SCO files for bankruptcy

SCO Group, best known for suing IBM, has filed for Chapter 11 bankruptcy. In a statement, SCO said it was filing to reorganize under Chapter 11.

The Board of Directors of The SCO Group (history lesson) have unanimously determined that Chapter 11 reorganization is in the best long-term interest of SCO and its subsidiaries, as well as its customers, shareholders, and employees.

I'm not sure what SCO bankruptcy does for shareholders, which usually get nada in a bankruptcy proceeding, but SCO may have a point about saving itself via Chapter 11. Groklaw reports that SCO owes Novell money. A trial starts on Monday to determine how much SCO owes Novell. It's unclear what this bankruptcy filing means for Novell--if I were to guess it probably means Novell is out of luck unless it owns some sort of preferred debt.

News.com's Stephen Shankland reports that Novell's case will be automatically stayed due to the bankruptcy filing. Update: Groklaw has all of the documents pertaining to the bankruptcy, including the creditor list.

In the grand scheme of things SCO was being crushed by legal challenges and running out of cash. SCO launched a legal war against IBM alleging that Linux was really just Unix in a new wrapper. With that argument SCO was planning on collecting royalties.

The plan went awry given a series of legal setbacks. Now the cash is running dry and SCO's best bet if it wants to survive is to reorganize its subsidiaries to focus on Unix and mobile services. If the courts ruled that SCO owned Novell anything above $12 million SCO would be close to broke.

What's really surprising is that the bankruptcy took this long. In January, observers were expecting SCO's cash to run dry.

The cash burn

At the end of the second quarter ending April 30, SCO had $7.78 million in cash and equivalents and $5.4 million in restricted cash.

Meanwhile it posted a second quarter loss of $1.14 million on revenue of $6 million. That was an improvement, but revenue falling SCO just wasn't sustainable. Revenue for the first two quarters of fiscal 2007 was $12 million, down from $14.4 million the year earlier.

On June 5, SCO said:

The decrease in revenue was primarily attributable to continued competitive pressures on the Company's UNIX products and services and the improvement in net loss was primarily attributable to reduced legal costs and operating expenses.

Even though legal costs improved, SCO still had $1 million in litigation costs for the second quarter. That was down from $3.76 million in the same quarter a year ago, but SCO just didn't have the financial heft for a long legal battle against a well-armed IBM. It didn't help that SCO was losing most court battles.

Meanwhile, the core business (Unix and mobile software) that SCO was setting up garnered a few customer wins, but the names highlighted (Sberbank, a Russian savings bank, George Delallo Co., Atlas Paper) weren't exactly Fortune 500 blue chippers.

As SCO was squeezed on cash, the company's legal woes escalated. Last month, SCO's claims were eviscerated in a 102-page ruling.

Dan Farber reported on August 11:

For the last several years, SCO has been engaged in lawsuits against IBM and others, claiming that parts of Linux violate its alleged copyrights to Unix. In its lawsuit versus IBM, SCO alleged that IBM contributed portions Unix code owned by SCO to the Linux community.

The ruling, which named Novell as the owner of the Unix and Unixware copyrights, could make SCO give up its four-year effort to extract royalties from Linux providers. Novell acquired Unix from AT&T in 1995.

In March 2004, SCO wanted to charge users for an SCO intellectual property license–$699 per single-processor server–to use Linux and dodge any legal action.

During the same time period, SCO filed lawsuits against auto parts retailer AutoZone for violating SCO’s Unix copyrights by running versions of the Linux operating system that “contain code, structure, sequence and/or organization from SCO’s proprietary Unix System V code in violation of SCO’s copyrights.” DaimlerChrysler was also sued for alleged violations of the automotive company’s Unix software agreement with SCO.

Both Microsoft and Sun paid SCO for licenses related to the Unix copyright claims in 2003.

That August ruling was really the bankruptcy blow for SCO, which largely bet the company on winning its court case. However, SCO's court track record wasn't so grand. In June 2006, a Utah judge threw out hundreds of claims made by SCO against IBM. IBM had launched counterclaims and sought copyright rulings on SCO's suit.