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December 19, 2004

SCO attempts to keep control ahead of results announcement

SCO Group Inc is taking steps to keep its senior executives at the company in the event of a potential takeover attempt as its lowly share price continues to make it look vulnerable.

By CBR Staff Writer

The Lindon, Utah-based Unix vendor is currently best known for its legal claims against IBM Corp and Linux, which pushed its shares to a high of $22.29 in October 2003. Since then its share price steadily declined, prompting SCO to adopt a shareholder rights plan in August to protect it from hostile takeover.

SCO has now followed that up with new agreements with its senior executives that will keep them at the company in the event of a proposed change in control, and reward them financially with the full vesting of stock, stock options, or restricted stock, in the event of a takeover attempt.

The agreements have been made with Darl McBride, president CEO; Bert Young, CFO; Chris Sontag, general manager of the SCOsource business; Jeff Hunsaker, general manager of the Unix business; and Ryan Tibbitts, general counsel and secretary.

According to the terms of the agreements, the five executives have agreed not to leave the company in the event of a takeover attempt, at least until the takeover attempt succeeds or fails. In return, any stock, stock option or restricted stock that would have become vested during their continued employment will immediately vest in full in the event of a change in control.

According to filings with the Securities and Exchange Commission (SEC), the change of control agreement was signed just days after McBride was granted 100,000 stock options exercisable at $4.85 from December 2005. Young was granted 150,000 stock options at the same terms, Sontag 25,000, Hunsaker 25,000, and Tibbitts 150,000.

As it adopted the shareholder rights plan in late August, SCO denied that it had taken the measure in response to a specific threat but McBride recently told ComputerWire that there had been various approaches to the company.

While not entirely ruling out a takeover, McBride added that the company would do its best to remain independent unless made an offer it could not refuse. We’re going to be protective of our customers, employees, and shareholders, he said.

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While not preventing any takeover attempt, SCO’s shareholder rights plan is designed to encourage anyone seeking to buy the company to negotiate fair value, McBride said in August, when he also admitted concern about SCO’s low share price.

Steady decline saw the share price reach a low of $2.76 in November 2004, before the sale of shares by former investor BayStar Capital II LP pushed it up to its most recent closing price of $4.29. BayStar was once mooted as a potential acquirer of SCO after it acquired 40,000 shares of Series A-1 convertible preferred stock.

The two companies agreed to go their separate ways in August, however, after falling out over the direction of SCO. BayStar wanted SCO to concentrate fully on its claims that IBM breached a contract with SCO by contributing Unix code to Linux, while SCO is trying to do that while also attempting to grow its core Unix operating system business.

That could be easier said than done SCO’s Unix business has been in decline for some time, bringing in revenue of just $10.5 million in the third quarter, compared to $12.8 million the previous year, although it did at least manage to generate a profit.

Earlier quarters had seen the SCOsource licensing and intellectual property division boosting SCO’s figures, but that business has also fallen away, bringing in $678,000 in IP license revenue in the third quarter, and just $11,000 in the previous quarter.

The third quarter also saw legal fees of $7.3 million related to SCO’s various lawsuits, pushing the company to a net loss overall, although it did manage to negotiate a cap on its legal costs with its counsel: Boies, Schiller and Flexner LLP.

The impact of that cap on SCO’s financial position will be seen when the company reports its fourth quarter and full-year results after the markets close on December 21. It has predicted total revenue for the quarter to be between $10 million to $12 million.

The reporting of the results – and the impact on SCO’s share price – could also give some indication as to whether SCO’s new change of control agreements are a prelude to a likely takeover attempt.

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