SCO Group Inc. has negotiated a cap on its legal costs and adopted a shareholder rights plan to protect it from hostile takeover as key hearings loom in its ongoing legal battles with IBM Corp. and Novell Inc.
The Lindon, Utah-based Unix vendor has also announced measures to cut costs during the fourth quarter, including office closures and downsizing, following the publication of financial results for the third quarter that showed revenue down 44%.
SCO recorded revenue of $11.2 million in its third quarter, ended July 31, 2004, compared to $20.1 million in the same quarter last year. It also recorded a net loss of $7.4 million, compared to net income of $3.1 million last year.
Despite those figures, SCO CEO, Darl McBride somewhat surprisingly said: The quarter can best be described as one where the company is firing on all cylinders.
At least SCO managed to break into profit in its Unix product business, which brought in revenue of $10.5 million, and the SCOsource intellectual property business showed some improvement.
The company sold $678,000 worth of compliance licenses in the third quarter, up from just $11,000 in the second quarter. This revenue is primarily from two sources, including a transaction completed in the prior quarter and a newly-signed license agreement, commented CFO, Bert Young.
Nevertheless, legal fees of $7.3 million related to SCO’s various lawsuits against IBM, Novell, Red Hat Inc. and Linux users AutoZone Inc. added to the costs in the third quarter, following what McBride classified as an unusually busy but productive quarter in the courts.
In order to limit its escalating legal costs SCO has begun negotiations with its legal counsel, Boies, Schiller and Flexner LLP, to limit the cash cost of its litigation to $31 million. In return the law firm has agreed to represent SCO throughout the duration and completion of litigation, according to Young, and will receive between 20% and 33% of any payout awarded to SCO, depending on its size.
Our litigation is on track and progressing as expected through the court system, and with that we are fully funded to follow it through to its conclusion, commented McBride on the new agreement. A key date in the course of its legal battles is coming up, with two hearings in its cases against IBM and Novell both scheduled for September 15.
The IBM hearing concerns IBM’s request for a partial summary judgment that its Linux activity does not infringe SCO copyright, while the Novell hearing concerns a request from Novell to dismiss SCO’s slander of title case against the software vendor.
Both hearings will be heard by Judge Dale Kimball and will be preceded by a hearing into SCO’s motion to compel discovery from IBM. Although the timing of the hearings suggests a potentially dark day for SCO, McBride responded to questions regarding the cases with his usual bravado. Everyone should tune in to the hearings on September 14 and September 15, he said. We look forward to those.
In October 2003 SCO’s legal threats against Linux users pushed its share price up to over $22. The current price of under $4 is giving the company cause for concern, therefore, and for more than one reason.
We are very concerned about the current price of the stock vis-à-vis what we think is the long-term value of the company, said McBride. The disparity between those two are definitely at the core of why we put this plan in place, he added of the company’s new shareholder rights plan.
The plan will kick in if any group or company not approved by the board acquires, or attempts to acquire, 15% or more of the company’s common stock. The plan will not prevent a takeover attempt but should encourage anyone seeking to buy the company to negotiate fair value with the board, commented McBride.
He also maintained that the plan had not been adopted in response to any current hostile takeover attempt, but the company’s recent wrangling with former investor BayStar Capital must have made an impact.
At one point BayStar demanded a change of management at SCO and held 40,000 shares of Series A-1 convertible preferred stock. Those shares were returned to SCO in August in return for 2,105,263 shares of SCO common stock and $13 million in cash after the two companies decided to go their separate ways.
The conclusion of that deal provided a boost to SCO shareholders this month as a contribution of capital of $15.5 million related to the repurchase pushed the company’s net income applicable to common stockholders up to $7.5 million, or $0.38 per share.
The company will have to continue to keep its cost down if it is to secure net income in the coming quarters. We are pleased but not fully satisfied with our progress on this front, commented Young, adding that the company anticipated restructuring costs in the fourth quarter as it closes offices in Spain and Italy and moves to smaller offices elsewhere.
Revenue for the fourth quarter is predicted to be between $10 million and $12 million.