A $13 million payout is not something most companies consider to be a positive event, particularly when the company is the one doing the paying.
But the June 1 announcement from The SCO Group that it would pay BayStar Capital $13 million in cash was truly a positive event indeed.
BayStar, along with Royal Bank of Canada, invested $50 million in SCO (Nasdaq:SCOX) in October in exchange for 50,000 shares of Series A convertible preferred shares of SCO, with BayStar receiving 20,000 preferred shares and RBC receiving 30,000.
These convertible preferred shares carried special "rights," including liquidation preference (meaning that the holders may have been able to force a conversion to common shares). The convertible preferreds also carried annual dividend rights beginning at eight percent per year and rising by two percent per year up to a cap of 12 percent per annum.
The Series A convertible preferred shares were exchanged for Series A-1 convertible preferred shares in early February, an exchange that SCO stated at the time gave it "expanded operational flexibility."
Maybe so. But the March 3 announcement of the company's results for the first quarter of 2004 (ended January 31), along with news that the company had filed lawsuits against two of its big-name customers AutoZone (NYSE:AZO) and DaimlerChrysler (NYSE:DCX), began what must be termed a significant slide in SCO's stock price.
Since early March, SCO's per-share stock price has slid to a low of $4.69 per share in mid-May from a high of $13.42 on March 2. (And that's down from 52-week high of $20.50 per share, the stock's closing price on October 15, 2003.)
With market pressures building on SCO's common shares, both BayStar and RBC publicly requested, in April and May respectively, the ability to convert their preferred shares into common stock. Royal Bank of Canada did just that in May, converting 10,000 preferred shares into common SCO stock and selling its remaining 20,000 preferred shares to BayStar.
With its portfolio expanded to 40,000 SCO convertible preferred shares, BayStar's relationship with Lindon-based SCO became even more strained, perhaps even acrimonious, as it began publicly demanding a greater say in how SCO was running its business.
Specifically, BayStar stated that SCO should abandon its UNIX business and focus exclusively on its litigation efforts surrounding its intellectual property. BayStar also questioned the strength and makeup of SCO's management team.
Regardless, the SCO/BayStar relationship came to an effective end last week when SCO agreed to buy back its 40,000 convertible preferred shares from BayStar for $13 million in cash and 2.1 million new shares of SCO's common stock.
Under terms of the agreement, SCO will issue the new shares to BayStar following the closing of a shelf registration statement for the resale of the BayStar shares. For its part, BayStar has agreed to limit the amount of SCO shares it can sell in any one day to 10 percent of SCO's average trading volume in the five preceding trading days.
By the time everything is wrapped up, SCO will have effectively netted $37 million out of the BayStar/RBC relationships, giving up roughly 2.85 million shares in the process.
One unknown, at least until SCO's next quarterly announcement on Thursday, is its cash position, although Ronna Abramson of TheStreet.com pegs it at $45 million at best.
This is probably the most critical item facing SCO in light of its ongoing litigation (and the attendant legal costs) in its various UNIX vs. Linux lawsuits.
But the company is confident it has sufficient reserves (given its ongoing operating costs) to keep the company afloat and on track through its legal battles.
"We think that we have the cash position to give these lawsuits the effort we need to pursue them aggressively and through to conclusion," said Bert Young, SCO's chief financial officer.
Which, at the end of the day, is probably the most important thing on SCO's agenda — staying afloat — even if it requires a $13 million payout.
In fact, if writing a $13 million check helps keep you in business, that's probably a good step to take.
Another good thing occurred last week when Salt Lake City-based Myriad Genetics (Nasdaq:MYGN) announced it will sell an additional 3.4 million shares in a public offering.
Myriad will gain an anticipated $50.2 million from the offering and will have a total of 30.6 million common shares outstanding following the close of its offering.
Myriad ended its third quarter of 2004 (ended March 31) with revenue of $13.8 million, a net loss of $10.7 million, and $99 million in cash and marketable securities in the bank.
David Politis leads Politis Communications, a strategic communications agency that helps maximize corporate value for high-tech and life science companies.
E-mail: dpolitis@politis.com.