SCO caps legal costs as losses mount

With its cash reserves dwindling and losses continuing to mount, The SCO Group Inc. is taking measures to cut its expenses and ensure it will have enough cash to process its lawsuit with IBM Corp, the company announced during its quarterly earnings conference call Tuesday. SCO reported a loss of US$7.4 million on revenue of US$11.2 million for the third quarter — a loss that was affected by the US$7.2 million in legal expenses the company incurred during the quarter, which ended July 31.

SCO CEO Darl McBride referred to the legal expenses as a “high water mark” for the company, during a conference call with press and analysts Tuesday, and said that SCO has now worked out a deal with Armonk N.Y., law firm Boies, Schiller & Flexner LLP to cap its legal costs at US$31 million.

Following the recent resolution of an investor dispute with Baystar Capital LP, SCO now has US$43 million in cash reserves, which is more than enough cash to cover the US$31 million it may have to pay in connection with its legal disputes, McBride said. “The litigation business is now in control from a cost standpoint,” he said.

In return for agreeing to cap its legal fees, Boise Schiller and Flexner is now entitled to a larger percentage of any legal settlement that may be reached in SCO’s lawsuit with IBM over Big Blue’s contributions to the Linux operating system. The law firm will now be paid between 20 per cent and 30 per cent of any settlement, depending on the amount awarded, McBride said.

In a further effort to reduce costs, SCO will close offices in Spain, Italy and Ireland and plans to move its 30 Santa Cruz, Calif., workers into smaller buildings over the next three months, said Bert Young, SCO’s chief financial officer.

SCO currently has 230 employees worldwide, Young said.

SCO saw a large increase in revenue for its SCOsource division, which licenses SCO’s Unix System V source code. SCOsource had taken in a mere US$31,000 during the first two quarters of 2004, but revenue jumped to US$678,000 during the third quarter, Young said during the conference call. “This revenue was primarily from two sources, including a transaction that was completed in a prior quarter and a new transaction that was completed in the current quarter,” he said.

Young declined identify the two companies involved by name.

Though SCOsource may have increased revenue during the quarter, it was far from solvent. SCO’s US$7.2 million in legal fees added to total expenses of US$8.1 million for the division during the period, Young said.

CEO McBride blamed his company’s ongoing litigation with Linux vendor Novell Inc. for the SCOsource division’s poor performance during 2004. “We continue to believe that Novell’s claims have greatly impacted our ability to achieve traction in this business,” he said.

Novell claims to own the copyright to the Unix System V source code that is licensed by SCOsource. The System V code is also at the center of SCO’s lawsuit with IBM.

In an apparent response to industry rumors that SCO may become the target of a hostile takeover bid, SCO’s Board of Directors has implemented a “shareholders rights plan” designed to deter unsolicited takeover attempts, McBride said. “We believe that this will basically keep any outside offers or potential takeovers that are not in the best interest of the shareholders at bay,” he said.

The plan, which was adopted by the board on Aug. 10, gives SCO’s board the right to determine the “fair value” of the company in the event of a takeover attempt, McBride said.

SCO’s stock, which was trading in the US$20 range in September 2003, has dropped below US$4 in recent weeks. “We are very concerned about the current price of the stock vis-a-vis what we think the long-term value of the company is,” McBride said. “The disparity between these two is definitely at the core of what we put in place.”

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