Stephen Norris & Co. Capital Partners said Thursday it and unnamed Middle Eastern partners will fund The SCO Group with up to $100 million to take over the financially beleaguered Unix company, move it out of bankruptcy protection, complete its controversial and unsuccessful Linux litigation, and take it private.
The SCO Group's board has approved the transaction, and the company should exit bankruptcy "in the coming year," the company said. And SNCP's reorganization plan "will also enable the company to see SCO's legal claims through to their full conclusion," it said.
The SCO Group sells a version of Unix that never achieved the popularity of rival products from companies such as IBM or Sun Microsystems, but it's better known in recent years for its ill-fated legal action that asserted Linux infringed its Unix intellectual property. The case largely fell apart when a court found that Novell still owned the Unix copyright.
Despite an attempt to begin a new line of mobile-computing software called Me, the company's revenue dropped steadily from $79 million in fiscal 2003 to $22 million in fiscal 2007, during which the company reported a loss of $6.8 million. And last week, the company announced layoffs of 30 employees from a staff numbering about 115.
Stephen Norris, managing partner of the firm, though, was bullish on the Lindon, Utah-based company's prospects.
"We saw a tremendous investment opportunity in SCO and its vast range of products and services, including many new innovations ready or soon to be ready to be released into the marketplace," said. "We expect to quickly develop these opportunities, and to stand behind SCO's existing base of customers and partners."
It's not clear how much the investors will have to pay to acquire their controlling interest and to take SCO private. News of the investment sent SCO's shares, traded over the counter since its delisting from Nasdaq in 2007, up 3 cents per share to 9 cents, giving the company a market capitalization of about $2 million.
The companies didn't disclose who the Middle Eastern partners are, but Norris' biography indicates he's worked with some on more than one occasion. He "acted as a principal financial advisor to Prince Al-Waleed bin Talal Al Saud of Kingdom Holding Company in structuring and negotiating the re-capitalization of Citibank" and worked on "the offer by a major Saudi Arabian investment firm for Lamborghini in Italy."
In October, The SCO Group had disclosed a plan to sell its Unix assets to New York Capital Management for up to $36 million. It appears now that the Unix assets will remain with SCO.
"This significant financial backing is positive news for SCO's customers, partners and resellers who continue to request upgrades and rely upon SCO's Unix services to drive their business forward," said Jeff Hunsaker, The SCO Group's president and chief operating officer, in a statement.
Investing in SCO has proven difficult. One fund, BayStar Capital Management, invested $50 million in 2003, but unwound the deal in 2004 after much bickering.
Update 12:46 p.m. PT: I added more information on The SCO Group's legal case and its market capitalization.
The SCO Group, working to emerge from Chapter 11 bankruptcy protection, hopes to sell its Unix assets to York Capital Management for up to $36 million, the company said this week in regulatory and bankruptcy court filings.
Through the deal, York would provide SCO with $10 million in cash; up to $10 million in credit to fund its Linux-related legal fight and to get 20 percent of revenue from that action; $10 million for a 20 percent stake in the company; and $6 million to license the Hipcheck products from SCO's Me mobile device software effort and to share revenue from that line, according to the U.S. Bankruptcy Court filing.
SCO, which is engaged in expensive, controversial but so far largely fruitless Linux-related lawsuits against Novell and IBM, urged the court to approve an accelerated bidding process for the assets. The auction would allow others to offer a higher price than York, but time is of the essence, the company argued in the bankruptcy court filing.
"Based on debtors' (SCO's) financial condition, but more importantly the skittishness of existing and potential customers" to engage in a business relationship with SCO, "the debtors must move quickly to realize the highest and best price for their assets," the filing said.
The SCO Group has been beleaguered by steadily dwindling revenues. It suffered a major legal setback in August when a court found that Novell retained the Unix copyrights SCO thought it bought. But it looks like the Lindon, Utah-based company plans to keep on fighting: the asset purchase agreement specifically excludes the suits against Novell and IBM from transfer.
Unix has had a long and winding history as assets have been sold from the original sponsor of the operating-system project, AT&T. The assets were sold to Novell, then to the Santa Cruz Operation, then to Linux seller Caldera International, which renamed itself The SCO Group after trying to remake its business on the SCO Unix products. It's a tortured issue trying to decipher exactly what intellectual property--patents, trademarks, copyrights and trade secrets--traveled to new ownership or remained with earlier owners.
An SCO representative didn't comment beyond the filing. York didn't immediately respond to a request for comment.
This posting has been updated with comment from legal foes, the Linux Foundation and The SCO Group as well as with SCO financial information.
Three and a half years after launching a high-profile legal attack on Linux, The SCO Group has filed for Chapter 11 bankruptcy protection.
The Lindon, Utah-based company long has maintained that it had enough money to fight its costly lawsuits against IBM, Novell, Red Hat (which sued SCO proactively), AutoZone and DaimlerChrysler. But on Friday, a month after losing on a crucial legal ruling, the company admitted a grimmer picture.
"The Board of Directors of The SCO Group 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," the company said in a statement. Added Chief Executive Darl McBride, "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."
Chapter 11 protects a company's assets from creditors during a reorganization.
IBM didn't comment, but Novell said it is evaluating its options. "U.S. bankruptcy law automatically stays the court case. We're assessing our options for how to pursue our interests," Novell said. A court case was scheduled to begin Monday to determine how much SCO owed Novell as a result of last month's ruling, according to Groklaw, a site that's closely monitored the case.
All of SCO's court cases now are on hold, a company representative said.
SCO has a complicated history. It went public as Linux seller Caldera Systems, then acquired the Unix business from the Santa Cruz Operation and renamed itself The SCO Group. It then scrapped its Linux business and sued IBM and others, alleging that Big Blue violated its Unix contract by moving proprietary Unix technology into open-source Linux.However, the company's legal case was dealt a crushing blow in August, when the federal judge overseeing its case, Dale Kimball, concluded "that Novell is the owner of the Unix and UnixWare copyrights."
In the meantime, SCO has been trying to enliven its ever-shrinking business, selling its UnixWare software, and to expand into the mobile-device software market.
In June, SCO reported a loss of $1.1 million for the quarter ended April 30 on revenue of $6 million, a decline from $7.1 million in the year-earlier quarter. Legal costs that quarter totaled $1.1 million, a major decrease from $3.8 million the year before.
Jim Zemlin, executive director of the Linux Foundation, couldn't resist a dig at The SCO Group.
"If they had built their business on Linux instead of trying to attack it, they might be enjoying success like Red Hat instead of filing for bankruptcy protection," he said in a statement. "It's always unfortunate for customers when a company fails like this. But anyone could have seen this coming when they went down the misguided litigious route they did."
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