BayStar Calls Investment Back From SCO

Investors in SCO Group have called back about $20 million of their $50 million investment in the UNIX system company, saying the return of the convertible securities is because the Utah-based company breached an investment agreement.

Shares of SCO Group tumbled over 13 percent Friday to close at down $8.37 after it announced it received a letter from BayStar Capital II requesting that SCO immediately redeem BayStar’s 20,000 shares of SCO’s Series A-1 Convertible Preferred Stock. The shares each have a face value of one thousand dollars.

The SCO Group, which is claiming copyright infringement in a Linux-related lawsuit against IBM , exchanged the preferred stock in connection with its $50 million private financing completed in October 2003 for a new series of preferred stock.

The financing helped the company remove a liability on its balance sheet. SCO officials did not return calls for comment. A BayStar official refused to provide comment.

BayStar’s letter did not provide specific information regarding SCO’s alleged breaches of the Exchange Agreement. In a statement, SCO said it wants more information from BayStar and is evaluating its obligations regarding the redemption request. However, the company said it does not believe it has breached any of the referenced provisions of the Exchange Agreement.

BayStar was one of
several companies who pitched in $50 million to buttress SCO, a company in the middle of an acrimonious legal battle with IBM . BayStar led the private investment at the
time, buying shares of Series A Convertible Preferred Stock at that could be resold at a minimum of $16.93 a share.

Darl McBride, SCO CEO, said at the time the investment was “monumental” and “secured the capital necessary to fund all aspects of the long-term growth of this company.”

SCO recorded $5.1 million in losses in the first quarter of 2004, which ended March 3.

SCO contends IBM used its copyrighted code to beef up the open source Linux kernel — used by commercial distributors like Red Hat and Novell’s SuSE operating systems, as well as legions of open
source enthusiasts. The company originally filed the lawsuit as a breach of
contract case, as the code they identified came from IBM’s AIX operating system,
which uses licensed SCO Unix code.

More recently, the company has asked a
federal court to split its case
into two separate trials, one for the breach of contract case — which is
stalled until SCO comes up with
code it claims IBM is in breach of; the other for copyright
infringement, which IBM has requested be tossed out.

SCO is also in the middle of lawsuits with Red Hat and
Novell,
as well as some of its customers.