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Baystar Sends SCO a Letter
Friday, April 16 2004 @ 03:12 PM EDT

Now it's getting interesting. BayStar wants SCO to immediately redeem BayStar's 20,000 shares of SCO's A-1 Convertible Preferred Stock. They say SCO has breached their agreement. SCO denies any breach. Here is the agreement that they are fighting over. (Here is the original from October.) My, this was a short honeymoon.

Dion Cornett is quoted in

"'I look at this as bad news for SCO,' said Dion Cornett, an analyst for Decatur Jones Equity Partners - Soleil. 'I don't think BayStar is going to be very successful in getting their money back. It's very difficult for a private equity investor to force a redemption on a company that doesn't want to redeem. But it makes it very difficult for SCO to raise future financing.' . . .

"Reflecting SCO's diminutive size, Cornett is the only sellside analyst covering the stock, according to Thomson First Call."

Melanie Hollands' assessment is here.

And Stephen Shankland has info on what the alleged breach involves -- publicity:

"The move means at a minimum that SCO has more legal wrangling in its future, but it also raises the possibility that the Royal Bank of Canada, which chipped in $30 million alongside BayStar's investment in October, could follow suit.

"RBC is keeping its options open. 'We haven't requested a redemption. We're reviewing the situation and will arrive at a decision shortly,' said spokesman Paul Wilson.

"BayStar said SCO violated provisions governing disclosure of information about SCO and publicity of the exchange agreement."

There is one confusing thing in the press release. They mention certain sections of the agreement that BayStar alleges SCO has breached, but they list 2(b)(viii) twice, so I'm not sure if that was a mistaken repetition or if they meant to list (vii). That makes it tough to analyze, but if you look at the sections that are clearly mentioned, it isn't just publicity at issue. It seems to be a matter of whether SCO was altogether forthcoming in telling them everything. Like the Novell letters, maybe? Remember how they weren't listed in their SEC filings? Or could the publicity issue be about the leaked memo revealing Microsoft's involvement? Or check this out about Blepp, on, with translation by JeR:

"Für Gregory Blepp kommt die Veröffentlichung dieser Unstimmigkeiten durchaus ungelegen. . . . So sollen Baystar-Emissäre in dieser Woche bei Münchner Venture-Kapitalgeber angerufen und sich nach früheren Arbeitsproben von Blepp erkundigt haben."

"For Gregory Blepp, the publication of these contrary assertions [that Blepp has the proof in his suitcase] are highly inconvenient. The SCO investor Baystar Capital has aspired to a more professional image for months. . . . It is said that this week, Baystar representatives called venture capitalists in Munich and inquired into Blepp's former assignments."

Here are the sections that Bay Star says they have breached:

"2(b)(v) Original Purchase Agreement -  Excluding the representations and warranties set forth in Sections 3(a), (b), (d), (e), (i), (y) and (z) of the Original Purchase Agreement, the representations and warranties of the Company set forth in Section 3 of the Original Purchase Agreement (the 'Original Representations and Warranties') are each true and correct as of the Closing Date, in each case as if made on the Closing Date. . . .

"2(b)(viii) Disclosure -  All information relating to or concerning the Company and/or any of its Subsidiaries set forth in this Agreement or provided to the Purchasers in connection with the transactions contemplated hereby is true and correct in all material respects, and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading.  No event or circumstance has occurred or exists with respect to the Company or its Subsidiaries or their respective businesses, properties, prospects, operations and financial conditions, which has not been publicly disclosed but, under applicable law, rule or regulation, would now be required to be disclosed by the Company in the Company’s Annual Report on Form 10-K.

"3 (g) Press Release; Publicity -  The Company shall issue a press release (the 'Press Release') describing in reasonable detail the transactions contemplated hereby as soon as practicable on or after the date hereof, but in no event later than the commencement of the first trading day following the date hereof.  The Press Release shall be subject to prior review and comment from BayStar Capital II, LP ('BayStar'). Within two days after the Closing Date, the Company shall file a Form 8-K with the SEC concerning this Agreement and the transactions contemplated hereby, which Form 8-K shall attach this Agreement as an exhibit to such Form 8-K (the '8-K Filing').  From and after the Press Release, the Company hereby acknowledges that no Purchaser shall be in possession of any material nonpublic information received from the Company, any of its subsidiaries or any of its respective officers, directors, employees or agents, that is not disclosed in the Press Release.  The Company shall not, and shall cause each of its subsidiaries and its and each of their respective officers, directors, employees and agents not to, provide any Purchaser with any material nonpublic information regarding the Company or any of its subsidiaries from and after the Press Release without the express written consent of such Purchaser; provided, however, that a Purchaser that exercises its rights under Section 4(n) of the Original Purchase Agreement shall be deemed to have given such express written consent.  No Purchaser shall have any liability to the Company, its subsidiaries or any of its or their respective officers, directors, employees, shareholders or agents for any such disclosure.  Subject to the foregoing, neither the Company nor any Purchaser shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Purchaser, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations (provided that any such press release or other public disclosure shall be subject to prior review and comment by BayStar provided such review and comment is timely and reasonable)."

If they meant to add 2(b)(vii) also, it reads like this:

" (vii)          Absence of Certain Changes -  Except as set forth in the Select SEC Documents (as defined in Section 2(b)(v) of this Agreement), since October 31, 2003, there has been no material adverse change and no material adverse development in the business, properties, operations, prospects, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole.  The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy or receivership law, nor does the Company or any of its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings with respect to the Company or any of its Subsidiaries."


Stowell has confirmed that it is (vii):

"SCO would have breached this provision if there were in fact a material adverse change or development in its business that had not been disclosed in the SEC filings described above. Again, BayStar has not provided specific information about what it allegedly views is the material adverse change or development that occurred in the period between October 31, 2003 and February 5, 2004."

And has one more tidbit:

"Von Baystar selbst gibt es derzeit noch keine Stellungnahme zu dem Vorfall. Möglicherweise sieht Baystar die Entwicklung in jüngster Zeit so, dass das vereinbarte Mitspracherecht bei allen wichtigen Entscheidungen gebrochen wurde. Emissäre von Baystar waren in dieser Woche auch in Deutschland unterwegs und haben sich wenig zufrieden mit der europäischen Entwicklung ihres Investitionspartners gezeigt."

Sherlock on my iMac makes this out of that:

"From Baystar gives it at present still no statement to the incident. Possibly Baystar sees the development in recent time in such a way that the agreed upon say was broken with all important decisions. Emissaries from Baystar were in this week also in Germany on the way and a little contently with the European development of their investment partner showed up."

JeR suggests this translation of the last part: "Emissaries from Baystar were on the road in Germany this week and showed little satisfaction with the European development of its investment partner."

Here is SCO's press release:


The SCO(R) Group, Inc. Receives Request From BayStar Capital II, L.P. to Redeem Shares of Series A-1 Convertible Preferred Stock

LINDON, Utah, April 16 /PRNewswire-FirstCall/ -- The SCO Group, Inc. ("SCO") (Nasdaq: SCOX - News), the owner of the UNIX operating system, received a letter on April 15, 2004 from BayStar Capital II, L.P. requesting that SCO immediately redeem BayStar's 20,000 shares of SCO's Series A-1 Convertible Preferred Stock. The letter asserts that BayStar is entitled to the redemption of its shares under Article VII.A(vii) of the Certificate of Designation, Preferences and Rights of the Series A-1 Convertible Preferred Stock because SCO has allegedly breached Sections 2(b)(v), 2(b)(viii), 2(b)(viii) and 3(g) of the Exchange Agreement dated February 5 2004 among SCO, BayStar and Royal Bank of Canada, which also holds shares SCO's Series A-1 Convertible Preferred Stock.

BayStar's letter did not provide specific information regarding SCO's alleged breaches of the Exchange Agreement. SCO is attempting to obtain specific information from BayStar and is evaluating its obligations and options with respect to the redemption notice. However, SCO does not believe it has breached any of the referenced provisions of the Exchange Agreement. As a result, SCO does not believe it is obligated to redeem BayStar's shares of Series A-1 Convertible Preferred Stock.

Forward-Looking Statements

This press release contains forward looking statements related to SCO's belief that it has not breached any of the provisions of the Exchange Agreement described in BayStar's letter and its belief that it is not obligated to redeem BayStar's shares of Series A-1 Convertible Preferred Stock. SCO wishes to advise readers that a number of important factors could cause actual results to differ materially from those anticipated in such forward-looking statements including a finding that SCO has breached the referenced provisions of the Exchange Agreement entitling BayStar to redemption. These and other factors that could cause actual results to differ materially from those anticipated are discussed in more detail in SCO's filings with the Securities and Exchange Commission.

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