The SCO Group, the beleaguered Unix company that's locked in an intellectual property war with IBM over Linux and Unix, reported another poor quarter Tuesday.
For its fiscal third quarter, ended July 31, The SCO Group Inc. reported revenue of $11.2 million, compared with $20.1 million in the same quarter a year ago. This was in line with SCO's third-quarter estimates.
The overall revenue drop was primarily caused by a decrease in the revenue of SCOsource, SCO's Unix licensing department, to $678,000, from $7.3 million in the year-ago quarter.
That said, SCOsource licensing revenue did increase by $667,000 from $11,000 in the previous quarter. The licensing revenue in the most recent quarter came from two companies, but SCO chief financial officer Bert Young said he could not name either customer.
According to SCO CEO Darl McBride, SCOsource revenue should improve dramatically once the Unix copyright case with Novell Inc. has been resolved. The case, which deals with the question of whether Novell or SCO owns Unix's copyright, is scheduled to come to trial Sept. 15 in U.S. District Court in Salt Lake City.
The net loss for the quarter was $7.4 million, compared with a net income of $3.1 million for the year-ago quarter.
Despite this, the net income applicable to common stockholders for the quarter was $7.5 million, or 38 cents per diluted common share. This positive income was the result of SCO netting $15.5 million from the repurchase of BayStar Capital II's remaining 40,000 shares of the company's Series A-1 Convertible Preferred Stock.
This came about because SCO recently resolved its fight with BayStar, a former financial backer that had obtained $50 million in financing for SCO to pursue its Linux lawsuits.
SCO has sued IBM for more than $5 billion related to Linux and Unix IP (intellectual property) issues, and is also involved in related lawsuits against Novell, Red Hat Inc., DaimlerChrysler Corp. and AutoZone Inc.
BayStar attempted to force SCO to focus entirely on its IBM litigation and discontinue its Unix operating system business. SCO executives fought back and insisted that SCO continue to also operate as a Unix vendor. The two finally agreed to split, but on July 23, the Larkspur, Calif.-based private equity firm threatened to sue SCO over how the companies had agreed to dissolve their relationship.
But on Aug. 25, SCO communications director Blake Stowell announced without fanfare, "BayStar requested the $13 million and the 2,105,263 shares of SCO common stock certificates SCO owed BayStar for its $40 million worth of Series A-1 shares." BayStar has since confirmed that they had agreed to settle the disagreement without further conflict.
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Still, SCO's ongoing legal battles are continuing to negatively affect the company, leaving it with few new customers for its Unix software and making current users reluctant to invest in new SCO product offerings.
According to Jeff Hunsaker, senior vice president of SCO's Unix division, SCO has been finding it "very difficult to get new customers" and is focusing on keeping its installed base.
Despite this, the Unix division has returned to profitability. This return was helped in part by the continued support of SCO's resellers, as well as the fact that the company is in the process of restructuring itself. SCO also has announced upgrades to its OpenServer and UnixWare lines and new software offerings.
But the company plans on continuing to restructure by closing some smaller offices and merging them into larger ones. And layoffs, in both the Unix and SCOsource divisions, have not been ruled out.
To help manage its finances, SCO is renegotiating its legal fees agreement with its primary IBM litigator, the law firm of Boies, Schiller & Flexner LLP. In this revised fee agreement, in return for giving the law firm as much as 33 percent of any settlement awards resulting from SCO's lawsuits, the overall cash cost of SCO's litigation has been capped at $31 million in cash and securities.
SCO also announced that it has adopted a shareholder rights plan. This is designed to deter hostile takeover tactics—including the accumulation of shares in the open market or through private transactions—and to prevent an acquirer from gaining control of SCO without offering a fair price to all of its shareholders.
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McBride said the shareholder rights plan was not a result of the BayStar fight, although that conflict had aspects of an attempted hostile takeover, or because of any current attempt to take over SCO. Instead, he said the move stemmed from the SCO board's concern about the company's currently low stock price compared with its long-term value. It is SCO's fear that with a current market cap of slightly more than $58 million, IBM—or an opportunistic group—might try to take over SCO.
"The plan will not prevent a takeover attempt, but should encourage anyone seeking to acquire the company to negotiate fair value directly with the board of directors," SCO chairman Ralph Yarro III said in a statement.
The plan will be triggered if a person or group acquires, or attempts to acquire, ownership of 15 percent or more of SCO's common stock. In the event of a takeover attempt, the board would decide whether the offer being made is fair to common SCO stockowners.
Looking ahead, McBride said SCO is staying "steadfast on a dual path for success both in marketplace and in the courtroom." Adding that the company isn't interested in having a "shouting match" or a "boisterous fight" with Linux supporters, he said SCO will "confine our arguments to the courtroom."
McBride said he remains convinced that SCO will triumph in the courtroom. But the stock market is showing signs of doubt, as prior to the aftermarket close announcement, SCO stock dropped 3.31 percent to a near 52-week low of $3.80 a share on light trading.
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