SCO Rocked by BayStar Charges

Friday's revelation of a rift between The SCO Group and its backer, venture fund BayStar Capital, appears to have caught the Unix developer unawares.

Fridays revelation of a rift between The SCO Group Inc. and its backer, venture fund BayStar Capital Management LLC, appears to have caught the Unix developer unawares.

In an interview with late Friday, Blake Stowell, director of corporate communications for the Lindon, Utah-based SCO, said BayStars "move came as a complete surprise."

"We received a letter from BayStar [on Thursday]," he said. "In that letter, they indicated to us that we had breached four different sections of the exchange agreement that had been finalized in early February this year. They gave us no hints on how SCO had breached the agreement."

According to Stowell, BayStar claims that SCO has breached four sections of the February 5, 2004, agreement, which exchanged BayStars shares from one type of preferred stock to another. This agreement among SCO, BayStar and the Royal Bank of Canada, which also holds shares of SCOs Series A-1 Convertible Preferred Stock, provided SCO with $50 million.

Specifically, BayStar is accusing SCO of violating four sections of the agreement: sections 2(b)(v), 2(b)(vii), 2(b)(viii) and 3(g). Stowell characterized these as "having to do with disclosure issues and that BayStar wanted to be kept informed every step of the way of SCOs business."

Stowell said section 2(b)(v) required SCO to reaffirm certain "representations and warranties" it made Oct. 16 as part of the original Series A stock financing transaction. Section 2(b)(vii) states that, from Oct. 31, 2003 (the end of SCOs last fiscal year), to Feb. 5, 2004, there was no "material adverse change or development" in SCOs business "and that during such time SCO has not taken any steps to seek protection under bankruptcy or similar laws."

About section 2(b)(viii), Stowell said: "This a general representation that all information relating to SCO set forth in the exchange agreement or otherwise provided to BayStar in connection with the exchange transaction was, as of February 5, 2004, true and correct in all material respects."

Finally, section 3(g) required SCO to issue a news release about the transaction and allow BayStar to review it. This section also required SCO to file Securities and Exchange Commission documentation and "not provide BayStar with material nonpublic information without its written consent or make further disclosures regarding the exchange transaction with BayStar."

In short, it appears that BayStar is accusing SCO of misrepresenting its business finances and plans. Therefore, BayStar is demanding that its investment be returned.

BayStar officials reached late Friday declined to comment.

/zimages/5/28571.gifClick here to read more about the SCO-BayStar rift and the Microsoft connection.

Stowell insisted that SCO has not violated any of the sections.

As one example, he said, "the press release about the exchange agreement was sent in draft form to BayStar for their approval and only afterward, on February 6, did we send it."

"How [BayStar] could take issue with this is a mystery to me," he said.

Stowell said the company was still in an information-gathering mode and was trying to find out where it stands. Because of this, Stowell said, SCO does not plan to immediately redeem the shares, which would amount to BayStars entire $20 million and had been meant for use as part of SCOs war chest for its litigation against IBM and Linux customers that had not signed a SCO Unix intellectual property license.

"Its our belief that theyd have to prove we breached the agreement before wed redeem those shares."

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