| SCO Asks the Bankruptcy Court to Let it Hire a CFO Temp - Updated Re Germany |
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Thursday, October 18 2007 @ 03:28 AM EDT
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In today's episode, SCO, having terminated, or lost, its CFO and the VP next in command -- though they leave with big wads of bills to soften the parting -- now finds itself in need of a CFO. It would like permission of the court to hire a CFO temp [PDF]. Well, actually, they already signed an agreement with CFO Solutions on October 1st under which agreement a Ken Nielsen is being paid at $150 an hour, but it is an agreement subject to approval by the Court. Believe it or not, the temp CFO gets all health and other benefits that a CFO on staff would get, except for stock. SCO indemnifies him, which would certainly be the first thing I'd ask for if I were being hired to do SCO's books. The agreement is for a term of six months and will be month to month after that. SCO would also like the court's approval to hire certain other professionals [PDF] that it was using before in non-Chapter 11 matters, like lawyers to handle the Indian ex-distributor who is suing SCO and another firm to handle whatever is happening in Germany, and here's one I don't recognize [PDF] -- the firm of Landman Corsi Baldman to provide "legal services regarding defense of employment related litigation." Eek. That's a term I immediately associate with sexual harassment litigation, although for sure that isn't all it can mean. Wrongful termination comes under that umbrella too, as well as other things. It's a Newark, NJ firm, so one can't help but wonder what it going on in New Jersey. It can't be much, though, because SCO suggests a monthly cap of payments to the firm of $1,000.
The firm's website actually calls them by a slightly different name, Landman Corsi Ballaine & Ford, and it describes its employment practice area in part like this: Employment Litigation
Landman Corsi Ballaine & Ford P.C. represents public and private employers in litigation arising from all aspects of the employer‑employee relationship. We have successfully defended employers in employment discrimination and labor matters in several state and federal jurisdictions, including before administrative tribunals, involving claims for wrongful termination, contract disputes, restrictive covenants, sexual harassment, hostile work environment as well as all types of discrimination claims. We have conducted internal investigations into employee complaints of discrimination and harassment. We have also successfully represented our clients in complex disputes concerning benefits under the Employee Retirement Income Security Act as well as employee privacy issues, including drug testing and search policies. Our attorneys frequently counsel clients on how to avoid employment‑related litigation.
We are proud of our ability to establish and maintain excellent working relationships with our clients as well as their insurance carriers and any in-house or private counsel recognizing the unique legal, economic and emotional nature of employment claims.
Today's list of recent filings:
134 -
Filed & Entered: 10/16/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service and Service List Regarding Schedules of SCO Operations, Inc. (related document(s)[130] ) Filed by The SCO Group, Inc.. (O'Neill, James)
135 -
Filed & Entered: 10/16/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service and Service List Regarding Statement of Financial Affairs of SCO Operations, Inc. (related document(s)[131] ) Filed by The SCO Group, Inc.. (O'Neill, James)
136 -
Filed & Entered: 10/16/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service and Service List Regarding Schedules of The SCO Group, Inc. (related document(s)[132] ) Filed by The SCO Group, Inc.. (O'Neill, James)
137 -
Filed & Entered: 10/16/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service and Service List Regarding Statement of Financial Affairs of The SCO Group, Inc. (related document(s)[133] ) Filed by The SCO Group, Inc.. (O'Neill, James)
138 -
Filed & Entered: 10/16/2007
Motion to Approve (B)
Docket Text: Motion to Approve Motion of the Debtors Seeking Approval of the Retention, Employment and Compensation of Certain Professionals Utilized by the Debtors in the Ordinary Course of Business Filed by The SCO Group, Inc.. Hearing scheduled for 11/6/2007 at 11:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 10/30/2007. (Attachments: # (1) Notice # (2) Exhibit A # (3) Exhibit B # (4) Proposed Form of Order # (5) Certificate of Service and Service List) (O'Neill, James)
139 -
Filed & Entered: 10/17/2007
Motion to Approve (B)
Docket Text: Motion to Approve Debtors' Motion for Approval of Employment of CFO Solutions to Furnish Chief Financial Officer to the Debtors Filed by The SCO Group, Inc.. Hearing scheduled for 11/6/2007 at 11:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 10/30/2007. (Attachments: # (1) Notice # (2) Exhibit A # (3) Exhibit B # (4) Proposed Form of Order # (5) Certificate of Service and Service List) (O'Neill, James)
Update: Heise has, in German, an article that helps us to know what the reference to Germany is about. Running it through a computer translation, we find this: In the writ referenzierten by Groklaw number 138 indicates the SCO
Group to output 15,000 dollar in the month on a procedure which is
described as follows: "proceedings in Munich, Germany, individually to
enforce rulings previously issued by German court against on." This
representation does not find correct deplored Andreas Kuckartz: "the
description submitted by SCO with court is false. With not a judicial
decision is, but around a complaint submitted at the regional court
Munich I against me due to expressions in another judicial procedure
before the regional court Munich II around the execution ('
enforcement '). I won this procedure in the main both before the
regional court Munich II and on 19 July 2007 in second instance before
the higher regional court Munich against The SCO Group GmbH, bath
Homburg."
I'll put it here in German also, so as to avoid any misinterpretation:
In dem von Groklaw referenzierten Schriftsatz Nummer 138 gibt die SCO Group an, 15.000 Dollar im Monat für ein Verfahren auszugeben, das wie folgt beschrieben wird: "proceedings in Munich, Germany, against an individual to enforce rulings previously issued by German court." Diese Darstellung findet der Beklagte Andreas Kuckartz nicht korrekt: "Die durch SCO bei Gericht eingereichte Beschreibung ist falsch. Es geht dabei nicht um die Zwangsvollstreckung ('enforcement') einer gerichtlichen Entscheidung, sondern um eine beim Landgericht München I gegen mich eingereichte Klage aufgrund von Äußerungen in einem anderen gerichtlichen Verfahren vor dem Landgericht München II. Dieses Verfahren habe ich in der Hauptsache sowohl vor dem Landgericht München II als auch am 19. Juli 2007 in zweiter Instanz vor dem Oberlandesgericht München gegen The SCO Group GmbH, Bad Homburg, gewonnen."
Update 2:
We have a human translation now:
In the filing #138 referenced by Groklaw, the SCO Group submits to be spending 15,000 USD per month for a suit which is described as follows: "proceedings in Munich, Germany, against an individual to enforce rulings previously issued by German court." The defendant Andreas Kuckartz does not view this to be a correct representation: “The description submitted to the court by SCO is incorrect. This does not relate to an enforcement of a court order but concerns an action brought against me at the regional court Munich I on the basis of statements made in a different action brought before the regional court Munich II. I have won the proceedings in the main action against The SCO Group Ltd. [GmbH], Bad Homburg, before the Regional Court Munich II as well as the proceedings of second instance before the Higher Regional Court Munich on 19 July 2007."
It occurs to me that it might be good to put SCO's September 17th 10Q up here, so we can notice anything that might be of interest. For example, I don't see the Landman Corsi Baldman firm mentioned or anything about employment related litigation. Maybe you'll find it. If not, I'm guessing this is new. This was filed three days after SCO filed for bankruptcy. SCO had to know it was filing for bankruptcy as it prepared this document, so there may be some interesting bits and pieces. Even if not, this is definitely part of the history, so it belongs here for the record. If you want to compare it to earlier filings, you'll find them on our SCO Financials page. I couldn't help but notice that in the most recent 10Q SCO says nothing about SCOsource being about UnixWare: The Company has operations in a number of countries that provide support services to customers and resellers. The Company acquired certain intellectual property rights surrounding UNIX and UNIX System V source code in May 2001 from The Santa Cruz Operation. During the year ended October 31, 2003, the Company initiated its SCOsource business to protect and defend its UNIX intellectual property rights....The Company’s SCOsource revenue to date has been primarily generated from agreements to utilize the Company’s UNIX source code as well as from intellectual property agreements. That seems fairly clear. Maybe it's the new temps. They didn't get the memo that the story just changed again.
****************************
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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| þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2007
OR
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| o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-29911
THE SCO GROUP, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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87-0662823 |
| (State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
| incorporation or organization) |
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355 South 520 West
Suite 100
Lindon, Utah 84042
(Address of principal executive offices and zip code)
(801) 765-4999
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). (Check one): YES o NO þ
As of September 12, 2007, there were 21,484,761 shares outstanding of the Registrant’s common
stock, $0.001 par value per share.
The SCO Group, Inc.
Table of Contents
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Page |
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Number |
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PART I. FINANCIAL INFORMATION |
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Item 1. Unaudited Financial Statements |
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3 |
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4 |
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5 |
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6 |
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18 |
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36 |
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37 |
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37 |
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38 |
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47 |
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48 |
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-2-
Table of Contents
THE SCO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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July 31, |
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October 31, |
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
7,393 |
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$ |
5,369 |
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Restricted cash |
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3,020 |
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8,024 |
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Available-for-sale marketable securities |
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— |
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2,249 |
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Accounts receivable, net of allowance for doubtful accounts of
$87 and $106, respectively |
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3,133 |
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5,123 |
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Other |
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1,328 |
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1,514 |
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Total current assets |
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14,874 |
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22,279 |
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PROPERTY AND EQUIPMENT: |
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Computer and office equipment |
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1,990 |
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|
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2,259 |
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Leasehold improvements |
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266 |
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316 |
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Furniture and fixtures |
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78 |
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78 |
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2,334 |
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2,653 |
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Less accumulated depreciation and amortization |
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(1,918 |
) |
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(2,045 |
) |
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Net property and equipment |
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416 |
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608 |
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OTHER ASSETS |
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504 |
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522 |
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Total assets |
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$ |
15,794 |
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$ |
23,409 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
1,944 |
|
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$ |
2,338 |
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Payable to Novell, Inc. |
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|
431 |
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|
|
2,978 |
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Accrued payroll and benefits |
|
|
1,380 |
|
|
|
2,507 |
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Accrued liabilities |
|
|
2,805 |
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|
|
3,059 |
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Deferred revenue |
|
|
2,561 |
|
|
|
2,994 |
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Royalties payable |
|
|
249 |
|
|
|
439 |
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Income taxes payable |
|
|
767 |
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|
|
820 |
|
|
|
|
|
|
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Total current liabilities |
|
|
10,137 |
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|
|
15,135 |
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|
|
|
|
|
|
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|
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LONG-TERM LIABILITIES |
|
|
186 |
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|
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192 |
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COMMITMENTS AND CONTINGENCIES (Note 3) |
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STOCKHOLDERS’ EQUITY: |
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|
|
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Common stock, $0.001 par value; 45,000 shares authorized,
21,782 and 21,391 shares outstanding, respectively |
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|
22 |
|
|
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21 |
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Additional paid-in capital |
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|
262,158 |
|
|
|
260,259 |
|
Common stock held in treasury, 297 shares |
|
|
(2,446 |
) |
|
|
(2,446 |
) |
Warrants outstanding |
|
|
856 |
|
|
|
856 |
|
Accumulated other comprehensive income |
|
|
986 |
|
|
|
932 |
|
Accumulated deficit |
|
|
(256,105 |
) |
|
|
(251,540 |
) |
|
|
|
|
|
|
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Total stockholders’ equity |
|
|
5,471 |
|
|
|
8,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities and stockholders’ equity |
|
$ |
15,794 |
|
|
$ |
23,409 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
-3-
Table of Contents
THE SCO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
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| |
|
Three Months Ended July 31, |
|
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Nine Months Ended July 31, |
|
| |
|
2007 |
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|
2006 |
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|
2007 |
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|
2006 |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Products |
|
$ |
3,690 |
|
|
$ |
6,201 |
|
|
$ |
13,451 |
|
|
$ |
17,904 |
|
SCOsource licensing |
|
|
— |
|
|
|
31 |
|
|
|
23 |
|
|
|
95 |
|
Services |
|
|
996 |
|
|
|
1,189 |
|
|
|
3,241 |
|
|
|
3,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue |
|
|
4,686 |
|
|
|
7,421 |
|
|
|
16,715 |
|
|
|
21,890 |
|
|
|
|
|
|
|
|
|
|
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|
|
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COST OF REVENUE: |
|
|
|
|
|
|
|
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|
|
|
|
|
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Products |
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|
329 |
|
|
|
478 |
|
|
|
1,041 |
|
|
|
1,559 |
|
SCOsource licensing |
|
|
1,156 |
|
|
|
2,315 |
|
|
|
2,876 |
|
|
|
10,087 |
|
Services |
|
|
448 |
|
|
|
666 |
|
|
|
1,553 |
|
|
|
2,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total cost of revenue |
|
|
1,933 |
|
|
|
3,459 |
|
|
|
5,470 |
|
|
|
13,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
|
2,753 |
|
|
|
3,962 |
|
|
|
11,245 |
|
|
|
8,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
2,463 |
|
|
|
3,111 |
|
|
|
7,296 |
|
|
|
8,656 |
|
Research and development |
|
|
1,424 |
|
|
|
2,029 |
|
|
|
4,737 |
|
|
|
5,786 |
|
General and administrative |
|
|
1,377 |
|
|
|
1,829 |
|
|
|
4,051 |
|
|
|
5,139 |
|
Amortization of intangibles |
|
|
— |
|
|
|
593 |
|
|
|
— |
|
|
|
1,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,264 |
|
|
|
7,562 |
|
|
|
16,084 |
|
|
|
21,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(2,511 |
) |
|
|
(3,600 |
) |
|
|
(4,839 |
) |
|
|
(13,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME (LOSS) OF AFFILIATE |
|
|
9 |
|
|
|
— |
|
|
|
115 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
112 |
|
|
|
191 |
|
|
|
351 |
|
|
|
542 |
|
Other income (expense), net |
|
|
20 |
|
|
|
(64 |
) |
|
|
29 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
132 |
|
|
|
127 |
|
|
|
380 |
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES |
|
|
(2,370 |
) |
|
|
(3,473 |
) |
|
|
(4,344 |
) |
|
|
(12,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
|
(28 |
) |
|
|
(107 |
) |
|
|
(221 |
) |
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(2,398 |
) |
|
$ |
(3,580 |
) |
|
$ |
(4,565 |
) |
|
$ |
(12,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET LOSS PER COMMON SHARE |
|
$ |
(0.11 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE BASIC AND DILUTED COMMON
SHARES OUTSTANDING |
|
|
21,372 |
|
|
|
21,063 |
|
|
|
21,264 |
|
|
|
20,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,398 |
) |
|
$ |
(3,580 |
) |
|
$ |
(4,565 |
) |
|
$ |
(12,855 |
) |
Foreign currency translation adjustment |
|
|
21 |
|
|
|
37 |
|
|
|
54 |
|
|
|
57 |
|
Unrealized gain on available-for-sale marketable securities |
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS |
|
$ |
(2,377 |
) |
|
$ |
(3,539 |
) |
|
$ |
(4,511 |
) |
|
$ |
(12,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
-4-
Table of Contents
THE SCO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
|
| |
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,565 |
) |
|
$ |
(12,855 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,407 |
|
|
|
1,323 |
|
Depreciation and amortization |
|
|
239 |
|
|
|
226 |
|
Loss on disposition of long-lived assets |
|
|
35 |
|
|
|
8 |
|
Equity in (income) loss of affiliate |
|
|
(115 |
) |
|
|
8 |
|
Amortization of intangibles (including $0 and $252 classified as cost of SCOsource
licensing revenue) |
|
|
— |
|
|
|
2,030 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
2,457 |
|
|
|
1,314 |
|
Accounts receivable, net |
|
|
1,990 |
|
|
|
2,271 |
|
Other current assets |
|
|
319 |
|
|
|
734 |
|
Accounts payable |
|
|
(394 |
) |
|
|
42 |
|
Accrued payroll and benefits |
|
|
(1,127 |
) |
|
|
(922 |
) |
Accrued liabilities |
|
|
(254 |
) |
|
|
(31 |
) |
Deferred revenue |
|
|
(433 |
) |
|
|
(966 |
) |
Royalties payable |
|
|
(190 |
) |
|
|
(134 |
) |
Income taxes payable |
|
|
(53 |
) |
|
|
13 |
|
Long-term liabilities |
|
|
(6 |
) |
|
|
(111 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(690 |
) |
|
|
(7,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(81 |
) |
|
|
(265 |
) |
Dividend received |
|
|
— |
|
|
|
308 |
|
Purchase of available-for-sale marketable securities |
|
|
— |
|
|
|
(6,441 |
) |
Proceeds from sale of available-for-sale marketable securities |
|
|
2,249 |
|
|
|
7,507 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
2,168 |
|
|
|
1,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock through employee stock purchase program |
|
|
436 |
|
|
|
613 |
|
Proceeds from exercise of common stock options |
|
|
57 |
|
|
|
35 |
|
Repurchase of common stock |
|
|
— |
|
|
|
(32 |
) |
Proceeds from sale of common stock in a private placement, net of issuance costs |
|
|
— |
|
|
|
9,809 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
493 |
|
|
|
10,425 |
|
|
|
|
|
|
|
|
| |
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
1,971 |
|
|
|
4,484 |
|
EFFECT OF FOREIGN EXCHANGE RATES ON CASH |
|
|
53 |
|
|
|
105 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
5,369 |
|
|
|
4,272 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
7,393 |
|
|
$ |
8,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
150 |
|
|
$ |
247 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in common stock subject to rescission |
|
$ |
— |
|
|
$ |
(1,018 |
) |
See accompanying notes to condensed consolidated financial statements.
-5-
Table of Contents
THE SCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
The business of The SCO Group, Inc. (the “Company”) focuses on marketing reliable,
cost-effective UNIX software products and related services for the small-to-medium sized business
market as well as replicated site franchises of Fortune 1000 companies. The Company has operations
in a number of countries that provide support services to customers and resellers. The Company
acquired certain intellectual property rights surrounding UNIX and UNIX System V source code in May
2001 from The Santa Cruz Operation. During the year ended October 31, 2003, the Company initiated
its SCOsource business to protect and defend its UNIX intellectual property rights.
The Company incurred a net loss of $4,565,000 for the nine months ended July 31, 2007, and,
during that same period, used cash of $690,000 in its operating activities. As of July 31, 2007,
the Company had a total of $7,393,000 in cash and cash equivalents and $3,020,000 in restricted
cash, of which $2,589,000 is designated to pay for experts, consultants and other costs in
connection with the litigation between the Company and IBM, Novell and Red Hat (the “SCO
Litigation”), and the remaining $431,000 of restricted cash is payable to Novell for its retained
binary royalty stream.
On August 10, 2007, the federal judge overseeing the Company’s lawsuit with Novell, Inc.
(“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the
United States District Court in Utah (the “Court”). The effect of these rulings was to
significantly reduce or to eliminate certain of the Company’s claims in both the Novell and IBM
cases, and possibly others. The Court ruled that Novell was the owner of the UNIX and UnixWare
copyrights that existed at the time of the 1995 Asset Purchase Agreement and that Novell retained
broad rights to waive the Company’s contract claims against IBM. The Company was directed to
accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined
that certain SCOsource licensing agreements that the Company executed in fiscal year 2003 included
SVRx technology and that the Company was required to remit some portion of the proceeds to Novell.
Over the Company’s objection, a bench trial was set to begin on September 17, 2007 and the federal
judge was to determine what portion, if any, of the proceeds of the fiscal year 2003 SCOsource
agreements is attributable to SVRx technology and should be remitted to Novell. The range of the
payment to Novell could have been from a de minimis amount to in excess of $30,000,000, the latter
amount being the amount claimed by Novell, including interest. Novell has sought to impose a
constructive trust on the Company’s current funds derived from these sources, which could result in
a freeze of the Company’s assets, and the Court indicated that it would address that issue as well.
The trial of these issues, however, was stayed as a result of the Company’s filing a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007. The Company’s
management and Board of Directors determined that filing for relief under Chapter 11 of the United
States Bankruptcy Code was appropriate and necessary. As a result of both the Court’s August 10, 2007 ruling and the Company’s entry into Chapter 11, there is substantial doubt about the
Company’s ability to continue as a going concern. Absent a significant cash payment to Novell
for this matter, management believes it is remote that the undiscounted future cash flows generated
by the Company would not be sufficient to recover the carrying values of the long-lived assets over
their expected remaining useful lives. However, if a significant cash payment is
-6-
Table of Contents
required, or
significant assets are put under a constructive trust, the carrying amount of the Company’s
long-lived assets may not be recovered. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
The Company intends to maintain business operations throughout the bankruptcy case. Subject
to the Bankruptcy Court’s approval, the Company will use its cash, cash equivalents, restricted
cash and subsequent cash inflows to meet its working capital needs throughout the reorganization
process.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
on a basis consistent with the Company’s audited annual financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information set forth therein. Certain information and note
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to SEC rules and
regulations, although the Company believes that the following disclosures, when read in conjunction
with the audited annual financial statements and the notes thereto included in the Company’s most
recent annual report on Form 10-K, are adequate to make the information presented not misleading.
Operating results for the three and nine months ended July 31, 2007 are not necessarily indicative
of the operating results that may be expected for the year ending October 31, 2007.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates. The Company’s critical accounting policies and
estimates include: revenue recognition, allowances for doubtful accounts receivable, useful lives
and impairment of long-lived assets, litigation reserves, and valuation allowances against deferred
income tax assets.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, as
modified by SOP 98-9. The Company’s revenue has historically been from three sources: (i) product
license revenue, primarily from product sales to resellers, end users and original equipment
manufacturers (“OEMs”); (ii) technical support service revenue, primarily from providing technical
support and consulting services to end users; and (iii) revenue from SCOsource licensing.
The Company recognizes product revenue upon shipment if a signed contract exists, the fee is
fixed or determinable, collection of the resulting receivable is probable and product returns are
reasonably estimable.
The majority of the Company’s revenue transactions relate to product-only sales. On occasion,
the Company has revenue transactions that have multiple elements (such as software products,
maintenance, technical support services, and other services). For software agreements
-7-
Table of Contents
that have
multiple elements, the Company allocates revenue to each component of the contract based on the
relative fair value of the elements. The fair value of each element is based on vendor specific
objective evidence (“VSOE”). VSOE is established when such elements are sold separately. The
Company recognizes revenue when the criteria for product revenue recognition set forth above have
been met. If VSOE of all undelivered elements exists, but VSOE does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining portion of the
license fee is recognized as revenue in the period when persuasive evidence of an arrangement is
obtained assuming all other revenue recognition criteria are met.
The Company recognizes product revenue from OEMs when the software is sold by the OEM to an
end-user customer. Revenue from technical support services and consulting services is recognized
as the related services are performed. Revenue for maintenance is recognized ratably over the
maintenance period.
The Company considers an arrangement with payment terms longer than the Company’s normal
business practice not to be fixed or determinable and revenue is recognized when the fee becomes
due. The Company typically provides stock rotation rights for sales made through its distribution
channel and sales to distributors are recognized upon shipment by the distributor to end users.
For direct sales not through the Company’s distribution channel, sales are typically non-refundable
and non-cancelable. The Company estimates its product returns based on historical experience and
maintains an allowance for estimated returns, which is recorded as a reduction to accounts
receivable and revenue.
The Company’s SCOsource revenue to date has been primarily generated from agreements to
utilize the Company’s UNIX source code as well as from intellectual property agreements. The
Company recognizes revenue from SCOsource agreements when a signed contract exists, the fee is
fixed or determinable, collection of the receivable is probable and delivery has occurred. If the
payment terms extend beyond the Company’s normal payment terms, revenue is recognized as the
payments become due.
Cash and Cash Equivalents
The Company considers all investments purchased with original maturities of three or fewer
months to be cash equivalents. Cash equivalents were $4,146,000 and $2,555,000 as of July 31, 2007
and October 31, 2006, respectively. Cash was $3,247,000 and $2,814,000 as of July 31, 2007 and
October 31, 2006, respectively. The Company has $100,000 of cash that is federally insured. All
remaining amounts of cash and cash equivalents as well as restricted cash exceed federally insured
limits.
Available-for-Sale Marketable Securities
Available-for-sale marketable securities are recorded at fair market value, based on quoted
market prices, and unrealized gains and losses are recorded as a component of
comprehensive loss. Realized gains and losses, which are calculated based on the
specific-identification method, are recorded in operations as incurred. Available-for-sale
marketable securities totaled $0 and $2,249,000 as of July 31, 2007 and October 31, 2006,
respectively.
Net Loss Per Common Share
Basic net income or loss per common share (“Basic EPS”) is computed by dividing net income or
loss by the weighted average number of common shares outstanding. Diluted net income or loss per
common share (“Diluted EPS”) is computed by dividing net income or loss by the sum of the weighted
average number of common shares outstanding and the dilutive
-8-
Table of Contents
potential common share equivalents
then outstanding. Potential common share equivalents consist of the weighted average number of
shares issuable upon the exercise of outstanding stock options and warrants to acquire common
stock. If dilutive, the Company computes Diluted EPS using the treasury stock method.
Due to the fact that for all periods presented, the Company has incurred net losses, common
share equivalents of 5,646,000 and 5,080,000 for the three and nine months ended July 31, 2007 and
2006, respectively, are not included in the calculation of diluted net loss per common share
because they are anti-dilutive.
(3) COMMITMENTS AND CONTINGENCIES
Litigation
IBM Corporation
On or about March 6, 2003, the Company filed a civil complaint against IBM. The case is
pending in the United States District Court for the District of Utah, styled The SCO Group, Inc. v.
International Business Machines Corporation, Civil No. 2:03CV0294. In this action, the Company
claims that IBM breached its UNIX source code licenses (both the IBM and Sequent Computer Systems,
Inc. (“Sequent”) licenses) by disclosing restricted information concerning the UNIX source code and
derivative works and related information in connection with its efforts to promote the Linux
operating system. The Company’s complaint includes, among other things, claims for breach of
contract, unfair competition, tortious interference and copyright infringement. The Company is
seeking damages in an amount to be proven at trial and seeking injunctive relief.
On or about March 6, 2003, the Company notified IBM that IBM was not in compliance with the
Company’s UNIX source code license agreement and on or about June 13, 2003, the Company delivered
to IBM a notice of termination of that agreement, which underlies IBM’s AIX software. On or about
August 11, 2003, the Company sent a similar notice terminating the Sequent source code license.
IBM disputes the Company’s right to terminate those licenses. In the event the Company’s
termination of those licenses is valid, the Company believes IBM is exposed to substantial damages
and injunctive relief claims based on its continued use and distribution of the AIX operating
system. On June 9, 2003, Novell sent the Company a notice purporting to waive the Company’s claims
against IBM regarding its license breaches.
On February 27, 2004, the Company filed a second amended complaint which alleges 9 causes of
action that are similar to those set forth above, adds a new claim for copyright infringement, and
removes the claim for misappropriation of trade secrets. IBM filed an answer and 14 counterclaims.
Among other things, IBM has asserted that the Company does not have
the right to terminate IBM’s UNIX license and IBM has claimed that the Company has breached the GNU
General Public License and has infringed certain patents held by IBM. IBM’s counterclaims include
claims for breach of contract, violation of the Lanham Act, unfair competition, intentional
interference with prospective economic relations, unfair and deceptive trade practices, promissory
estoppel, patent infringement and a declaratory judgment claim for non-infringement of copyrights.
On October 6, 2005, IBM voluntarily dismissed with prejudice its claims for patent infringement.
On December 22, 2005, the Company filed a voluminous report detailing IBM’s misuse of the
Company’s proprietary material. The Company’s December 2005 report included 293 total disclosures,
which the Company claims violate its contractual rights and copyrights. These reports and the
disclosures identified are the result of analysis from experienced outside technical consultants.
-9-
Table of Contents
On February 13, 2006, IBM filed a motion with the court seeking to limit the Company’s claims
as set forth in the December 2005 report. IBM argued that of the 293 items the Company had
identified, 201 did not meet the level of specificity required by the Court. IBM requested that
the Company be limited to 93 items set forth in the December 2005 filing, which IBM claims meet the
required level of specificity. On June 28, 2006, the Magistrate Judge issued a ruling striking
over 180 of the technology disclosures challenged by the Company from the case. This ruling is a
limitation of the number of technology disclosures the Company challenged in its December 2005
filing, but means that over 100 of the challenged items remain in the case. On July 13, 2006, the
Company filed objections to the Magistrate Judge’s order with the District Court; those objections
challenged the process and the result embodied in the Magistrate Judge’s order. On November 29,
2006, the District Court issued a ruling sustaining in full the Magistrate Judge’s ruling of June
28, 2006. The Company has filed a motion to reconsider this ruling and a motion to amend its
technology disclosures of December 2005.
On June 8, 2006, IBM filed a motion to confine the Company’s claims to, and strike allegations
in excess of, the final disclosures. In this motion, IBM claims that the Company’s technology
expert reports go beyond the disclosures contained in the Company’s December 2005 submission to the
Court and that those expert reports should be restricted to that extent. On December 21, 2006, the
Magistrate Judge granted IBM’s motion. The Company has filed objections to that order with the
District Court.
Both parties have filed expert reports and substantially finished expert discovery. IBM has
filed 6 motions for summary judgment that, if granted in whole or in substantial part, could
resolve the Company’s claims in IBM’s favor or substantially reduce the Company’s claims. The
Company has filed 3 motions for summary judgment. The summary judgment motions were heard by the
Court on March 1, 5 and 7, 2007, as scheduled, and the Court took all motions under advisement and
will issue rulings at some point in the future. A trial date will be set pending the outcome of
those motions.
As a result of the judge’s order of August 10, 2007, in the SCO v. Novell case, several of the
Company’s claims against IBM will be dismissed. These claims will include its claims that IBM
breached its UNIX license agreement and the Company’s claims arising from its termination of IBM’s
license. The Company believes that the Court’s August 10, 2007 ruling does not resolve certain
claims in the case, or aspects of those claims, including the Company’s claim for unfair
competition arising out of the Project Monterey initiative in the late 1990’s. IBM has taken the
position that the Court’s ruling of August 10, 2007 in the Novell case resolves all of the
Company’s claims against IBM in IBM’s favor; the Company disputes this. IBM’s counterclaims
against the Company would remain in the case subject to pending motions for summary judgment.
Novell, Inc.
On January 20, 2004, the Company filed suit in Utah state court against Novell, Inc. for
slander of title seeking relief for its alleged bad faith effort to interfere with the Company’s
ownership of copyrights related to the Company’s UNIX source code and derivative works and the
Company’s UnixWare product. The case is pending in the United States District Court for the
District of Utah under the caption, The SCO Group, Inc. v. Novell, Inc., Civil No. 2:04CV00139. In
the lawsuit, the Company requested preliminary and permanent injunctive relief as well as damages.
Through these claims, the Company seeks to require Novell to assign to the Company all copyrights
that the Company believes Novell has wrongfully registered, to prevent Novell from claiming any
ownership interest in those copyrights, and to require Novell to retract or withdraw all
representations it has made regarding its purported ownership of those copyrights and UNIX itself.
-10-
Table of Contents
Novell filed two motions to dismiss claiming, among other things, that Novell’s false
statements were not uttered with malice and are privileged under the law. The court denied both of
Novell’s motions to dismiss. On July 29, 2005, Novell filed its answer and counterclaims against
the Company, asserting counterclaims for the Company’s alleged breaches of the Asset Purchase
Agreement between Novell and the Company’s predecessor-in-interest, The Santa Cruz Operation, for
slander of title, restitution/unjust enrichment, an accounting related to Novell’s retained binary
royalty stream, and for declaratory relief regarding Novell’s alleged rights under the Asset
Purchase Agreement. On or about December 30, 2005, the Company filed a motion for leave to amend
its complaint to assert additional claims against Novell including copyright infringement, unfair
competition and a breach of Novell’s limited license to use the Company’s UNIX code. Novell
consented to the Company’s filing of these additional claims.
On or about April 10, 2006, Novell filed a motion to stay the case in Utah pending a request
for arbitration that Novell and SuSE Linux, GmbH (“SuSE”) filed on the same date in the
International Court of Arbitration. Through these proceedings, Novell claims that the Company
granted SuSE the right to use its intellectual property through the Company’s participation in the
UnitedLinux initiative in 2002 and through its acquisition of SuSE, Novell acquired SuSE’s rights
as a member of UnitedLinux. On August 21, 2006, the District Court ordered that portions of claims
relating to the SuSE arbitration should be stayed but the other portions of claims in the case
should proceed. Trial for the remaining matters has been set for September 2007.
The three-person arbitration panel has been selected for the SuSE arbitration and that process
has commenced. The arbitration has been set for December 2007.
In September 2006, Novell filed an Amended Counterclaim asserting 9 claims for relief
including, among other things, claims for slander of title, breach of contract, declaratory relief
and claims for an accounting, and for a constructive trust over certain revenue the Company
collected from Sun and Microsoft in 2003. In September 2006, Novell also filed a motion for
summary judgment or a preliminary injunction. The Company has opposed the motion and filed a
cross-motion for summary judgment or partial summary judgment. Those motions were argued on
January 23, 2007, before the District Court in Utah.
Novell has also filed motions for summary judgment asking the Court to rule that Novell
retained the UNIX and UnixWare copyrights under the Asset Purchase Agreement (“APA”), that the
Company has not met its burden of establishing special damages on its slander of title claim, that
Novell retained broad rights to waive the Company’s contract claims against IBM, and that the
portion of the Company’s contract and unfair competition claims based on non-compete provisions in
the APA and a related agreement should not proceed to a jury trial. The Company has filed its own
motions for summary judgment seeking a ruling that it owns the UNIX and UnixWare copyrights under
the APA, and that Novell’s retained rights under the APA are much narrower than Novell now claims.
On August 10, 2007, the federal judge ruled in favor of Novell on several of the summary
judgment motions that were before the Court. The effect of these rulings was to significantly
reduce or to eliminate certain of the Company’s claims in both the Novell and IBM cases, and
possibly others. The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights
that existed at the time of the 1995 Asset Purchase Agreement and that Novell retained broad rights
to waive the Company’s contract claims against IBM and the Company was directed to accept Novell’s
waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain
SCOsource licensing agreements that the Company executed in fiscal year 2003 included SVRx
technology and that the Company was required to remit some portion of the proceeds to Novell. Over
the Company’s objection, a bench trial was set to begin on September 17, 2007 and the federal judge
was to determine what portion, if any, of the
-11-
Table of Contents
proceeds of the fiscal year 2003 SCOsource agreements
is attributable to SVRx technology and should be remitted to Novell. The range of the payment to
Novell could have been from a de minimis amount to in excess of $30,000,000, the latter amount
being the amount claimed by Novell, including interest. Novell has sought to impose a constructive
trust on the Company’s current funds derived from those sources, which could result in a freeze of
the Company’s assets, and the Court would address that issue as well. The trial of these issues,
however, was stayed as a result of the Company’s filing a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code on September 14, 2007.
IPO Class Action Matter
The Company is an issuer defendant in a series of class action lawsuits involving over 300
issuers that have been consolidated under; In re Initial Public Offering Securities Litigation, 21
MC 92 (SAS). The consolidated complaint alleges, among other things, certain improprieties
regarding the underwriters’ conduct during the Company’s initial public offering and the failure to
disclose such conduct in the registration statement in violation of the Securities Act of 1933, as
amended. Class standing was certified for all of these cases by the United States District Court
for the Southern District Court of New York.
The plaintiffs, the issuers and the insurance companies negotiated and executed an agreement
to settle the dispute between the plaintiffs and the issuers. While the settlement agreement was
awaiting approval by the district court, the court of appeals overturned the class certification on
December 5, 2006. It is unlikely a settlement of a class action can remain effective as the class
is de-certified. If the decision by the court of appeals is not reversed, the Company does not
believe the settlement will stand, and it is possible the lawsuit may fragment into individual
actions. At this time, the Company does not know and cannot predict the legal or procedural
results of such an action. If the de-certification is reversed, and if thereafter the settlement
agreement is approved by the court, and if no cross-claims, counterclaims or third-
party claims are later asserted, this action will be dismissed with respect to the Company and
its directors. If the settlement agreement is not approved by the court, the matter will continue
unless another settlement agreement is reached.
The Company has notified its underwriters and insurance companies of the existence of the
claims. Management presently believes, after consultation with legal counsel, that the ultimate
outcome of this matter will not have a material adverse effect on the Company’s results of
operations or financial position and will not exceed the $200,000 self-insured retention already
paid or accrued by the Company.
Red Hat, Inc.
On August 4, 2003, Red Hat, Inc. filed a complaint against the Company. The action is pending
in the United States District Court for the District of Delaware under the case caption, Red Hat,
Inc. v. The SCO Group, Inc., Civil No. 03-772. Red Hat asserts that the Linux operating system
does not infringe on the Company’s UNIX intellectual property rights and seeks a declaratory
judgment for non-infringement of copyrights and no misappropriation of trade secrets. In addition,
Red Hat claims the Company has engaged in false advertising in violation of the Lanham Act,
deceptive trade practices, unfair competition, tortious interference with prospective business
opportunities, trade libel and disparagement. On April 6, 2004, the court denied the Company’s
motion to dismiss this case; however, the court stayed the case and requested status reports every
90 days regarding the case against IBM. Red Hat filed a motion for reconsideration, which the
court denied on March 31, 2005. The Company intends to vigorously defend this action. In the
event that the stay is lifted and Red Hat is allowed to pursue its claims, the Company will likely
assert counterclaims against Red Hat.
-12-
Table of Contents
Other Matters
In April 2003, the Company’s former Indian distributor filed a claim in India, requesting
summary judgment for payment of approximately $1,428,000, and an order that the Company trade in
India only through the distributor and/or give a security deposit until the claim is paid. The
distributor claims that the Company is responsible to repurchase certain software products and to
reimburse the distributor for certain other operating costs. Management does not believe that the
Company is responsible to reimburse the distributor for any operating costs and also believes that
the return rights related to any remaining inventory have lapsed. The distributor additionally
requested that the Indian courts grant interim relief in the form of attachment of local assets.
These requests for interim relief have failed in the court, discovery has commenced, and hearings
on the main claims have been held and are ongoing. The Company intends to vigorously defend this
action.
Pursuit and defense of the above-mentioned matters will be costly, and management expects the
costs for legal fees and related expenses will be substantial. A material, negative impact on the
Company’s results of operations or financial position from the Red Hat, Inc., IPO Class Action, or
Indian Distributor matters, or the IBM or Novell counterclaims is not estimable.
The Company is a party to certain other legal proceedings arising in the ordinary course of
business. Management believes, after consultation with legal counsel, that the ultimate outcome of
these legal proceedings will not have a material adverse effect on the Company’s results of
operations, financial position or liquidity.
(4) STOCKHOLDERS’ EQUITY
Issuance of Common Stock
On November 29, 2005, the Company entered into a Common Stock Purchase Agreement (“Purchase
Agreement”) with several institutional investors and one member of the Company’s board of
directors. On November 30, 2005, the Company sold to the investors approximately 2,852,000 shares
of the Company’s common stock for gross proceeds of approximately $10,005,000. The costs to
facilitate the private placement of the common stock were approximately $196,000. The shares
issued to the institutional investors were issued at $3.50 per share and the shares issued to the
board member were issued at $3.92 per share. Pursuant to the Purchase Agreement, the Company
agreed to use its best efforts to file a registration statement with the SEC covering the resale of
this common stock, and to use its commercially reasonable efforts to have such registration
statement declared effective. On May 25, 2006, this registration statement was declared effective
by the SEC.
Equity Plans
The Company has established the 1998 Stock Option Plan (the “1998 Plan”), 1999 Omnibus Stock
Incentive Plan (the “1999 Plan”), the 2002 Omnibus Stock Incentive Plan (the “2002 Plan”) and the
2004 Omnibus Stock Incentive Plan (the “2004 Plan”) for the award of stock options, stock
appreciation rights, restricted stock, phantom stock rights, and stock bonuses to employees,
executive officers, members of the Board of Directors and outside consultants. The Compensation
Committee of the Board of Directors has the ability to determine the terms of the option, the
exercise price, the number of shares subject to each option, and the exercisability of the options.
The Company’s current practice is for the Compensation Committee to recommend option grants
subject to the approval and ratification of the entire Board of Directors at regularly
scheduled board meetings. Under the terms of the 1998, 1999, 2002 and 2004 Plans, options
generally expire 10 years from the date of grant or within 90 days of termination. Options granted
under these plans generally vest 25 percent after the completion of one year of service
-13-
Table of Contents
and then
1/36 per month for the remaining three years and become fully vested at the end of four years.
Pursuant to the terms of their grant agreements, certain of the options granted under these plans
may be subject to accelerated vesting upon a change in control of the Company.
The Company has also established an employee stock purchase plan, which is designed to allow
eligible employees of the Company and its participating subsidiaries to purchase shares of the
Company’s common stock, at semi-annual intervals, through periodic payroll deductions.
Prior to October 31, 2005, as permitted under Statement of Financial Accounting Standards
(“SFAS”) No. 123, the Company accounted for its stock option plans following the recognition and
measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
issued to Employees,” and related interpretations. Accordingly, no stock-based compensation
expense had been reflected in the Company’s statements of operations as all options granted had an
exercise price equal to the market value of the underlying common stock on the date of grant and
the related number of shares granted was fixed at that point in time.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R),
“Share Based Payment.” This statement revised SFAS No. 123 by eliminating the option to account
for employee stock options under APB No. 25 and requiring companies to recognize the cost of
employee services received in exchange for awards of equity instruments based on the grant-date
fair value of those awards.
Effective November 1, 2005, the Company adopted the fair value recognition provisions of SFAS
No. 123(R) using the modified prospective application method. Under this transition method, the
Company recorded compensation expense on a straight-line basis for the three and nine months ended
July 31, 2007 and 2006, for: (a) the vesting of options granted prior to November 1, 2005 (based on
the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and
previously presented in the pro-forma note disclosures), and (b) stock-based awards granted
subsequent to November 1, 2005 (based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R)).
The effect of accounting for stock-based awards under SFAS No. 123(R) for the three months
ended July 31, 2007 and 2006 was to record $396,000 and $490,000, respectively, of stock-based
compensation expense. For the nine months ended July 31, 2007 and 2006, $1,407,000 and $1,323,000,
respectively, of stock-based compensation expense was recorded. For the three and nine months
ended July 31, 2007 and 2006, the Company has allocated stock-based compensation expense to the
following statement of operations captions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
Cost of products |
|
$ |
2,000 |
|
|
$ |
5,000 |
|
|
$ |
5,000 |
|
|
$ |
12,000 |
|
Cost of SCOsource licensing |
|
|
66,000 |
|
|
|
61,000 |
|
|
|
211,000 |
|
|
|
171,000 |
|
Cost of services |
|
|
12,000 |
|
|
|
17,000 |
|
|
|
29,000 |
|
|
|
46,000 |
|
Sales and marketing |
|
|
68,000 |
|
|
|
102,000 |
|
|
|
286,000 |
|
|
|
261,000 |
|
Research and development |
|
|
51,000 |
|
|
|
41,000 |
|
|
|
147,000 |
|
|
|
97,000 |
|
General and administrative |
|
|
197,000 |
|
|
|
264,000 |
|
|
|
729,000 |
|
|
|
736,000 |
|
| |
|
|
Total stock-based compensation |
|
$ |
396,000 |
|
|
$ |
490,000 |
|
|
$ |
1,407,000 |
|
|
$ |
1,323,000 |
|
| |
|
|
-14-
Table of Contents
With respect to stock options granted during the three and nine months ended July 31,
2007 and 2006, the assumptions used in the Black-Scholes option-pricing model are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
Risk-free interest rate |
|
|
4.7 |
% |
|
|
5.0 |
% |
|
|
4.7 |
% |
|
|
4.8 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility |
|
|
96.9 |
% |
|
|
66.2 |
% |
|
|
90.0 |
% |
|
|
63.4 |
% |
Expected exercise life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
The estimated fair value of stock options and ESPP shares are amortized over the vesting
period of the award.
During the nine months ended July 31, 2007, the Company granted options to purchase
approximately 1,229,000 shares of common stock with an average exercise price of $1.90 per share.
None of these stock options were granted with an exercise price below the quoted market price on
the date of grant. During the nine months ended July 31, 2007, options to purchase approximately
52,000 shares of common stock were exercised with an average exercise price of $1.09 per share. As
of July 31, 2007, there were approximately 5,411,000 stock options outstanding with a weighted
average exercise price of $3.54 per share.
Change in Control Provision for Employees
On March 26, 2007, the Company’s Board of Directors approved a modification to certain stock
option awards to allow for full vesting on stock option awards for employees who are non-executive
officers in the event of a Change in Control, as defined. The adoption of this provision
represents a modification to the outstanding underlying stock option awards. The Company
determined that the fair value of the awards on the modification date, in accordance with SFAS No.
123(R), was $0.
(5) SEGMENT INFORMATION
The Company’s resources are allocated and operating results managed to the operating income
(loss) level for each of the Company’s segments: UNIX and SCOsource. Both segments are based on
the Company’s UNIX intellectual property. The UNIX business sells and distributes UNIX products
and services through an extensive distribution channel and to corporate end-users and the SCOsource
business enforces and protects the Company’s UNIX intellectual property. Segment disclosures for
the Company are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, 2007 |
| |
|
UNIX |
|
SCOsource |
|
Total |
| |
|
|
Revenue |
|
$ |
4,686,000 |
|
|
$ |
— |
|
|
$ |
4,686,000 |
|
Cost of revenue |
|
|
777,000 |
|
|
|
1,156,000 |
|
|
|
1,933,000 |
|
| |
|
|
Gross margin (deficit) |
|
|
3,909,000 |
|
|
|
(1,156,000 |
) |
|
|
2,753,000 |
|
| |
|
|
Sales and marketing |
|
|
2,463,000 |
|
|
|
— |
|
|
|
2,463,000 |
|
Research and development |
|
|
1,424,000 |
|
|
|
— |
|
|
|
1,424,000 |
|
General and administrative |
|
|
1,377,000 |
|
|
|
— |
|
|
|
1,377,000 |
|
| |
|
|
Total operating expenses |
|
|
5,264,000 |
|
|
|
— |
|
|
|
5,264,000 |
|
| |
|
|
Loss from operations |
|
$ |
(1,355,000 |
) |
|
$ |
(1,156,000 |
) |
|
$ |
(2,511,000 |
) |
| |
|
|
-15-
Table of Contents
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, 2006 |
| |
|
UNIX |
|
SCOsource |
|
Total |
| |
|
|
Revenue |
|
$ |
7,390,000 |
|
|
$ |
31,000 |
|
|
$ |
7,421,000 |
|
Cost of revenue |
|
|
1,144,000 |
|
|
|
2,315,000 |
|
|
|
3,459,000 |
|
| |
|
|
Gross margin (deficit) |
|
|
6,246,000 |
|
|
|
(2,284,000 |
) |
|
|
3,962,000 |
|
| |
|
|
Sales and marketing |
|
|
3,111,000 |
|
|
|
— |
|
|
|
3,111,000 |
|
Research and development |
|
|
1,932,000 |
|
|
|
97,000 |
|
|
|
2,029,000 |
|
General and administrative |
|
|
1,781,000 |
|
|
|
48,000 |
|
|
|
1,829,000 |
|
Amortization of intangibles |
|
|
593,000 |
|
|
|
— |
|
|
|
593,000 |
|
| |
|
|
Total operating expenses |
|
|
7,417,000 |
|
|
|
145,000 |
|
|
|
7,562,000 |
|
| |
|
|
Loss from operations |
|
$ |
(1,171,000 |
) |
|
$ |
(2,429,000 |
) |
|
$ |
(3,600,000 |
) |
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, 2007 |
| |
|
UNIX |
|
SCOsource |
|
Total |
| |
|
|
Revenue |
|
$ |
16,692,000 |
|
|
$ |
23,000 |
|
|
$ |
16,715,000 |
|
Cost of revenue |
|
|
2,594,000 |
|
|
|
2,876,000 |
|
|
|
5,470,000 |
|
| |
|
|
Gross margin (deficit) |
|
|
14,098,000 |
|
|
|
(2,853,000 |
) |
|
|
11,245,000 |
|
| |
|
|
Sales and marketing |
|
|
7,296,000 |
|
|
|
— |
|
|
|
7,296,000 |
|
Research and development |
|
|
4,737,000 |
|
|
|
— |
|
|
|
4,737,000 |
|
General and administrative |
|
|
4,051,000 |
|
|
|
— |
|
|
|
4,051,000 |
|
| |
|
|
Total operating expenses |
|
|
16,084,000 |
|
|
|
— |
|
|
|
16,084,000 |
|
| |
|
|
Loss from operations |
|
$ |
(1,986,000 |
) |
|
$ |
(2,853,000 |
) |
|
$ |
(4,839,000 |
) |
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, 2006 |
| |
|
UNIX |
|
SCOsource |
|
Total |
| |
|
|
Revenue |
|
$ |
21,795,000 |
|
|
$ |
95,000 |
|
|
$ |
21,890,000 |
|
Cost of revenue |
|
|
3,571,000 |
|
|
|
10,087,000 |
|
|
|
13,658,000 |
|
| |
|
|
Gross margin (deficit) |
|
|
18,224,000 |
|
|
|
(9,992,000 |
) |
|
|
8,232,000 |
|
| |
|
|
Sales and marketing |
|
|
8,655,000 |
|
|
|
1,000 |
|
|
|
8,656,000 |
|
Research and development |
|
|
5,501,000 |
|
|
|
285,000 |
|
|
|
5,786,000 |
|
General and administrative |
|
|
4,994,000 |
|
|
|
145,000 |
|
|
|
5,139,000 |
|
Amortization of intangibles |
|
|
1,778,000 |
|
|
|
— |
|
|
|
1,778,000 |
|
| |
|
|
Total operating expenses |
|
|
20,928,000 |
|
|
|
431,000 |
|
|
|
21,359,000 |
|
| |
|
|
Loss from operations |
|
$ |
(2,704,000 |
) |
|
$ |
(10,423,000 |
) |
|
$ |
(13,127,000 |
) |
| |
|
|
(6) SUBSEQUENT EVENTS
On September 14, 2007, the Company and its wholly owned subsidiary, SCO Operations, Inc. (the
“Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the
District of Delaware (the “Bankruptcy Court”). The Debtors’ Chapter 11 cases are being jointly
administered under Case Nos. 07-11337 and 07-11338. The Debtors will continue to operate their
businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
-16-
Table of Contents
accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy
Court. The Company’s foreign subsidiaries were not included in the filings and will continue their
business operations without supervision from the Bankruptcy Court and will not be subject to the
requirements of the Bankruptcy Code. In connection with this proceeding, the Company has filed
motions with the Bankruptcy Court requesting permission to go forward on a “business as usual”
basis as a debtor-in-possession. Accordingly, the Company expects to continue to have jurisdiction
over its assets and business subject to the supervision and orders of the Bankruptcy Court. The
Company will continue operating and will file a plan of reorganization with the Bankruptcy Court.
Among other things, and unless the Bankruptcy Court modifies or removes it, and with limited
exceptions, a company that files for relief under Chapter 11 of the Bankruptcy Code is protected by
an automatic stay against the continuation or commencement of lawsuits to collect or adjudicate
prepetition claims against the company and its assets. Accordingly, the litigation pending against
the Company was stayed effective with the Chapter 11 filing on September 14, 2007.
As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as debtors-in-possession under the protection of
Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as
permitted in the normal course of business, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the condensed
consolidated financial statements.
In addition, under the priority scheme established by the Bankruptcy Code, unless creditors
agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full
before shareholders are entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be
determined until confirmation of a plan or plans of reorganization. No assurance can be given as
to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or
what types or amounts of distributions, if any, they would receive. A plan of reorganization could
result in holders of the Company’s stock receiving no distribution on account of their interests
and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met,
a plan of reorganization can be confirmed notwithstanding its rejection by the Company’s equity
security holders and notwithstanding the fact that such equity security holders do not receive or
retain any property on account of their equity interests under the plan.
-17-
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve
risks and uncertainties. Forward-looking statements can also be identified by words such as
“intends,” “anticipates,” “expects,” “believes,” “plans,” and similar terms. Forward-looking
statements are not guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those set forth below under “Forward-Looking
Statements and Factors that May Affect Future Results and Financial Condition” and Part II, Item 1A
– Risk Factors, and elsewhere in this Form 10-Q. The following discussion should be read in
conjunction with our unaudited condensed consolidated financial statements and notes thereto
included in this Form 10-Q and our audited consolidated financial statements included in our annual
report on Form 10-K for the year ended October 31, 2006 filed with the Securities and Exchange
Commission and management’s discussion and analysis contained therein. All information presented
herein is based on the three and nine months ended July 31, 2007 and 2006. We assume no obligation
to revise or update any forward-looking statements for any reason, except as required by law.
Recent Developments
Novell, Inc. Ruling
On August 10, 2007, the federal judge overseeing our lawsuit with Novell, Inc. (“Novell”)
ruled in favor of Novell on several of the summary judgment motions that were before the United
States District Court in Utah (the “Court”). The effect of these rulings was to significantly
reduce or eliminate certain of our claims in both the Novell and IBM cases, and possibly others.
The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the
time of the 1995 Asset Purchase Agreement and that Novell retained broad rights to waive our
contract claims against IBM. We were directed to accept Novell’s waiver of our UNIX contract
claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements
that we executed in fiscal year 2003 included SVRx technology and that we were required to remit
some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on
September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of
the fiscal year 2003 SCOsource agreements is attributable to SVRx technology and should be remitted
to Novell. The range of the payment to Novell could have been from a de minimis amount to in
excess of $30,000,000, the latter amount being the amount claimed by Novell, including interest.
Novell has sought to impose a constructive trust on our current funds derived from those sources,
which could result in a freeze of our assets, and the Court indicated that it would address that
issue as well. The trial of these issues, however, was stayed as a
result of our filing
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007. Our
management and Board of Directors determined that filing for relief under Chapter 11 of the United
States Bankruptcy Code was appropriate and necessary. As a result of both the Court’s August 10,
2007 ruling and our entry into Chapter 11, there is substantial doubt about our ability to continue
as a going concern. Absent a significant cash payment to Novell for this matter, management
believes it is remote that the undiscounted future cash flows generated by us would not be
sufficient to recover the carrying values of the long-lived assets over their expected remaining
useful lives. However, if a significant cash payment is required, or significant assets are put
under a constructive trust, the carrying amount of our long-lived assets may not be recovered. The
accompanying financial statements do not include any adjustments that might result from the outcome
of these uncertainties.
-18-
Table of Contents
We intend to maintain business operations throughout the bankruptcy case. Subject to the
Bankruptcy Court’s approval, we will use our cash, cash equivalents, restricted cash and
subsequent cash inflows to meet our working capital needs throughout the reorganization
process.
Bankruptcy Filing
On September 14, 2007, The SCO Group, Inc. and its wholly-owned subsidiary, SCO Operations,
Inc. (the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”). The Debtors’ Chapter 11 cases are being jointly-administered
under Case Nos. 07-11337 and 07-11338. The Debtors will continue to operate their businesses as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Our foreign
subsidiaries were not included in the filings and will continue their business operations without
supervision from the Bankruptcy Court and will not be subject to the requirements of the Bankruptcy
Code. In connection with this proceeding, we have filed motions with the Bankruptcy Court
requesting permission to go forward on a “business as usual” basis as a debtor in possession.
Accordingly, we expect to continue to have jurisdiction over our assets and business subject to the
supervision and orders of the Bankruptcy Court. We will continue operating and will file a plan of
reorganization with the Bankruptcy Court.
As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as debtors-in-possession under the protection of
Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as
permitted in the normal course of business, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the condensed
consolidated financial statements.
In addition, under the priority scheme established by the Bankruptcy Code, unless creditors
agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full
before shareholders are entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be
determined until confirmation of a plan or plans of reorganization. No assurance can be given as
to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or
what types or amounts of distributions, if any, they would receive. A plan of reorganization could
result in holders of our stock receiving no distribution on account of their interests and
cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a
plan of reorganization can be confirmed notwithstanding its rejection by our equity security
holders and notwithstanding the fact that such equity security holders do not receive or retain any
property on account of their equity interests under the plan. Accordingly, we urge that the
appropriate caution be exercised with respect to existing and future investments in any of these
securities as the value and prospects are highly speculative.
Under the supervision of the Bankruptcy Court, we may decide to pursue various strategic
alternatives as deemed appropriate by our Board of Directors to serve the best interests of the
Company and our stakeholders, including assets sales or strategic partnerships.
Business Focus
UNIX Business. Our UNIX business serves the needs of small-to-medium sized businesses as well
as replicated site franchisees of Fortune 1000 companies, by providing reliable, cost effective
UNIX software technology for distributed, embedded and network-based systems.
-19-
Table of Contents
Our UNIX business
includes our mobility product and services offerings. Our largest source of UNIX business revenue
is derived from existing customers through our worldwide, indirect, leveraged channel of partners,
which includes distributors and independent solution providers. We have a presence in a number of countries that provide support and services to customers and
resellers. The other principal channel for selling and marketing our UNIX products is through
existing customers that have a large number of replicated sites or franchisees.
We access these corporations through their information technology or purchasing departments
with our Area Sales Managers (“ASMs”) in the United States and through our reseller channel in
countries outside the United States. In addition, we also sell our operating system products to
original equipment manufacturers (“OEMs”). Our sales of UNIX products and services during the last
several years have been primarily to existing UNIX customers and not newly acquired customers. Our
UNIX business revenue depends significantly on our ability to market and sell our products to
existing customers and to generate upgrades from existing customers.
The following table shows the operating results of the UNIX business for the three and nine
months ended July 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
Revenue |
|
$ |
4,686,000 |
|
|
$ |
7,390,000 |
|
|
$ |
16,692,000 |
|
|
$ |
21,795,000 |
|
Cost of revenue |
|
|
777,000 |
|
|
|
1,144,000 |
|
|
|
2,594,000 |
|
|
|
3,571,000 |
|
| |
|
|
Gross margin |
|
|
3,909,000 |
|
|
|
6,246,000 |
|
|
|
14,098,000 |
|
|
|
18,224,000 |
|
| |
|
|
Sales and marketing |
|
|
2,463,000 |
|
|
|
3,111,000 |
|
|
|
7,296,000 |
|
|
|
8,655,000 |
|
Research and development |
|
|
1,424,000 |
|
|
|
1,932,000 |
|
|
|
4,737,000 |
|
|
|
5,501,000 |
|
General and administrative |
|
|
1,377,000 |
|
|
|
1,781,000 |
|
|
|
4,051,000 |
|
|
|
4,994,000 |
|
Amortization of intangibles |
|
|
— |
|
|
|
593,000 |
|
|
|
— |
|
|
|
1,778,000 |
|
| |
|
|
Total operating expenses |
|
|
5,264,000 |
|
|
|
7,417,000 |
|
|
|
16,084,000 |
|
|
|
20,928,000 |
|
| |
|
|
Loss from operations |
|
$ |
(1,355,000 |
) |
|
$ |
(1,171,000 |
) |
|
$ |
(1,986,000 |
) |
|
$ |
(2,704,000 |
) |
| |
|
|
Revenue from the UNIX business decreased by $2,704,000, or 37%, for the three months
ended July 31, 2007 compared to the three months ended July 31, 2006 and revenue from the UNIX
business decreased by $5,103,000, or 23%, for the nine months ended July 31, 2007 compared to the
nine months ended July 31, 2006. The revenue from this business has been declining over the last
several years primarily as a result of increased competition from alternative operating systems,
particularly Linux, and from the negative publicity of the SCO Litigation. We believe the
inclusion of UNIX code and derivative works in Linux has been a contributor to the decline in our
UNIX business because users of Linux generally do not pay for the operating system itself, but pay
for services and maintenance. The Linux operating system competes directly with our OpenServer and
UnixWare products and has taken significant market share from these products.
Operating costs for the UNIX business decreased from $7,417,000 for the three months ended
July 31, 2006 to $5,264,000 for the three months ended July 31, 2007 and operating costs for the
UNIX business decreased from $20,928,000 for the nine months ended July 31, 2006 to
$16,084,000 for the nine months ended July 31, 2007. These decreases were primarily
attributable to reduced headcount and related costs as well as from the elimination of amortization
expense from intangible assets. Our intangible assets became fully amortized during the three
months ended October 31, 2006.
The decline in our UNIX business revenue may be accelerated if industry partners withdraw
their support for our products. The decline in our UNIX business and our SCOsource
-20-
Table of Contents
business may
cause industry partners, developers and hardware and software vendors to choose not to support or
certify to our UNIX operating system products. This would lead to an accelerated decline in
revenue and an increase in negative cash flows from our UNIX business.
SCOsource Business. During the year ended October 31, 2003, we became aware that our UNIX
code and derivative works had been inappropriately included by others in the Linux operating
system. We believe the inclusion of UNIX code and derivative works in Linux has been a contributor
to the decline in our UNIX business because users of Linux generally do not pay for the operating
system itself, but pay for services and maintenance. The Linux operating system competes directly
with our OpenServer and UnixWare products and has taken significant market share from these
products.
In an effort to protect and defend our UNIX intellectual property rights, we initiated our
SCOsource business. We have incurred significant legal costs in an effort to defend and protect
our UNIX intellectual property rights and expect that costs and expenses for this business for the
year ending October 31, 2007 will be material.
The following table shows the operating results of the SCOsource business for the three and
nine months ended July 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
Revenue |
|
$ |
— |
|
|
$ |
31,000 |
|
|
$ |
23,000 |
|
|
$ |
95,000 |
|
Cost of revenue |
|
|
1,156,000 |
|
|
|
2,315,000 |
|
|
|
2,876,000 |
|
|
|
10,087,000 |
|
| |
|
|
Gross deficit |
|
|
(1,156,000 |
) |
|
|
(2,284,000 |
) |
|
|
(2,853,000 |
) |
|
|
(9,992,000 |
) |
| |
|
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
Research and development |
|
|
— |
|
|
|
97,000 |
|
|
|
— |
|
|
|
285,000 |
|
General and administrative |
|
|
— |
|
|
|
48,000 |
|
|
|
— |
|
|
|
145,000 |
|
| |
|
|
Total operating expenses |
|
|
— |
|
|
|
145,000 |
|
|
|
— |
|
|
|
431,000 |
|
| |
|
|
Loss from operations |
|
$ |
(1,156,000 |
) |
|
$ |
(2,429,000 |
) |
|
$ |
(2,853,000 |
) |
|
$ |
(10,423,000 |
) |
| |
|
|
Revenue from our SCOsource business decreased from $31,000 for the three months ended
July 31, 2006 to $0 for the three months ended July 31, 2007. Revenue also decreased from $95,000
for the nine months ended July 31, 2006 to $23,000 for the nine months ended July 31, 2007.
Revenue in the above mentioned periods was primarily attributable to sales of our SCOsource IP
agreements.
Cost of revenue, which primarily includes legal and professional fees incurred in connection
with defending our UNIX intellectual property rights in the SCO Litigation, decreased from
$2,315,000 for the three months ended July 31, 2006 to $1,156,000 for the three months ended July
31, 2007 and decreased from $10,087,000 for the nine months ended July 31, 2006 to
$2,876,000 for the nine months ended July 31, 2007. The decrease in the cost of revenue for
the three months ended July 31, 2007 as compared to July 31, 2006 was primarily attributable to
decreased legal services provided by technical, industry, damage and other experts in connection
with the SCO Litigation. The decreases in cost of revenue for the nine months ended July 31, 2007
as compared to the nine months ended July 31, 2006 was primarily attributable to the absence of the
$2,000,000 quarterly payment to Boies, Schiller & Flexner LLP and Kevin McBride (the “Law Firms”)
(which quarterly payments ended during the three months ended January 31, 2006), and by significant
decreases in legal services provided by technical, industry, damage and other experts in connection
with the SCO Litigation. Berger Singerman, P.A. (“Berger”) was also a member of this group of Law
Firms. With the consent of
-21-
Table of Contents
the Company, the engagement of this firm was mutually
terminated. The last payment received by Berger was on November 24, 2004. In addition to the
expenses incurred above, we must pay one or more contingency fees upon any amount that we or our
stockholders may receive as a result of a settlement, judgment, or a sale of our company.
Because of the unique and unpredictable nature of the SCO Litigation, the occurrence and
timing of certain expenses such as damage, industry and technical review and other consultants is
difficult to predict, and it will be difficult to predict the total cost of revenue for the
upcoming quarters.
Critical Accounting Policies
Our critical accounting policies and estimates include the following:
| |
• |
|
Revenue recognition; |
| |
| |
• |
|
Valuation allowances against deferred income tax assets; |
| |
| |
• |
|
Litigation reserves; |
| |
| |
• |
|
Useful lives and impairment of property and equipment; and |
| |
| |
• |
|
Allowances for doubtful accounts. |
Revenue Recognition. We recognize revenue in accordance with Statement of Position (“SOP”)
97-2, as modified by SOP 98-9. Our revenue has historically been from three sources: (i) product
license revenue, primarily from product sales to resellers, end users and OEMs; (ii) technical
support service revenue, primarily from providing technical support and consulting services to end
users; and (iii) revenue from SCOsource licensing.
We recognize product revenue upon shipment if a signed contract exists, the fee is fixed or
determinable, collection of the resulting receivable is probable and product returns are reasonably
estimable.
The majority of our revenue transactions relate to product-only sales. On occasion, we have
revenue transactions that have multiple elements (such as software products, maintenance, technical
support services, and other services). For software agreements that have multiple elements, we
allocate revenue to each component of the contract based on the relative fair value of the
elements. The fair value of each element is based on vendor specific objective evidence
(”VSOE”). VSOE is established when such elements are sold separately. We recognize revenue
when the criteria for product revenue recognition set forth above have been met. If VSOE of all
undelivered elements exists, but VSOE does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the license fee is recognized as
revenue in the period when persuasive evidence of an arrangement is obtained assuming all other
revenue recognition criteria are met.
We recognize product revenue from OEMs when the software is sold by the OEM to an end-user
customer. Revenue from technical support services and consulting services is recognized as the
related services are performed. Revenue for maintenance is recognized ratably over the maintenance
period.
-22-
Table of Contents
We consider an arrangement with payment terms longer than our normal business practice not to
be fixed or determinable and revenue is recognized when the fee becomes due. We typically provide
stock rotation rights for sales made through our distribution channel and sales to distributors are
recognized upon shipment by the distributor to end users. For direct sales not through our
distribution channel, sales are typically non-refundable and non-cancelable. We estimate our
product returns based on historical experience and maintain an allowance for estimated returns,
which is recorded as a reduction to accounts receivable and revenue.
Our SCOsource revenue to date has been primarily generated from agreements to utilize our UNIX
source code as well as from intellectual property compliance agreements. We recognize revenue from
SCOsource agreements when a signed contract exists, the fee is fixed or determinable, collection of
the receivable is probable and delivery has occurred. If the payment terms extend beyond our
normal payment terms, revenue is recognized as the payments become due.
Valuation Allowances Against Deferred Income Tax Assets. The amount, and ultimate
realization, of our deferred income tax assets depends, in part, upon the tax laws in effect, our
future earnings, if any, and other future events, the effects of which cannot be determined. We
provided a valuation allowance of $76,385,000 against our entire net deferred income tax assets as
of October 31, 2006. The valuation allowance was recorded because of our history of net operating
losses and the uncertainties regarding our future operating profitability and taxable income.
Litigation Reserves. We are party to a number of legal matters described in more detail
elsewhere in this Form 10-Q, including under Part II, Item I – Legal Proceedings. Pursuit and
defense of these matters will be costly, and management expects the costs for legal fees and
related expenses will be substantial. A material, negative impact on our results of operations or
financial position from the Red Hat, Inc., IPO Class Action, or Indian Distributor matters, or the
IBM and Novell counterclaims is not estimable. Because these matters are not estimable, we have
not recorded any reserves or contingencies related to these legal matters. In the event that our
assumptions used to evaluate these matters change in future periods, we may be required to record a
liability for an adverse outcome, which could have a material adverse effect on our results of
operations, financial position and liquidity.
Useful Lives and Impairment of Property and Equipment. We review our long-lived assets for
impairment at each balance sheet date and when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The carrying value of a long-lived asset is
considered impaired when the anticipated cumulative undiscounted cash flows of the related
asset or group of assets is less than the carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the estimated fair market value of the
long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as
circumstances dictate.
Write-downs of long-lived assets may be necessary if the future fair value of these assets is
less than the carrying value. If the operating trends for our UNIX or SCOsource businesses
continue to decline, or a definitive negative judgment requiring cash payments to third parties or
significant assets to be placed under a constructive trust is issued in various litigation matters,
we may be required to record an impairment charge in a future period related to the carrying value
of our long-lived assets.
Allowance for Doubtful Accounts Receivable. We offer credit terms on the sale of our products
to a majority of our customers and require no collateral from these customers. We
-23-
Table of Contents
perform ongoing
credit evaluations of our customers’ financial condition and maintain an allowance for doubtful
accounts based upon our historical collection experience and a specific review of customer balances
to determine expected collectibility. Our policies for determining allowances for doubtful
accounts have been applied consistently. Our allowance for doubtful accounts receivable was
$87,000 as of July 31, 2007. We have not experienced material differences from the actual amounts
provided for bad debts and our recorded estimates. However, our actual bad debts in future periods
may differ from our current estimates and the differences may be material, which may have an
adverse impact on our future accounts receivable and cash position.
Results of Operations
The following table presents our results of operations for the three and nine months ended
July 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
|
Nine Months Ended July 31, |
| Statement of Operations Data: |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
3,690,000 |
|
|
$ |
6,201,000 |
|
|
$ |
13,451,000 |
|
|
$ |
17,904,000 |
|
SCOsource licensing |
|
|
— |
|
|
|
31,000 |
|
|
|
23,000 |
|
|
|
95,000 |
|
Services |
|
|
996,000 |
|
|
|
1,189,000 |
|
|
|
3,241,000 |
|
|
|
3,891,000 |
|
| |
|
|
Total revenue |
|
|
4,686,000 |
|
|
|
7,421,000 |
|
|
|
16,715,000 |
|
|
|
21,890,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
329,000 |
|
|
|
478,000 |
|
|
|
1,041,000 |
|
|
|
1,559,000 |
|
SCOsource licensing |
|
|
1,156,000 |
|
|
|
2,315,000 |
|
|
|
2,876,000 |
|
|
|
10,087,000 |
|
Services |
|
|
448,000 |
|
|
|
666,000 |
|
|
|
1,553,000 |
|
|
|
2,012,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
1,933,000 |
|
|
|
3,459,000 |
|
|
|
5,470,000 |
|
|
|
13,658,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
2,753,000 |
|
|
|
3,962,000 |
|
|
|
11,245,000 |
|
|
|
8,232,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
2,463,000 |
|
|
|
3,111,000 |
|
|
|
7,296,000 |
|
|
|
8,656,000 |
|
Research and development |
|
|
1,424,000 |
|
|
|
2,029,000 |
|
|
|
4,737,000 |
|
|
|
5,786,000 |
|
General and administrative |
|
|
1,377,000 |
|
|
|
1,829,000 |
|
|
|
4,051,000 |
|
|
|
5,139,000 |
|
Amortization of intangibles |
|
|
— |
|
|
|
593,000 |
|
|
|
— |
|
|
|
1,778,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,264,000 |
|
|
|
7,562,000 |
|
|
|
16,084,000 |
|
|
|
21,359,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,511,000 |
) |
|
|
(3,600,000 |
) |
|
|
(4,839,000 |
) |
|
|
(13,127,000 |
) |
| |
|
|
Equity in income (loss) of affiliate |
|
|
9,000 |
|
|
|
— |
|
|
|
115,000 |
|
|
|
(8,000 |
) |
Other income (expense), net |
|
|
132,000 |
|
|
|
127,000 |
|
|
|
380,000 |
|
|
|
588,000 |
|
Provision for income taxes |
|
|
(28,000 |
) |
|
|
(107,000 |
) |
|
|
(221,000 |
) |
|
|
(308,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,398,000 |
) |
|
$ |
(3,580,000 |
) |
|
$ |
(4,565,000 |
) |
|
$ |
(12,855,000 |
) |
| |
|
|
THREE AND NINE MONTHS ENDED JULY 31, 2007 AND 2006
Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Revenue |
|
$ |
4,686,000 |
|
|
|
(37 |
)% |
|
$ |
7,421,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Revenue |
|
$ |
16,715,000 |
|
|
|
(24 |
)% |
|
$ |
21,890,000 |
|
-24-
Table of Contents
Revenue for the three months ended July 31, 2007 decreased by $2,735,000, or 37%, from
the three months ended July 31, 2006, and revenue for the nine months ended July 31, 2007 decreased
by $5,175,000, or 24%, from the nine months ended July 31, 2006. These decreases were primarily
attributable to a continued decline in our UNIX business as a result of continued competitive
pressure from competing operating systems, particularly Linux, and from continuing negative
publicity from the SCO Litigation which has adversely impacted and delayed our customers’ buying
decisions.
Revenue generated from our UNIX business and SCOsource business is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
UNIX revenue |
|
$ |
4,686,000 |
|
|
|
(37 |
)% |
|
$ |
7,390,000 |
|
Percent of total revenue |
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
SCOsource revenue |
|
|
— |
|
|
|
(100 |
)% |
|
|
31,000 |
|
Percent of total revenue |
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
UNIX revenue |
|
$ |
16,692,000 |
|
|
|
(23 |
)% |
|
$ |
21,795,000 |
|
Percent of total revenue |
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
SCOsource revenue |
|
|
23,000 |
|
|
|
(76 |
)% |
|
|
95,000 |
|
Percent of total revenue |
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
The decrease in revenue in the UNIX business of $2,704,000, or 37%, for the three months
ended July 31, 2007 compared to the three months ended July 31, 2006 and the decrease in revenue in
the UNIX business of $5,103,000, or 23%, for the nine months ended July 31, 2007 compared to the
nine months ended July 31, 2006 was primarily attributable to continued competition from other
operating systems, particularly Linux, and from continuing negative
publicity from the SCO Litigation which has adversely impacted and delayed our customers’
buying decisions. We anticipate that for the remainder of the year ending October 31, 2007 our
UNIX business and the related revenue from the UNIX business will continue to face significant
competition from Linux and other operating systems.
Sales of our UNIX products and services during the three and nine months ended July 31, 2007
and 2006 were primarily to existing customers. Our UNIX business revenue depends significantly on
our ability to market our products to existing customers and to generate upgrades from existing
customers. Our UNIX revenue may be lower than currently anticipated if (1) we are not successful
with our existing customers, (2) we lose the support of any of our existing hardware and software
vendors, or (3) our key industry partners withdraw their marketing and certification support or
direct their support to our competitors.
-25-
Table of Contents
Products Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Products revenue |
|
$ |
3,690,000 |
|
|
|
(40 |
)% |
|
$ |
6,201,000 |
|
Percent of total revenue |
|
|
79 |
% |
|
|
|
|
|
|
84 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Products revenue |
|
$ |
13,451,000 |
|
|
|
(25 |
)% |
|
$ |
17,904,000 |
|
Percent of total revenue |
|
|
81 |
% |
|
|
|
|
|
|
82 |
% |
Our products revenue consists of software licenses for UNIX products such as OpenServer
and UnixWare, as well as sales of UNIX-related products. Products revenue also includes revenue
derived from OEMs, distribution partners and large accounts. We rely heavily on our two-tier
distribution channel and any disruption in our distribution channel could have an adverse impact on
future revenue.
The decrease in products revenue of $2,511,000, or 40%, for the three months ended July 31,
2007 compared to the three months ended July 31, 2006 and the decrease in products revenue of
$4,453,000, or 25%, for the nine months ended July 31, 2007 compared to the nine months ended July
31, 2006 was primarily attributable to decreased sales of OpenServer and UnixWare and other
products revenue primarily resulting from increased competition in the operating system market,
particularly from Linux, and from continuing negative publicity from the SCO Litigation which has
adversely impacted and delayed our customers’ buying decisions.
Our products revenue was derived primarily from sales of our OpenServer and UnixWare products.
Other products revenue consists mainly of product maintenance and other UNIX-related products.
Revenue for these products was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
OpenServer revenue |
|
$ |
2,135,000 |
|
|
|
(33 |
)% |
|
$ |
3,184,000 |
|
Percent of products revenue |
|
|
58 |
% |
|
|
|
|
|
|
51 |
% |
UnixWare revenue |
|
|
1,172,000 |
|
|
|
(55 |
)% |
|
|
2,592,000 |
|
Percent of products revenue |
|
|
32 |
% |
|
|
|
|
|
|
42 |
% |
Other products revenue |
|
|
383,000 |
|
|
|
(10 |
)% |
|
|
425,000 |
|
Percent of products revenue |
|
|
10 |
% |
|
|
|
|
|
|
7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
OpenServer revenue |
|
$ |
8,202,000 |
|
|
|
(19 |
)% |
|
$ |
10,176,000 |
|
Percent of products revenue |
|
|
61 |
% |
|
|
|
|
|
|
57 |
% |
UnixWare revenue |
|
|
3,820,000 |
|
|
|
(35 |
)% |
|
|
5,901,000 |
|
Percent of products revenue |
|
|
28 |
% |
|
|
|
|
|
|
33 |
% |
Other products revenue |
|
|
1,429,000 |
|
|
|
(22 |
)% |
|
|
1,827,000 |
|
Percent of products revenue |
|
|
11 |
% |
|
|
|
|
|
|
10 |
% |
The decrease in revenue for OpenServer and UnixWare for the three and nine months ended
July 31, 2007 compared to the three and nine months ended July 31, 2006 is primarily the result of
continued competition from other operating systems,
particularly Linux, and from
-26-
Table of Contents
continuing
negative publicity from the SCO Litigation which has adversely impacted and delayed our customers’
buying decisions. The decrease in other products revenue for the three and nine months ended July
31, 2007 compared to the three and nine months ended July 31, 2006 is primarily attributable to
decreased sales of UNIX-related products and decreased sales of product maintenance. These trends
may continue or be enhanced as a result of the adverse rulings on summary judgment motions in our
lawsuit with Novell and our bankruptcy filings.
SCOsource Licensing Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
SCOsource licensing revenue |
|
$ |
— |
|
|
|
(100 |
)% |
|
$ |
31,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
SCOsource licensing revenue |
|
$ |
23,000 |
|
|
|
(76 |
)% |
|
$ |
95,000 |
|
We initiated our SCOsource business for the purpose of protecting and defending our
intellectual property rights in our UNIX source code and derivative works. SCOsource licensing
revenue was $0 for the three months ended July 31, 2007 compared to $31,000 for the three months
ended July 31, 2006 and was $23,000 for the nine months ended July 31, 2007 compared to $95,000 for
the nine months ended July 31, 2006. Revenue in the above mentioned periods was primarily
attributable to sales of our SCOsource IP agreements.
Services Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Services revenue |
|
$ |
996,000 |
|
|
|
(16 |
)% |
|
$ |
1,189,000 |
|
Percent of total revenue |
|
|
21 |
% |
|
|
|
|
|
|
16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Services revenue |
|
$ |
3,241,000 |
|
|
|
(17 |
)% |
|
$ |
3,891,000 |
|
Percent of total revenue |
|
|
19 |
% |
|
|
|
|
|
|
18 |
% |
Services revenue consists primarily of technical support fees, engineering services fees,
professional services fees and consulting fees. These fees are typically charged and invoiced
separately from UNIX products sales. The decrease in services revenue of $193,000, or 16%, for the
three months ended July 31, 2007 compared to the three months ended July 31, 2006 and the decrease
in services revenue of $650,000, or 17%, for the nine months ended July 31, 2007 compared to the
nine months ended July 31, 2006 was primarily attributable to the renewal of fewer support and
engineering services contracts as a result of lower UNIX product revenue.
The majority of our support and professional services revenue continues to be derived from
services for UNIX-based operating system products. Our future level of services revenue depends in
part on our ability to generate UNIX products revenue from new customers as well as to renew annual
support and services agreements with existing UNIX customers.
-27-
Table of Contents
Cost of Products Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Cost of products revenue |
|
$ |
329,000 |
|
|
|
(31 |
)% |
|
$ |
478,000 |
|
Percent of products revenue |
|
|
9 |
% |
|
|
|
|
|
|
8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Cost of products revenue |
|
$ |
1,041,000 |
|
|
|
(33 |
)% |
|
$ |
1,559,000 |
|
Percent of products revenue |
|
|
8 |
% |
|
|
|
|
|
|
9 |
% |
Cost of products revenue consists of manufacturing costs, royalties to third-party
vendors, technology costs and overhead costs. Cost of products revenue decreased by $149,000, or
31%, for the three months ended July 31, 2007 as compared to the three months ended July 31, 2006
and decreased by $518,000, or 33%, for the nine months ended July 31, 2007 as compared to the nine
months ended July 31, 2006. The decrease in the dollar amount of cost of products revenue was
primarily attributable to lower products revenue as margins did not vary considerably.
Cost of SCOsource Licensing Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Cost of SCOsource licensing revenue |
|
$ |
1,156,000 |
|
|
|
(50 |
)% |
|
$ |
2,315,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Cost of SCOsource licensing revenue |
|
$ |
2,876,000 |
|
|
|
(71 |
)% |
|
$ |
10,087,000 |
|
Cost of SCOsource licensing revenue includes legal and professional fees incurred in
connection with our SCO Litigation, the salaries and related personnel costs of SCOsource
employees, and an allocation of corporate costs.
Cost of SCOsource licensing revenue decreased by $1,159,000, or 50%, during the three months
ended July 31, 2007 as compared to the three months ended July 31, 2006 and decreased by
$7,211,000, or 71%, for the nine months ended July 31, 2007 as compared to the nine months ended
July 31, 2006. The decrease in the cost of SCOsource licensing revenue for the three months ended
July 31, 2007 as compared to the three months ended July 31, 2006 was primarily attributable to
decreases in services provided by technical, damage, industry and other experts in connection with
the SCO Litigation. The decrease in cost of SCOsource licensing revenue for the nine months ended
July 31, 2007 as compared to the nine months ended July 31, 2006 was primarily attributable to the
absence of the $2,000,000 quarterly payment and related expense to the Law Firms (which quarterly
payments ended during the three months ended January 31, 2006), and significant decreases in
services provided by technical, industry, damage and other experts in connection with the SCO
Litigation.
Because
of the unique and unpredictable nature of the SCO Litigation and our
entry into Chapter 11, the occurrence and
timing of certain expenses is difficult to predict, and will be difficult to predict for the
upcoming quarters. We will continue to make payments for technical, damage and industry experts,
consultants and for other fees. However, future legal fees may include contingency
-28-
Table of Contents
payments made
to the Law Firms as a result of a settlement, judgment, or a sale of our company, which could cause
the cost of SCOsource licensing revenue for the three months ending October 31, 2007 or for future
periods to be higher than the costs incurred for the three months ended July 31, 2007.
Cost of Services Revenue
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Cost of services revenue |
|
$ |
448,000 |
|
|
|
(33 |
)% |
|
$ |
666,000 |
|
Percent of services revenue |
|
|
45 |
% |
|
|
|
|
|
|
56 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Cost of services revenue |
|
$ |
1,553,000 |
|
|
|
(23 |
)% |
|
$ |
2,012,000 |
|
Percent of services revenue |
|
|
48 |
% |
|
|
|
|
|
|
52 |
% |
Cost of services revenue includes the salaries and related personnel costs of employees
delivering services revenue as well as third-party service agreements. Cost of services revenue
decreased by $218,000, or 33%, for the three months ended July 31, 2007 compared to the three
months ended July 31, 2006 and decreased by $459,000, or 23%, for the nine months ended July 31,
2007 compared to the nine months ended July 31, 2006. These decreases were primarily attributable
to reduced employee and employee-related costs.
Sales and Marketing
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Sales and marketing expenses |
|
$ |
2,463,000 |
|
|
|
(21 |
)% |
|
$ |
3,111,000 |
|
Percent of total revenue |
|
|
53 |
% |
|
|
|
|
|
|
42 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Sales and marketing expenses |
|
$ |
7,296,000 |
|
|
|
(16 |
)% |
|
$ |
8,656,000 |
|
Percent of total revenue |
|
|
44 |
% |
|
|
|
|
|
|
40 |
% |
Sales and marketing expenses consist of the salaries, commissions and other personnel
costs of employees involved in the revenue generation process, as well as advertising and corporate
allocations. The decrease in sales and marketing expenses of $648,000, or 21%, for the three
months ended July 31, 2007 compared with the three months ended July 31, 2006 and the decrease of
$1,360,000, or 16%, for the nine months ended July 31, 2007 compared with the nine months ended
July 31, 2006 was primarily attributable to lower commissions, lower travel expenses, reduced
discretionary marketing spending and lower co-operative advertising as a result of lower revenue.
Included in sales and marketing expenses for the three months ended July 31, 2007 and 2006 was
$68,000 and $102,000, respectively, for stock-based compensation.
Included in sales and marketing expenses for the nine months ended July 31, 2007 and 2006 was
$286,000 and $261,000, respectively, for stock-based compensation.
-29-
Table of Contents
Research and Development
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Research and development expenses |
|
$ |
1,424,000 |
|
|
|
(30 |
)% |
|
$ |
2,029,000 |
|
Percent of total revenue |
|
|
30 |
% |
|
|
|
|
|
|
27 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Research and development expenses |
|
$ |
4,737,000 |
|
|
|
(18 |
)% |
|
$ |
5,786,000 |
|
Percent of total revenue |
|
|
28 |
% |
|
|
|
|
|
|
26 |
% |
Research and development expenses consist of the salaries and benefits of software
engineers, consulting expenses and corporate allocations. Research and development expenses
decreased by $605,000, or 30%, for the three months ended July 31, 2007 compared with the three
months ended July 31, 2006 and decreased by $1,049,000, or 18%, for the nine months ended July 31,
2007 compared with the nine months ended July 31, 2006. The decrease in research and development
expenses was primarily attributable to reduced employee and employee-related costs. Included in
research and development expenses for the three months ended July 31, 2007 and 2006 was $51,000 and
$41,000, respectively, of stock-based compensation. Included in research and development expenses
for the nine months ended July 31, 2007 and 2006 was $147,000 and $97,000, respectively, of
stock-based compensation.
General and Administrative
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
General and administrative expenses |
|
$ |
1,377,000 |
|
|
|
(25 |
)% |
|
$ |
1,829,000 |
|
Percent of total revenue |
|
|
29 |
% |
|
|
|
|
|
|
25 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
General and administrative expenses |
|
$ |
4,051,000 |
|
|
|
(21 |
)% |
|
$ |
5,139,000 |
|
Percent of total revenue |
|
|
24 |
% |
|
|
|
|
|
|
23 |
% |
General and administrative expenses consist of the salaries and benefits of finance,
human resources, and executive management and expenses for professional services and corporate
allocations. General and administrative expenses decreased by $452,000, or 25%, during the three
months ended July 31, 2007 as compared to the three months ended July 31, 2006 and decreased by
$1,088,000, or 21%, during the nine months ended July 31, 2007 as compared to the nine months ended
July 31, 2006. The decrease in general and administrative expenses was primarily attributable to
decreased personnel and personnel-related costs and from decreased professional services costs for
services rendered by external consultants. Included in general and administrative expenses for the
three months ended July 31, 2007 and 2006 was $197,000 and $264,000, respectively, of stock-based
compensation. Included in general and administrative expenses for the nine months ended July 31,
2007 and 2006 was $729,000 and $736,000, respectively, of stock-based compensation.
-30-
Table of Contents
Amortization of Intangibles
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Amortization of intangibles |
|
$ |
— |
|
|
|
(100 |
)% |
|
$ |
593,000 |
|
Percent of total revenue |
|
|
0 |
% |
|
|
|
|
|
|
8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
Change |
|
2006 |
Amortization of intangibles |
|
$ |
— |
|
|
|
(100 |
)% |
|
$ |
1,778,000 |
|
Percent of total revenue |
|
|
0 |
% |
|
|
|
|
|
|
8 |
% |
As of October 31, 2006, all intangible assets had been fully amortized and, therefore, no
amortization expense was recorded during the three and nine months ended July 31, 2007.
Equity in Income (Loss) of Affiliate
We account for our ownership interests in companies in which we own at least 20% and less than
50% using the equity method of accounting. Under the equity method, we record our portion of the
entities’ net income or net loss in our consolidated statements of operations. As of July 31,
2007, the carrying value of our investment of $504,000 was for our 30% ownership in a Chinese
company.
During the three months ended July 31, 2007 and 2006, we recorded $9,000 and $0, respectively,
representing our portion of the net income (loss) in this entity. During the nine months ended
July 31, 2007 and 2006, we recorded $115,000 and $(8,000), respectively, representing our portion
of the net income (loss) in this entity.
Other Income (Expense), net
Other income (expense), net, consisted of the following components for the three and nine
months ended July 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended July 31, |
|
Nine Months Ended July 31, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Interest income |
|
$ |
112,000 |
|
|
$ |
191,000 |
|
|
$ |
351,000 |
|
|
$ |
542,000 |
|
Other income (expense), net |
|
|
20,000 |
|
|
|
(64,000 |
) |
|
|
29,000 |
|
|
|
46,000 |
|
| |
|
|
Total |
|
$ |
132,000 |
|
|
$ |
127,000 |
|
|
$ |
380,000 |
|
|
$ |
588,000 |
|
| |
|
|
Interest income decreased by $79,000 for the three months ended July 31, 2007 as compared
to the three months ended July 31, 2006 and decreased by $191,000 for the nine months ended July
31, 2007 as compared to the nine months ended July 31, 2006 and was primarily attributable to lower
cash and available-for-sale marketable securities balances.
The change in other income (expense), net, of $84,000 for the three months ended July 31, 2007
as compared to the three months ended July 31, 2006 and the change of $17,000 for the nine months
ended July 31, 2007 as compared to the nine months ended July 31, 2006 was primarily attributable
to changes in foreign currency rates.
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Provision for Income Taxes
The provision for income taxes was $28,000 for the three months ended July 31, 2007 and
$107,000 for the three months ended July 31, 2006 and was $221,000 for the nine months ended July
31, 2007 and $308,000 for the nine months ended July 31, 2006. Our provision for income taxes is
primarily related to earnings in foreign subsidiaries as well as from withholding taxes on revenue
generated in certain foreign locations.
Liquidity and Capital Resources
On
September 14, 2007, The SCO Group, Inc. and its wholly owned subsidiary, SCO Operations,
Inc. (the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”). The Debtors’ Chapter 11 cases are being jointly-administered
under Case Nos. 07-11337 and 07-11338. The Debtors will continue to operate their businesses as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Our foreign
subsidiaries were not included in the filings and will continue their business operations without
supervision from the Bankruptcy Court and will not be subject to the requirements of the Bankruptcy
Code. In connection with this proceeding, we have filed motions with the Bankruptcy Court
requesting permission to go forward on a “business as
usual” basis as a debtor-in-possession.
Accordingly, we expect to continue to have jurisdiction over our assets and business subject to the
supervision and orders of the Bankruptcy Court. We will continue operating and will file a plan of
reorganization with the Bankruptcy Court. For a further description of our bankruptcy filing, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent
Developments, Bankruptcy Filing”.
We intend to maintain business operations throughout the bankruptcy case. Subject to the
Bankruptcy Court approval, we will use our cash, cash equivalents, restricted cash, and subsequent
cash inflows to meet our working capital needs throughout the reorganization process.
Under the supervision of the Bankruptcy Court, we may decide to pursue various strategic
alternatives as deemed appropriate by our Board of Directors to serve the best interests of the
Company and our stakeholders, including asset sales or strategic partnerships.
Our cash and cash equivalents balance increased from $5,369,000 as of October 31, 2006 to
$7,393,000 as of July 31, 2007. During this same time period, our investment in available-for-sale
marketable securities decreased from $2,249,000 as of October 31, 2006 to $0 as of July 31, 2007.
As of July 31, 2007, we also had $3,020,000 of restricted cash, of which $2,589,000 is set aside to
cover expert and other costs related to the SCO Litigation and $431,000 is set aside for royalties
payable to Novell.
Subject to the Bankruptcy Court’s oversight and approval, we intend to use the cash and cash
equivalents as of July 31, 2007 to run our UNIX business, which includes our mobility products and
services offerings, and to pursue related initiatives.
Our net cash used in operating activities during the nine months ended July 31, 2007 was
$690,000 and was attributable to a net loss of $4,565,000, non-cash items of $1,566,000 and changes
in operating assets and liabilities of $2,309,000.
Our net cash used in operating activities during the nine months ended July 31, 2006 was
$7,050,000 and was attributable to a net loss of $12,855,000, non-cash items of $3,595,000 and
changes in operating assets and liabilities of $2,210,000.
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Our investing activities have historically consisted of equipment purchases and the purchase
and sale of available-for-sale marketable securities. During the nine months ended July 31, 2007,
cash provided by investing activities was $2,168,000, which was primarily a result of proceeds from
the sale of available-for-sale marketable securities of $2,249,000, offset by purchases of
equipment of $81,000.
During the nine months ended July 31, 2006, cash used in investing activities was $1,109,000,
which was primarily a result of sales, net of purchases, of available-for-sale marketable
securities of $1,066,000 and a dividend received from our 30% owned Chinese company of $308,000,
offset by purchases of equipment of $265,000.
Our financing activities provided $493,000 of cash during the nine months ended July 31, 2007.
The primary sources of cash were from the exercise of options to acquire common stock of $57,000
and proceeds of $436,000 received from the sale of common stock through our employee stock purchase
plan.
Our financing activities provided $10,425,000 of cash during the nine months ended July 31,
2006. The primary sources of cash were the net proceeds from the issuance of approximately
2,852,000 shares of our common stock for $9,809,000, the exercise of options to acquire common
stock of $35,000 and proceeds of $613,000 received from the sale of common stock through our
employee stock purchase plan, offset, in part, by the repurchase of shares of our common stock made
in connection with the completion of our rescission offer of $32,000.
Our net accounts receivable balance decreased from $5,123,000 as of October 31, 2006 to
$3,133,000 as of July 31, 2007, primarily as a result of lower sales (and related invoicing)
generated during the three months ended July 31, 2007 as compared to the three months ended October
31, 2006. The majority of our accounts receivable are current and our allowance for doubtful
accounts was $87,000 as of July 31, 2007, which represented approximately 3 percent of our gross
accounts receivable balance and is consistent with our experience in prior periods, and we expect
this trend to continue. Our write-offs of uncollectible accounts during the three and nine months
ended July 31, 2007 and 2006 were not significant.
As described elsewhere in this Form 10-Q, we are continuing to pay for expert, consulting and
other expenses relating to the SCO Litigation. These expenses have been material in the past and
even though we expect these expenses to be lower for the year ending October 31, 2007 as compared
to the year ended October 31, 2006, we expect them to continue to be material to our financial
statements.
In addition to the cash expenditures mentioned above, we must pay one or more contingency fees
upon any amount that we or our stockholders may receive as a result of a settlement, judgment, or a
sale of our company. The contingency fee amounts payable to the Law Firms will be, subject to
certain credits and adjustments, as follows:
| |
• |
|
33 percent of any aggregate recovery amounts received up to $350,000,000; |
| |
| |
• |
|
plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or
equal to $700,000,000; |
| |
| |
• |
|
plus 20 percent of any aggregate recovery amounts in excess of $700,000,000. |
The Engagement Agreement provides that, except for the compensation obligations specifically
described above, we will not be obligated to pay any legal fees, whether hourly, contingent or
otherwise, to the Law Firms, or any other law firms that may be engaged by the Law Firms, in
connection with the SCO Litigation through the end of the current litigation
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between us and IBM,
including any appeals. In light of the Chapter 11 filings, these arrangements are subject to
Bankruptcy Court approval.
We have entered into operating leases for our corporate offices located in the United States
and our international sales offices. We have commitments under these leases that extend through
the year ending October 31, 2010.
The following table summarizes our contractual operating lease obligations as of July 31,
2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
| |
|
Total |
|
1 year |
|
1 – 3 years |
|
3 -5 years |
|
5 years |
Operating lease obligations |
|
$ |
1,061,000 |
|
|
|
647,000 |
|
|
$ |
414,000 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
As of July 31, 2007, we did not have any long-term debt obligations, purchase obligations
or material capital lease obligations.
Our ability to reduce costs to offset revenue declines in our UNIX business is limited because
of contractual commitments to maintain and support our existing UNIX customers. The decline in our
UNIX business may be accelerated if industry partners withdraw their support as a result of the SCO
Litigation. In addition, our Chapter 11 filing and the SCO Litigation may cause industry partners,
developers and hardware and software vendors to choose not to support or certify to our UNIX
operating system products. This would lead to an accelerated decline in our UNIX products and
services revenue. If our UNIX products and services revenue is less than expected, our liquidity
will be adversely impacted.
In the event that cash required to fund operations and strategic initiatives exceeds our
current cash and cash equivalents resources, we will be required to reduce costs and perhaps raise
additional capital. We may not be able to reduce costs in a manner that does not impair our
ability to maintain our UNIX business and pursue the SCO Litigation. We may not be able to raise
capital for any number of reasons, including those listed under the section “Risk Factors” under
Part II, Item 1A of this Form 10-Q. If additional equity financing is available, it may not be
available to us on attractive terms and may be dilutive to our existing stockholders. In addition,
if our stock price declines, we may not be able to access the public equity markets on acceptable
terms, if at all. Our ability to effect acquisitions for our common stock would also be impaired.
On August 10, 2007, the federal judge overseeing our lawsuit with Novell ruled in favor of
Novell on several of the summary judgment motions that were before the Court. The effect of these
rulings was to significantly reduce or to eliminate certain of our claims in both the Novell and
IBM cases, and possibly others. The Court ruled that Novell was the owner of the UNIX and UnixWare
copyrights that existed at the time of the 1995 Asset Purchase Agreement and that Novell retained
broad rights to waive our contract claims against IBM. We were directed to accept Novell’s waiver
of our UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource
licensing agreements that we executed in fiscal year 2003 included SVRx technology and that we were
required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was
set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of
the proceeds of the fiscal year 2003 SCOsource agreements is attributable to SVRx technology and
should be remitted to Novell. The range of the payment to Novell could have been from a de minimis
amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, including
interest. Novell has sought to impose a constructive trust on our current funds derived from those
sources, which could result in a freeze of our assets, and the Court indicated that it would
address that issue as well. The
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trial of these issues, however, was stayed as a result of us
filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14,
2007. Our management and Board of Directors determined that filing for relief under Chapter 11 of
the United States Bankruptcy Code was appropriate and necessary. As a result of both the Court’s
August 10, 2007 ruling and our
entering into Chapter 11, there is substantial doubt about our ability to continue as a going
concern. Absent a significant cash payment to Novell for this matter, management believes it is
remote that the undiscounted future cash flows generated by us would not be sufficient to recover
the carrying values of the long-lived assets over their expected remaining useful lives. However,
if a significant cash payment is required, or significant assets are put under a constructive
trust, the carrying amount of our long-lived assets may not be recovered. The accompanying
financial statements do not include any adjustments that might result from the outcome of these
uncertainties.
Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition
With the exception of historical facts, the statements contained in Management’s Discussion
and Analysis of Financial Condition and Results of Operations are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our
current expectations and beliefs regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties and are based upon
assumptions and beliefs that may or may not materialize. These forward-looking statements include,
but are not limited to, statements concerning:
| |
• |
|
Our intention to maintain business operations throughout the
bankruptcy proceeding; |
| |
| |
• |
|
Our intention to use cash, cash equivalents, restricted cash
and subsequent cash inflows to meet our working capital needs
throughout the reorganization process; |
| |
| |
• |
|
Our intention to continue operating and file a plan of
reorganization with the Bankruptcy Court; |
| |
| |
• |
|
The possibility that we may decide to pursue various
strategic alternatives; |
| |
| |
• |
|
Our intention to vigorously defend legal claims and counterclaims brought against
us by others; |
| |
| |
• |
|
Our intention to continue to pursue the SCO Litigation, as allowed by the
Bankruptcy Court; |
| |
| |
• |
|
Our belief that legal matters that we are a party to are not estimable; |
| |
| |
• |
|
The strength of our intellectual property rights and contractual claims regarding
UNIX generally and specifically the strength of our claim that unauthorized UNIX
source code and derivatives of UNIX source code are prevalent in Linux; |
| |
| |
• |
|
Our belief that competition from Linux will continue during the year ending October
31, 2007 and future periods; |
| |
| |
• |
|
Our expectation that future services revenue will depend in part on our ability to
generate UNIX products revenue from new customers as well as the renewal of annual
support and services agreements from existing UNIX customers; |
| |
| |
• |
|
Our intention to continue to pay for expert, consulting and other expenses through
the conclusion of our litigation with IBM, and our expectation that although these
expenses are expected to decrease for the year ending October 31, 2007 as compared to
the year ended October 31, 2006, that they will continue to be material to our
financial statements; |
| |
| |
• |
|
Our expectation for the three months ending October 31, 2007 that because of the
unique and unpredictable nature of the SCO Litigation, the occurrence and timing of
certain expenses is difficult to predict, and will be difficult to predict for the
upcoming quarters; and
|
| |
| |
• |
|
Our intention to use the cash and cash equivalents as of
July 31, 2007 to run our UNIX business and to pursue the SCO
Litigation. |
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We wish to caution readers that our operating results are subject to various risks and
uncertainties that could cause our actual results and outcomes to differ materially from those
discussed or anticipated, including the resolution of the SCO Litigation, competition from other
operating systems, particularly Linux, the amount and timing of SCOsource licensing revenue, our
ability to enhance our UNIX operating systems and maintain our UNIX business, the outcomes and
developments in our Chapter 11 case, the impact of the Chapter 11 proceedings on
our other pending litigation, our cash balances and available cash, continued competitive
pressure on our operating system products, which could impact our results of operations, adverse
developments in and increased or unforeseen legal costs related to the Company’s litigation, the
inability to devote sufficient resources to the development and marketing of our products,
including the Me Inc. mobile services and development platform, and the possibility that customers
and companies with whom we have formed partnerships will decide to terminate or reduce their
relationships with us, and the factors set forth below in Part II, Item 1A-Risk Factors. We also
wish to advise readers not to place any undue reliance on the forward-looking statements contained
in this report, which reflect our beliefs and expectations only as of the date of this report. We
assume no obligation to update or revise these forward-looking statements to reflect new events or
circumstances or any changes in our beliefs or expectations, other than as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk. We have foreign offices and operations in Europe and Asia. As a
result, a portion of our revenue is derived from sales to customers outside the United States. Our
international revenue is primarily denominated in U.S. dollars, Euros and United Kingdom Pounds.
Most of the operating expenses related to our foreign-based operations are denominated in foreign
currencies and therefore operating results are affected by changes in the U.S. dollar exchange rate
in relation to foreign currencies such as the Euro, among others. If the U.S. dollar weakens
compared to the Euro and other currencies, our operating expenses for foreign operations will be
higher when translated back into U.S. dollars. Our revenue can also be affected by general
economic conditions in the United States, Europe and other international markets. Our results of
operations may be affected in the short term by fluctuations in foreign currency exchange rates.
Interest Rate Risk. The primary objective of our cash management strategy is to invest
available funds in a manner that assures safety and liquidity and maximizes yield within such
constraints. We believe that a hypothetical movement in interest rates, either up or down of up to
2%, would not have a material adverse impact on our cash and cash equivalents. We do not borrow
money for short-term investment purposes.
Investment Risk. We have historically invested in equity instruments of privately held and
public companies in the technology industry for business and strategic purposes. Investments are
accounted for under the cost method if our ownership is less than 20 percent and we are not able to
exercise influence over operations. We account for our ownership interests in companies in which
we own at least 20% and less than 50% using the equity method of accounting. Under the equity
method, we record our portion of the entities’ net income or net loss in our consolidated
statements of operations. Our investment policy is to regularly review the assumptions and
operating performance of these companies and to record impairment losses when events and
circumstances indicate that these investments may be impaired. As of July 31, 2007, we did not
hold any cost method investments. As of July 31, 2007, the carrying value of our equity method
investment of $504,000 was for our 30% ownership in a Chinese company.
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The stock market in general, and the market for shares of technology companies in particular,
has experienced price fluctuations. In addition, factors such as new product introductions by our
competitors or developments in the SCO Litigation may have a significant impact on the market price
of our common stock. Furthermore, quarter-to-quarter fluctuations in our results of operations may
have a significant impact on the market price of our common stock. These conditions could cause
the price of our common stock to fluctuate substantially over short periods of time.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our disclosure controls and
procedures were effective.
Changes in internal control over financial reporting. During the most recent fiscal quarter
covered by this report, there has been no change in our internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which we are involved are discussed in Part I, Item 3, of our
Annual Report on Form 10-K for the year ended October 31, 2006. In addition, for more information
regarding our legal proceedings, please see Note 3 included in Part 1, Item 1. Unaudited Financial
Statements – Notes to Condensed Consolidated Financial Statements, which information is
incorporated herein by reference. The following is a description of
certain material developments during
and subsequent to the three months ended July 31, 2007.
Novell
On August 10, 2007, the federal judge ruled in favor of Novell on several of the summary
judgment motions that were before the Court. The effect of these rulings was to significantly
reduce or to eliminate certain of our claims in both the Novell and IBM cases, and possibly others.
The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the
time of the 1995 Asset Purchase Agreement and that Novell retained broad rights to waive our
contract claims against IBM. We were directed to accept Novell’s waiver of its UNIX contract
claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements
that we executed in fiscal year 2003 included SVRx technology and that we were required to remit
some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on
September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of
the fiscal year 2003 SCOsource agreements is attributable to SVRx technology and should be remitted
to Novell. The range of the payment to Novell could have been from a de minimis amount to in
excess of $30,000,000, the latter amount being the amount claimed by Novell, including interest.
Novell has sought to impose a constructive trust on our current funds derived from those sources,
which could result in a freeze on our assets, and the Court indicated that it would address that issue
as well. The trial of these issues, however, was
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stayed as result of the Company’s filing a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007.
IBM
As a result of the judge’s order of August 10, 2007, in the SCO v. Novell case, several of our
claims against IBM will be dismissed. These claims will include our claims that IBM breached its
UNIX license agreement and our claims arising from our termination of IBM’s license. We believe
that the Court’s August 10, 2007 ruling does not resolve certain claims in the case, or aspects of
those claims, including our claim for unfair competition arising out of the
Project Monterey initiative in the late 1990’s. IBM has taken the position that the Court’s
ruling of August 10, 2007 in the Novell case resolves all of our claims against IBM in IBM’s favor;
we dispute this. IBM’s counterclaims against us would remain in the case subject to pending
motions for summary judgment.
ITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. In addition to the other
information contained in this Form 10-Q, you should consider the following risk factors before
investing in our securities.
We do not have a history of profitable operations and our cash resources are limited.
Our year ended October 31, 2003 was the first full year we were profitable in our operating
history. Our profitability for the year ended October 31, 2003 resulted primarily from our
SCOsource business. For the years ended October 31, 2006, 2005 and 2004, we incurred net losses of
$16,598,000, $10,726,000 and $16,227,000, respectively, and for the nine months ended July 31, 2007
we incurred a net loss of $4,565,000. As of July 31, 2007, our accumulated deficit was
$256,105,000.
If our revenue from the sale of our UNIX products and services continues to decline, or if we
continue to devote significant cash resources to the SCO Litigation, we will need to further reduce
operating expenses to generate positive cash flows. During October 2006, we implemented a
reduction in force and decreased our ongoing operating expenses in an effort to decrease our total
costs. We may not be able to further reduce operating expenses without damaging our ability to
support our existing UNIX business. Additionally, we may not be able to achieve profitability
through additional cost-cutting actions.
As of July 31, 2007, we had a total of $7,393,000 in cash and cash equivalents and an
additional $3,020,000 of restricted cash of which $2,589,000 can be used to pursue the SCO
Litigation. Since October 31, 2004, we have spent a total of $12,411,000 for expert, consulting
and other costs and fees as agreed to in the Engagement Agreement with our legal counsel in the SCO
Litigation. Our limited cash resources may not be sufficient to fund continuing losses from
operations and the expenses of the SCO Litigation.
A long period of operating under Chapter 11 may harm our business.
A long period of operating
under Chapter 11 could adversely affect our business and
operations. So long as the Chapter 11 cases continue, our senior management will be required to
spend a significant amount of time and effort dealing with the Bankruptcy reorganization instead of
focusing exclusively on business operations. A prolonged period of operating under Chapter 11 will
also make it more difficult to attract and retain management and other key personnel necessary to
the success and growth of our business. In addition, the longer the Chapter 11 cases continue, the
more likely it is that our customers and suppliers will lose
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confidence in our ability to
successfully reorganize our businesses and seek to establish alternative commercial relationships.
Furthermore, so long as the Chapter 11 cases continue, we will be required to incur
substantial costs for professional fees and other expenses associated with the proceedings. A
prolonged continuation of the Chapter 11 cases may also require us to seek additional financing.
If we require additional financing during the Chapter 11 cases and we are unable to obtain the
financing on favorable terms or at all, our chances of successfully reorganizing our businesses may
be seriously jeopardized.
We may not be able to obtain confirmation of our Chapter 11 plan.
In order to successfully emerge from Chapter 11 bankruptcy protection as a viable entity, we
believe that we must develop, and obtain requisite court and creditor approval of a viable Chapter
11 plan of reorganization (the “Plan”). This process requires us to meet certain statutory
requirements with respect to adequacy of disclosure with respect to the Plan, soliciting and
obtaining creditor acceptances of the Plan, and fulfilling other statutory conditions for
confirmation. We may not receive the requisite acceptances to confirm the Plan. Even if the
requisite acceptances of the Plan are received, the Bankruptcy Court may not confirm the Plan.
If our Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able
to reorganize our businesses and what, if any, distributions to holders of claims against us would
ultimately receive with respect to their claims. If an alternative reorganization could not be
agreed upon, it is possible that we would have to liquidate our assets, in which case it is likely
that holders of claims would receive substantially less favorable treatment than they would receive
if we were to emerge as a viable, reorganized entity.
A plan of reorganization may result in holders of our common stock receiving no distribution on
account of their interests and cancellation of their common stock.
Under the priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before
shareholders are entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be
determined until confirmation of a plan or plans of reorganization. No assurance can be given as
to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or
what types or amounts of distributions, if any, they would receive. A plan of reorganization could
result in holders of our common stock receiving no distribution on account of their interests and
cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a
plan of reorganization can be confirmed notwithstanding its rejection by our equity security
holders and notwithstanding the fact that such equity security holders do not receive or retain any
property on account of their equity interests under the Plan. Therefore, an investment in our
common stock is highly speculative.
Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business strategies.
The U.S. Bankruptcy Code limits our ability, among other things, to:
| |
• |
|
incur additional indebtedness; |
| |
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• |
|
pay dividends, repurchase our capital stock or make certain other restricted
payments or investments; |
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• |
|
make investments; |
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• |
|
sell assets; |
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| |
• |
|
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
| |
| |
• |
|
create liens; |
| |
| |
• |
|
enter into strategic partnerships and other contracts; |
| |
| |
• |
|
plan for or react to market conditions or meet capital needs
or otherwise restrict our activities or business plans; and |
| |
| |
• |
|
finance our operations, strategic acquisitions, investments or alliances or other
capital needs or to engage in other business activities that would be in our interest. |
In addition, if a trustee is appointed to operate us in Chapter 11, the trustee would assume
control of our assets and the SCO Litigation, and we may not be able to pursue the SCO Litigation
or the rest of our business plan as we would like to do.
We have suffered a significant setback in our lawsuit with Novell that has significantly limited
our claims and raises substantial doubt about our ability to continue as a going concern and we may
not prevail in our lawsuits with IBM, Novell and others.
On August 10, 2007, the
federal judge overseeing our lawsuit with Novell ruled in favor of Novell on several of the summary judgment motions
that were before the Court. The effect of these rulings was to significantly
reduce or to eliminate certain of our claims in both the Novell and IBM cases, and possibly others.
The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the
time of the 1995 Asset Purchase Agreement and that Novell retained broad rights to waive our
contract claims against IBM. We were directed to accept Novell’s waiver of our UNIX contract
claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements
that we executed in fiscal year 2003 included SVRx technology and that we were required to remit
some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on
September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of
the fiscal year 2003 SCOsource agreements is attributable to SVRx technology and should be remitted
to Novell. The range of the payment to Novell could have been from a de minimis amount to in
excess of $30,000,000, the latter amount being the amount claimed by Novell, including interest.
Novell has sought to impose a constructive trust on our current funds derived from those sources,
which could result in a freeze of our assets, and the Court indicated that it would address that
issue as well. The trial of these issues, however, was stayed as a result of the Company’s filing
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007. Our
management and Board of Directors determined that filing for relief under Chapter 11 of the United
States Bankruptcy Code was appropriate and necessary. As a result of both the Court’s August 10,
2007 ruling and our entering into Chapter 11, there is substantial doubt about our ability to
continue as a going concern. Absent a significant cash payment to Novell for this matter,
management believes it is remote that the undiscounted future cash flows generated by us would not
be sufficient to recover the carrying values of the long-lived assets over their expected remaining
useful lives. However, if a significant cash payment is required, or significant assets are put
under a constructive trust, the carrying amount of our long-lived assets may not be recovered. The
accompanying financial statements do not include any adjustments that might result from the outcome
of these uncertainties.
We cannot guarantee whether our claims against IBM or Novell will be heard by a jury. The
lawsuits with IBM and Novell will continue to be costly. In the event that we are not successful
with the IBM or Novell motions, or the continuing litigation requires more cash than expected, our
business and operations would be materially harmed.
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We must continue to pay for expert, consulting and other expenses through the conclusion of
our litigation with IBM and Novell. As we continue with discovery and other trial preparations, we
may be required to place additional amounts into the escrow account, which could further reduce our
liquidity position.
If the Court imposes a constructive trust on proceeds of the fiscal year 2003 SCOsource agreements,
we may not be able to continue in business.
The federal judge overseeing our lawsuit with Novell had scheduled a bench trial that was set
to begin on September 17, 2007. At that time the federal judge was to determine what portion, if
any, of the proceeds of the fiscal year 2003 SCOsource agreements is attributable to SVRx
technology and should be remitted to Novell. The range of the payment to Novell could
have been from a de minimis amount to in excess of $30,000,000, the latter amount being the
amount claimed by Novell, including interest. Novell has sought to impose a constructive trust on
our current funds derived from these sources, which could result in a freeze of our assets, and the
Court indicated that it would address that issue as well. The trial
of these issues, however, was stayed as a result of our filing a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code on
September 14, 2007. If the automatic stay is lifted, and the Court imposes a constructive
trust in an amount that exceeds our cash and cash equivalents and restricted cash, or if the amount
of the constructive trust is otherwise significant, we may not be able to continue in business.
Our claims relating to our UNIX intellectual property may subject us to additional legal
proceedings.
In August 2003, Red Hat brought a lawsuit against us asserting that the Linux operating system
does not infringe our UNIX intellectual property rights and seeking a declaratory judgment for
non-infringement of copyrights and no misappropriation of trade secrets. In addition, Red Hat
claims we have engaged in false advertising in violation of the Lanham Act, deceptive trade
practices, unfair competition, tortious interference with prospective business opportunities, and
trade libel and disparagement. This case is currently stayed pending the resolution of our suit
against IBM. If Red Hat is successful in its claim against us, our business and results of
operations could be materially harmed.
Our Engagement Agreement with the Law Firms representing us in the SCO Litigation requires us to
pay for expert, consulting and other costs, which could harm our liquidity position.
On October 31, 2004, the Company entered into an engagement agreement (the “Engagement
Agreement”) with Boies, Schiller & Flexner LLP, Kevin McBride and Berger Singerman P.A. (the “Law
Firms”). This Engagement Agreement supercedes and replaces the original engagement agreement that
was entered into in February 2003. The Engagement Agreement governs the relationship between the
Law Firms and us in connection with the Law Firms’ representation of us in the SCO Litigation.
Berger Singerman P.A. was a member of this group of Law Firms. With the
consent of us, the engagement of this firm was mutually terminated. The last payment received by
Berger Singerman P.A. was on November 24, 2004.
On June 5, 2006, we entered into an amendment to the Engagement Agreement and agreed with the
Law Firms to deposit an additional $5,000,000 into the escrow account to cover additional expert,
consulting and other expenses. During October 2006, we deposited an additional $5,000,000 into the
escrow account. In the event that we exhaust these funds, we must continue to pay for expert,
consulting and other expenses through the conclusion of our litigation with IBM. As we continue
with discovery and other trial preparations, we may be required to place additional amounts into
the escrow account, which could further reduce our liquidity position. As of July 31, 2007, we had
a total of $7,393,000 in cash and cash equivalents and an
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additional $3,020,000 of restricted cash
to be used to pursue the SCO Litigation. Since October 31, 2004, we have spent a total of
$12,411,000 for expert, consulting and other costs and fees as agreed to in the Engagement
Agreement with our legal counsel in the SCO Litigation. In light of the Chapter 11 filings, these
arrangements are subject to Bankruptcy Court approval.
Developments in the SCO Litigation and fluctuations in our operating results or the failure of our
operating results to meet the expectations of public market analysts and investors may negatively
impact our stock price and our ability to continue in business.
Developments in the SCO Litigation and fluctuations in our operating results or our failure to
meet the expectations of analysts or investors, even in the short-term, could cause our stock price
to decline significantly. Because of the potential for fluctuations in our expenses
related to the SCO Litigation in any particular period, you should not rely on comparisons of
our results of operations as an indication of future performance.
Factors that may affect our results include:
| |
• |
|
our ability to operate effectively under Chapter 11 protection and changes in
business attitudes toward UNIX as a viable operating system compared to other
competing operating systems, especially Linux, as well as the possibility that the
automatic stay triggered by our Chapter 11 filing will be lifted or modified, and a
constructive trust will be imposed upon our cash in a significant amount; |
| |
| |
• |
|
the outcome of pending motions for summary judgment in our lawsuit with IBM,
adverse rulings relating to IBM’s counterclaims, and results of, developments in, or
costs of the SCO Litigation as well as adverse publicity regarding our business and
the SCO Litigation; |
| |
| |
• |
|
changes in general economic conditions, such as recessions, that could affect
capital expenditures in the software industry; |
| |
| |
• |
|
the interest level of resellers in recommending our UNIX business solutions
to end users and the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors; |
| |
| |
• |
|
the contingency and other costs we may pay to the Law Firms representing us
in our efforts to establish and defend our intellectual property rights; |
| |
| |
• |
|
changes in attitudes of customers and partners due to the decline in our UNIX
business and our position against the inclusion of our UNIX code and derivative works
in Linux; and |
| |
| |
• |
|
the activities of short sellers. |
We also experience fluctuations in operating results in interim periods in Europe and the Asia
Pacific regions due to seasonal slowdowns and economic conditions in these areas. Seasonal
slowdowns in these regions typically occur during the summer months.
As a result of the factors listed above and elsewhere, it is possible that our results of
operations may be below the expectations of public market analysts and investors in any particular
period. This could cause our stock price to decline. If revenue falls below our expectations, and
we are unable to quickly reduce our spending in response, our operating results will be lower than
expected. Our stock price may fall in response to these events.
For a further description of
recent developments in our litigation with Novell, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent
Developments, Novell, Inc. Ruling”. For a further description of the risks we face as a result of
filing for Chapter 11, see “A long period of operating
under Chapter 11 may harm our business”,
“We
may not be able to obtain confirmation of our Chapter 11
plan”, “A plan of
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reorganization may
result in holders of our common stock receiving no distribution on account of their interests and
cancellation of their common stock”, and “Operating under the U.S. Bankruptcy Code may restrict our
ability to pursue our business strategies”.
If we are unable to retain key personnel in an intensely competitive environment, our operations
could be adversely affected.
We need to retain our key management, technical and support personnel. Competition for
qualified professionals in the software industry is intense, and departures of existing personnel
could be disruptive to our business and might result in the departure of other employees. During
October 2006 we were required to reduce our operating expenses and eliminated certain positions
within our worldwide workforce in an effort to reduce operating costs. The loss or departure of
any officers or key employees could harm our ability to implement
our business plan and could adversely affect our operations. Our future success depends to a
significant extent on the continued service and coordination of our management team, particularly
Darl C. McBride, our President and Chief Executive Officer and Ryan E. Tibbitts our General
Counsel. For a discussion of the risks we face in attracting and retaining employees due to our
Chapter 11 filing, see “A long period of operating under Chapter 11 may harm our business.”
We operate in a highly competitive market and face significant competition from a variety of
current and potential sources; many of our current and potential competitors have greater financial
and technical resources than we do; thus, we may fail to compete effectively.
In the operating system market, our competitors include IBM, Red Hat, Novell, Sun, Microsoft,
and other UNIX and Linux distributors. These and other competitors are aggressively pursuing the
current UNIX operating system market. Many of these competitors have access to substantially
greater resources than we do. The major competitive alternative to our UNIX products is Linux.
The expansion of our competitors’ offerings may restrict the overall market available for our UNIX
products, including some markets where we have been successful in the past.
Our future success may depend in part on our ability to continue to meet the increasing needs
of our customers by supporting existing and emerging technologies. If we do not have the resources
to enhance our products to meet these evolving needs, we may not remain competitive and be able to
sustain our business. Additionally, because technological advancement in the UNIX operating system
market and alternative operating system markets is progressing at an advanced pace, we will have to
develop and introduce enhancements to our existing products and any new products on a timely basis
to keep pace with these developments, evolving industry standards, changing customer requirements
and keeping current on certifications. Our failure to meet any of these and other competitive
pressures may render our existing products and services obsolete, which would have an adverse
impact on our revenue and operations.
The success of our UNIX business will depend on the level of commitment and certification we
receive from industry partners and developers. In recent years, we have seen hardware and software
vendors as well as software developers turn their certification and application development efforts
toward Linux and elect not to continue to support or certify to our UNIX operating system products.
If this trend continues, our competitive position will be adversely impacted and our future
revenue from our UNIX business will decline. The decline in our UNIX business may be accelerated
if industry partners withdraw their support from us for any reason, including our SCO Litigation.
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If the market for UNIX continues to contract, our business will be harmed.
Our revenue from the sale of UNIX products has declined over the last several years. This
decrease in revenue has been attributable primarily to increased competition from other operating
systems, particularly Linux, and from the negative publicity we have received from the SCO
Litigation. Our sales of UNIX products and services are primarily to existing customers. If the
demand for UNIX products continues to decline, and we are unable to develop UNIX products and
services that successfully address a market demand, our UNIX revenue will continue to decline,
industry participants may not certify to our operating system and products, we may not be able to
attract new customers or retain existing customers and our business and results of operations will
be adversely affected. Additionally, with the recent adverse summary judgment rulings in our
lawsuit with Novell and our entry into Chapter 11, customers will likely determine to no longer buy our
products and services. Because of the long adoption cycle for operating system purchases and the
long sales cycle of our operating system products, we may not be able to reverse these revenue
declines quickly.
We may lose the support of industry partners leading to an accelerated decline in our UNIX products
and services revenue.
The decline in our UNIX business, the recent rulings in our lawsuit with Novell and our filing
for protection under Chapter 11 may cause industry partners, developers, customers and hardware and
software vendors to choose not to support or certify to our UNIX operating system products. This
would lead to an increased decline in our UNIX products and services revenue and would adversely
impact our results of operations and liquidity.
We rely on our indirect sales channel for distribution of our products, and any disruption of our
channel at any level could adversely affect the sales of our products.
We have a two-tiered distribution channel. The relationships we have developed with resellers
allow us to offer our products and services to a much larger customer base than we would otherwise
be able to reach through our own direct sales and marketing efforts. Some solution providers also
purchase solutions through our resellers, and we anticipate they will continue to do so. Because
we usually sell indirectly through resellers, we cannot control the relationships through which
resellers, solution providers or equipment integrators purchase our products. In turn, we do not
control the presentation of our products to end users. Therefore, our sales could be affected by
disruptions in the relationships between us and our resellers, between our resellers and solution
providers, or between solution providers and end users. Also, resellers and solution providers may
choose not to emphasize our products to their customers. Any of these occurrences could diminish
the effectiveness of our distribution channel and lead to decreased sales.
Our foreign-based operations and sales create special problems, including the imposition of
governmental controls and taxes and fluctuations in currency exchange rates that could hurt our
results.
We have employees or contractors in certain locations in Europe, the Middle East, Latin
America, and Asia. These foreign operations are subject to certain inherent risks, including:
| |
• |
|
potential loss of developed technology through piracy, misappropriation, or
more lenient laws regarding intellectual property protection; |
| |
| |
• |
|
imposition of governmental controls, including trade restrictions and other
tax requirements; |
| |
| |
• |
|
fluctuations in currency exchange rates and economic instability; |
| |
| |
• |
|
longer payment cycles for sales in foreign countries; and |
| |
| |
• |
|
seasonal reductions in business activity. |
-44-
Table of Contents
In addition, certain of our operating expenses are denominated in local currencies, creating
risk of foreign currency translation losses that could reduce our financial results and cash flows.
When we generate profits in foreign countries, our effective income tax rate is increased.
During the three months ended April 30, 2004, our Indian office was assessed withholding taxes
by the Government of India Income Tax Department. The Tax Department assessed a 15% withholding
tax on certain revenue transactions in India that the Tax Department deemed royalty revenue under
the Income Tax Act. We have filed an appeal with the Tax Department and believe that revenue from
our packaged software does not qualify for royalty treatment and therefore would not be subject to
withholding tax. However, we may be unsuccessful in our appeal against the Tax Department and be
obligated to pay the assessed taxable amounts. Because of our international operations, we may be
subject to additional withholding or other taxes from other international jurisdictions.
We could lose our listing on the Nasdaq Capital Market and the loss of our listing would make our
stock significantly less liquid and would affect its value.
There are certain qualitative and quantitative criteria for continued listing on the Nasdaq
Capital Market, known as continued listing requirements. Failure to satisfy any one of these
continued listing requirements could result in our securities being delisted from the Nasdaq
Capital Market. On April 23, 2007, we received a letter from The Nasdaq Stock Market (“Nasdaq”)
indicating that the bid price of our common stock for the last 30 consecutive business days had
closed below the minimum $1.00 per share required for continued listing under Nasdaq Marketplace
Rule 4310(c)(4). Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(D), we were provided an initial
period of 180 calendar days, or until October 22, 2007, to regain compliance. On June 11, 2007, we
received a letter from Nasdaq indicating that we regained compliance with Nasdaq Marketplace Rule
4310(c)(4). During the compliance period provided under the Marketplace Rules, the closing bid
price of our common stock was at $1.00 per share or greater for at least 10 consecutive business
days. Accordingly, the Nasdaq Staff informed us that we had regained compliance with Marketplace
Rule 4310(c)(4).
The closing price of our common stock on September 14, 2007 was $0.37. There is the risk of
being delisted from the Nasdaq Capital Market should our common stock fail to maintain a minimum
bid price of $1.00 per share for 30 consecutive days, or we fail to meet other continued listing
requirements.
In addition, as a result of our having filed for protection under Chapter 11 of the U.S.
Bankruptcy Code, Nasdaq may decide to use its authority under Marketplace Rules 4300, 4450(f) and
IM-4300 to delist our securities from The Nasdaq Stock Market or suspend trading in our securities.
Upon delisting from the Nasdaq Capital Market, our stock would be traded over-the-counter,
more commonly known as OTC. OTC transactions involve risks in addition to those associated with
transactions in securities traded on the Nasdaq Capital Market. Many OTC stocks trade less
frequently and in smaller volumes than securities traded on the Nasdaq Capital Market. Accordingly,
our stock would be less liquid than it would otherwise be, and the value of our stock could
decrease.
-45-
Table of Contents
Our stock price is volatile.
The trading price for our common stock has been volatile during the last several years and our
share price has changed dramatically over short periods. We believe that changes in our stock
price are affected by the factors mentioned above under the caption entitled “Developments in the
SCO Litigation and fluctuations in our operating results or the failure of our operating results to
meet the expectations of public market analysts and investors may negatively impact our stock
price and our ability to continue in business” as well as from changing public perceptions concerning the strength of the SCO Litigation
and other factors beyond our control. Public perception can change quickly and without any change
or development in our underlying business or litigation position. An investment in our stock is
subject to such volatility and, consequently, is subject to significant risk.
There are risks associated with the potential exercise of our outstanding options.
As of August 31, 2007, we have issued outstanding options to purchase up to approximately
5,396,000 shares of common stock with an average exercise price of $3.53 per share. The existence
of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to
raise future equity and debt funding, and the exercise of such rights will dilute the percentage
ownership interest of our stockholders and may dilute the value of their ownership. The possible
future sale of shares issuable on the exercise of outstanding options could adversely affect the
prevailing market price for our common stock. Further, the holders of the outstanding stock
options may exercise them at a time when we would otherwise be able to obtain additional equity
capital on terms more favorable to us.
Common stock available for resale may depress the market price of our common stock.
We have filed a post-effective amendment to a registration statement with the Securities and
Exchange Commission (“SEC”), which has been declared effective, covering the potential resale by
two of our stockholders of up to 923,019 shares of common stock, or 4.3% of our outstanding common
stock. The selling stockholders are bound by certain selling limitations, which limit the numbers
of shares of our common stock that may be sold at one time. In addition, we have filed a
registration statement with the SEC, which has been declared effective, covering the potential
resale by some of our stockholders of up to 2,852,449 shares of our common stock, or 13.3% of our
outstanding common stock. The existence of a substantial number of shares of common stock subject
to immediate resale could depress the market price for our common stock and impair our ability to
raise needed capital.
Our stock price could decline further because of the activities of short sellers.
Our stock has attracted significant interest from short sellers. The activities of short
sellers could further reduce the price of our stock or inhibit increases in our stock price.
The right of our Board of Directors to authorize additional shares of preferred stock could
adversely impact the rights of holders of our common stock.
Our Board of Directors currently has the right, with respect to the 5,000,000 shares of our
preferred stock, to authorize the issuance of one or more additional series of our preferred stock
with such voting, dividend and other rights as our directors determine. The Board of Directors can
designate new series of preferred stock without the approval of the holders of our common stock.
The rights of holders of our common stock may be adversely affected by the rights of any holders of
additional shares of preferred stock that may be issued in the future, including without
limitation, further dilution of the equity ownership percentage of our holders of common stock and
their voting power if we issue preferred stock with voting rights.
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Table of Contents
Additionally, the issuance of
preferred stock could make it more difficult for a third party to acquire a majority of our
outstanding voting stock.
Our stockholder rights plan could make it more difficult for a hostile bid for our company or a
change of control transaction to succeed at current market prices for our stock.
We have adopted a stockholder rights plan. The power given to the Board of Directors by the
stockholder rights plan may make it more difficult for a change of control of our company to occur
or for our company to be acquired if the acquisition is opposed by our Board of Directors.
ITEM 6. EXHIBITS
(a) Exhibits
| |
3.1 |
|
Amended and Restated Certificate of Incorporation of Caldera International,
Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form
8-A12G/A (File No. 000-29911)). |
| |
| |
3.2 |
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding consolidation of outstanding shares (incorporated by reference to Exhibit
3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)). |
| |
| |
3.3 |
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit
3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)). |
| |
| |
3.4 |
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to
SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)). |
| |
| |
3.5 |
|
Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCO’s Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)). |
| |
| |
3.6 |
|
Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)). |
| |
| |
31.1 |
|
Certification of Darl C. McBride, President and Chief Executive Officer,
pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
| |
| |
31.2 |
|
Certification of Bert B. Young, Chief Financial Officer, pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
| |
32.1 |
|
Certification of Darl C. McBride, President and Chief Executive Officer,
pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| |
32.2 |
|
Certification of Bert B. Young, Chief Financial Officer, pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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Table of Contents
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
|
|
| Date: September 17, 2007 |
|
THE SCO GROUP, INC. |
|
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|
|
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|
By:
|
|
/s/ Bert B. Young |
|
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|
|
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Bert B. Young |
|
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Duly Authorized Officer and
Chief Financial Officer |
|
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(Principal Financial and
Accounting Officer) |
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Table of Contents
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
3.1
|
|
Amended and Restated Certificate of Incorporation of Caldera International,
Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form
8-A12G/A (File No. 000-29911)). |
|
|
|
3.2
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding consolidation of outstanding shares (incorporated by reference to Exhibit
3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)). |
|
|
|
3.3
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit
3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)). |
|
|
|
3.4
|
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to
SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)). |
|
|
|
3.5
|
|
Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCO’s Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)). |
|
|
|
3.6
|
|
Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)). |
|
|
|
31.1
|
|
Certification of Darl C. McBride, President and Chief Executive Officer,
pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Bert Young, Chief Financial Officer, pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Darl C. McBride, President and Chief Executive Officer,
pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Bert Young, Chief Financial Officer, pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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|
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|
| Authored by: MDT on Thursday, October 18 2007 @ 03:36 AM EDT |
Please try to put something in the topic to make it easier to locate what you're
talking about. Thanks
---
MDT[ Reply to This | # ]
|
| |
| Authored by: MDT on Thursday, October 18 2007 @ 03:37 AM EDT |
Please use clicky's for links. That nice little PREVIEW button is a nice thing
to use to make sure your clicky is working.
---
MDT[ Reply to This | # ]
|
| |
| Authored by: MDT on Thursday, October 18 2007 @ 03:41 AM EDT |
All comments on newspick articles here please. Make any links clicky please.
That nice PREVIEW button helps a lot to make sure they work.
---
MDT[ Reply to This | # ]
|
| |
| Authored by: MDT on Thursday, October 18 2007 @ 03:44 AM EDT |
Ok,
Here's a question. Wouldn't a temporary CFO (and an outsider) have a
fiduciary liability to report any illegal shenanigans he came across while going
over the books to the SEC, the Bankruptcy court, and maybe even the Justice
Department?
I know he's supposed to be getting a release of responsibility for anything
that happened before he got there, but, if he didn't report things he found,
that wouldn't be covered would it?
I guess what I'm asking is, how likely is it that SCO management and board is
sweating bullets right now that they've got an external party handling the books
that they have to give to the bankruptcy court?
---
MDT[ Reply to This | # ]
|
| |
| Authored by: skip on Thursday, October 18 2007 @ 03:45 AM EDT |
So Novell have lost their money then, SCO seem to be spending it at a serious
rate. All the exit bonuses smack of corrupt practice too.
I don't understand how they can just do this, its a blatent case of theft, this
isn't their money they're spending.[ Reply to This | # ]
|
| |
| Authored by: kh on Thursday, October 18 2007 @ 04:15 AM EDT |
| Try and make links clickable. [ Reply to This | # ]
|
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- A side rant... - Authored by: Anonymous on Thursday, October 18 2007 @ 11:50 AM EDT
- A side rant... - Authored by: Anonymous on Thursday, October 18 2007 @ 04:14 PM EDT
- A side rant... - Authored by: Anonymous on Thursday, October 18 2007 @ 04:30 PM EDT
- A side rant... - Authored by: Tyro on Thursday, October 18 2007 @ 04:39 PM EDT
- A side rant... - Authored by: Altair_IV on Friday, October 19 2007 @ 05:38 AM EDT
- Ubuntu 7.10 released today - Authored by: DarkPhoenix on Thursday, October 18 2007 @ 10:51 PM EDT
- Jon Honeyball lays into OOXML - Authored by: Anonymous on Thursday, October 18 2007 @ 08:27 AM EDT
- When does Sco hire a temp for McBride? - Authored by: Anonymous on Thursday, October 18 2007 @ 09:03 AM EDT
- Off Topic Thread - Linux Survey - Authored by: Anonymous on Thursday, October 18 2007 @ 09:55 AM EDT
- Law-firm: copyright prohibits "view source" on our page - Authored by: Anonymous on Thursday, October 18 2007 @ 10:55 AM EDT
- If it doesn't work, do it again... - Authored by: Latesigner on Thursday, October 18 2007 @ 11:52 AM EDT
- RIAA Hits another University - Authored by: Anonymous on Thursday, October 18 2007 @ 11:54 AM EDT
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| Authored by: kh on Thursday, October 18 2007 @ 04:20 AM EDT |
| Just in case you see a mistake. [ Reply to This | # ]
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| Authored by: kh on Thursday, October 18 2007 @ 04:23 AM EDT |
| For newspick suggestions and discussion about newspicks. [ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 04:33 AM EDT |
Could "legal services regarding defense of employment related
litigation" be due to Sandy Gupta suing for "wrongful promotion"?[ Reply to This | # ]
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| Authored by: jmc on Thursday, October 18 2007 @ 04:38 AM EDT |
Although the costs may have shrunk to "only" $1.1M most people would
surely have thought that spending this to get precisely $0 might be at least a
slight indication that their strategy might possibly be adrift.[ Reply to This | # ]
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| Authored by: tqft on Thursday, October 18 2007 @ 04:59 AM EDT |
The Arbitration is proceeding from the short blurb.
Who gets to make the decision about whether it should? Previous entries have
included (vast) costs about that and requests to be approved. As Novell
requested the Arbitration is it possible for anyone to cancel it?
---
anyone got a job good in Brisbane Australia for a problem solver? Currently
over employed in one job.[ Reply to This | # ]
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| Authored by: Ian Al on Thursday, October 18 2007 @ 05:16 AM EDT |
| I was idly looking at the numbers to see if a viable business could be prised
out of the company. Looking at the OpenServer/Unixware/Support areas it looked
as if they could be assembled as a profitable entity in the short term.
However, the costs seemed low. It got me wondering if the removal of the
SCOSource costs (even if that were possible) would really give positive
numbers.
This quote caught my eye. Sales and marketing expenses
consist of the salaries, commissions and other personnel costs of employees
involved in the revenue generation process, as well as advertising and corporate
allocations.[removed lots of sales and marketing stuff] Included in sales and
marketing expenses for the nine months ended July 31, 2007 and 2006 was
$286,000 and $261,000, respectively, for stock-based
compensation.
That could be read as the corporate overhead going
into Sales and Marketing and it would certainly explain the large figures. It
would suggest on a cursory glance that a going concern could not be created if
senior management and general overhead costs continue to outstrip the actual
costs of money making activity.
I am not an accountant. Who would have me?
However, if anyone out there does accounts numbers I would love to hear their
thoughts. ---
Regards
Ian Al
Linux: Genuine Advantage [ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 05:18 AM EDT |
| Reminds me of what happens when a toilet is flushed. [ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 05:27 AM EDT |
If one compares the rate of decline in the SCOsource business to the rate of
decline in the UNIX business it shouldn't take long for an unbiased observer to
decide SCOsource has no future.[ Reply to This | # ]
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| Authored by: phantomjinx on Thursday, October 18 2007 @ 05:34 AM EDT |
Maybe this is totally normal for a chapter 11 bankruptcy but it is really
starting to remind me of Brewsters Millions.
"You have one month in which to spend 30 million dollars but cannot own any
assets!"
Except SCO are trying to do this but avoid winning the 300 million!
Regards
phantomjinx[ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 05:46 AM EDT |
Bert Young has been in this situation before.
He should like to keep his head (down).
He perhaps wants to leave before the shareholder
suits start. Since they *say* that he was terminated,
he may be reluctant to do things that got him into
trouble before. No doubt they are keeping him on a
"consulting" retainer to keep his mouth shut.
If *I* were a creditor *I* would object to continuing
payments to him. [ Reply to This | # ]
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| Authored by: LionKuntz on Thursday, October 18 2007 @ 06:16 AM EDT |
Page 38
We do not have a history of profitable operations and our cash resources are
limited.
Our year ended October 31, 2003 was the first full year we were profitable in
our operating history. Our profitability for the year ended October 31, 2003
resulted primarily from our SCOsource business. For the years ended October 31,
2006, 2005 and 2004, we incurred net losses of $16,598,000, $10,726,000 and
$16,227,000, respectively, and for the nine months ended July 31, 2007 we
incurred a net loss of $4,565,000. As of July 31, 2007, our accumulated deficit
was $256,105,000. [ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 06:40 AM EDT |
Our financing activities provided $493,000 of cash during the
nine months ended July 31, 2007. The primary sources of cash were from the
exercise of options to acquire common stock of $57,000 and proceeds of
$436,000 received from the sale of common stock through our employee stock
purchase plan.
Exercise of stock options would be the cost of the
execs selling their options (neat trick that with the stock price being what it
is).
Does anyone know anything about the "employee stock purchase plan"? I
don't suppose that would be one of the employee "benefits" now, would it? At the
rate listed in the statement, the shares purchased under the "employee stock
purchase plan" would at the current price amount to roughly 1% of the total
shareholder's equity per month. If the plan continues under bankruptcy and the
stock remains at the current price, the stock purchased under the plan could be
a significant fraction of the total equity. Where are the shares held and who
votes them?
[ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 06:46 AM EDT |
Perhaps the court should oblige them and dismiss the petition.
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| Authored by: Anonymous on Thursday, October 18 2007 @ 07:06 AM EDT |
We intend to maintain business operations throughout the bankruptcy
case. Subject to the Bankruptcy Court approval, we will use our cash,
cash equivalents, restricted cash, and subsequent cash inflows to meet our
working capital needs throughout the reorganization
process.
(emphasis mine)
Shouldn't they have
said:
...we will use Novell's cash... [ Reply to This | # ]
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| Authored by: The Mad Hatter r on Thursday, October 18 2007 @ 07:46 AM EDT |
Hey, it's as good a suggestion as I've seen yet!
---
Wayne
http://sourceforge.net/projects/twgs-toolkit/
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| Authored by: Anonymous on Thursday, October 18 2007 @ 07:58 AM EDT |
Assuming I had enough money I bet I could hire BS&F to defend my rights to
my ocean front property in Arizona. After all, it would be ethically OK as they
are only obligated to defend any rights I might have.
;-) [ Reply to This | # ]
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| Authored by: bstone on Thursday, October 18 2007 @ 08:29 AM EDT |
Wow!! They're spending $15,000/month for lawyers in Munich on some issue that
they have never mentioned before (including in the current financial report)?
Another $15,000/month for public relations (it doesn't look like this is
working)? And another $15,000/month in legal services for patents and
trademarks (they haven't mentioned having patent and trademark problems before
either)?
What they're paying just for the services they list in #138 is more than 50% of
what they're paying for all of their product development costs. I guess
products aren't a priority.
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| Authored by: Anonymous on Thursday, October 18 2007 @ 08:43 AM EDT |
I thought I knew what I was reading when I looked at the numbers under cash
flow. A number with parenthesis was money going out, a negative value, and a
regular number was a money coming in. But I must not understand, because I see
accounts payable for ending july 2006 at plus forty two thousand, but this year
minus three hundred ninety four thousd. How do you get a positive number for
accounts payable? What did they do, send back a bunch of equipment and get a
refund on it? Wouldn't that be a receivable?
I'm lost. [ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 09:42 AM EDT |
I was glancing at the discussion of SCO-IBM and I noticed that they say their
claims regarding IBM's use of Unix will be dismissed. [Is this their first
articulated acceptance of that?] I see they think they
have claims which can
go forward regarding Project Monterey and unfair
competition. (They also don't
mention IBM's counterclaims.) I thought
the door was slammed on bringing
Project Monterey in the suit. [ Reply to This | # ]
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| Authored by: Anonymous on Thursday, October 18 2007 @ 09:59 AM EDT |
In forward looking statements:
Our belief that legal matters that we are a party to are not estimable;
Is this SCO claiming that no number can be associated with the Novell money
that they have converted?
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| Authored by: stryx on Thursday, October 18 2007 @ 11:02 AM EDT |
The whole section 1a discussing risk factors (pp.38-46) is fascinating, as is
their forward looking statements section. As much as SCO tries to put a good
face on things, they're in a world of hurt. Like 3M+ outstanding options
averaging $3 a share.
What caught my eye was the section on their
litigation in India (p.45):
During the three months ended April 30,
2004, our Indian office was assessed withholding taxes by the Government of
India Income Tax Department. The Tax Department assessed a 15% withholding tax
on certain revenue transactions in India that the Tax Department deemed royalty
revenue under the Income Tax Act. We have filed an appeal with the Tax
Department and believe that revenue from our packaged software does not qualify
for royalty treatment and therefore would not be subject to withholding tax.
However, we may be unsuccessful in our appeal against the Tax Department and be
obligated to pay the assessed taxable amounts.
Any chance this
will get in the Groklaw archives?
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- Puns - Authored by: Anonymous on Thursday, October 18 2007 @ 11:09 AM EDT
- Puns - Authored by: Anonymous on Thursday, October 18 2007 @ 11:30 AM EDT
- 3M+ outstanding options averaging $3 a share - Authored by: Anonymous on Thursday, October 18 2007 @ 11:55 AM EDT
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| Authored by: OutRiders on Thursday, October 18 2007 @ 02:03 PM EDT |
"Our foreign subsidiaries were not included in the filings and will
continue their business operations without supervision from the Bankruptcy Court
and will not be subject to the requirements of the Bankruptcy Code."
From SCO's 10Q, Liquidity and Capital Resources[ Reply to This | # ]
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| Authored by: JamesK on Thursday, October 18 2007 @ 02:57 PM EDT |
I guess they'll be looking for someone who's good at juggling. ;-)
---
There are 10 kinds of people, those who understand binary and those who don't.
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| Authored by: Anonymous on Thursday, October 18 2007 @ 05:25 PM EDT |
They may be hiring the law firm to make sure they lay people off properly.
It is in NJ, because that is where most of the employees are. They are left over
from the Bell Labs people.
"Our attorneys frequently counsel clients on how to avoid
employment‑related litigation."
Dennis H[ Reply to This | # ]
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| Authored by: Steve Martin on Friday, October 19 2007 @ 06:58 AM EDT |
The Company’s SCOsource revenue to date has been primarily
generated from agreements to utilize the Company’s UNIX source code as well as
from intellectual property agreements.
According to
available information, SCOsource revenue has "primarily" (in fact, almost
entirely) been from the Sun and Microsoft agreements. If, as claimed here,
SCOsource revenue has "primarily" been from agreements to utilize UNIX source
code, doesn't that make these agreements "SVRX Licenses"? Hm?
(Yeah, I
know, beating a dead horse...)
---
"When I say something, I put my
name next to it." -- Isaac Jaffee, "Sports Night" [ Reply to This | # ]
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| Authored by: Anonymous on Sunday, October 21 2007 @ 11:19 AM EDT |
You might be interested in reading this
http://www.heise.de/english/newsticker/news/97693
article dealing with the nature of that mentioned affair in germany.
you might find words like "betrayal"
who wonders...
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