The SCO Group Announces Third Quarter 2004 Results The Company's UNIX Business Achieves Profitability; Company Announces Adoption

of Shareholder Rights Plan and Letter of Intent to Complete a Revised Fee

Agreement With Boies, Schiller & Flexner



    LINDON, Utah, Aug. 31 /PRNewswire-FirstCall/ -- The SCO Group, Inc.
 (Nasdaq:   SCOX), owner of the UNIX operating system and a leading provider of
 UNIX-based solutions, today reported results for the fiscal third quarter
 ended July 31, 2004.
     Revenue for the third quarter of fiscal year 2004 was $11,205,000 as
 compared to $20,055,000 from the comparable quarter of the prior year.  The
 decrease in revenue in the third quarter of fiscal year 2004 from the
 comparable quarter of the prior year was primarily due to a decrease in
 SCOsource licensing revenue to $678,000 in the third quarter of fiscal year
 2004 from $7,280,000 in the third quarter of fiscal year 2003.  However,
 SCOsource licensing revenue did increase by $667,000 from the prior quarter
 ended April 30, 2004.
     The net loss for the third quarter of fiscal year 2004 was $7,423,000 as
 compared to net income of $3,096,000 for the comparable quarter of the prior
 year.  The net income applicable to common stockholders for the third quarter
 of fiscal year 2004 was $7,501,000, or $0.38 per diluted common share.
 Included in the net income applicable to common stockholders for the third
 quarter of fiscal year 2004 was a contribution to capital of $15,475,000
 related to the repurchase and retirement of the remaining 40,000 shares of the
 Company's Series A-1 Convertible Preferred Stock.
     "Several positive developments fell into place for us this quarter that
 strengthened the Company's overall position," said Darl McBride, president and
 CEO, The SCO Group.  "We successfully delivered on our strategy to restore
 profitability within our UNIX business which is generating positive cash flow.
 At the same time, we saw a nice uplift from SCOsource licensing revenue.  In
 addition, we closed the BayStar transaction and as announced today, we
 implemented a Shareholder Rights Plan that will help protect the Company from
 any potential undervalued takeover attempt.  Finally, we are pleased to have
 entered into a letter of intent with Boies, Schiller & Flexner that not only
 demonstrates their belief in SCO's legal case but will also provide SCO with
 greater financial flexibility."
     McBride concluded, "We remain steadfastly committed to enforcing our
 intellectual property rights on behalf of our customers, employees and
 shareholders.  Through the combination of the quarter's positive developments
 and our current cash position, we are well-positioned to pursue our current
 litigation through its conclusion."
     For the first three quarters of fiscal year 2004, revenue was $32,734,000
 compared to revenue for the first three quarters of fiscal year 2003 of
 $54,964,000.  For the first three quarters of fiscal year 2004, the net loss
 was $16,834,000 and the net loss applicable to common stockholders was
 $9,711,000, or $0.67 per diluted common share, compared to net income of
 $6,872,000, or $0.47 per diluted common share for the first three quarters of
 fiscal year 2003.  Despite the net loss reported for first three quarters of
 fiscal year 2004, cash and available-for-sale securities positions were
 $43,027,000 at July 31, 2004.
 
     BayStar Capital
     As the Company previously announced on July 23, 2004 and reaffirmed on
 August 25, 2004, SCO completed its transaction with BayStar Capital II, L.P.
 regarding the retirement of BayStar's 40,000 shares of SCO's Series A-1
 Convertible Preferred Stock in exchange for $13 million in cash and
 2,105,263 shares of the Company's common stock.  Upon completion of this
 transaction, all outstanding shares of the Company's preferred stock were
 retired.
 
     Shareholder Rights Plan
     SCO announced today in a separate press release that the Company's board
 of directors has adopted a Shareholder Rights Plan.  This plan is designed to
 ensure that potential acquirers of the Company's stock recognize fair value
 for the Company's assets and opportunities.  Additional details of the
 Shareholder Rights Plan have been made available through a press release that
 was distributed today and through a current report on Form 8-K to be filed by
 the Company.
 
     Legal Fee Re-negotiation
     The Company has entered into a letter of intent with Boies, Schiller &
 Flexner LLP, its outside legal counsel to enter into a revised fee agreement
 with respect to pending intellectual property and licensing litigation, to
 limit overall cash cost of the Company's litigation to $31 million.  The terms
 also stipulate that Boies, Schiller & Flexner will lead SCO's efforts through
 the duration and completion of the pending litigation in return for increased
 contingency.
     SCO will release further details of the new contract upon finalization of
 the agreement.
 
     Financial Outlook
     The following statements are forward looking and actual results may differ
 materially.  See the discussion of certain risks and uncertainties related to
 this financial outlook at the end of this release under "Forward-Looking
 Statements."
     For the fourth fiscal quarter ending October 31, 2004 the Company expects
 total revenue to be in the range of $10,000,000 to $12,000,000.  As previously
 indicated, SCOsource revenue remains extremely difficult to predict, including
 the timing and level of revenue in the near term or any given quarter.
 Operating expenses for the fourth quarter relating to UNIX products and
 services, exclusive of any charges from restructuring activities, are
 anticipated to slightly decline from the third quarter of fiscal year 2004 and
 comparable quarters.  Expenses relating to SCOsource, including legal fees,
 are expected to vary from quarter to quarter depending on the level of, and
 activity surrounding, our intellectual property claims, and therefore are
 difficult to predict.  The Company will continue to take the necessary legal
 steps to protect its UNIX intellectual property and aggressively pursue its
 legal claims through the court system.
 
     Conference Call
     As previously announced, The SCO Group will host a conference call at
 5:00 p.m. EDT today, August 31, 2004, to discuss our third quarter results and
 key corporate developments.  To participate in the teleconference, please call
 800-289-0436 or 913-981-5507; confirmation code: 824670, approximately five
 minutes prior to the time stated above.  A listen-only Web cast of the call
 will be broadcast live with a replay available the following day.  The Web
 cast and replay may be accessed from http://ir.sco.com/medialist.cfm.
 
     About SCO
     The SCO Group, Inc. (Nasdaq:   SCOX) helps millions of customers in more
 than 82 countries to grow their businesses everyday.  Headquartered in Lindon,
 Utah, SCO has a worldwide network of more than 11,000 resellers and
 4,000 developers.  SCO Global Services provides reliable localized support and
 services to partners and customers.  For more information on SCO products and
 services, visit http://www.sco.com.
 
     SCO and the associated SCO logo are trademarks or registered trademarks of
 The SCO Group, Inc. in the U.S. and other countries.  UNIX is a registered
 trademark of The Open Group.  All other brand or product names are or may be
 trademarks of, and are used to identify products or services of, their
 respective owners.
 
     Forward-Looking Statements
     This press release, particularly the "Financial Outlook" section, contains
 forward-looking statements representing our current expectations and beliefs,
 including, among other things: (i) the expectation that we will continue to
 focus on our SCOsource initiatives and enforce our intellectual property
 rights; (ii) expected consolidated revenue in the fourth quarter of fiscal
 year 2004 of $10,000,000 to $12,000,000; (iii) the expectation that expenses
 related to UNIX products and services, exclusive of any restructure costs,
 will slightly decline for the fourth quarter compared to the third quarter of
 fiscal year 2004 and comparable quarters of the prior year; (iv) the
 expectation that expenses related to SCOsource are expected to vary from
 quarter to quarter depending on the level of, and activity surrounding, our
 intellectual property claims, and therefore are difficult to predict; and (v)
 our intent to continue to take the necessary legal steps to protect our UNIX
 intellectual property and aggressively pursue our legal claims and (vi) our
 expectation that we will enter into a revised fee agreement with our law firms
 handling our litigation.  These forward-looking statements and related
 assumptions are subject to risks and uncertainties that could cause actual
 results and outcomes to differ materially from any forward-looking statements
 contained herein.  These risks and uncertainties include, without limitation:
 (a) risks that we will not be successful in our efforts to protect and enforce
 our intellectual property rights; (b) risks that our core UNIX business may
 continue to decline; (c) risks that we will face increasing competition from
 competing providers of operating system products and services, particularly
 Linux; (d) risks that the U.S. and international economic and political
 conditions will worsen and adversely affect technology purchases; (e) risks
 that our SCOsource licensing initiatives will yield fewer licenses or less
 licensing revenue than anticipated or that such licensing revenue will not be
 generated when or in amounts currently anticipated; (f) risks that we will
 require more capital to sustain our business objectives than we may have and
 that such capital may not be available; (g) we may not be able to enter into a
 revised fee agreement with our law firms; and (h) other risks and
 uncertainties set forth in our filings with the Securities and Exchange
 Commission.  These forward-looking statements speak only as of the date
 hereof, and we undertake no obligation to update such forward-looking
 statements after the date hereof.
 
 
                     Condensed Consolidated Balance Sheets
                           (unaudited, in thousands)
 
                                                      July 31,     October 31,
                                                        2004           2003
      Assets:
       Cash and cash equivalents                      $15,982        $64,428
       Restricted cash                                 13,506          2,025
       Available-for-sale securities                   27,045          4,095
       Accounts receivable, net                         5,954          9,282
       Other current assets                             2,466          2,450
        Total current assets                           64,953         82,280
       Property and equipment, net                        799          1,148
       Goodwill and intangibles, net                    6,090         10,452
       Other assets                                     1,390          1,072
        Total assets                                  $73,232        $94,952
 
      Liabilities:
       Accounts payable                                $1,825         $1,978
       Accrued payroll and accrued expenses            13,824          8,506
       Payable to BayStar Capital II, LLP              13,000             --
       Accrued compensation to law firms                7,956         10,556
       Deferred revenue                                 5,936          5,501
       Derivative related to Series A convertible
        preferred stock                                    --         15,224
       Other current liabilities                        2,038          3,347
        Total current liabilities                      44,579         45,112
       Long-term liabilities                              501            508
       Minority interest                                   --            145
       Convertible preferred stock                         --         29,671
      Stockholders' equity                             28,152         19,516
        Total liabilities and stockholders' equity    $73,232        $94,952
 
 
                Condensed Consolidated Statements of Operations
                (unaudited, in thousands, except per share data)
 
                                   Three Months Ended    Nine Months Ended,
                                         July 31,             July 31,
                                     2004      2003       2004       2003
 
      Products revenue              $8,929   $10,804    $27,056    $33,016
      Services revenue               1,598     1,971      4,969      6,418
      SCOsource licensing revenue      678     7,280        709     15,530
       Total revenue                11,205    20,055     32,734     54,964
      Cost of products revenue         825     1,284      2,614      3,676
      Cost of services revenue         878     1,538      3,273      5,008
      Cost of SCOsource licensing
       revenue                       7,312     1,712     15,236      3,875
       Total cost of revenue         9,015     4,534     21,123     12,559
       Gross margin                  2,190    15,521     11,611     42,405
      Operating expenses:
       Sales and marketing           4,233     5,930     13,952     18,421
       Research and development      2,592     2,950      8,167      8,142
       General and administrative    1,889     1,413      6,475      4,525
       Restructuring charges            --       614         --        498
       Loss on impairment of
        long-lived assets               --        --      2,139         --
       Amortization of intangibles     593       895      1,973      2,295
       Stock-based compensation        270       309        868        927
        Total operating expenses     9,577    12,111     33,574     34,808
      Income (loss) from operations (7,387)    3,410    (21,963)     7,597
      Equity in income (loss) of
       affiliates                       41       (71)       115       (171)
      Other income (expense), net       99       (55)     6,284        (59)
      Income (loss) before income
       taxes                        (7,247)    3,284    (15,564)     7,367
      Provision for income taxes      (176)     (188)    (1,270)      (495)
      Net income (loss)             (7,423)    3,096    (16,834)     6,872
      Dividends on convertible
       preferred stock              14,924        --      7,123         --
      Net income (loss) applicable
       to common stockholders       $7,501    $3,096    $(9,711)    $6,872
      Basic net income (loss) per
        common share                 $0.49     $0.25     $(0.67)     $0.58
      Diluted net income (loss) per
       common share                  $0.38     $0.19     $(0.67)     $0.47
      Weighted average basic common
       shares outstanding           15,242    12,469     14,389     11,753
      Weighted average diluted
       common shares outstanding    19,912    16,180     14,389     14,744
 
 
 
 

SOURCE The SCO Group, Inc.

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