The Santa Cruz Operation, Inc. Business Information, Profile, and History

Company Perspectives:

Our mission is to create, market, and support the server software that system builders choose for networked business computing. SCO believes that server-based network computing, which is based on Internet and web technologies, enables businesses to dramatically improve their customer information flow and business transaction efficiencies. Companies that adopt a server-based network computing model can understand their customers better, reach wider potential markets, bring products to market faster, and improve their overall customer satisfaction levels. With server-based computing and SCO products and services, IT [information technology] professionals can immediately leverage their existing investments, deploy applications faster, and dramatically cut the cost of systems administration and management.

History of The Santa Cruz Operation, Inc.

Founded in 1979 as a Unix consulting company, The Santa Cruz Operation, Inc. (SCO) became a leader in providing Unix operating systems in the 1980s and 1990s. As an operating system, Unix faced heavy competition from MS-DOS in the 1980s and Windows NT in the 1990s, not to mention OS/2 in the early 1990s. SCO remained committed to developing Unix systems for Intel-based PCs and later for network servers. Its close relationship with Microsoft Corporation led it to adopt a Windows-friendly strategy, uncommon among Unix providers. SCO introduced Tarantella network management software in 1996, which provided for web-based management and deployment of server-based applications. With the release of Tarantella Enterprise II in December 1999, SCO was moving away from its Unix server operating systems toward server-based applications and browser-based client services. In 2000 the company announced that it was selling its two Unix divisions to Caldera Systems Inc. and planning to change its name to Tarantella Inc.

Introducing Unix Operating Systems in the 1980s

The Santa Cruz Operation, Inc. (SCO) was founded in 1979 by Doug and Larry Michels as a Unix system porting and consulting company. Larry Michels, who had spent the past ten years as vice-president and director of TRW's Advanced Product Laboratory in Los Angeles, was SCO's president. His son Doug, a recent graduate of the University of California at Santa Cruz, was executive vice-president. From 1979 to 1984 the company evolved into a provider of Unix operating systems. An alternative to other operating systems such as MS-DOS, Unix was developed originally by AT & T engineers and was designed to handle several tasks at once.

In 1983 Microsoft entered into an exclusive agreement with SCO to exchange Unix technology. That year SCO delivered the first packaged Unix operating system that ran on Intel-powered PCs. Called the SCO Xenix System V, it provided small businesses with an affordable business-critical computing system. As Intel developed more powerful processors throughout the 1980s, SCO introduced new versions of its Unix operating system to run on them. These new versions also had the ability to run applications developed on earlier versions, a feature known as 'upward compatibility.'

With the support of AT & T, SCO and Microsoft unveiled Xenix System V for the AT & T 6300 and IBM PC XT and compatible computers at the Unix Expo in New York City in 1985. According to PC Week, Xenix was a Microsoft version of Unix designed to be used on a microcomputer. AT & T wanted to establish Unix System V as the common operating system for workstations connected to mainframes. In 1987 Microsoft and SCO introduced Xenix System/V 386 to run on Intel's 80386 chip. The system would be sold by both Microsoft and SCO with different packaging.

In 1986 SCO introduced SCO Professional, a software package that contained a Xenix version of DOS standard Lotus 1-2-3 for spreadsheet applications, and SCO FoxBASE, which provided the functionality of dBASEII for database applications. By making these industry-standard DOS applications available on Xenix, SCO hoped to attract new users to its operating system. Also in 1986 SCO established its first European headquarters with the acquisition of Logica Ltd. in the United Kingdom.

In 1987 SCO hosted its first annual SCO Forum conference, which has been held each summer on the campus of the University of California at Santa Cruz, overlooking Monterey Bay. In October 1987 AT & T and Sun Microsystems announced a new alliance to refine and improve Unix. That led to the establishment of the Open Software Foundation, a consortium of computer makers whose goal was to set software standards for the Unix operating system.

SCO's revenue doubled each year from 1984 to 1987, as the company put its efforts into marketing its Xenix system to businesses. More applications for the Xenix operating system were being written by third-party developers. The system offered multi-tasking, multi-user capabilities. By the end of fiscal 1987 SCO's share of the Xenix market had grown from 12 percent in January 1986 to more than 40 percent, with an installed base of 60,000 systems. SCO was offering Xenix at the retail level, while its competitors were focusing on original equipment manufacturers (OEMs). To promote Xenix to multi-user work groups, SCO hosted numerous conferences, taught classes covering how to use Xenix and how to sell it, and issued numerous press releases and publications. Its bimonthly technical bulletin, Discover, sometimes ran more than 30 pages.

SCO was able to complete its second round of venture capital financing in 1987, with funds from Accel Partners, Citibank Investment Management Fund, and the Fleming American Fund. Investors controlled about ten percent of SCO. For fiscal 1987 ending September 30, SCO posted revenue of $27.1 million. Profits were about $500,000, and the company had a large workforce of about 500 employees.

In October 1987 SCO claimed that it beat IBM in a race to develop Xenix operating systems for IBM's PS/2 Models 50, 60, and 80. The SCO Xenix 286 and SCO Xenix 386 were the only operating systems to take full advantage of the Intel 80286 and 80386 chips in IBM's new product line. A year later SCO announced a Xenix 386 upgrade that offered several new features found in AT & T's System V/386 release 3.2, which merged AT & T's Unix System V with Microsoft's Xenix. The new features included mouse and video graphics array (VGA) support, more communications protocols, and an extended multiscreen feature that allowed users to open more than one window on a terminal.

SCO announced its integrated software solution for Xenix in 1988. Its Office Portfolio program would integrate stand-alone business applications under a common user interface, allowing information to be copied and moved between applications. Several applications could run at once. Applications included in Office Portfolio included SCO Professional, which was an improved Lotus 1-2-3 spreadsheet program, and SCO FoxBase+, a dBASE III Plus work-alike program. In October 1988 Sun Microsystems entered into a strategic alliance with SCO to port its applications to run under Unix on the Sun-3 family of workstations.

In early 1989 Microsoft, which had been focusing on developing the OS/2 operating system for IBM PCs, announced that it would invest in SCO. For an estimated $20 million Microsoft took a 20 percent equity position in SCO. Noting the slow pace of acceptance for OS/2, analysts interpreted the investment as an indication of Unix's potential as a desktop operating system. Later in the year Hewlett-Packard Co. signed an agreement to market and incorporate the SCO Unix operating system into its 386-based Vectra PCs, which would allow the HP computers to handle Unix-based multi-user applications.

In 1989 SCO introduced Open Desktop, the first 32-bit graphical user interface (GUI) for UNIX systems running on Intel processor-based computers. When it was announced at the Uniforum in March 1989, Open Desktop was positioned as a Unix equivalent of OS/2's Extended Edition. Open Desktop began shipping in September 1989.

Becoming Unix System Market Leader for Desktop PCs: 1990s

In 1990 Lotus Development Corporation filed lawsuits against SCO and Borland International, the maker of Quattro Pro. The suit against SCO alleged that SCO Professional copied virtually all Lotus 1-2-3 commands and menus. SCO filed a countersuit asking for a judgment of copyright non-infringement. In mid-1991 SCO and Lotus reached an out-of-court agreement, whereby SCO would remove its SCO Professional spreadsheet from the market and recommend SCO Professional users migrate to Lotus 1-2-3 for Unix System V.

In 1990 SCO joined with AT & T and Intel to announce a binary compatibility specification for different versions of Unix systems running on Intel's 80386 and 80486 processors. The new specification was expected to resolve incompatibilities among versions of Unix that ran on high-end Intel platforms. The new specification was regarded as a step toward a single Unix system that would allow the development of shrink-wrapped Unix applications on a scale comparable with applications available for DOS, Windows, and OS/2. Sales for fiscal 1990 were $118.9 million, an increase of 43 percent over the previous year.

By 1991 SCO was clearly the market leader in providing Unix systems for PCs. SCO accounted for an estimated 65 percent of all Unix shipments for Intel-based machines in 1989. By 1991 SCO claimed there were some 350,000 SCO Unix 386 and predecessor SCO Xenix 286 systems running worldwide. The two main market opportunities for Unix at the time were minicomputer replacement and the advent of distributed computing in large companies.

By mid-1991 SCO had grown to 1,300 employees. Following a reorganization into four business units, SCO cut about 65 positions at its headquarters in Santa Cruz as well as at its offices in Toronto, Canada, and London, England. The four business units were the Distributed Corporate Computing Unit, which would oversee SCO's work on the Advanced Computing Environment (ACE) initiative; the General Business Systems Unit, which included SCO's operating systems; the Business Systems Unit, which included SCO's applications software; and the Services Unit, which included SCO's consulting, training, and support services. For fiscal 1991 ending September 30 SCO reported revenue of $137.8 million.

The ACE initiative was formed in April 1991 to develop a standard open operating system for microcomputers and workstations. It included Microsoft, SCO, and DEC, among other companies. In November 1991 SCO cut another 110 positions, many of them involved with developing the ACE-RISC workstation platform. SCO planned to focus its development efforts on the already popular Intel platform. By May 1992 SCO and Compaq Computer had left the ACE consortium.

In cooperation with Microsoft, SCO introduced the Microsoft LAN Manager for Unix Systems, which was an enhanced version of the Microsoft LAN Manager for DOS and OS/2. Responding to a competing Unix initiative called Univel Inc., which was a joint venture between Novell Inc. and Unix System Laboratories Inc., SCO licensed Novell's Netware transport protocols to provide better integration between SCO Unix operating systems and Novell's Netware. The license would give SCO users direct access to NetWare networks and enable SCO to compete against Univel and other Unix suppliers.

Facing increased competition for Unix market share from Univel and SunSoft, which was the software arm of Sun Microsystems Inc., SCO introduced a major upgrade to Open Desktop in 1992. Open Desktop accounted for 61 percent of the desktop Unix operating system market. With Microsoft's Windows NT operating system expected later in 1993, Unix vendors were forming alliances to compete more effectively against the new Windows operating system for networks. Unix Systems Laboratories (USL) agreed to provide SCO with application development technologies to allow software developers to create common application source code for USL and future SCO Unix operating systems.

In November 1992 SCO won a contract from the U.S. Department of Defense to provide Unix operating systems and networking products for up to 70,000 workstations for the Air Force. The potential value of the contract was estimated to be $100 million.

Achieving Profitability and Going Public: 1992-93

Fiscal 1992 was SCO's first profitable year in its 12-year history. It reported revenue of $163.7 million. After that SCO went public on the NASDAQ in 1993, selling six million shares at $12.25 each on May 26. The company felt it was important to be a public company to compete better with Microsoft, Sun Microsystems, and others for a share of the Fortune 500 market, where IT managers preferred doing business with a public company. Before the company went public, though, President and CEO Larry Michels resigned in the wake of allegations of sexual harassment. In March 1993 Swedish-born Lars Turndal, head of SCO's European operations since 1988, was named to succeed Larry Michels as president and CEO. Doug Michels became executive vice-president and chief technical officer. In April the lawsuit against Larry Michels was settled.

In March 1993 SCO acquired British software vendor IXI Ltd., which formed the basis for SCO's Cambridge development center. With the release of Windows NT in 1993, six former Unix competitors formed an alliance called Common Open Software Environment (COSE). Members of the alliance included SCO, Hewlett-Packard, Unix System Laboratories, IBM, Univel, and SunSoft.

Reorganizations and Acquisitions Under New Management: 1994-2000

In 1994 SCO introduced Global Access, the first commercial product to use Mosaic, which was a new graphical user interface for Internet access and the forerunner of the Netscape Web browser. At the time four companies were licensed by the National Center for Supercomputing Applications at the University of Illinois at Champaign-Urbana to develop third-party applications using Mosaic. Also in 1994 SCO co~hosted the First International Conference on the World Wide Web in Geneva, Switzerland.

In May 1994 SCO hired Alok Mohan, formerly with NCR, as its chief financial officer (CFO). In December Mohan would be elected to SCO's board of directors and become president and chief operating officer, replacing president Lars Turndal. Mohan later became SCO's CEO in July 1995 and would serve until April 1998, when he was named chairman of the board.

The company also announced that it would scale back its attempts to diversify and refocus on its core Unix products. Toward the end of the year it shipped the next generation of its operating system, code-named Everest, to 1,000 beta testers for possible release in mid~1995. In December 1994 SCO acquired British-based software developer Visionware Ltd. for $14.8 million and established an office in Leeds, England. The acquisition would help SCO develop Windows-to-Unix connectivity tools. SCO's Windows-friendly strategy was designed to prevent Unix users from migrating en masse to Windows NT.

In 1995 SCO gained support from IBM for its Open Server Unix network operating system through a sales and marketing agreement. SCO would gain improved distribution through the agreement, and IBM would benefit from the popularity of SCO's products. IBM would provide service and support for SCO's Open Server software products across IBM's new multiprocessor server line, the PC Server 720. SCO also created a new product division, the Client Integration Division, which joined Visionware Ltd. and IXI Ltd. to develop software to provide Unix-based Windows integration. The division's first product was Wintif 95, an emulation package that provided a Windows 95 interface for Unix servers. SCO also hoped that Open Server 5.0, previously code-named Everest, would be more attractive to systems managers than Windows NT.

Also in 1995 SCO began developing a new server operating system, code-named Voyager, that would focus on telecommunications applications and support technology such as switching and PBX. Server products based on the new system were expected in 1996 and 1997.

Later in 1995 SCO acquired Novell Corporation's UNIX system source technology business as well as its UnixWare 2 operating system. In exchange, Novell received 6.1 million shares of SCO stock and would continue to receive Unix royalties. SCO planned to merge Open Server 5.0 with UnixWare 2 to create a standard high-volume Unix operating system for release in 1997. As part of the deal, Hewlett-Packard would take the lead in developing a next-generation 64~bit implementation of Unix that would combine HP~UX, SCO Unix, and UnixWare, along with NetWare services.

In 1996 SCO launched the Big E Initiative to establish a standard UNIX system for high-volume Intel processor-based servers in business enterprises. Following the acquisition of UnixWare, SCO announced that it would support both Open Server and UnixWare as separate products throughout 1996. The company then planned to merge both operating systems into a single platform, the UnixWare/OpenServer operating system, which would provide full backward compatibility with both UnixWare and Open Server applications. SCO released UnixWare 2.1 in February 1996. Also in February SCO and Hewlett-Packard unveiled their 64~bit operating system, called Summit 3D. SCO planned to license the technology to OEMs. SCO's goal was to unify some of the 17 versions of Unix currently on the market. SCO also gained support from hardware vendors who pledged to make SCO UnixWare their volume operating system for enterprisewide servers.

With the acquisition of Novell's Unix business, SCO controlled the source code used by 90 percent of all Unix suppliers, according to InformationWeek. The company was looking at four product areas for future growth: Internet products, layered technologies, Windows integration products, and new Unix licensing agreements.

SCO announced its SCO Internet Family at the 1996 Internet World trade show and planned to ship a version of SCO Unix with integrated Internet functions before 1997. In December 1996 SCO announced Tarantella network management software, which provided centralized deployment and management of server-based applications across the web. Tarantella would allow network administrators to distribute applications across multiple Unix servers, which could then be accessed by any Java-enabled web browser.

SCO again reorganized in 1997, laying off 10 percent of its workforce, or 120 employees. It also combined its product development groups into one engineering and marketing division and planned to distribute software electronically over the Internet. The company already was consolidating its products through the development of Gemini, the new operating system that would combine Open Server and UnixWare. A beta version of Gemini was introduced in August 1997, fulfilling SCO's promise to unify its Unix offerings. SCO had spent more than $50 million to develop Gemini and Tarantella, which would be the company's two most important products for fiscal 1998.

In 1998 SCO delivered the UnixWare 7 operating system, the most advanced server operating system for Intel processors. SCO offered five editions: UnixWare Base Edition, priced at $795; Messaging Edition, priced at $2,295; Intranet Edition; Departmental Edition; and Enterprise Edition, priced at $4,995. Among the products bundled with various editions were Netscape's directory, messaging, and enterprise web servers; network and systems management tools from Computer Associates International Inc.; and RealNetworks' multimedia streaming technologies.

SCO launched the Data Center Initiative in 1998 to establish a standard Unix system for Intel processor-based servers in the data center. Hardware vendors supporting the initiative included Compaq, Data General, ICL, and Unisys.

Project Monterey, initially involving SCO and IBM, was begun in 1998 to develop a high-volume enterprise Unix system. Its goal was to establish a single product line to run on systems ranging from entry-level servers to large enterprise environments. In April 1999 Compaq joined Project Monterey, which also included Sequent Computer Systems. As Doug Michels told the San Jose Mercury News, "Project Monterey came out of trying to understand how the world is changing as Intel is introducing its 64~bit chip, Itanium, which is a pretty radical shift. It's still a ways away." In November 1999 Oracle Corporation joined Project Monterey.

In April 1998 Doug Michels was promoted to president and CEO, and Alok Mohan was named chairman of the board. Also in 1998 Novell announced that it would sell its 6.1 million shares of SCO.

New Directions: 1999-2000

At the end of 1999 it was clear that SCO was moving away from UnixWare to focus more on Web and application hosting. The release of Tarantella Enterprise II software in December 1999 signaled SCO's first big step away from its UnixWare server operating system toward server-based applications and browser-based client services. In March 2000 SCO reorganized into three divisions: Server, Tarantella, and Professional Services. Then, in August 2000, SCO announced that it would sell its Server Software Division and Professional Services Division to Caldera Systems Inc. of Orem, Utah. Caldera was a leader in providing Linux operating systems for business. The acquisition would enable Caldera to combine Linux and UNIX server solutions and services into the first comprehensive Open Internet Platform, which would provide customers with a single scaleable platform.

Under the terms of the sale, SCO would receive a 28 percent interest in Caldera, Inc., a new holding company formed to acquire the divisions, and $7 million in cash. SCO would keep its Tarantella Division as well as the SCO Open Server revenue stream and intellectual properties. SCO would gain two seats on the board of directors of Caldera, Inc., one of which would be filled by Doug Michels. Forum2000, scheduled for August 20-23, 2000, would be cohosted by Caldera Systems and SCO. Later in the year SCO announced that it expected the sale of its two divisions to Caldera would close in the second quarter of fiscal 2001, with the delay attributed to regulatory processes. In preparation for the sale, SCO reduced its workforce by 19 percent, laying off 190 employees and leaving it with a workforce of about 810. In a related development, IBM canceled Project Monterey in September 2000 and planned to integrate its technology into its own version of Unix, called AIX.

For fiscal 2000 ending September 30, SCO reported revenue of $148.9 million compared with $223.6 million for fiscal 1999, a decline of 33 percent. For fiscal 2000 SCO reported a net loss of $57 million, which included a one-time charge of approximately $16.5 million, compared with net income of $16.9 million in fiscal 1999. The company attributed the losses to Y2K-related slowdowns, while analysts noted that the company's UnixWare was being hurt by Linux, which could offer the same value for less money.

As calendar year 2000 drew to a close, SCO was anticipating completing the sale of two divisions to Caldera and benefiting from the future synergy between the Unix system and Linux product lines. Through a private placement of common stock and warrants SCO raised $13.1 million to finance continued development of its Tarantella business. Following the sale of its two divisions SCO planned to change its name to Tarantella Inc. and leverage its technology to take advantage of the mostly untapped market for web-enabled applications.

Principal Competitors: Citrix Systems Inc.; Microsoft Corporation; Sun Microsystems Inc.; Novell Inc.; International Business Machines Corporation.

Chronology

• Key Dates:

• 1979: The Santa Cruz Operation, Inc. (SCO) is founded by Larry Michels and his son, Doug Michels, as a Unix consulting company.
• 1983: SCO enters into an agreement with Microsoft Corporation to exchange Unix technology and delivers the first packaged Unix operating system for Intel-powered PCs.
• 1989: Microsoft invests $20 million in SCO; SCO introduces Open Desktop, the first 32-bit graphical user interface (GUI) for Unix systems running on Intel processor-based computers.
• 1993: SCO becomes a publicly traded company on NASDAQ; Larry Michels resigns as president.
• 1994: SCO introduces Global Access, the first commercial product to use Mosaic; Alok Mohan is hired as CFO, then becomes president and COO.
• 1995: SCO acquires UnixWare and related technology from Novell Inc.
• 1996: SCO introduces Tarantella network management software.
• 1998: Doug Michels is promoted to president and CEO.
• 2000: SCO announces the sale of two divisions to Caldera Systems Inc. and plans to change company name to Tarantella Inc.