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At the Center of SCO's Storm

Two years ago, SCO Group became one of the most reviled companies in the technology industry when it leveled a multibillion lawsuit against IBM (IBM), charging that Big Blue fed code owned by SCO into the Linux operating system. Now, thanks to a string of setbacks in the courtroom and boardroom, it appears that the company some people believed was a grave threat to Linux is melting down (see BW Online, 3/3/05, "A Linux Nemesis on the Rocks").

If SCO Group (SCOXE) is indeed on the rocks, CEO Darl McBride doesn't show any signs of it. In an hourlong interview with BusinessWeek Computers Editor Spencer E. Ante, McBride struck an optimistic tone, claiming the company was in "pretty good shape" and its prospects were "much stronger" than in the past. Here are edited excerpts from their conversation:

Q: You've had recent problems with regulatory filings. Why did you not file your 10-K annual financial statement on time with the Securities & Exchange Commission?

A: We got hit with this issue a week or two before we were ready to publish [SCO says it had difficulty with accounting for some common stock and its equity compensation plan]. It's not a major problem. There's a reasonable chance we may file it before the Mar. 17 hearing. It's a very difficult process.

Q: Are you upset that this happened?

A: It's aggravating, frustrating. You deal with these issues and move on. I used to run hurdles in high school. It trained me well for this company. Once you clear a hurdle, there's another one.

Q: Do you have enough cash to stay in business?

A: Absolutely. We're very encouraged about the foundation underneath this company. It's a crazy, crazy environment we live in. But if you look at the core foundation of the company, we're in pretty good shape.

Q: You have new Unix operating system software coming out soon. Will the new products boost your sales this year or next?

A: I am very encouraged about the OpenServer [Unix] product. It's the most development that's gone into a software release in the last seven years. We just released a beta version. The early feedback we have received has been very, very good. It's like a Humvee -- it doesn't crash. A lot of customers are very excited about that. The opportunity is taking the installed base and the next version. We've got more innovating to do.

Q: You've cut research and development spending 40% over the last two years. Are you concerned that hurts your ability to innovate?

A: While we are small in numbers, we are very high in engineering expertise. The 50 or 60 people working on stuff are very good, very skilled. Sure, we want to have more R&D. Our goal is to get this revenue line turned around.

If you step back and measure us, the stability and foundation and future prospects have gotten much stronger. Our market capitalization has gone up. We had two quarters of cash when I joined in June, 2002. We have sized the business so we are cash-flow positive. Still, our competing in the courtroom will define how we end up in this game.

Q: How many employees do you have now?

A: There are just under 200 employees right now. We let go of around 100 last year.

Q: Will you need to lay off more?

A: We've made the cuts. Unless we have a precipitous drop in revenue, we plan to keep staff -- [and] we could hire if sales grow.

Q: What are your chances of increasing sales?

A: We won't know until this summer [when SCO starts selling the new software]. We haven't had any new core products to dent that line.

Q: Is there any chance the SCO Source licensing program, where you're asking people to buy a license to use certain Unix operating-system technology, will generate significant sales soon?

A: We don't give guidance on that issue. We have some people that have signed up. A number of obstacles have been put by the courtroom. I believe that business line will be minimal until we resolve courtroom issues.

Q: Have all the lawsuits, some against your customers, hurt your ability to sign up new customers and business?

A: Yes and no. There are lawsuit-related issues that come up with the sales team. We also have a core set of customers. Their main issue is not lawsuit-related. They are concerned about us bailing out. We need more [software makers] to work with. We've got some work to do. We do have some new interest coming our way with the new product. We are reaching out to open-source vendors.

Q: Ralph Yarro was terminated in December as CEO of Canopy Group, SCO's longtime financial backer, for allegedly overpaying himself. Is Ralph Yarro still on SCO's board?

A: Yes.

Q: Do you want him to stay on the board?

A: Ralph has been a great board member. He's been very supportive and valuable in terms of the input he has provided.

Q: What has he helped you do?

A: Ralph has a great entrepreneurial mind. He's been good on intellectual property and legal battles. I wouldn't call him the architect of our legal strategy, but he clearly has added value. How that's all going to play out, I don't know.

Q: Are you concerned about his ability to serve?

A: We had a board meeting last week. The company needs to get some clarity about the situation. It's important to figure out who represents the Canopy shares. As long as the cloud is there regarding the Canopy situation we want to remove the cloud.

Q: Will he stay on the board?

A: No one on the SCO board has asked him to step down. He will continue to serve.

Q: Has the new Canopy management team made any requests yet of SCO?

A: We have had some discussions. I spoke with [new Canopy CEO] Bill Mustard. After the Mar. 8 hearing, I would be glad to provide details. We value them as our largest shareholder.

Q: Has Canopy made any suggestions that you sell off the Unix software business?

A: Shareholders don't come to a public company and make those kinds of decisions. We will work with them. They will definitely have a voice.

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