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The SCO Group, Inc.
355
South 520 West
Lindon, Utah 84042
(801) 765-4999
www.thescogroup.com
Sales
$79
million
Business Description
We own the UNIX operating system and are a provider of UNIX-based products
and services. We generate revenue from two sources: sales of our UNIX-based
products and services and licenses of our UNIX technology through our
SCOsource initiatives. Our core business is to sell and service our UNIX
operating system and related software products to small-to-medium sized
businesses and branch offices and franchisees of Fortune 1000 businesses.
Our main products that drive the majority of our UNIX revenue are OpenServer
and UnixWare. We intend to continue to maintain our core business in fiscal
year 2004 by continuing our research and development efforts to enhance our
OpenServer and UnixWare products and their related services.
We developed our SCOsource initiatives as part of our ongoing efforts to
establish and protect our intellectual property rights, particularly
relating to our UNIX source code. In reviewing our intellectual property
rights in early 2003, we became aware that parts of our proprietary UNIX
source code and derivative works have been included in the Linux operating
system without our authorization or copyright attribution. Commencing in
January 2003, our SCOsource initiatives have included:
• reviewing and evaluating our UNIX license and sublicense agreements with
UNIX vendors and identifying those in the software industry that may be
currently using our intellectual property without obtaining the necessary
licenses;
• requiring our UNIX licensees to certify that they are in full compliance
with the terms of their respective licenses and have not misused copyrighted
UNIX source code and are not misusing that code in Linux;
• warning users of the Linux operating system through written correspondence
that their use of Linux may violate our intellectual property rights and
specifically violate our copyrights; and
• offering our SCO Intellectual Property ("IP") Licenses to Linux end users
to properly authorize their use of our intellectual property in the Linux
operating system.
In connection with our SCOsource initiatives, in March 2003, we filed a
complaint against International Business Machines Corporation ("IBM"),
alleging, in part, that IBM had breached its license agreement with us by,
among other things, inappropriately contributing UNIX source code and
derivative works to the open source community and seeking to use its
knowledge and methods related to UNIX source code and derivative works and
modifications licensed to it to decrease the value of the
UNIX operating system in favor of promoting the Linux operating system, of
which it has been a major backer. Based on these alleged breaches, we
delivered to IBM notice of termination of our license agreement with IBM
that permitted IBM's use of our UNIX source code in developing its AIX
operating system. We describe our legal action against IBM and its
procedural status in more detail below under Part I, Item 3 of this Form
10-K.
Additionally, as part of our SCOsource initiatives, in fiscal year 2003, we
entered into two significant vendor license agreements with Sun Microsystems
("Sun") and Microsoft Corporation ("Microsoft"). We will continue pursuing
our SCOsource initiatives in fiscal year 2004, seeking to obtain additional
vendor licensing agreements similar to the Sun and Microsoft agreements and
pursuing our SCOsource IP license initiative with Linux end users. We also
plan to continue to pursue our litigation against IBM, and have announced
that we expect in the near term to commence our first legal action against
an end user violating our intellectual property or contractual rights. On
January 20, 2004, we brought suit against Novell, Inc. ("Novell") for
slander of title seeking relief for Novell's alleged bad faith efforts to
interfere with our copyrights related to our UNIX source code and derivative
works and our UnixWare product. We describe our legal action against Novell
in more detail below under Part I, Item 3 of this Form 10-K.
Historical Information
We originally incorporated as Caldera Systems, Inc., a Utah corporation
("Caldera Systems"), in August 1998, and reincorporated as a Delaware
corporation in March 2000, when we completed an initial public offering of
our common stock. In May 2001, we formed a new holding company in Delaware
under the name of Caldera International, Inc. ("Caldera International") to
acquire substantially all of the assets and operations of the server and
professional services groups of The Santa Cruz Operation, now known as
Tarantella, Inc. In connection with this acquisition, Caldera Systems became
a wholly-owned subsidiary of Caldera International. Former holders of shares
and options to purchase shares of Caldera Systems received an equal number
of shares and options to purchase shares in Caldera International.
On May 16, 2003, our stockholders approved our corporate name change from
Caldera International, Inc. to The SCO Group, Inc. As used herein, the
"Company" or "us," "we," "ours," or similar terms refer to The SCO Group,
Inc. and our operating subsidiaries.
UNIX-Based Products and Services Business
Background
Our core business focus is to serve the needs of small-to-medium sized
businesses, including branch offices and franchisees of Fortune 1000
companies, by providing reliable, cost effective UNIX operating systems and
software products to power computers running Intel architecture. We also
provide a full range of pre and post sale technical support for all of our
products, primarily focusing on OpenServer and UnixWare. Additionally, we
provide UNIX-based professional consulting and custom software development
services.
Our largest source of revenue for our core UNIX business is derived from our
worldwide, indirect, leveraged channel of partners, which includes
distributors and independent solution providers (collectively, "resellers").
We have local offices in a number of countries that provide support and
services to customers and resellers in those geographic areas. The other
principal channel for selling and marketing our products is through large
corporations which have a large number of branch offices or franchisees. We
access these corporations through their information technology or purchasing
departments with our direct sales team in the United States and through our
reseller channel in countries outside the United States. In addition, we
also sell our operating system products to original equipment manufacturers
("OEMs") through our direct sales team in the United States and our reseller
channel in countries outside the United States.
The UNIX operating system, which we own, was conceived on the premise that
an operating system should be easily adapted to a broad range of hardware
platforms and should provide a simple way of connecting programs. Over the
years, the UNIX operating system has been adapted for almost every OEMs
hardware architecture, and today UNIX has achieved the goal of seamlessly
sharing data across heterogeneous environments. We own a broad and deep set
of intellectual property rights relating to the UNIX operating system which
we intend to continue to enforce and protect through our SCOsource
initiatives, described in more detail below in the subsection entitled "SCOsource
Initiatives" under the section entitled "SCOsource Business."
UNIX has had a long history of small business implementation, and has a
large and loyal base of both customers and vendors that provide solutions
and applications. On the Intel platform, our OpenServer and UnixWare
products represent a low cost, UNIX operating system available for business.
Our offerings permit businesses, particularly small businesses, to take
advantage of the reliability of the UNIX operating system that runs on the
Intel platform at a relatively low cost.
Current Status and Strategy
Sales of our UNIX-based products and services have been declining in each of
the last four years. This decline in revenue has been primarily attributable
to significant competition from alternative operating systems, particularly
Linux, the worldwide economic slowdown and lower information technology
spending.
We anticipate that our OpenServer and UnixWare products will continue to
provide a revenue stream for our UNIX business, although we expect revenue
from these products will continue to decline. Both of these UNIX products
have a strong existing customer base and constitute a well-known brand with
a reputation for quality and reliability. We also have a seasoned, mature
sales channel of resellers focused on the small-to-medium sized business
market. This channel is a unique asset that will allow us to continue to
provide reliable UNIX operating systems for small-to-medium sized business
customers.
In fiscal year 2004, we intend to focus our development resources on
maintaining and enhancing our existing OpenServer and UnixWare products by
increasing system reliability and performance, maintaining backward
compatibility with existing applications and software, providing increased
application support and additional hardware support and integrating
widely-used internet applications and increase system performance.
We are also enhancing our UNIX operating systems with web services software
that provides interoperability and compatibility with web services
standards, under an initiative called SCOx. These enhancements will provide
customers with a cost effective way to modernize and integrate legacy
applications and modernize application user interfaces. Target end users may
include small-to-medium sized businesses and branch offices and franchisees
of Fortune 1000 companies, with an initial emphasis on end users currently
using our UNIX operating systems. We will also continue to look at
augmenting our current UNIX operating systems with more vertically focused
solutions. Future expansion of this initiative may include acquisitions of
technologies, acquisitions of companies with an established presence in key
vertical markets, strategic alliances with industry participants and
licensing transactions.
We have also completed the development of a "small footprint" version of
UNIX that can be used in embedded devices. We believe that this will allow
us to expand our reach in certain retail markets. Our research and
development efforts are described in more detail below in the subsection
entitled "Software Engineering and Development."
Competition
We face direct competition in the operating system market from Linux
operating system providers, other non-UNIX operating system providers, other
UNIX-based operating system providers, technical support providers and
professional services organizations. In the operating system market, some of
our competitors include Hewlett-Packard, IBM, Microsoft and Sun. Operating
systems such as Linux and Microsoft's Windows Server are aggressively
pursuing the current UNIX operating system market and have taken significant
market share from our UNIX business. We are also in the process of asserting
our copyrights and contractual rights related to our UNIX source code and
derivative works that have been integrated into Linux.
We believe that we compete favorably with many of our competitors in a
number of respects, including product performance, functionality and price,
networking capability and breadth of hardware compatibility. However, many
of our competitors are significantly larger than we are and have greater
access to funding, technical expertise, marketing, and research and
development. In addition, many of our competitors have established brand
recognition and market presence that may prevent us from obtaining
significant market share.
The success of our UNIX business will depend on the level of commitment and
certification we receive from industry partners and developers. In recent
years, we have seen hardware and software vendors as well as software
developers turn their certification and application development efforts
toward Linux and elect not to continue to support or certify to our UNIX
operating system products. If this trend continues, our competitive position
will be adversely impacted and our future revenue from our UNIX business
will decline. The decline in our UNIX business may be accelerated if
industry partners withdraw their support from us as a result of our
SCOsource initiatives and in particular any lawsuit against end users
violating our intellectual property and contractual rights.
Products and Services
OpenServer. OpenServer is our UNIX-based legacy offering. Businesses use
OpenServer to simplify and speed business operations, better understand and
respond to their customers' needs, and achieve a competitive advantage.
OpenServer excels at running multi-user, transaction and business
applications, communications gateways, and mail and messaging servers in
both host and client/server environments. We continue to aggressively
support existing users of OpenServer, keeping the operating system current
with hardware platforms available in the market. The latest release,
OpenServer 5.0.7, began shipping in February 2003.
UnixWare. UnixWare is an advanced deployment platform for industry standard
Intel processor systems. UnixWare is a foundation for solutions where proven
scalability, reliability and affordability are critical. UnixWare includes
enhancements and refinements to the UNIX platform, representing significant
added value for existing UnixWare customers. The latest release, UnixWare
7.1.3, began shipping in December 2002.
Technical Support Services. We provide a full range of pre and post sale
technical support for all of our products, primarily focusing on OpenServer
and UnixWare.
We also provide technical support to all our partners, including resellers,
hardware and software vendors and solution providers, as well as directly
supporting our end-user customers. Our partners have the option to direct
their customers to us for technical support or to provide first-level
customer support themselves and utilize our technical expertise for
second-tier support.
Technical support services include a range of options from single incident
email and telephone support to dedicated "enterprise" level support
agreements. Customers seeking additional technical support directly from us
may enter into service agreements that best suit their needs.
Professional Consulting and Custom Development Services. Our UNIX consulting
services include project management, software development and programming,
migration tools and services, development of customized operating systems,
as well as assisting customers with modernizing and integrating legacy
applications with web services. We assist our end-user customers and
solution providers in planning, creating, implementing and deploying
business application solutions.
Strategic Alliances
We have business alliances with a number of key global industry partners.
These relationships encompass product integration, two-way technology
transfers, channel partnerships and revenue generating initiatives in areas
of product bundling, OEM agreements and training and education. The
objectives of these partnerships include providing complete hardware and
software UNIX solutions and mutually developing our sales and distribution
channel by coordinating marketing initiatives in creating demand for our
products.
We also have alliances with numerous solution providers who write and
develop custom applications to run on UNIX operating systems. Most of our
small business customers that cannot afford high-end solutions or an
information technology staff rely on one of our channel partners for these
services. We also intend to expand our relationships with key partners in
certain vertical markets such as retail, medical and
manufacturing/accounting where our UNIX operating systems have an existing
presence. Our efforts to maintain or expand industry partnerships may be
adversely impacted by our SCOsource initiatives, particularly any lawsuit
against end users violating our intellectual property and contractual
rights.
Software Engineering and Development
We have undertaken an initiative to maintain our UNIX operating systems
while at the same time gaining operational efficiencies where possible. We
are modernizing our UNIX technology with the requirements to maintain system
reliability, maintain backward compatibility, increase application support,
provide broad hardware support, better integrate widely-used internet
applications, improve usability, and increase system performance. While we
believe that these product enhancements will extend the life and improve the
functionality of our UNIX products, they will not result in significant
revenue increases in the short-term due to the long adoption cycle for new
operating system purchases and the length of our operating system product
sales cycle.
Technology trends in the central processing unit ("CPU") market have enabled
our 32-bit operating systems and associated applications to run on 64-bit
hardware. These developments have significantly reduced the entry cost into
the 64-bit market which will allow us to assign a limited but skilled amount
of resources to develop a 64-bit version of our operating system technology.
Our objective in making this investment is to provide our current and new
customers a long-term product roadmap that will provide them a seamless
upgrade path to 64-bit computing that is no more difficult than a standard
32-bit operating system upgrade. We expect this investment to provide future
returns as we give customers confidence in their commitment to our
technologies.
Our product development process is modeled to standard, commercial software
engineering practices. We apply these practices to both documentation and
procedures to ensure consistent product quality. As a result, we are able to
offer our platform products to OEM customers in several configurations
without significant additional effort. We are also able to move our platform
products efficiently to new processor platforms as new business
opportunities arise.
SCOsource Business
Background
We acquired our rights relating to the UNIX source code and derivative works
and other intellectual property rights when we purchased substantially all
of the assets and operations of the server and professional services groups
of The Santa Cruz Operation, Inc. in May 2001. The Santa Cruz Operation (now
known as Tarantella, Inc.) had previously acquired such UNIX source code and
other intellectual property rights from Novell in September 1995, which were
initially developed by AT&T Bell Labs. Through this process, we acquired all
UNIX source code, source code license agreements with thousands of UNIX
vendors, all UNIX copyrights, all claims for violation of the above
mentioned UNIX licenses and copyrights and other claims, and the control
over UNIX derivative works. The UNIX licenses we obtained have led to the
development of several proprietary UNIX-based operating systems, including
but not limited to our own UnixWare and OpenServer products, Sun's Solaris,
IBM's AIX, SGI's IRIX, Hewlett-Packard's UX, Fujitsu's ICL DRS/NX, Siemens'
SINIX, Data General's DG-UX, and Sequent's DYNIX/Ptx. These operating
systems are all derivatives of the original UNIX source code owned by us.
The success of our SCOsource business depends on our ability to protect our
proprietary UNIX source code as well as our copyrights and other
intellectual property rights. To protect our proprietary rights, we rely
primarily on a combination of copyright laws, contractual rights and a
detailed legal strategy. We have dedicated internal personnel and other
resources to our SCOsource business and intend to dedicate additional
SCOsource sales personnel in fiscal year 2004.
In January 2003, we commenced our first SCOsource initiative in which, as
described in more detail below, we began reviewing the status of our
existing UNIX license agreements with UNIX vendors and to identify those in
the software industry that may be using our intellectual property without
obtaining the necessary licenses. As part of this process, we became aware
that parts of our proprietary UNIX source code and derivative works have
been included in the Linux operating system without attribution or our
authorization in violation of our intellectual property rights. To respond
to this concern, we have instigated additional SCOsource initiatives related
to end users of Linux, which are described in more detail below.
Additionally, we filed a complaint against IBM in March 2003 alleging that
IBM breached its license agreement with us related to its efforts to promote
and support the Linux operating system. We describe our legal action against
IBM in more detail below under Part I, Item 3 of this Form 10-K.
SCOsource Initiatives
Reviewing and Evaluating Existing UNIX Licenses. As mentioned above, in
January 2003, we began reviewing the status of our existing UNIX license
agreements with UNIX vendors. This review is continuing and we will continue
to expand our efforts in fiscal year 2004. During fiscal year 2003, we
entered into two significant license agreements. The first of these licenses
was with Sun, a long-time UNIX licensee and a major participant in the UNIX
industry. The second license was to Microsoft and covers Microsoft's UNIX
compatible products, subject to certain specified limitations. The Sun and
Microsoft license agreements accounted for $25,846,000 of our revenue in
fiscal 2003, representing approximately 33 percent of our total revenue for
such period.
Warning Letters to Linux End Users. In response to our belief that parts of
our UNIX source code and derivative works have been inappropriately included
in the Linux operating system, in May 2003, we sent letters to approximately
1,500 large corporations notifying them that using the Linux operating
system may violate our asserted intellectual property rights. Subsequently,
we began contacting Linux end users about their use of Linux, and in
December 2003, we began sending additional letters to selected Fortune 1000
Linux end users specifically asserting that using the Linux operating system
in a commercial setting violates our rights under the United States
Copyright Act, including the Digital Millennium Copyright Act, because
certain copyrighted application binary interfaces, or "ABI Code," have been
copied from our copyrighted UNIX code base and derivative works and
contributed to Linux without proper authorization and without copyright
attribution. In the letter we also warned Linux end users that we intend to
take appropriate actions to protect our rights and that they may not use our
copyrighted code except as authorized by us.
Linux End User Intellectual Property ("IP") License Initiative. In August
2003, we first offered to Linux end users our IP license in the United
States and recently began offering the license in countries outside the
United States. The license permits the use of our intellectual property, in
binary form only, as contained in the Linux operating system. By purchasing
the license, customers will properly compensate us for our UNIX intellectual
property as currently found in Linux.
Requiring UNIX Licensees to Certify Full Compliance with License Agreements.
Beginning in December 2003, we began delivering written notice to a large
number of our UNIX licensees that they must certify in writing to us that
they are in full compliance with their license agreements, including
certification that they are not using our proprietary UNIX code and
derivative works in Linux, have not allowed unauthorized use of our licensed
UNIX by their employees or contractors and have not breached confidentiality
provisions relating to licensed UNIX code.
Intellectual Property Protection Generally
Our SCOsource initiatives rely primarily on a combination of contract
rights, copyright laws and a detailed legal strategy. We also require that
our employees and consultants sign confidentiality and nondisclosure
agreements. We also regulate access to, and distribution of, our
documentation and other proprietary information.
We cannot guarantee the success of our SCOsource initiatives and other
efforts to protect our intellectual property rights, but we will continue to
seek to enforce and pursue these rights through public awareness and the
legal system, if necessary. Additionally, we cannot be certain that we will
succeed in preventing the future misappropriation of our copyrights or that
we will be able to prevent the unauthorized use of our technology in the
future.
Current Status and Strategy
In fiscal 2004, we will continue to pursue our SCOsource initiatives. We
will continue to review and evaluate our UNIX license agreements and pursue
large vendor contracts similar to those completed in fiscal year 2003 with
Sun and Microsoft. Additionally, we will further pursue our SCOsource IP
license initiative with end users of Linux. To accomplish this objective, we
plan to increase our SCOsource sales team in fiscal year 2004, and may also
make the SCOsource IP license available through select SCO resellers.
In an effort to reinforce our ownership rights in UNIX, we brought suit
against Novell on January 20, 2004 for slander of title seeking relief for,
among other things, Novell's alleged bad faith efforts to interfere with our
copyrights related to our UNIX source code and derivative works and our
UnixWare products. We also plan to continue to pursue our litigation against
IBM, and have announced that we expect in the near term to commence our
first legal action against an end user violating our intellectual property
and contractual rights.
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