**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q/A**

**(AmendmentNo.1)**

 
| **(Mark one)**                                                                                                                                                                                                           | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                                                                                                               | **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                     |       |       |
| **For the quarterly period ended January 31,  2005**                                                                                                                                                                |
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| **OR**                                                                                                                                                                                                                   |
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| ** **                                                                                                                                                                                                               | **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                     |       |       |
| **For the transition period from                  to                 ** |

 

**Commission file number 0-29911**

 

**THE SCO GROUP, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                     | ** ** | **87-0662823**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                             |       |                                     |
| **355 South 520 West  Suite 100  Lindon, Utah 84042**       |
| (Address of principal  executive offices and zip code)           |
|                                                             |       |                                     |
| **(801) 765-4999**                                               |
| (Registrant’s telephone  number, including area code)       |

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tofiling requirements for the past 90 days.

 

YES ý NO o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act)

 

YESo NO ý

 

As of April 12, 2005, there were 17,915,292shares of the Registrant’s common stock, $0.001 par value per share,outstanding.

 

 

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**EXPLANATORY NOTE**

 

This Amendment No. 1 on Form 10-Q/A (this “Amendment”)amends the Quarterly Report on Form 10-Q (the “Original Quarterly Report”)for the quarter ended January 31, 2005, which was originally filed withthe Securities and Exchange Commission (the “SEC”) on April 14, 2005.  We are filing this Amendment in response to acomment letter received from the SEC in connection with its review of ourregistration statement on Form S-1 (File No. 333-127000).  We have modified Item 4, “Controls andProcedures,” in this Amendment in response to the comment letter to modify andenhance our disclosure regarding our disclosure controls and procedures and thematerial weakness in our internal controls over financial reporting describedin Item 4.

 

We have included as exhibits to this Amendment newcertifications of our principal executive officer and principal financial andaccounting officer.

 

Except as described above, no attempt has been made inthis Amendment to modify or update other disclosures presented in the OriginalQuarterly Report.  This Amendment doesnot reflect events occurring after the filing of the Original Quarterly Reportor modify or update those disclosures, including the exhibits to the OriginalQuarterly Report affected by subsequent events. Accordingly, this Amendment should be read in conjunction with ourfilings with the SEC subsequent to the filing of the Original Quarterly Report,including any amendments to those filings.

 

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**PART I**

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluationof disclosure controls and procedures. * Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we evaluated the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)).  Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that, as ofthe end of the period covered by this report and as a result of the materialweakness in our internal controls described below, our disclosure controls andprocedures were not effective to ensure that information required to bedisclosed by us in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin applicable rules and forms.

 

We have a material weakness with respect to accountingfor non-routine capital stock and stock option transactions.  Our material weakness was identified in lateJanuary 2005 by Company management. Company management concluded the material weakness was indicative of theaggregate effects of three accounting errors relating to accounting fornon-routine capital stock and stock option transactions.  The first of these accounting errors wasdiscovered by Company management in the quarter ended April 30, 2004.  The three accounting errors are described asfollows:

 

•                                          First,in the quarter ended January 31, 2004, we incorrectly accounted forcompensation expense by not properly accounting for a non-routine stock optiongrant to a non-employee.  When weidentified this error in the quarter ended April 30, 2004, allcompensation cost had been fully recognized and the error did not impact futureaccounting periods.  In that quarter, wecompleted an analysis in accordance with Staff Accounting Bulletin (“SAB”)No. 99 and determined that this accounting error was not material to thefinancial statements as of and for the quarters ended January 31, 2004 andApril 30, 2004.

 

•                                          Second,for the quarters ended January 31, 2004 and April 30, 2004, weincorrectly accounted for dividends on our now retired Series AConvertible Preferred Stock by incorrectly recording dividends payable on suchpreferred stock as a component of stockholders’ equity instead of as dividendspayable.  When we identified this errorin the quarter ended July 31, 2004, all outstanding shares of ourSeries A-1 Convertible Preferred Stock, which had previously beenexchanged for all outstanding shares of Series A Convertible PreferredStock, had been converted to shares of common stock, and we were no longerrequired to accrue for dividends.  AtJuly 31, 2004, we completed a second analysis in accordance with SABNo. 99 and determined that this accounting error individually, as well aswhen aggregated with the accounting error described in the preceding bullet,was not material to the financial statements for any of the quarters affectedby this accounting error.

 

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•                                          Third,near the end of the quarter ended January 31, 2005, we discovered that wehave issued certain shares of our common stock under our equity compensationplans without complying with the registration requirements of federal andapplicable state securities laws.  As aresult, the holders of such shares may have a rescission right, and,consequently, certain amounts the Company received upon purchase of such sharesshould have been reclassified from permanent equity to temporary equity.  Company management determined that thisaccounting error, when aggregated with the errors described in the precedingbullets, were evidence of a material weakness in our controls over financial reportingwith respect to accounting for non-routine capital stock and stock optiontransactions.  In addition, onFebruary 28, 2005, upon recommendation from Company management,  the Audit Committee of our Board of Directorsconcluded that, due to the aggregate effects of these accounting errors, theCompany’s financial statements for the quarters ended January 31, 2004,April 30, 2004 and July 31, 2004 should no longer be relied upon andshould be restated.

 

The Company believes that its material weakness firstbegan in the quarter ended January 31, 2004, which was the first period inwhich all three accounting errors described above combined to materially affectthe Company’s financial statements for that period.  As of October 31, 2004, the end of thefiscal year covered by this Form 10-K, the material weakness still existedand no remedial measures for the material weakness had been undertaken by theCompany.  No remedial measures for thematerial weakness were undertaken before the second quarter of fiscal year 2005because Company management did not identify we had a material weakness untillate January 2005.

 

In April 2005, the Company restated its financialstatements for the first three quarters of the fiscal year endedOctober 31, 2004 and filed with the SEC amended quarterly reports on Form 10-Qfor such quarters correcting all three accounting errors for non-routinecapital stock and stock option transactions described above.

 

Our internal controls over financial reportingidentified the third accounting error concerning our failure to classify astemporary equity amounts we received from share purchasers under the ESPPentitled to rescission rights during the quarter ended January 31,2005.  Company management had previouslyrequested its external legal counsel to undertake a review of the Company’sequity incentive plans.  As a result ofthis review and the discovery of the third accounting error, and given theprior accounting errors described above, Company management determined amaterial weakness related to non-routine capital stock and stock optiontransactions existed in late January 2005.

 

We have discussed the material weakness in ourinternal controls over financial reporting with the Audit Committee of theBoard of Directors and with KPMG LLP, our independent registered publicaccounting firm for the period covered by this Form 10-Q.  In response, beginning in February 2005,we began taking measures to remediate the material weakness in our internalcontrols, which measures have included the following:

 

•                                          Wehave implemented additional transactional controls concerning equity awardsunder our equity compensation plans, which principally include reconciling on a

 

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quarterly basis thenumber of common shares available for issuance under our equity compensationplans to the number of shares that have been registered for issuance under theSecurities Act of 1933 and qualified for issuance under applicable state “bluesky” laws.

 

•                                          Wehave required Company management to regularly perform the procedures outlinedin an equity compliance checklist which include: 

 

•                                          confirmingthat the reconciliation in the first bullet above occurs quarterly,

 

•                                          documentingany non-routine issuances of equity awards to employees and non-employees, and

 

•                                          preparingand approving by Company management all required equity disclosures in ourperiodic filings with the SEC.

 

•                                          Wehave added additional review and approval requirements for non-routine equitytransactions by requiring documented approval by our Chief Financial Officerand Chairman of our Audit Committee of such transactions.

 

*Changes in internal control overfinancial reporting. *Duringthe most recent quarter ended January 31, 2005, there has been no changein our internal control over financial reporting (as defined inRule 13a-15(f) and 15d-15(f) under the Exchange Act) that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting. However, as discussed above, changes have been implemented subsequent tothe period covered by this Form 10-Q to add additional controls to correctthe material weakness in internal control over financial reporting.

 

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**PART II**

 

**ITEM 6.           EXHIBITS**

 

Note:  Item 6 in the Form 10-Q,as originally filed, is unchanged except for the filing of additionalcertifications of our principal executive officer and principal financial andaccounting officer.

 

The following exhibits are included as part of this Form 10-Q/A.

 
| 31.1   |   | Certification of Darl C. McBride, President and  Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |
| 31.2   |   | Certification of Bert Young, Chief Financial Officer,  pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                           |
|   |   |                                                                                                                                                                                                                    |
| 32.1   |   | Certification of Darl C. McBride, President and  Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18,  United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|   |   |                                                                                                                                                                                                                    |
| 32.2   |   | Certification of Bert Young, Chief Financial  Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States  Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                     |

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date: October 26,  2005 | THE SCO GROUP,  INC. |
|------------------------------|----------------------|
|                         |                 |   |   |
|                         |                 | By: | /s/ Bert B.  Young |   |
|                         |                 |   | Bert B. Young |
|                         |                 |   | Duly Authorized  Officer and  Chief Financial Officer  (Principal Financial and  Accounting Officer) |

 

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**Exhibit Index**

 
| 31.1   |   | Certification of Darl C. McBride, President and  Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                              |
| 31.2   |   | Certification of Bert Young, Chief Financial  Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                      |
|   |   |                                                                                                                                                                                                                              |
| 32.1   |   | Certification of Darl C. McBride, President and  Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title  18, United States Code, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                                                              |
| 32.2   |   | Certification of Bert Young, Chief Financial  Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States  Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                    |

 

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