Tech Industry

SCO warns of IBM lawsuit risks

The company says its billion-dollar lawsuit alleging that IBM misappropriated trade secrets will be costly and could have other consequences.

SCO Group warned in a regulatory filing that its billion-dollar lawsuit alleging that IBM misappropriated trade secrets will be costly and could alienate others in the computing industry.

"Unintended consequences of our lawsuit against IBM may adversely affect our business," the Lindon, Utah-based seller of Unix and Linux products warned last week in a regulatory filing that permits two major shareholders to sell all their stock. The shareholders received the stock in 2002 in connection with SCO's efforts to get financial help, including the possibility of finding a buyer.

SCO sued IBM earlier in March, alleging IBM misappropriated trade secrets by taking SCO intellectual property in the Unix operating system and moving it into Linux. The suit also alleges unfair competition, breach of contract and "tortious interference" with SCO's business. The company is seeking more than $1 billion in the case, has hired high-profile attorney David Boies to pursue the claim and is threatening to revoke IBM's license to ship its version of Unix, called AIX.

The filing warns of several possible ways the suit could hurt SCO: Legal fees likely will "increase substantially" and revenue from joint ventures with IBM and Big Blue?s partners could decrease. In addition, SCO warns that IBM could influence customers to shun SCO products.

"There is also a risk that the lawsuit against IBM will be negatively viewed by participants in our marketplace, and in such event, we may lose support from such participants," SCO warned.

Indeed, the suit has been criticized by some industry analysts and several people in the open-source community that collectively develops Linux. And SuSE, a SCO business partner and another Linux seller, said it is re-evaluating its relationship with SCO.

Last week, IBM took its first formal action, moving the suit from Utah state court to federal court in that state. The move was possible because IBM is incorporated in New York, whereas SCO is incorporated in Delaware.

"Since the parties are incorporated in different states, both parties are entitled to have their dispute heard in a federal rather than a state court," said John Ferrell, an intellectual property attorney with Carr & Ferrell in Palo Alto, Calif.

SCO's warning about the lawsuit's side effects appears in a list of risk disclosures that companies must provide to investors. The filing also permits two major shareholders to sell a total of 1 million shares of SCO's 12.2 million outstanding shares of stock.

The first shareholder is Chief Executive John R. Wall, who obtained a 6.6 percent stake, or 800,000 shares, of SCO stock. Wall received the stock in connection with a transaction involving a SCO investment in, a SCO license to market's services and a $1 million convertible note SCO acquired that is payable by The transaction took place in the quarter ended Oct. 31, according to SCO's annual report.

The second is Morgan Keegan & Co., an investment banking firm that in August received a warrant for 1.6 percent of SCO, or 200,000 shares. SCO retained the firm to explore and possibly execute plans that included finding, financing or selling SCO to another company, according to SCO's filing for the quarter ended Jan. 31.

Under the agreement, Morgan Keegan would get between 1 percent and 6 percent of money raised. If SCO is acquired or acquires another company, Morgan Keegan would receive the greater of $250,000 or 2 percent of the transaction price, according to the filing.

SCO looked at being acquired and at raising finances for three or four months last year, "but we turned that aside in December or January as we got cash-flow positive," Chief Financial Officer Bob Bench said in an interview. Now the company is looking more at acquisitions of smaller companies, he said.

"We have some growth internally, but we'd like to grow faster doing acquisition of technologies and smaller companies," Bench said.

In a separate filing Monday, the company announced its annual stockholder meeting will be May 16, when the company plans to officially change its name from Caldera International to SCO Group.

In Monday's proxy statement filing, the company also listed executive pay. Chief Executive Darl C. McBride was paid $80,525 in 2002, with no bonus or other compensation. Chief Financial Officer Bench was paid $173,032. And Chris Sontag, senior vice president of the operating system group and the executive handling the IBM lawsuit, received $6,231.

Several executives also received rights to purchase shares in the company as part of stock option incentives. According to Friday filings, McBride has options for 200,000 shares; Bench has 100,000 options; Jeff F. Hunsacker, vice president of sales, has 100,000 options; Reginald Broughton, vice president of international sales, has 50,000 options; and Michael Olson, controller, has 50,000 options.