| SCO admits it may be going under |
Sep. 19, 2007
A few days late, SCO finally released its financial report, Form 10-Q, on Sept. 18 for the quarter ending on July 31. The news was bad. How bad? SCO admits that "there is substantial doubt about the company's ability to continue as a going concern."
According to SCO's 10-Q report to the SEC (Security and Exchange Commission), SCO's losing its claims to Unix's IP (intellectual property) to Novell in the U.S. District Court on Aug. 10 and its recent court filing for Chapter 11 bankruptcy, make it questionable that the company will survive.
Others, who have been following the case closely, agree. Once SCO filed for Chapter 11, they saw this as not just the beginning of the end, but the end for SCO.
In particular, SCO noted in its 10Q that the judge in the Novell case was going 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." In addition, "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."
In his statement to the bankruptcy court in Delaware, SCO CEO Darl McBride expanded on this, saying, "Novell claims that it is entitled to the full amount of the Microsoft and Sun payments and to all other SCOsource agreements, which, collectively constitute a principal amount in excess of $26 million, and, with claimed interest, in excess of $37 million. Novell also seeks the imposition of a constructive trust on whatever such funds are currently in the Debtors' possession can be properly traced backed to those transactions. The entry of a substantial judgment against SCO would likely impair the Debtors' ability to conduct their business in the ordinary course and the value of SCO's litigation claims relating to infringement of its intellectual property rights in Unix."
In short, if SCO hasn't frozen the Novell lawsuit with its Chapter 11 filing, SCO might well have ended up either owing, or having its assets locked up in a trust, for far more than the company is currently worth.
At the same time that Novell was smashing the foundations of SCO's anti-Linux lawsuits by reclaiming the rights and payments for Unix's IP, SCO Unix business was collapsing. "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."
SCO blamed the "increased competition from alternative operating systems, particularly Linux, and from the negative publicity of the SCO litigation," for these declines. While SCO has been cutting its operating costs, it's not been enough. The company's Unix losses have continued to increase. In this last quarter, SCO lost $1.355 million.
In addition, McBride said at the SCO Chapter 11 bankrupcy trial, that the "success of SCO's UNIX business will, in large measure, depend on the level of commitment and certification it receives from industry partners and developers. In recent years, the company has 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 SCO's UNIX operating system products."
McBride continued, "This trend continued for the company's fiscal year ended October 31, 2006, and it continues during the year ending October 31, 2007. If this trend continues, SCO' s competitive position will be adversely impacted and future revenue from UNIX business will decline."
SCO's other revenue lines have also fallen apart. SCOsource, which made money from licensing Unix IP rights, had already dropped to zero for the last quarter. This happened even before SCO lost its claims to those rights.
At the end of the quarter, SCO reported a net loss of $2.398 million. This is better than the last quarter, but still not enough of an improvement, in light of everything else that is happening, to give SCO's leadership any optimism for the company's future.
Steven J. Vaughan Nichols
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