SCO files Chapter 11 bankruptcy

The SCO Group Inc., just one month after being dealt a crippling blow in its legal offensive against IBM and advocates of the freely distributed Linux operating system, filed Chapter 11 bankruptcy on Friday.

The small Lindon company's bankruptcy filing came on the eve of a trial -- which was to have started Monday -- over the remainder of its controversial intellectual property lawsuit against Novell Inc. News of SCO's bankruptcy sent its shares skidding more than 43 percent or 28 cents to close at 37 cents on Friday. The company had hit a five-year high of nearly $25 a share in 2003 shortly after it announced it sued IBM.

Friday's bankruptcy filing, which has the effect of staying all pending litigation including Monday's trial, came after a federal judge last month found Novell, and not SCO, owns the copyrights to Unix.

That ruling undermined SCO's long-held claims that IBM stole code from Unix and put it into Linux. SCO also was ordered to remit to Novell a portion of the fees it collected from selling Unix licenses to Microsoft and Sun Microsystems.

Monday's trial would have examined whether SCO had the authority to collect Unix license fees and how much it would have to pay Novell for licensing fees it collected over the past few years.

But SCO's bankruptcy petition came as little surprise to some, and in fact, reflects what one Linux advocate describes as "the last throes of a battle that has long since been lost."

"The bankruptcy filing wasn't a surprise to anyone. The real question is: Will there be cash to get?" said James Zemlin, executive director of the Linux Foundation, a nonprofit consortium formed to foster the Linux operating system. In its bankruptcy filing, SCO listed assets of between $1 million and $100 million, and liabilities of between $1 million and $100 million.

"It's not surprising that the lion's share of SCO's debts are legal bills," Zemlin said.

The Florida law firm of Boies, Schiller & Flexner LLP, which is representing SCO in its legal battle against IBM and others, is listed among the Lindon company's 20 largest unsecured creditors.

Other creditors include: New York legal services company Amici LLC; SCO's former venture capital provider Canopy Group; and a slew of tech companies including Sun Microsystems, Microsoft Licensing, Veritas Software, Intel Corp., Fujitsu Services and Unisys Corp.

Another Linux Foundation executive, Don Kohn, says SCO may face the possibility of being forced into an involuntary Chapter 7 bankruptcy petition to liquidate its assets depending on how aggressive its creditors and Novell are in their debt recovery attempts.

Novell declined to comment on its next move.

"We'll be evaluating our options for pursuing our interests in this matter," said Kevan Barney, spokesman for Novell.

By filing bankruptcy, SCO may buy some time to negotiate with creditors and obtain debtor-in-possession financing for its debts.

In a news release Friday, SCO said its board of directors "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."

"We want to assure our customers and partners that they can continue to rely on SCO products, support and services for their business critical operations," said Darl McBride, president and CEO of SCO Group.

"Chapter 11 reorganization provides the company with an opportunity to protect its assets during this time while focusing on building our future plans," he said.

Subject to court approval, SCO and its subsidiaries will use the cash flow from their consolidated operations to meet capital needs during its reorganization.

SCO has filed a series of court documents to ensure that it will be able to maintain all of its commitments to its customers including paying its vendors and retaining various advisors.

But Kohn questioned if the company will survive the bankruptcy filing in the long run.

"Even if they emerge from Chapter 11, I can't imagine anyone wanting to risk their business by buying SCO's software," Kohn said.

Zemlin said the brunt of SCO's bankruptcy filing will likely be borne by its customers and its 150-plus employees.

"SCO customers will have to decide whether to continue to use its technology, or migrate to an alternative in the long run," he said.

SCO officials declined to comment beyond the news release on Friday.

Sources