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 Canopy?
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 http://scofacts.org/scorecard.html#numbers 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 http://scofacts.org/scorecard.html#summary 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 http://scofacts.org/maxwell-vs-young-02-complaint.pdf : 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 company. -al
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