BayStar Demands Return Of $20 Million Investment From SCO

SCO said today that it has been notified by major investor BayStar Capital that BayStar wants its $20 million back from SCO, on the grounds that SCO is in violation of the investment agreement.

If granted, the demand would be a significant blow to SCO. BayStar's $20 million investment is significantly greater than SCO's last quarterly earnings of $11 million. BayStar has roughly a 7 percent interest in SCO.

added 2:06 PM PDT 4/16: greater detail about the BayStar charges, BayStar declines to comment.

"BayStar's letter did not provide specific information regarding SCO's alleged breaches of the Exchange Agreement," SCO said in a statement. "SCO is attempting to obtain specific information from BayStar and is evaluating its obligations and options with respect to the redemption notice.

The company added, "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."SCO said it was informed of BayStar's wishes in a letter April 15.

BayStar declined to comment.

Stowell said in an e-mail statement that BayStar is accusing SCO of violating four provisions of their investor agreement:

- Section 2(b)(v), which required SCO to re-affirm certain "representations and warranties" it made Oct. 16 as part of the original Series A stock financing transaction. Stowell said the statements were true as of Feb. 5, when SCO said they were true. "We do not yet know which of such representations and warranties BayStar claims SCO allegedly has breached."

- Section 2(b)(vii), in which SCO says that, from Oct. 31, 2003, the end of the last fiscal year, to Feb. 5, 2004, there was no "material adverse change or development" in SCO's business "and that during such time SCO has not taken any steps to seek protection under bankruptcy or similar laws," other than those described by U.S. Securities and Exchange Commission filings. Stowell said: "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."- 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.... SCO would have breached this representation if it provided BayStar materially false information or omitted to inform BayStar of material facts.... Again, BayStar has not provided SCO with details as to how it has allegedly breached this representation."

- Section 3(g): Required SCO to issue a press release about the transaction, and allow BayStar to review it. It also required SCO to file SEC documentation, and "not provide BayStar with material nonpublic information without its written consent or make further disclosures regarding the exchange transaction with BayStar (other than the press release described above). SCO would have breached this provision if it had failed under any of its obligations pursuant thereto. As is the case for the other provisions, BayStar has not provided specific information about how SCO allegedly has breached this provision."