SCO Building Up a War Chest

By Peter Galli  |  Posted 2003-10-17 Print this article Print

A $50 million investment deal enables SCO to continue expanding its product base.

The ability to build up a "war chest" of cash was too compelling to pass up—and so The SCO Group agreed to a $50 million investment deal, announced yesterday, with investment fund BayStar Capital. In a media and analyst teleconference Friday, CEO Darl McBride said he is pleased with the structure of the transaction, which is favorable to both the company and its shareholders. "They are non-voting convertible shares and, once converted, the investors will own 17.5 percent of the companys outstanding shares," he said.
SCO Chief Financial Officer Bob Bench said there is no timing on the conversion of the shares, which are immediately convertible and have to be redeemed in minimum batches of 100,000 common shares at a time. There is also mandatory redemption once the stock price reaches 150 percent of the transaction value or 20 consecutive trading days at that level.
"SCO also has redemption rights and after three years can redeem the stock with a liquidation preference. So we have a lot of freedom to redeem this stock if BayStar has not converted," Bench said. No dividend will be payable on this stock for the first 12 months, but will then kick in at 8 percent and then rise by up by 2 percent for each of the next two years with a 12 percent cap. The net proceeds of the investment deal, combined with cash SCO had on hand at the end of the July quarter, give SCO $61 million cash on hand. "The deal now strengthens our balance sheet and allows SCO to continue expanding its product base," he said. Asked why the company decided to follow this route now, McBride said its "easiest to raise cash when you dont need it and thats the situation we find ourselves in today. Were generating cash from our operations, so why now? The ability to build a war chest right now was too compelling to pass up," he said. BayStars transaction history was one of the major factors in SCOs decision to go with an outside investor, as well as its breadth and reach of investments in the IT marketplace, he said. McBride also pointed out that SCO did not solicit the investment deals, but was approached by several companies interested in taking an investment stake in the company. "Also, a year ago the share price was far lower and the dilution would have been far higher had we done the deal at that time," he said. The proceeds will be used to grow and expand SCOs businesses. On the Unix front there are more than 2 million servers running, and the company is committed to moving this product forward. Web services is also a potential area with the ability to go out and put a wrapper around these services. In addition, SCOsource offers a lot of opportunities to further enforce its intellectual property rights. "Were not here to spell out how the money will be allocated, but we have this war chest to take the company forward from here," McBride said. Next page: Whats happening on the litigation front.

Peter Galli has been a financial/technology reporter for 12 years at leading publications in South Africa, the UK and the US. He has been Investment Editor of South Africa's Business Day Newspaper, the sister publication of the Financial Times of London.

He was also Group Financial Communications Manager for First National Bank, the second largest banking group in South Africa before moving on to become Executive News Editor of Business Report, the largest daily financial newspaper in South Africa, owned by the global Independent Newspapers group.

He was responsible for a national reporting team of 20 based in four bureaus. He also edited and contributed to its weekly technology page, and launched a financial and technology radio service supplying daily news bulletins to the national broadcaster, the South African Broadcasting Corporation, which were then distributed to some 50 radio stations across the country.

He was then transferred to San Francisco as Business Report's U.S. Correspondent to cover Silicon Valley, trade and finance between the US, Europe and emerging markets like South Africa. After serving that role for more than two years, he joined eWeek as a Senior Editor, covering software platforms in August 2000.

He has comprehensively covered Microsoft and its Windows and .Net platforms, as well as the many legal challenges it has faced. He has also focused on Sun Microsystems and its Solaris operating environment, Java and Unix offerings. He covers developments in the open source community, particularly around the Linux kernel and the effects it will have on the enterprise.

He has written extensively about new products for the Linux and Unix platforms, the development of open standards and critically looked at the potential Linux has to offer an alternative operating system and platform to Windows, .Net and Unix-based solutions like Solaris.

His interviews with senior industry executives include Microsoft CEO Steve Ballmer, Linus Torvalds, the original developer of the Linux operating system, Sun CEO Scot McNealy, and Bill Zeitler, a senior vice president at IBM.

For numerous examples of his writing you can search under his name at the eWEEK Website at


Submit a Comment

Loading Comments...
Manage your Newsletters: Login   Register My Newsletters

Rocket Fuel