From: Al Petrofsky
Sent: Monday, June 14, 2004 6:03 PM

During the conference call last week, SCO partially explained away the
eye-popping $12 million drop in cash as being mostly offset by the $9
million increase in "available-for-sale securities".  I was
disappointed no one asked SCO about what this suddenly large and
important component of its balance sheet comprised.

After the call, however, I looked at SCO's SEC reports from previous
quarters, saw that the available-for-sale securities were disclosed to
comprise solely bonds, that SCO further gave a breakdown of the
maturity dates of these bonds, and I figured there probably wasn't
anything too fishy going on ...

... but today the 10-Q comes out.  In contrast to previous quarters,
there is no disclosure whatsoever of what the available-for-sale
securities comprise.  This is despite the facts that they mushroomed
from $6.8 million to $15.6 million and that the "Liquidity and Capital
Resources" section now prominently discusses, in the first sentence,
the sum of cash and available-for-sale securities as the primary
measure of liquidity, an importance not attributed to the
available-for-sale securities in previous reports.

I wonder, did SCO go out and buy $15 million of Magic Beans from

From: Dion Cornett
Subject: RE: SCO's available-for-sale securities
Date: Mon, 14 Jun 2004 22:50:06 -0500

Al, good question.  I noticed the up tick last week, but assumed that it was
just part of a strategy to do better than checking account interest.
However, given some past issues you're right, it is worth at least asking
about, which I will.

Date: Tue, 31 Aug 2004 01:57:42 -0700
From: Al Petrofsky
To: Dion Cornett
Subject: Re: SCOX

> You have gotten an earlier e-mail from me covering the cash question.

Thank you for all your responses.  Did you ever get a chance to look
at the questions I raised in my August 17 email about the problems in
how your income statement is listing SCO's legal costs?

> One thing I was looking for was a list of seemingly unbiased legal
> experts who in the course of interviews or otherwise have expressed
> doubt wrt SCOX's claim.  Would you happen to have some names ahead
> of tomorrow's conference call?

Generally, for a legal expert to look at a case closely enough to be
able to give an informed opinion about it, someone must pay him
considerably for his time, and the source of the funds will often seem
to introduce a bias.

However, since the last conference call, two legal experts who are
seemingly unbiased (at least we all hope so) have scrutinized SCO's
claims and expressed considerable doubts about them.  Their names are
Dale Kimball and Rae Lee Chabot.

In Judge Kimball's June 9 ruling in the Novell case, he found (see
page 10) that "the agreements raise substantial doubt as to whether
the APA as amended by Amendment No. 2 qualifies as a Section 204(a)
writing" that could have transferred copyrights from Novell to SCO's
alleged predecessor.  Thus, he found substantial doubt as to whether
SCO even owns the copyrights that SCO has vaguely claimed are being
infringed by Linux users.

When Judge Chabot dismissed most of SCO's case against DaimlerChrysler
at the July 21 hearing, she found that "the contract very clearly does
not require certification of the various clauses contained in the
agreement" and that "by its unambiguous terms" the contract only
required certification relating to the current use of the software,
which Daimler had provided (see her August 9 ruling, and the last two
pages of the hearing transcript).  The theory on which SCO brought the
DaimlerChrysler case is pretty much separate from SCO's other
cockamamie theories, but the ruling goes to show that Boies, Schiller,
& Flexner is sometimes willing to pursue a case with no merit, and
thus one should make no inference, from BS&F's decision to continue
with SCO's other cases, that those other cases have any merit either
-- especially given that the legal fees, nearly $26 million through
April 30, have not been contingent on any legal victory, despite SCO's
initial indications that they would be (see for my $26 million
calculation: it's actually the total of all SCOsource costs, but SCO
has indicated that SCOsource has very few employees or other costs
other than the legal fees).

Those were the two big expressions of doubt from unbiased experts this
quarter.  Until we get the results of the September 15 hearing, I
think the most damning expression of doubt will remain the decision by
SCO's own legal team in February to "streamline" their case by
dropping the trade secrets claim that was the foundation of their
original complaint 11 months earlier.  Throughout 2003, as SCO
executives seemingly used the phrase "our valuable intellectual
property" at least once in every sentence they uttered, this count for
misappropriation of trade secrets was the only actual intellectual
property claim SCO was pursuing in any court of law.  After eleven
months, it came to nothing.  SCO has since filed two more claims of
intellectual property violations, one in February against IBM and one
in March against AutoZone.  Given SCO's proven track record of losing
every intellectual property claim it's made within one year of filing
it, I'm fairly confident that these two claims will also be lost by
March of next year.

For a brief summary of the major court rulings so far, with links to
the court documents, see

If you want to see some doubts expressed about the veracity of Bert
Young's financial claims, be sure to look at what the Marchfirst
bankruptcy trustee, Andrew Maxwell, has to say about Young in the
ongoing 2002-AP-00194 case in the Northern District of Illinois:

  From page 1 of :

    From its inception, marchFIRST suffered from a profound and
    fundamental lack of basic corporate management.  Management
    embarked on costly, ill-considered ventures ... Management also
    engaged in a variety of conduct designed to create the impression
    that marchFIRST was enjoying success in the marketplace when it was
    really in deep financial trouble... This facade of success came at
    the cost of wasting untold millions of dollars by building an
    infrastructure for growth that did not exist at marchFIRST.  Those
    abuses continued and accelerated while marchFIRST was in the
    vicinity of insolvency.  Management and the Board of Directors of
    marchFIRST recklessly, intentionally and knowingly breached their
    duties to the company and its creditors.

I really laughed last month when you told me about SCO's accounting
technology problems:

> I actually brought this up with the company around the time of 10K
> filing.  They claimed that they were recognizing end-user SCOSource
> in FY03 with their UNIX revenue because their accounting systems
> were not set up to handle the separate revenue entry.  You can
> imagine how this was perceived by investors I shared this tidbit
> with.

Bert Young is just the man to fix that!  Maxwell has this to say about
Marchfirst's accounting system troubles:

108. ... Bernard, Szofer, Clarkson, Young and Shelow knew that
     marchFIRST was never able to integrate its billing, accounting,
     personnel infrastructure and computer systems... marchFIRST was
     forced to run two unintegrated systems side by side and attempt
     to periodically merge the information manually.  This situation
     continued throughout the entire corporate life of marchFIRST.
110. These glaring weaknesses in marchFIRST's internal controls
     facilitated the abuses in income recognition that have previously
     been explained...
114. ... Bernard and Young disclosed to the public inaccurate
     information about the status of integration.  For example, in the
     second quarter of 2000, Bernard and Young disclosed that
     marchFIRST had made "great strides" in completing the
     Whittman-Hart/USWeb integration, and that such integration would
     be virtually complete by the end of the third quarter of 2000.
     At the October 24, 2000, analyst conference call, Bernard
     represented that marchFIRST completed its integration.

One other thing, did you ever get any information from SCO about
what's in the $15.6 million available-for-sale securities item?  (See
our email about it back in June below.)  I'm particulary interested in
whether or not it includes any MTIC, the other publicly-traded Canopy


 Copyright 2004