life to the FUD cloud litigation for the future? Let's also guess that York is fronting for someone, Acacia-like at least, who plans to bring a bogo patent infringement action based on this patent that they earlier discounted as having no use for that purpose. You think? That might explain York's eagerness to actually pay for lawyers to show up in Bankruptcy Court to try to get the deal approved. And it would take years to prove the patent was useless against Linux.

And that research and development question leads to something interesting, from Caldera's 10K for the fiscal year ended October 31, 2001:

The increase in research and development expenses from fiscal 2000 to fiscal 2001 was attributable to increased personnel and related costs as a result of the acquisitions of the WhatiIfLinux technology from Acrylis and operations from Tarantella as our personnel focused on the development of Linux and UNIX operating systems....

WRITE-DOWN OF GOODWILL AND INTANGIBLES.

During the fourth quarter of fiscal 2001 we determined that various assets related to the operations acquired from Tarantella and Acrylis were impaired and that the book value as of October 31, 2001 exceeded the current estimates of fair value. As a result, we recorded a $73.7 million write-down of goodwill and intangible assets. The asset write-down is the result of significant unanticipated decreases in actual and forecasted revenue of the acquired operations, a significant decline in market valuations and general economic conditions, particularly in the information technology sector, a weakening of certain partner relationships, the loss of certain key executives and other factors.

Yet here in this 10K for the period ending July 31, 2003, we see what SCO, then Caldera, thought the Acrylis technology was worth. A lot. I can't explain it, folks. I'm just putting bread crumbs on the path for those who follow.

And finally as a reminder, here's what Darl McBride told the US Trustee Joseph McMahon on the record at the 341 meeting about the Acrylis patent:

McMahon: Can you explain to me what Cattleback is and what the patent is?

Darl McBride: The patent's a systems management patent that we acquired when we bought a company back in, I believe it was 2001, called Acrylis. We bought it for the technology. It's an online updating technology and it had this Pending Patent in 2001 that actually issued in 2003. Even though it issued in 2003, because of all the other things we had going on, there wasn't a lot of attention paid to it until earlier this year, where we started looking at our Intellectual Property portfolio and figured out this patent was sitting there and we had some initial workup on it, and established that there was some value there.

I see OSI has removed the Anderer memo, so the link in my article back then no longer resolves, which sadly does not surprise me, but we published the memo contemporaneously also. Here it is again, for the record, and as you can see with your own eyes, Mr. Anderer reports that "there is no upside here" to the Acrylis patent, as it reads to me. In any case, to say they didn't pay much attention to it in 2003 doesn't seem to match the memo. You will see that Anderer says that BayStar invested in SCO because of Microsoft, which BayStar's Larry Goldfarb agreed was true, although Microsoft denies it, in a declaration [PDF] in the SCO v. IBM litigation. Goldfarb said one of his contacts at Microsoft was Rich Emerson:

6. Sometime in 2003, I was approached by Richard Emerson (Microsoft's senior vice president for corporate development and stratedy) about investing in SCO, a company about which I knew little or nothing at the time. Mr. Emerson stated that Microsoft wished to promote SCO and its pending lawsuit about IBM and the Linux operating system. But Microsoft did not want to be seen as attacking IBM or Linux. For that reason, Microsoft wanted to further its interest through independent investors like BayStar.

7. I did some research on SCO, and had conversations with Mr. Emerson about it as well. In the course of my research about SCO, I became concerned that SCO might be merely a litigation company. As a result, Mr. Emerson and I discussed a variety of investment structures wherein Microsoft would "backstop," or guarantee in some way, BayStar's investment. In addition, I had discussions with Kenneth Lustig, Microsoft's managing director of intellectual property and Tivanka Ellawala, from Microsoft's corporate development department regarding the SCO deal. As part of these discussions, Microsoft assured me that it would in some way guarantee BayStar's investment in SCO. However, Microsoft would not agree to put anything in writing on this point.

8. The other managing members of BayStar and I met with Darl McBride of SCO and heard his pitch about SCO's business and SCO's lawsuit against IBM. We also discussed SCO's lawsuit with David Boies from SCO's outside law firm, Boies, Schiller & Flexner LLP. Mr. Boies informed me that he believed that IBM would settle the case fairly quickly.

9. As a result of Microsoft's and SCO's assurances, the other managing members of BayStar and I voted unanimously to make the $50 million investment in SCO. the transaction was completed on October 16, 2003.

Emerson left Microsoft in September of 2003 and went to Evercore, where he's in the Private Equity group. Evercore also does counseling of companies in Chapter 11 bankruptcies, and here's a SEC filing where we find it listed as getting shares in a company, Motient Corp., where Evercore Partners was the financial advisor to the creditors' committee in its reorganization:

Motient's Chapter 11 Filing and Plan of Reorganization

Under our Plan of Reorganization, all then-outstanding shares of our pre-reorganization common stock and all unexercised options and warrants to purchase our pre-reorganization common stock were cancelled. The holders of $335.0 million in senior notes exchanged their notes plus accrued interest for 25,000,000 shares of our new common stock. Some of our other creditors received an aggregate of 97,256 shares of our new common stock in settlement for amounts owed to them. These shares were issued upon completion of the bankruptcy claims process; however, the value of these shares has been recorded in the financial statements as if they had been issued on the effective date of the reorganization. Holders of our pre-reorganization common stock received warrants to purchase an aggregate of approximately 1,496,512 shares of new common stock. The warrants never became exercisable by their terms, and were cancelled on May 1, 2004. All warrants issued to the holders of our pre-reorganization common stock, including those shares held by our 401(k) savings plan, have been recorded in the financial statements as if they had been issued on the effective date of the reorganization. Also, in July 2002, we issued to Evercore Partners LP, financial advisor to the creditors' committee in our reorganization, a warrant to purchase up to 343,450 shares of common stock, at an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has a term of five years. If the average closing price of our common stock for thirty consecutive trading days is equal to or greater than $20.00, we may require Evercore to exercise the warrant, provided that our common stock is then trading in an established public market. The value of this warrant has been recorded in the financial statements as if it had been issued on May 1, 2002.

And, oddly enough, the following January, York became an investor in that company, or more accurately in a subsidiary:

On January 27, 2003, our wholly-owned subsidiary, Motient Communications, closed a $12.5 million term credit agreement with a group of lenders, including several of our existing stockholders. The lenders include the following entities or their affiliates: M&E Advisors, L.L.C., Bay Harbour Partners, York Capital and Lampe Conway & Co. York Capital is affiliated with James G. Dinan and JGD Management Corp. JGD Management Corp., James G. Dinan, James D. Dondero and Highland Capital Management each hold 5% or more of our common stock. The lenders also include Gary Singer, directly or through one or more entities. Gary Singer is the brother of Steven G. Singer, one of our directors.

Emerson is also on the Board of Directors for Clearwire, and his bio there indicates he is now a Senior Managing Director of Evercore Partners. And as we earlier pointed out, Baystar has Acacia in its portfolio, Acacia being the parent company of the folks suing Novell and Red Hat recently over alleged patent infringement. It was Egan Orian at the Inquirer that pointed out this interesting tidbit:

As a matter of fact, JGD Management Corp., doing business as York Capital Management, shares its street address at 1118 East Green Street in Pasadena, California 91106, with Arrowhead Research Corp. The CEO and Chairman of Arrowhead Research is R. Bruce Stewart, who also founded Acacia Research Corp. Acacia Research is the parent of IP Innovation, the company that recently filed patent infringement lawsuits against Linux distributors Red Hat and Novell. Suddenly all of this ties together and becomes clearer.
And just to bring it full circle, two of the founders of IP Innovation are ex-Microsoft executives.

So with that background, let's look at the memo. Here it is. Decide for yourself what you think is going on:

***************************************************

--- From the mailbox of chris sontag

From: Mike Anderer
Sent: Sunday, October 12, 2003
To: csontag at sco.com
CC: Bob Bench
Subject: Conversation Friday

Chris:

I know you were going totalk to Bob later Friday, but I figured I would outline the issues.

1) Baystar is easy as they were just a Microsoft referral and would be 2%

2) Any licensing deal would be at 5%

3) Much of the other work would go from 2% to 3% as I have engaged in direct, but this would require according to Bob either Darl or you signing off on the fact that this ane was not a referral.

4) On the patent side for IPX, where foes that fit it. I am working with the lawyers to get these moved from provisional to more complete in the next week. I think it will spawn at least 3 patents. Ed and I are the inventors on these. What do we fo here

5) The RedHat, Acrylis examiniation, there is no upside here is this billable seperatly. I bought a PC and loaded up RedHat and will take that over and work through it with the Lawfirm. What do we do here?

I realize the last negotiations are not as much fun, but Microsoft will have brough in $86 million for us including Baystar. The next deal we should be able to get from $16-20, but it will be brutial as it is for go to makerket work and some licences. I know we can do this , if everyone stays on board and still wants to do a deal. I just want to get this deal and move away from corp dev and out into the marketing andfield dollars....In this market we can get $3-5 million in incremental deals and not have to go through the gauntlet which will get tougher next week with the SR VP's.

We should line up some small acquisitions here to jump start this if we do it. We shoudl also do this ASAP. Microsoft also indicated there was a lot more money out there and they would clearly rather use Baystar"like" entities to help us get signifigantly more money if we want to grow further or do acquisitions

This Microsoft deal is the Ante to the poker game...We should get this done and go after several $2-3 Million deals from the expense side of their company.

The will help us a lot and if we execute we could exit and Unix componients we have build potentially back to Microsoft or MCS. I think they are on track and may not be able to push much more this round, but there are other ways to get money from them, their partners, investment bank referrals, etc..

Do kepp in mind that they have brough us between $82 million and $86 million if this deal is between $4million per quarter where Rich is at, or it turns into %5 million wjich is the lowest number Chris had interest in.

There will be more, lons, partnerships, etc..but we need to just get this one done. It is too high profile, it is also critical, but they are not the people to pitch. We should get what we can from them ad then work the other and larger areas of the company and groups where they have real budget and need for our help.

.Let me know your thoughts.

-Mike


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