Update: SCO seeks bankruptcy protection

With its cash reserves running out, the SCO Group Inc. has filed for bankruptcy protection.

The Lindon, Utah, company made the announcement in a news release, issued Friday afternoon. "The Board of Directors of The SCO Group 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," the statement said.

SCO expects to "maintain all normal business operations throughout the bankruptcy proceedings."

Once a respected vendor of the Unix operating system SCO is now best known as a long-running lawsuit against IBM related to the computer giant's support of the Linux operating system. SCO has claimed that IBM inappropriately contributed to the development of Linux, but SCO's critics say that the lawsuit was simply a desperate attempt to reach a financial settlement from IBM, which has invested heavily in Linux over the years.

The company's critics said that the bankruptcy filing was expected. "I have to say we weren't surprised," said Jim Zemlin, executive director of the Linux Foundation, in a statement e-mailed to IDG News. " Their legal strategy was ill-conceived and misguided. Companies like Red Hat, IBM and many others have proven that it's far smarter to build a business around Linux than it is to attack it in the courts."

The lawsuit had proved to be a costly one. SCO has been losing money for years as it has racked up millions of dollars in legal fees and seen its core Unix software business decline.

SCO had just over US$13 million in the bank as of June, according to the company's most recent filings with the U.S. Securities and Exchange Commission, but about $5.4 million of that had been set aside to cover legal and royalty costs.

Last month, it suffered a major legal setback as a a federal judge ruled that Novell, not SCO, owns the Unix copyright and that SCO would have to pay Novell for past licensing deals it had struck with Sun and Microsoft.

SCO had been expected back in court on Monday, when a judge was to begin evaluating how much SCO has to pay Novell, but the Chapter 11 filing automatically puts a hold on the trial, said Kevan Barney, senior manager of public relations for Novell.

The Chapter 11 status will also affect Novell's ability to collect, said Pamela Jones, a SCO critic and editor of the Groklaw.net blog. " What I think it does mean is Novell will have to work harder now get the money SCO owes," she said in an e-mail interview.

SCO's stock has been hammered since March of 2003, when it first filed suit against IBM. On Friday it closed at $0.37, down 43 percent on the bankruptcy news.

Robert Mullins of Network World and Paul Krill of InfoWorld contributed to this story.