May 7, 2004

Major SCO Group investors reposition stock holdings

Author: Chris Preimesberger

Two major shareholders in The SCO Group Friday began repositioning themselves for apparent future protection as the Lindon, Utah-based Unix licensing and service company's stock continues to slip in price. SCOX was basically unchanged today and closed at $5.98 on the Nasdaq market. The price is now at its lowest level since June 2003, when it traded in the $3.15 range.

The Royal Bank of Canada, which invested a hefty $30 million of a $50 million private interest in public equity (PIPE) transaction last October to help keep SCO Group in business, has decided to transfer its 10,000 shares of preferred (non-voting) stock into 740,740 shares of common (voting) stock.

BayStar Capital, a private California hedge fund which ponied up $20 million to fill out the $50 million PIPE package, purchased 20,000 shares of Series A-1 preferred stock directly from Royal Bank just before the stock transfer. Upon completion of its conversion, Royal Bank of Canada will have no equity interest in SCO other than the shares of common stock it receives from the conversion. BayStar will be the sole remaining holder of outstanding shares of Series A-1 preferred stock.

In opting for the stock transfer, the Royal Bank is accepting a 50 percent loss in its investment of only seven months ago. In exchange, it gains a measure of voting power regarding the future strategic direction of the company. After today's announcement, there are 15,200,000 outstanding common shares of SCOX. RBC's stake of 740,740 shares works out to a bit less than 5 percent ownership.

A holding of that size, however, is probably not enough to affect direct change in SCO Group management, as has been called for by BayStar. However, following Friday's transactions, BayStar will have more influence in the boardroom. The Larkspur, Calif., investment firm now owns 40,000 of the 50,000 preferred shares originally issued in the October investment.

SCO Group spokesman Blake Stowell told NewsForge Friday that this stock transfer doesn't affect the company directly at this time.

"As far as the impact to us now, there's not much to it," Stowell said. "Basically, the company retains its considerable investment from the (Royal) bank, which it received in October of last year. They just changed the form of the investment. BayStar also retains its investment."

The conversion will occur as permitted under SCO's Certificate of Designation, Preferences and Rights relating to the Series A-1 stock. The Series A-1 stock was purchased at a price of $1,000 per share, and will be converted to common stock based on a conversion price of $13.50 per share.

Royal Bank of Canada spokesman Chris Pepper also didn't have much to say about the transaction, except that "the bank performs regular reviews of all its investments, and based upon some events that happened about two weeks ago, we decided to make the transfer. That's about all I can say at this time."

BayStar told NewsForge on April 23 that it doesn't believe SCO's senior management is experienced enough in IT litigation to fully reap the financial benefits from the company's intellectual property. SCO Group is suing several major companies, including IBM, DaimlerChrysler, AutoZone, and Novell for alleged copyright violations involving Unix V System code and its Linux variations.

SCO Group's biggest value is in its intellectual property ownership, BayStar spokesman Bob McGrath said, and not in its Unix products and services. SCO Group reported income of about $11 million in Unix products and services (ongoing contracts) and a meager $20,000 from SCOsource initiatives -- new business -- last quarter. "We still think SCO Group has a strong story in the value of its IP," he said.

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