SCO Could Face Cash Crunch After Novell Trial

SCO could be facing a serious cash and asset shortage if it does not receive a favorable decision in its 3-1/2-year-old legal battle with Novell over the Unix operating system.

Paul McDougall, Editor At Large, InformationWeek

August 23, 2007

3 Min Read

Unix distributor SCO Group could be facing a serious cash and asset shortage if it does not receive a favorable decision on one of the few significant issues left to be decided in its 3-1/2-year-old legal battle with Novell over the Unix operating system.

A judge earlier this month dismissed SCO's ownership claim over Unix and ruled that the OS belongs to Novell, essentially gutting a copyright lawsuit SCO filed against Novell in early 2004. In his decision, Utah federal court judge Dale Kimball said his ruling means SCO must remit to Novell a portion of fees it collected from a Unix licensing program it launched in 2003 called SCOsource.

The amount that SCO owes to Novell is now the primary focus of the case as it moves toward a trial that's slated to start on Sept. 17. SCO's problem: It's potentially on the hook for a sum that exceeds its total cash and assets. A judge or jury, depending on how the case is heard, will decide the final amount -- barring a settlement.

Securities and Exchange Commission filings show that SCO collected more than $25 million from SCOsource in 2003 -- the only year in which the program yielded any significant revenue for the Utah-based company. Most of that revenue came from SCOsource customers Sun Microsystems and Microsoft.

But as of April 2007, the latest date for which financial numbers were available, SCO had just $7.8 million in cash or equivalents and total assets of only $20 million, SEC records show. The company also had set aside only $2 million to pay Novell.

A spokesman for Novell on Tuesday declined to say what legal moves the company would consider if SCO is unable to pay up. "We'll actively pursue what we believe to be our rights" at the trial said the spokesman, who declined to elaborate. In a January court filing, Novell expressed concerns about its ability to collect on any judgment imposed on SCO. "For SCO, bankruptcy is inevitable," Novell said in the filing.

One analyst says SCO's future looks bleak. The lawsuit "was a bet the company strategy, and it doesn't look like they're holding the winning hand," said Yankee Group's Laura DiDio. "Whether SCO can survive remains to be seen, but it doesn't look good," she added.

In a report issued last week, financial analysts at research firm New Constructs said SCO represents a "dangerous" investment. Though SCO's shares were trading at just 38 cents per share when the report was issued, New Constructs said the stock held "more downside risk than upside potential." SCO's big problem, said New Constructs, is weakness of future cash flows.

SCO officials on Tuesday declined to answer questions about the company's financial status. SCO said in its most recent quarterly report that its failure to prevail in the Novell litigation, and in a related case against IBM, "may adversely affect our ability to continue in business."

Given the stakes, it's possible that SCO may pursue a settlement with Novell before the issue gets to trial. Court records indicate that SCO may argue that it owes little to Novell because the software in question, Unix System V, Release x, was only "incidentally" licensed to Microsoft and Sun under the SCOsource program and what those companies received was mostly SCO's own UnixWare software.

SCO is facing other financial worries brought on by Kimball's Aug. 10 ruling. Its stock has been trading under a dollar on the Nasdaq small cap index ever since the decision was handed down. Nasdaq rules say companies can be delisted if their share price drops bellow the dollar mark for 30 days.

SCO has hinted that it may appeal Kimball's ruling.

About the Author(s)

Paul McDougall

Editor At Large, InformationWeek

Paul McDougall is a former editor for InformationWeek.

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