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SCO 4Q & Year-End Financial Conference Call Transcript
Wednesday, December 22 2004 @ 01:11 AM EST

Here, thanks to the remarkable speed of jbf, is the transcript of SCO's 4th quarter and year-end financial conference call of yesterday evening. I also wish to thank bruxie and fLameDogg for their help.

I had to read the transcript several times before I understood what SCO seems to be saying behind the words. The first thing to jump off the page was this sentence: "During the call, the company will only be providing a general update on the status of our pending litigation and cannot address evidence, rulings, strategies or other specific details."

SCO? SCO can't talk about its litigation? Since when? That's all they used to do in these conference calls. They even had David Boies attend one and make threatening noises about the DMCA. So why now? Why can't they discuss it now? ("The specifics of this are laid out in our filings with the court.")

When I got to the part about DaimlerChrysler, I think I figured it out. They have dropped the case regarding timeliness against DC, according to what McBride says. I'll check with the court once it opens, but that is what he said, so unless he mispoke, DC is over, as far as the timeliness issue is concerned, unless somehow, someday, SCO can win something in the IBM case. Just as marbux predicted, they soooo do not want to go to trial on that timeliness issue in the Daimler case. He said they'd probably drop the timeliness issue just before trial. Instead, they'll try to appeal, they say, the original order regarding whether the certification process includes Linux and the kitchen sink, and then, if pigs start to fly and they win something in the IBM case, maybe then they'll swing back around and bring a brand new action against DC on the timeliness issue, with, they hope, a win on appeal on the other matter to support it. Of course, first the world has to turn upside down, and pigs have to fly.

Here is what else struck me in the call:

  • McBride seemed to stress that the legal team has been handling things so well that the SCO executives could just pay attention to the "core" business, the Unix bucket as opposed to the litigation bucket. I've never seen litigation that works like that. So I couldn't help but wonder if this is the first sign of jockeying to assign blame elsewhere, specifically onto Boies Schiller? A "my lawyer did it" defense? The execs were happily busy elsewhere and uninvolved in the legal maneuvers, don't you know, to hear them tell it now.

  • They took in money from a Canopy Group company, $500,000 from Vintela, which used to be Center 7, under an agreement entered into in April of 2003. They spoke of it as if it were a coup of some sort. The Center 7 agreement can be found in this 10Q:

    "On April 30, 2003, the Company and Center 7, Inc., ('C7') entered into a Marketing and Distribution Master Agreement (the 'Marketing Agreement') and an Assignment Agreement. C7 is majority owned by The Canopy Group, Inc. ('Canopy'), who is the Company’s principal stockholder. Under the Marketing Agreement, the Company was appointed as a worldwide distributor for C7 products and will co-brand, market and distribute these products. The Company will pay C7 a royalty on all products sold. Under the Assignment Agreement, the Company assigned C7 the copyright applications, trademarks, patents and contracts related to Volution Manager, Volution Authentication, Volution Online and Volution Manager Update Service (collectively, the 'Assigned Software'). As consideration for this assignment, C7 issued to the Company a $500,000 non-recourse promissory note, secured by the Assigned Software, due on April 30, 2005 with interest payable at a rate of one percent above the prime rate as reported in the Wall Street Journal.

    "During the time the Company was developing the Assigned Software, it had expensed all amounts for its research and development efforts. As a result, at the time the promissory note was executed, the Company had no recorded basis in the Assigned Software. Because the transfer of the Assigned Software was to a related party in exchange for a promissory note, no gain will be recognized by the Company until payments are received."

    Now the interest was dropped, because of it being paid off a little early. This is the coup?

  • When discussing SCOsource, McBride sighed twice noticeably. He continues to present it that customers asked him for a license, and SCO merely gave in to their requests.

  • When asked about the stock, they suggested questions be directed to BayStar. It felt to me like more fingerpointing.

  • Not one soul asked about Ralph Yarro and Darcy Mott, as to whether they would remain with SCO now that they are out at Canopy, or what other impact the shakeup might have.

  • Maureen O'Gara wasn't there. She's a party now, or is asking to be, to the IBM litigation, so perhaps she realized that she can't honorably report on this story any more. I suppose it's conceivable that she was on the line but never got called on. Right.

UPDATE: For those who are curious to see how the two reporters on the call later wrote their articles, here is Stephen Shankland's article and here is Ronna Abramson's.

*************************************

SCO's December 22, 2005 4Q & Year-End Financial Conference Call Transcript

Good day, everyone, and welcome to the SCO group's fiscal fourth quarter and year-end 2004 earnings conference call. At this time everone is in listen-only mode. Later a question-and-answer session will be opened. During the call, the company will only be providing a general update on the status of our pending litigation and cannot address evidence, rulings, strategies or other specific details. Today's call is being recorded. Participating on the call today are Darl McBride, President and Chief Executive Officer, and Bert Young, Chief Financial Officer. Each of you should have a copy of the press release issued this afternoon containing our results which we will be discussing further in this call. I wish to point out to the participants on today's conference call that the information provided during this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made only as of the date of this conference call, and we undertake no obligation to update or revise the forward-looking information whether as a result of new information, future developments, or otherwise.

1:05 - 2:09

Our performance is subject to significant risks and uncertainties, known and unknown, that could cause our actual results to differ materially from those that may be anticipated by the forward-looking statements. These risks and uncertainties may cause our actual results, level of activity, performance, or achievements to be materially different from any projections or future results implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. For a full discussion of these and other risks and uncertainties, please see our Annual Report on form 10K from the fiscal year ended October 31st, 2003, and our quarterly reports on form 10Q from the first quarter ended January 31st, 2004, the second quarter ended April 30th, 2004, the third quarter ended July 31st, 2004, and other reports we have filed with the SEC, all available at www.sco.com. I will now turn the call over to Darl McBride, President and Chief Executive Officer of The SCO Group.

2:09 3:09

Darl McBride: OK, thanks, Blake, and thanks everyone for joining us on today's call. Building on a positive third quarter, I am pleased to say we have continued to further our business objectives in the fourth quarter and ended the year on an upbeat note. With greater detail to come, we are pleased to note that our core Unix business is generating meaningful cash flow and is poised to continue that trend into our 2005 fiscal year. As an organization during Q4, we continued to innovate and to introduce new programs like SCO Marketplace, and we successfully capped our attorneys' fees. The combination of the solid operating results in our Unix business and the cap on the costs of litigation, will ensure we can remain steadfastly focused on driving success in both the marketplace and in the courtroom, and demonstrate our focus on taking whatever steps are necessary to ensure success in both areas. I'll turn the call over now to Bert Young for an overview of the company's financial results. Bert?

3:09 - 4:45

Bert Young: Thanks, Darl. Good afternoon, everyone. The company reported revenue in quarter 4 of 10.1 million for this 4th quarter of fiscal year 2004, as compared to revenue of 24.3 million for the comparable quarter of the prior year. The net loss for the 4th quarter was 6.5 million, or 37 cents per diluted common share, compared to a net loss of 1.6 million or 12 cents per diluted common share reported in the comparable quarter the prior year. Included in our 4th quarter net loss to common stockholders was 2.7 million in charges related to a restructuring of our operations, reductions in force, and dispositions of long-lived assets, which equates to 15 cents a share for that restructuring charge. Nearly all of our quarterly revenue of 10.1 million came from our Unix business. Unix revenue, however, was down year-over-year, primarily as a result of continued competitive pressures for operating systems and was essentially flat sequentially. The remaining revenue for the 4th quarter was derived from $120,000 in SCOsource licensing, which represents significant year-over-year decrease, given the 4th quarter of 2003 was an exceptional quarter in which the company closed two large licenses. As we have stated in previous quarters, we have cautioned that predicting this revenue stream of SCOsource is very challenging and will continue to be difficult to predict.

4:45 - 6:10

For fiscal year 2004, revenue was 42.8 million compared to revenue of fiscal year of 2003 of 79.8 million. For fiscal year 2004, the net loss to common shareholders was 16.2 million or $1.07 per diluted common share, compared to net income attributable to common stockholders of 5.3 million, or 34 cents, per diluted common share. Cash and available for-sale securities were 31.4 million at October 31, 2004. In addition, $5 million was placed in an escrow account and is classified as restricted cash that will be used to pay for certain expenses associated with our IP litigation.

I will speak more on the cash situation in a minute. For the 4th quarter, the cost of revenue for the Unix business was 1.7 million, resulting in gross margin of 8.2 million or 83 percent. Cost and expenses for the Unix business, excluding the restructure and other losses on asset dispositions, were 7.6 million. Continue to trend downward, as we expect, these costs, these operating costs, will be even lower in quarter 1 of fiscal year 2005, as a result of our recent restructuring of ongoing operations.

6:10 - 8:03 As a management team, we're pleased with the progress we've made in the Unix business, despite a challenging and competitive operating environment. As in previous quarters, we're continuing to classify the legal and professional fees and other costs and expenses that relate directly to the enforcement of our intellectual property rights as costs of revenue. For the 4th quarter of fiscal year 2004, these costs were 4.3 million, which was down significantly from the prior quarter, as a result of our revised arrangement with Boies Schiller & Flexner. For the year, costs associated with the defense of our Unix intellectual property, classified as cost of revenue, totaled 19.7 million.

As we look ahead to fiscal year 2005, we anticipate ongoing legal fees, classified as cost of revenue, will be approximately 3 million per quarter. As we have previously indicated, our attorney fees have now been capped. We've signed and completed an agreement with Boies Schiller & Flexner that caps our legal fees and ensures we have their representation through the conclusion of the IBM litigation, including the appeal process. The revised fee agreement limits the overall cash costs of the legal fees assocated with our litigation from September 1st, 2004 to a total of 31 million, other than any contingency fees. In return for this new fee arrangement, we've agreed to increase the contingency associated with any award on a scaled basis from 20 to 33%, depending on the overall size of the judgment or settlement. The revised agreement reinforces the commitment that Boies Schiller & Flexner has in our cases.

8:03 - 11:12

Now, turning back to our current cash situation, let me break down the cash and the litigation costs so you can understand these in more detail. Of the approximately 31 million to be paid to Boies, as a result of the new agreement, we paid 1.7 million in the 4th quarter, and as was previously mentioned, have placed 5 million in escrow, leaving a balance of approximately 24.3 million that we need to pay Boies at the end of the quarter. If you subtract the 24.3 million from our closing cash balance of 31.4, as of October 31, we have approximately 7 million left over to operate the business going forward.

Now, switching gears, let's take a look at some of the changes that have occurred. The restructuring, continuing forward from previous efficiencies, we continue to be focused on bringing an added level of financial discipline to the company. In the 4th quarter, we made additional operational adjustments to both the Unix and SCOsource businesses. That will reduce ongoing operating expenses by approximately 10% per quarter and will further increase the efficiency of the company's operations.

And finally, moving out of discussion of Q4 in 2004, let me mention something that has happened in quarter 1, and will be reported as part of our quarter 1 2005 results. We recently concluded an IP asset sale that was originally consumated in April 2003 with Center 7. Under the original agreement, from April 2003, SCO assigned Center 7 the copyright applications, trademarks, patents and contracts related to Volution Authentication, Volution Online, and Volution Manager update service. As consideration for this assignment, Center 7 issued to the company a $500,000 non-recourse promissory note, secured by the assigned software that was originally due on April 30, 2005. During the time the company was developing the assigned software, it had expensed all amounts for research and development efforts. As a result, at the time the promissory note was executed, the company had no recorded basis in the assigned software. Because the transfer of the assigned software was to a related party, in exchange for promissory note, no gain was recognized by the company until the note was to be paid.

In November 2004, we agreed with Vintela, the successor company to Center 7, to forgo any interest charges in return for an immediate payment of the $500,000. On December 9th, the company received the $500,000 payment from Vintela and will record the transaction in fiscal Q1. With that, I'll now turn the call back over to Darl.

11:12 - 13:37

McBride: OK, thanks, Bert. We can't overstate the importance of our finalized agreement with our legal team. We've always believed in the merits of our claims and that we are well-positioned in the litigation. With this financial cap in place, we can now say without hesitation that we are looking forward to having our case heard by a jury. Importantly, the strength of our legal team has allowed the rest of us at SCO to concentrate on running our business.

I'd like to spend the remainder of our call addressing our business performance and prospects. We're pleased with the cost adjustments we've made in our Unix business and that business' focus on generating positive cash flow, despite a challenging business environment. Between Unix products and services, we provided support to many customers in Q4. Some of the more notable customers include Unisys, Family Mart, China Post, webMD, Cyberguard, Active-N-Eckerd, City, CVS Pharmacies, Thomson Financial, US Army, US Navy, FAA, Proquest, Unisys [sic: repeat], Spectel, McDonald's, Siemens, UK Ministry of Defense, Argos, and many others. These deals are primarily related to our UnixWare and OpenServer technology. SCOoffice Server 4.1, the company's new email and collaboration product, has begun to see interest in the marketplace. During the 4th quarter, the company shipped SCOoffice Server 4.1 and has seen interest in customers and great reviews from the media.

In addition, during Q4, SCO launched its SCO Marketplace site, for third-party developers to participate with SCO in development projects that will benefit future SCO products. We see this as a win-win for SCO and the developer community, extending SCO's engineering team and providing new income opportunities for external developers.

On deck and on track for second calendar quarter of 2005 is a major upgrade to OpenServer, code-named Legend. This is one of the most highly anticipated releases of SCO OpenServer and represents significant development effort and investment by the company. Last August, we provided more than 600 attendees at SCOforum, our annual partners' conference, with a sneak peek at many of the capabilities that will be added to this new version of OpenServer, and the feedback was overwhelmingly positive.

13:37 - 15:26

We believe the release of Legend will strengthen the overall ecosystem of partners, developers, customers, and resellers that rely on OpenServer and will also present SCO with opportunities to upgrade our current installed base. On this, I will reiterate that we believe there is value in our Unix licensing business, and that we are offering our customers and potential customers a value they must be made aware of.

There is continued interest in the licensing of our Unix technology, and we believe that when our legal claims are substantiated in a court of law, we will see an increase in the demand for this licensing business. Some end users have chosen to not wait for a court resolution, and we've accommodated their requests to license our intellectual property now.

Now, moving on to the litigation update, during the last quarter, our litigation efforts have centered around discovery and motion practice in the various cases. We are awaiting rulings from the District Court in Utah on IBM's motion for partial summary judgment on their 10th Counterclaim related to IBM's Linux activities, and our motion to dismiss the same counterclaim. We are also waiting on rulings from the Federal Magistrate Judge on a request for additional discovery from IBM. The parties are also currently submitting briefings to the court relating to IBM's motions for summary judgment on SCO's breach of contract claims and on IBM's 8th Counterclaim for copyright infringement, as well as concerning SCO's motion to amend its complaint to add an additional claim for copyright infringement relating to IBM's alleged use of unlicensed SCO code in AIX for Power. We have no indication of when rulings might be issued on those motions. Otherwise we feel our case is developing well, and the specifics of this are laid out in our filings with the court.

15:26 - 18:06

In the Novell case, Novell's second motion to dismiss is scheduled for hearing on January 20th. The issues involved in that motion are set forth in the filings with the court. The Red Hat case has been stayed by the court in Delaware, pending developments in our resolution of the IBM matters. No decision has been issued by the court on Red Hat's request for reconsideration of the order staying the case. In SCO's case against DaimlerChrysler, earlier this year the Michigan State Court dismissed SCO's claim that Daimler had failed adequately to certify compliance with its Unix source code license, but let stand SCO's claim that Daimler's certification was not made timely.

After the court dismissed the certification claim, we determined that it would not be a wise use of resources to pursue the timeliness claim alone. Therefore, we moved to stay that claim pending further clarification of the issues on the IBM case. The court in Michigan denied our motion to stay, but based on a stipulation of the parties, the court entered an order of dismissal without prejudice that permits us to refile our claim later, if necessary. We may now pursue an appeal of the court's certification ruling.

And then finally, in the AutoZone case, filed in Federal Court in Nevada, which is a claim for copyright infringement, the court granted AutoZone's motion to stay the case but allowed certain discovery to proceed to determine whether SCO is entitled to injunctive relief in the case. We are currently evaluating that discovery.

So in summary, then, we've accomplished a great deal during fiscal 2004 at SCO. The company's Unix business is generating cash flow and will remain so going forward into fiscal year 2005. We have launched more new products in 2004 than in recent years. This effort continues to expand the way we work with our partners and for our customers. And these products are being well received by the marketplace. We consolidated our shareholder structure by removing the rights and preferences associated with BayStar and retired their preferred shares. And we have advanced our legal cases, with the most significant activity being the recent agreement inked with Boies Schiller & Flexner that provides us newfound flexibility both in the business market and on the litigation front. We look forward to having our cases heard in the courtroom. So now I'll turn the call over to the operator, to open up the phone lines for whatever questions you might have.

18:06 - 18:52

Operator: The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your Touchtone telephone. If you are using a speakerphone to listen to today's conference, please make sure to disengage your mute function before signaling, so that your signal may reach our equipment. We will proceed in the order you signal, and we will take as many questions as time permits. Once again, please press *1 on your Touchtone telephone at this time to ask a question. We'll pause for just a moment to assemble our roster.

18:52 - 19:55

Today's first question comes from Larry Solomon, with Capital Guardian.

Larry Solomon: Yes, Darl, the 24.3 million that you'll pay to Boies Schiller, when will that be paid?

Young: Larry, this is Bert. Maybe I can answer that. We've paid about 13 million of that already, right after we finished the quarter, and then there will be a remaining amount of 2 million a quarter that will be paid over the next five quarters.

Solomon: And what's the rationale for paying them much of it up front, as opposed to paying them along the way?

Young: Well, a good portion of the amount we paid them up front was for amounts of work they previously performed for us -- if you will, an accounts payable. It's just money we owed them. So we just paid them the amounts that we'd already expensed on our records and that they'd invoiced us for and we got those paid.

19:55 - 23:10

Solomon: Right, thanks.

Operator: We go next to Dion Cornett with Decatur Jones.

Dion Cornett: Hi, Bert. I just have a number of sort of quick admin questions. What would share count have been had you been profitable? What would share count be if you were acquired, given the recent change in control provisions, headcount, and then finally, it looks like you may have undersold how successful this quarter was by not providing a pro forma number, which will provide a sort of 22-cent loss comparison instead of 37-cent loss comparison. Why the change in your reporting?

Young: Well, we've not provided pro forma reporting before, Dion. We've tried to -- as you've caught -- in my comments, I've tried to give the information so you could see what the per-share loss is without the restructure.

Cornett: OK.

Young: But we've not provided pro forma earnings releases, that separate table before, and have chosen not to do it now just to be consistent and to keep it straightforward.

Cornett: OK, share count?

Young: The share count, you know I don't have an estimate if we were profitable. The share count in the press release was 17.4 million shares.

Cornett: But obviously that number is lower than it would be if you were profitable per accounting rules.

Young: Correct. Yeah, I guess I'd have to figure out how much profitability, so we can get the weighted average there, but we haven't done that.

Cornett: Then, obviously, investors look to calculate what their return could be on some large legal settlement. You know, a fully diluted share count, including vested options, would be a useful number as well.

Young: Yeah, it would be useful. We haven't provided that number before. You know, I'd have to go back and look at that and figure out what we could say about that.

Cornett: How about head count at quarter's close?

Young: Just under 200 in head count.

Cornett: Was there some reclassification between accounts payable and accrued expenses? I noticed accounts payable shot up the quarter but accrued expenses dropped down significantly?

Young: Yeah, we had a big number last quarter in accrued expenses that we moved up into accounts payable, and as I just mentioned to Larry Solomon, much of that was paid to Boies right after the end of the quarter.

Cornett: So why the uptake in accounts payable this quarter?

Young: Well, just moving from an accrued, an amount, from their bills to getting their bills to getting it booked in payables and getting ready to pay it -- we just moved it from one account to another, as we got more detailed on the billing.

Cornett: OK, well congrats on the improvement in the core business.

Young: Appreciate it.

McBride: Thanks, Dion.

Operator: And once again, as a reminder, if you would like to ask a question, or if you have a follow-up question, please press *1 to signal. And as a reminder, if you are using a speakerphone to listen to today's presentation, please disengage your mute function before signaling, so that your signal may reach our equipment. Again, it is *1 at this time for questions.

23:10 - 24:40

We'll take our next question from Stephen Shankland with CNET.

Stephen Shankland: Hi, guys. You're talking, obviously, about your Unix technology, specifically, Legend, the next version of OpenServer.

McBride: Right.

Shankland: You guys said earlier that would be the first quarter of 2005, earlier this year. Now it's second quarter. Why the slip?

McBride: We've gone through the, went into the beta process, getting feedback. There's nothing significant. It's maybe a movement of a couple of months. We're not talking about a big movement, but they're just getting everything tightened down before it goes out.

Shankland: Is that going to have any financial effect?

McBride: No, I believe the , you know, the opportunity for Legend is not going to be measured in weeks or months. It's going to be... We think it's a substantial upgrade opportunity for customers as we go forward. Typically, at the end of a quarter, this type of product, you don't see a big rush of upgrade sales right at the beginning. It happens as they take it. They'll go out and they'll work with it, and, given where we're targeting to ship, we'll still see it having the potential to have good impact on the year, but we don't see a substantial impact as it stands right now.

Shankland: Thanks.

McBride: Thank you, Stephen.

24:41 - 31:59

Operator: And we'll take our next question from Tom Eisenberg with Open Road Partners.

Eisenberg: Yes, hello. I'm relatively new to the company, so I hope you'll excuse my fundamental or preliminary type of questions. BayStar, I believe was their name, was a large shareholder, and they've been sort of selling stock continually. You also owed them some money -- I don't know if I've seen the most recent balance sheet, but you mentioned 31 million in cash plus 5 million in restricted cash. That seems to be down more than what you used in operations and for legal fees in the past quarter, since whatever it was, the previous 10Q, so did you pay off their loan? They had a 13 million loan, and what was your relationship with them and why are they disengaging? I realize I can ask them and probably might, but I thought I'd just ask you now, sort of what's going on there and their sale of stock and then with the debt and that's really about it.

Young: So Tom, Bert here, let me address that. I think you'd have to talk to BayStar about their selling; I can't speak for them on that, but I can tell you what we've talked about previously. At the end of the last quarter, we had agreed with BayStar to convert their previous stock position, which was a preferred stock, into shares of common stock with also a cash payment, which you see booked there last quarter as a payable, and we also had restricted cash of that amount. When we finished quarter 3 and moved into quarter 4, we paid that amount to them, as part of the conversion of their preferred position into common stock. So that position has been paid and closed, we've issued now common shares to them, and, then as you note, they have done some selling this quarter, and you'd probably have to talk to them about what their strategy and plan is for that.

Eisenberg: What was your relationship in the beginning? Did they help fund you and all that, and made the loans, etc.?

Young: Yeah, what happened was that a little over a year ago, BayStar and another shareholder with them, RBC Capital, invested 50 million dollars in the company for this preferred stock position, and then over this year, that position's been converted into common stock and then 13 million back to them.

McBride: In returned for lifting the preferred.

Young: Yeah, in return for turning preferred into common stocks.

McBride: Right.

Young: That's kind of a quick history of last year.

Eisenberg: All right, just trying to go back. Did you just release a balance sheet? A gentlemen was speaking about accounts payable and all. Maybe I missed it?

Young: In the press release, attached to our press release, is the balance sheet compared to year-over-year and quarterly and year-end PNL.

Eisenberg: Interesting...

Young: Should be attached to the press release that was released about an hour and a half ago.

Eisenberg: Yeah. Just bear with me one minute. I don't know why I'm not getting that on my PR newswire. Here we go, all right, so how much was your cash down from the last quarter?

Young: So, from the last quarter, if you don't include restricted cash to BayStar, we're down just over 6 million. That 6 million is made up of, as I mentioned, 2.7 in restructuring, 4 and a half million spent on the SCOscource, and then we offset -- we had some working capital changes -- and then Unix generated cash during the quarter.

Eisenberg: Uh-huh, so, from operations, what was the net cash use in the quarter? Or was it cash positive? Just from the operations, leaving aside the charge and the legal fees and all that?

McBride: [whispers, unclear, but seems to be explaining the question as relating to what Unix was generating.]

Young: It will be 4 million in operations cash use.

Eisenberg: 4 million, so... and that doesn't include legal?

Young: No, it does include the legal.

Eisenberg: All right, but...

Young: So if you take the legal out, we generate a positive cash of half a million dollars.

Eisenberg: You did, all right, so the 6-7 million you have in cash remaining for the business not earmarked for legal or BayStar, you believe you're cash flow positive now, so you shouldn't in theory need to touch that?

McBride: That's correct, and we did make, as we said earlier, some adjustments to the business towards the end of the quarter that we feel like we're in good shape to continue to add cash on a quarter by quarter basis as we go throughout this year, so if you really think of our business in two simple buckets -- you've got the core business bucket, and then you've got the litigation bucket. The litigation bucket is now funded, has a set of funds over there, and the fees are capped with the law firm, and now it's a matter of going out and having those claims heard in front of the court.

Eisenberg: Uh-huh.

McBride: Now you come back to the core business, the core business is cash flow positive, and we're coming out with some new products there, so we're actually fairly excited about going into this new year with the increased flexibility we have, in terms of having our legal fees capped and some strong claims over there in front of the various courts, and at the same time being able to come out, take our cash flow of Unix operations, and then build on that.

Eisenberg: If the litigation takes more than 2 years, and you sort of run out of the earmarked legal money, then Boies just pays for it themselves?

McBride: That's correct, he then converts over to his pocketbook, that was again significant for us, that he is a joint partner in this with us and that moves all the way through the appeals process. We don't know how long it's going to take to have these claims heard. We do know we're set to be in front of a jury trial in Utah in the IBM case on November 1, 2005, is where it's scheduled right now.

Eisenberg: Good.

McBride: So we're inside of 11 months on that as we stand. You go through that process, if there are appeals, so, the point is we're making progress here, we're approaching 2 years from when we started, we're now inside of a year to when it's set to go to trial, but if it does extend beyond that, we have one of the most prominent litigators in America that is stepping up with us as a partner, who will help us see this through to full conclusion.

Eisenberg: Right, I know you mentioned this once before, but I'm now looking at the balance sheets. Funny. There were two press releases -- one didn't have the balance sheet but the other did. I found it. The restricted cached 8 million is earmarked for legal expenses.

Young: 5 million of that is.

Eisenberg: Uh-huh. What about the other 3?

Young: The other 3 is a royalty agreement that we collect on behalf of Novell and then send to them. So it's basically just a pass-through here in the company. We have that every quarter.

31:59 - 33:13

Operator: We'll take our next question from Ronna Abramsom from TheStreet.com.

Ronna Abramson: Hi, I have just two questions. Did Boies also get some sort of options as part of the agreement? And also, I'm just wondering if could talk a little bit about the significance of the discovery motion and your overall case and how crucial you think it is and what role it plays.

McBride: Well, with respect to did he get options in this latest agreement, no, the answer to that is no. With respect to the discovery, obviously we put our claims in front of the court, we had a hearing on that on October 19th, the judge has taken that under advisement, and you know, we look forward to her ruling on that. You know, we have a number of issues going on in the various cases we have here. We've been moving those cases and the issues in those cases down the field, and at this point it's sort of a waiting game, waiting to hear for the judge's decision on these issues.

Abramson: OK.

33:13 - 35:06

Operator: Our next question will come from Al Petrofsky, a private investor.

Al Petrofsky: Hello, I had a question for Bert Young just on the liabilities, . On the liability, it shows up as an accrued compensation to law firms of 7,956,000. I believe that showed up there originally from a transaction in October 2003, where you were going to issue 400,000 shares to Boies Schiller & Flexner. Is that correct, and did that ever happen, and what's going on with that?

Young: That's correct. The 400,000 shares were never issued, and as part of this new fee agreement, we've agreed to pay that then in cash and not issue those shares. And... but you're right, that's what that original agreement refers to.

Petrofsky: So that will disappeaar in the first quarter?

Young: Pardon me?

Petrofsky: That will be gone from the next statement? Is that what you . . .?

Young: Correct. That's the amount that's been paid now in this new quarter, along with the amounts that were in accounts payable, so this new agreement has superceded that previous agreement.

Petrofsky: OK, if I could just squeeze in an unrelated thing here, to Darl. You said that your motion to amend the IBM case, you wanted to add a claim of copyright infringement? Is that correct?

McBride: Correct.

Petrofsky: OK.

McBride: In respect to what we assert is unlicensed use of our SCO code inside of AIX for Power.

Petrofsky: OK, and you're just trying to add one copyright infringement claim?

McBride: That's correct.

Petrofsky: And not really change the rest of the complaint?

McBride: That's correct.

Petrofsky: OK.

McBride: The standalone claim is what we're waiting on.

Petrofsky: Thank you very much.

McBride: Thank you, Al.

35:07 - 36:55

Operator: And that is all the time we have for questions today. If anyone has any further questions, or would like to follow up on any point, please contact the public relations team at SCO. I'd like to turn the conference back over to Mr. Young and Mr. McBride for any closing remarks.

McBride: Again, we thank you for joining us today. It was an interesting year, a little bit of a roller-coaster year, I guess you could say, in 2004, but we like how it ended, and we like the position we're in going forward. I'll reiterate one more time that by having the cap in place, I believe it was the last call, there were a number of questions that were coming my direction around the notion of "Well, what happens if you run out of cash? You might have tens of millions in cash right now, but is that enough to fight the thing all the way to the end?" By having this cap in place, by having the Boies team in partnership with us, that question goes away, and we're set to fully take these cases to full conclusion, and we have a lot of confidence in those cases, and we look forward to the outcome of those.

So then, again, as we head into this new year, we really do as a management team look forward to spending more direct time innovating products. We have some interesting things we're working on now that we'll talk to you about in the future. We look forward into heading into the new year. Thanks again for joining us today, from all of us at S-C-O, we'd like to wish all of you happy holidays, and we'll talk to you on the other side of the New Year. Thanks.

Operator: And once again, this will conclude SCO's 4th quarter and year-end 2004 earnings conference. We appreciate you being with us today, you may disconnect at this time.


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