Lawsuits push SCO to the brink

The long-running legal actions between Unix vendor SCO and IBM over rights to Unix code may soon be over, if only because SCO is running out of money to pursue its claims.

This news was revealed by SCO in its annual financial reports filed with the US Securities and Exchange Commission earlier this month. The reports inform investors about risks related to SCO stock. They also provide guidance to companies awaiting the outcome of SCO's legal actions before deciding whether to invest in Linux.

SCO's filings highlight doubts over future revenue and the firm's ability to continue servicing its existing Unix customers.

In its statement, SCO acknowledged that cash flow has been a persistent problem. "We do not have a history of profitable operations. Our fiscal year ending 31 October 2003 was the first full year we were profitable in our operating history. Our profitability in fiscal year 2003 resulted primarily from our SCOsource licensing initiatives."

The SCOsource project was designed to generate income from firms using Linux. SCO argued that firms using Linux should pay SCOsource a fee for its intellectual property allegedly contained in Linux. Red Hat and others have challenged this, but the Red Hat case is scheduled to be heard only after SCO's cases with IBM are resolved.

Therefore, income from SCOsource has dried up. SCO reported a net loss from operations of $28m for fiscal year 2004, and said its total debt as of 31 October was $224m. "If we do not receive SCOsource licensing revenue in future quarters and our revenue from the sale of our Unix products and services continues to decline, we will need to further reduce operating expenses to generate positive cash flow," the company stated. "We may not be able to further reduce operating expenses without damaging our ability to support our existing Unix business."

SCO's SEC filing continues: "Because of the uncertainties related to our SCOsource business, we are unable to estimate the amount and timing of future SCOsource licensing revenue as well as predict the ultimate level of spending on our lawsuits. This uncertainty represents a significant risk and challenge for us, both in the short and long term."

Future SCOsource revenue may be sporadic and fluctuate from quarter to quarter. "Our SCOsource initiatives are unlikely to produce a stable or predictable revenue stream for the foreseeable future."

SCO also confirmed that future SCOsource income could rely on the outcome of its litigation with IBM.

"The success of these initiatives may depend on the strength of our intellectual property rights and contractual claims regarding Unix, including the strength of our claim that unauthorised Unix source code and derivative works are prevalent in Linux."