July 23, 2004 5:01 PM PDT

SCO, BayStar resume squabbling

The SCO Group and BayStar Capital, the fund that arranged a crucial $50 million investment in the Linux litigator, haven't settled their disagreements after all.

SCO and BayStar appeared to have buried the hatchet in June, announcing a deal under which SCO would buy back all the preferred shares BayStar owned after an investment made in October 2003. The two firms had agreed that SCO would exchange 2,105,263 common shares and $13 million for BayStar's 40,000 Series A-1 preferred shares.

On Friday, SCO said it had bought back the shares--but BayStar said an unspecified dispute is keeping the transaction incomplete. BayStar did not elaborate.

Dueling press releases indicate that the dispute centers on SCO's disclosures about its SCOsource program, which sells Unix intellectual property. BayStar, based in Larkspur, Calif., said it plans to file a lawsuit to settle the matter.

The spat is a new wrinkle in SCO's controversial and thus far largely unsuccessful effort to profit from Linux, which the Lindon, Utah, company says infringes on Unix intellectual property it claims to own.

To pay for the campaign--including lawsuits against IBM, Novell, DaimlerChrysler and AutoZone--BayStar Capital invested $20 million and helped bring along a further $30 million from the Royal Bank of Canada. RBC later backed away from the deal, converting a third of its stake into shares that could be publicly traded, selling the remainder to BayStar.

On June 22, SCO filed a registration statement with the U.S. Securities and Exchange Commission to issue the common shares. SCO said the SEC, on July 21, had declared the registration statement effective, a move that fulfilled "the only condition to closing the repurchase transaction."

"Accordingly, SCO has informed BayStar that it considers the repurchase transaction to be closed as of July 21, 2004," SCO said in its Friday statement. It sent BayStar a certificate for the new stock and said it's ready to deliver the $13 million in cash.

BayStar replied that the transactions "have not closed, due to an unresolved dispute between the parties. BayStar intends to file an action requesting a declaratory judgment with respect to its rights under the Stock Repurchase Agreement," the May 31 deal that set up SCO's buyout.

SCO spokesman Blake Stowell declined to comment beyond the company's statement. BayStar general partner Larry Goldfarb did not return a call seeking comment.

According to SCO, BayStar claims that SCO has given inconsistent statements to the public and to BayStar about SCOsource licensing opportunities. The concern is baseless, according to SCO's statement: "SCO takes such questions very seriously and reaffirms the accuracy of its public disclosures concerning its SCOsource business and confirms its belief that such disclosures are not inconsistent with any confidential statements previously made to BayStar."

SCOsource has not been a financial success. Shortly after BayStar and SCO announced their settlement, SCO announced that it had received $11,000 in SCOsource revenue for the quarter ended April 30, a drop from $20,000 three months earlier. SCOsource expenses, on the other hand, increased from $3.4 million to $4.4 million over the same period.

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Oh what a tangled web they weave
When first they begin to deceive.

Now the chickens have begun to come home to roost for SCO Group. Couldn't happen to a more deserving group of folks.

When you threaten to extort, you should expect the end is near. Such a set of schemes they have been running in full view of the public, thumbing their nose at Justice, the public and everyone.

They purport to a lot of things and prove nothing. Sad to see that it has taken this long for it to begin to unravel.

CT
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