SCO Puts Cap On Legal Costs, Moves To Protect Shareholders

During a conference call Tuesday, SCO CEO Darl McBride disclosed that the company spent almost $8 million of the $11 million in revenue generated during its third fiscal quarter of 2004 on legal fees, a "high-water mark" in litigation costs since the embattled Unix company filed suit against IBM in the spring of 2003.

To date, SCO, Lindon, Utah, has spent roughly $15 million in legal fees to fight intellectual property claims it has brought against IBM and Novell.

Following an agreement reached with its chief law firm, Boies, Schiller and Flexner, last quarter, SCO will pay no more than $31 million to ensure that its intellectual property issues are defended throughout the trial and appeals processes, McBride said. That way, SCO is assured it won't exhaust its entire $43 million in cash reserves to fight its legal battles and can use at least $12 million to fund other business initiatives in the interim, he said.

In exchange, the law firm will enjoy higher contingency fees of between 20 percent and 33 percent if SCO wins its multibillion-dollar claims against IBM, McBride said.

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During the last quarter, SCO's board of directors also instituted a shareholder rights plan to protect investors from any hostile takeover attempt.

During the course of highly publicized litigation against IBM and Novell over the past year, SCO's stock price has fluctuated between $3 and $22 per share. The stock price was trading at slightly less than $4 at midday Wednesday.

McBride said most top publicly traded companies have plans in place to protect investors and the program was not set up in response to a particular takeover attempt. The company needed to act to prevent a hostile acquirer from gaining control of SCO without offering a fair price to its shareholders, he said.

"The plan won't prevent takeover, but it ensures that SCO shareholders get fair value," McBride said. "It's to keep potential takeovers not in the best interests of shareholders at bay. [We want to] make sure someone can't come in with less than a friendly takeover attempt. We're very concerned about the current price of the stock vis-a-vis the long-term value of the company, and the disparity is at the core of [the shareholder rights plan]."

Despite posting a $7.5 million loss for the quarter, SCO said it has restored its Unix business to profitability and significantly increased its SCO source licensing revenue to $678,000, recognized during the quarter based on deals with two unnamed licensees.

That's a big jump from the $11,000 the company generated during the previous quarter for SCO source licenses, which allow customers to run Linux without fear of legal liability from SCO.

McBride discounted the notion that SCO's legal case is falling apart in light of recent court rulings that seemingly favored IBM and Novell in their respective intellectual property and copyright disputes against SCO. Moreover, he is confident that the Utah court will deny motions filed by IBM and Novell last month asking the court to throw out SCO's core claims.

"We're steadfastly focused on dual paths for success in the marketplace and the courtroom, and we'll take whatever steps necessary to ensure both," said McBride, who claimed that many of SCO's detractors are making bold predictions about court dismissals without studying the evidence provided to the court during the discovery process. "We can't fight back against the boisterous nature of people trying to shout us down. We're not going to get into industry brawl. We're going to keep our arguments confined to the courtroom."

Some of those detractors, however, said they are confident that the U.S. District Court may issue a partial judgment throwing out SCO's claim that Big Blue misappropriated its Unix code and donated it to Linux. A hearing on that matter is scheduled to be held in Utah on Sept. 15.

"The house of cards is tumbling down," said Anthony Awtrey, a vice president at I.D.E.A.L. Technology, a Linux solution provider in Orlando, Fla.

And while many Linux proponents deny that the SCO case has slowed sales, one ISV said a swift end would bolster his business. "Once the SCO case is dead, Linux growth will escalate dramatically," said Mike Sheffey, CEO of Santa Barbara, Calif.-based Versora, a Linux ISV. "Many enterprises have been waiting to deploy Linux once the case is settled."

SCO's case against IBM is scheduled to go to trial in the fall of 2005.