SCO loses some serious $$$

SCO Says VC Wants Out

A filing with the SEC says BayStar Capital wants SCO to redeem all of
the venture-capital firm's 20,000 shares of the company's Series A-1
Convertible Preferred Stock.

By Larry Greenemeier,  InformationWeek
April 16, 2004
URL:
http://www.informationweek.com/story/showArticle.jhtml?articleID=18901910

The SCO Group's war chest may have just gotten a lot lighter. The
company, which is suing IBM and several Linux end-user companies, has
filed an 8-K report with the Securities and Exchange Commission stating
that BayStar Capital wants SCO to redeem all of the venture-capital
firm's 20,000 shares of SCO's Series A-1 Convertible Preferred Stock.

In October, BayStar bought about 3 million SCO shares, representing
about 17.5% of the company, in what was supposed to be a $50 million
investment. At the time, this pushed the company's cash position to $61
million, which president and CEO Darl McBride said would go toward the
enhancement of its Unix operating system and software, the development
of Web services, and fighting its ongoing legal battles against
companies it believes have infringed upon SCO's intellectual property.

BayStar's investment in SCO was structured as a private placement of
nonvoting Series A Convertible Preferred Shares, convertible into common
equity at a fixed price of $16.93 per share--the average closing bid
price for the company's common stock for the five trading days prior to
and including the date of closing. SCO's stock closed on Friday at $8.37
per share.

An SCO spokesman said late Friday that the company is seeking further
clarification from BayStar, which cited four items from its agreement
with SCO that it said had been breached.

One area of representations and warranties that BayStar accuses SCO of
breaching came with the release of a Feb. 6 news release announcing the
exchange of the preferred stock issued in connection with BayStar's $50
million in private financing. SCO was obligated to let BayStar review
the release prior to its distribution, and also was obligated to file a
Current Report on Form 8-K within two days of the date of the Exchange
Agreement. The SCO spokesman says his company agreed to write a release
at the time of the exchange and send it to BayStar for review before
issuing it"and that SCO followed those procedures.

SCO would also have breached a second provision if there was "a material
adverse change or development in its business that had not been
disclosed" in its annual report on Form 10-K for the fiscal year ended
Oct. 31, 2003. But according to SCO, BayStar hasn't provided specific
information about any "material adverse change or development" that
might have occurred between Oct. 31, 2003, and the close of their deal
on Feb. 5, 2004.

SCO also states that as of Feb. 5, there was no information about SCO
that had not been publicly disclosed but would be required to be
disclosed in its annual report. SCO would have breached this
representation if it had provided BayStar false information or if it had
not disclosed information that would be required to be disclosed in its
annual report. Again, BayStar has not provided SCO with details as to
how it has allegedly breached this representation.

SCO would have breached one section of its agreement with BayStar if any
representations and warranties it previously made on Oct. 16, 2003 as
part of the original Series A stock financing transaction were not true
on Feb. 5, 2004. SCO claims its does not yet know which of such
representations and warranties BayStar claims SCO allegedly has breached.

Although it's uncertain at this time where all of this is leading, Dion
Cornett, managing director at Decatur Jones Equity Partners, says this
is a tough way for BayStar to get its money back. If BayStar's claims
against SCO are true, SCO may have to give back the investment amount,
plus an 8% dividend. However, a legal battle over the investment is
hardly what BayStar wants, particularly because SCO would be fighting
the suit with BayStar's money.

Cornett speculates that IBM's plans to have SCO's case dismissed could
have shaken BayStar's confidence. "Common sense tells you something
spooked [BayStar]," Cornett says. "Something tells them this isn't the
home-run investment that they though it would be, and you don't make an
investment you don't think is a home run."