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SCO's Finances Reverse As Legal Fees Mount 2

SCO Group has a plan to keep itself fit enough to continue its legal battles against Linux and to develop its Unix-on-Intel operating systems.
As its legal fees mount and Unix System V licensing revenue drops, SCO Group has developed a multipart plan to keep the company fiscally fit enough to continue its legal battles against Linux and to develop its Unix-on-Intel operating systems.

In addition to making several new Unix product announcements during its third quarter, ended July 31, SCO exchanged 40,000 shares of SCO Series A-1 convertible preferred stock owned by BayStar Capital LP for $13 million in cash. It also revised its fee agreement with its lead law firm Boies, Schiller & Flexner, and adopted a shareholder-rights plan.

Tuesday, SCO reported a third-quarter loss of $7.4 million on revenue of $11.2 million. That's a sharp contrast to a year ago, when the company reported a profit of $3.1 million on revenue of $20.1 million.

The drop was primarily due to a decrease in SCOsource licensing revenue--from $7.3 million a year ago to $678,000. SCO sells SCOsource licenses to protect Linux users from legal action in the event SCO wins its intellectual-property lawsuit against IBM. SCO claims that IBM used SCO-owned Unix V source code without SCO's permission.

In a related matter, SCO signed a letter of intent with Boies, Schiller & Flexner to revise its fee agreement, limiting the overall cash cost of SCO's numerous legal cases to $31 million. In return, Boies, Schiller & Flexner has committed to leading SCO's courtroom battles for an increased contingency fee of 20% to 33%.

During the third quarter, SCO spent about $7.3 million in legal fees on its cases against IBM, Novell, and others. "Our legal fees came in higher than expected [for the quarter], but we believe it was money well spent," SCO president and CEO Darl McBride said at Tuesday's earnings conference. "The [new] arrangement with Boies shows how committed they are to our case."

SCO directors Aug. 10 adopted a shareholder-rights, or poison-pill, plan to dissuade undervalued takeover attempts, McBride said Tuesday. "The plan won't prevent a takeover attempt, but will assure SCO shareholders that they'll receive fair value for their holdings."

Company execs anticipate fourth-quarter revenue of about $10 million but some restructuring and downsizing as well that will cost the company money in the short term.