SCO has filed its annual report. SCO is down to 63 employees:
As of October 31, 2008, we had a total of 63 full-time equivalent employees. Of the total employees, 21 were in product development, 24 in sales and marketing, 4 in services, 2 in customer delivery and manufacturing, 2 in SCOsource and 10 in administration (which includes finance, human resources, executive management and information systems). From time to time, we also engage independent contractors to support our professional services, product development, sales and marketing organizations. They vow to soldier on protecting their IP rights in courts though, if they can find the bucks and can avoid that specificity thing.
Here's the part about soldiering on:
We cannot guarantee the success of our SCO Litigation and other efforts to protect and enforce our intellectual property rights, but we will continue to seek to enforce and pursue these rights through the judicial system including through the appeal we have recently filed with the United States Court of Appeals for the Tenth Circuit. They might not have enough money to continue, sadly:
Our year ended October 31, 2003 was the first and only 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, 2008, 2007 and 2006, we incurred net losses of $8,687,000 $6,826,000 and $16,598,000, respectively. As of October 31, 2008, our accumulated deficit was $267,053,000. And the bankruptcy has certain requirements that may prove unreachable for them:
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 and January 2008, 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 October 31, 2008, we had a total of $1,237,000 in cash and cash equivalents and an additional $1,534,000 is to be used to pursue the SCO Litigation and to cover any amounts required to be put into constructive trust under the Novell judgment. Since October 31, 2004, we have spent a total of $13,447,000 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.
To successfully emerge from Chapter 11 as a viable entity, one must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Chapter 11 plan of reorganization (the “Plan”), solicit and obtain the requisite acceptances of the Plan, and fulfill other statutory conditions for confirmation. Ah. A demand for specificity. That's always the fly in SCO's ointment, isn't it? And on the subject of creditors and shareholders, it's good luck to one and all, and here's the plan:
On January 8, 2009, we filed our Amended Reorganization Plan and Disclosure Statement. Under the proposed Plan, we intend to hold an open auction to sell certain assets including our mobility business assets and our OpenServer operating system assets and business. Through this sale, we hope to obtain enough consideration to pay our creditors and continue operations as set forth in the Plan. In the event that the asset sale does not generate enough cash to meet the aforementioned objectives, we will scale back our operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain SCO assets are not sold, we will continue to sell and support our UNIX and mobility business and will also focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “True-up” licensing program with current customers, (c) reducing overall operating costs (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware; and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.
They'll sell the UNIX business to continue the litigation? All that will be left is SCOsource? Am I reading that right? To me, that's like a crack addict, selling possessions-- first the car, then bits of furniture, then jewelry, including wedding ring, then blood. Except SCO has to have permission from bankruptcy court to sell any assets. Ironically, that is exactly what BayStar wanted SCO to do, reportedly. Sell off Unix and focus only on the litigation. A lot of things have to go SCO's way for anything to work out, and they recognize it:
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 anything, 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 our bankruptcy case could be converted to a liquidation under Chapter 7 and 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 and stockholders would likely receive nothing from the liquidation.
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 stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, 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. No assurance can be provided regarding the date any plan or plans of reorganization will be proposed, confirmed or consummated or regarding when any distributions could be made to parties in interest. 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 the class comprising the interests of our equity security holders. Therefore, an investment in our common stock is highly speculative.
In addition, if a trustee is appointed to operate the Debtors in Chapter 11 (or the case is converted to a case under Chapter 7), the trustee would assume control of our assets, including the SCO Litigation. If SCO sells assets, I gather Boies Schiller gets a cut:
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 the company. The contingency fee amounts payable to the Law Firms will be, subject to certain credits and adjustments, as follows: And here's the rub -- SCO paid the lawyers through appeal, but the expenses, like for experts, are not part of that deal. Here's what they've spent so far and what they have available still in that escrow fund:
• 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.
As of October 31, 2008, we had a total of $1,237,000 in cash and cash equivalents and an additional $1,554,000 of restricted cash to be used to pursue the SCO Litigation and to cover any amounts required to be put into constructive trust under the Novell judgment. Since October 31, 2004, we have spent a total of $13,447,000 for expert, consulting and other costs and fees as agreed to in the Engagement Agreement with the Law Firms in the SCO Litigation. In light of the Chapter 11 filings, these arrangements are subject to Bankruptcy Court approval. As to the future of UNIX, SCO makes it sound bleak indeed:
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. They have 21 people left in development.
The only mention of China in the 10K is this:
In connection with the Company’s acquisition of the server and professional services groups from The Santa Cruz Operation, it acquired a 30 percent ownership interest in SCO Software, China; a joint venture in China. This investment is being accounted for using the equity method. As of October 31, 2008, the Company’s investment balance in SCO Software, China was $365,000, which is included in other assets. The Company’s other investments in non-marketable securities have been fully impaired in prior years and do not have a carrying value as of October 31, 2008. Last year, the balance was $497,000.
SCO's prospects from UNIX sounds a bit less glowing than their reorganization plan's wording:
We have taken steps to improve our UNIX software products to maintain system reliability, maintain backward compatibility, increase application support, provide broad hardware support, better integrate widely used internet applications, improve usability, and increase system performance. While we believe that these product enhancements will extend the lives and improve the functionality of our UNIX products, they will not result in significant revenue increases in the short-term due to the long adoption cycle for new operating system purchases and the length of our operating system product sales cycle as well as the competition in our markets.
If there are such bleak prospects, how realistic is the reorganization plan B, if the asset sale fails?
And UnixWare and UNIX are not identical after all, according to SCO's description of SCOsource, in contrast to the story SCOfolk told at trial:
We acquired our rights relating to the UNIX (including UnixWare) source code and derivative works and certain other intellectual property rights when we purchased substantially all of the assets and operations of the server and professional services groups of The Santa Cruz Operation, Inc. in May 2001. The Santa Cruz Operation had previously acquired such UNIX source code and certain intellectual property rights from Novell in 1995, which technology was initially developed by AT&T Bell Labs. Through this process, we acquired all UNIX source code, source code license agreements with thousands of UNIX vendors, certain UNIX intellectual property, all claims for violation of the above mentioned UNIX licenses and other claims, and the control over UNIX derivative works. The UNIX licenses we obtained have led to the development of several UNIX-based operating systems, including but not limited to our own UnixWare and, to some extent OpenServer products, IBM’s AIX, Sequent’s DYNIX/Ptx, Sun’s Solaris, SGI’s IRIX and Hewlett-Packard’s HP-UX. These operating systems are all derivatives of the original UNIX source code owned by us. Novell is on appeal by SCO:
The appeal before the United States Court of Appeals for the Tenth Circuit will proceed over the next several months with briefing and then argument before the Court. On January 23, 2009, we filed an unopposed motion for an expedited appeal. A decision on the appeal could be forthcoming in approximately the next ten to fourteen months, unless we are successful in our motion that the Court handle the appeal on an expedited basis.
Despite what you read in the funny papers, there is no fast track currently. SCO has to apply for fast track after all the papers are filed.
What about IBM?
As a result of the Court’s order of August 10, 2007, in the SCO v. Novell case, several of our claims against IBM may be dismissed. These claims 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 IBM 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, but we dispute this position. IBM’s counterclaims against us would remain in the case subject to pending motions for summary judgment. The IBM case is also currently stayed due to our Chapter 11 bankruptcy cases. And Autozone is apparently in discovery:
On September 22, 2008, the Nevada District Court held a status conference on the case and decided to lift the stay effective December 31, 2008. On January 6, 2009, the assigned Magistrate Judge issued an order directing the parties to file a proposed discovery plan and scheduling order by January 16, 2009. On that date, the parties filed a Joint Discovery Plan and Scheduling Order proposing January 15, 2010, as the deadline for the parties to complete fact discovery. That may explain why SCO is so interested in a fast track on the Novell appeal. The bottom line?
As a result of both the Court’s August 10, 2007 and July 16, 2008 ruling and the uncertainties surrounding the confirmation of the Company’s Amended Reorganization Plan, among other matters, there is substantial doubt about the Company’s ability to continue as a going concern. In connection with these developments, management recorded an impairment of the carrying value of the Company’s long-lived assets of $276,000 during the year ended October 31, 2008.... Well. One thing one can say. SCO is consistent. But it all gives me the feel I get when looking at before and after pictures of meth addicts.
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 counterclaims may be probable but 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.