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BayStar Does About Face With SCO

In a new twist to its investment relationship with Baystar Capital, the SCO Group said it would retire BayStar Capital's 40,000 Series A-1 shares in the company for a payment of $13 million and just over 2.1 million shares of common stock.

The transaction, including the A-1 shares with a face value of $40 million, is seen as a vote of confidence for the Lindon, Utah-based company's operations by its investment group after relations between the two grew tense. SCO Group also said it would postpone its quarterly earnings release from June 2nd to June 10th.

SCO is currently in the middle of a protracted and bitter legal suit with IBM , Red Hat and Novell over copyright claims involving Linux.

Only a month ago BayStar Capital appeared to be on the verge of forcing widespread operational and management changes at the SCO Group. In an interview with the New York Times recently, Larry Goldfarb, BayStar's managing general partner, expressed concern over SCO CEO Darl McBride's comments in the media. Goldfarb's remarks prompted media speculation that BayStar might demand SCO shed of all its operations excepting those dealing with its licensing of Unix System V code and getting rid of all the senior management at SCO.

That was then. This is now: "After productive and substantial discussions with SCO's management team, board of directors and legal team, BayStar is extremely satisfied with SCO's current operating and cash management plans, new initiatives, management of the litigation, and plans for improving its business going forward," Goldfarb said in a statement.

By selling its Series A-1 (equity level) shares, BayStar gave up many of its rights and privileges as principal investors to influence business operations. As common stock shareholders, they'll have as much influence as 2.1 million shares will get them in a public company.

By selling off its equity stake in the company, BayStar loses $40 million of liquidation preference if, for example, SCO were to go out of business.

Stowell said the agreement is a indication of how much more comfortable BayStar is with SCO management after a round of talks discussing the future of SCO and its legal cases.

"I think through the discussions that both companies had, we came to a better understanding of what [BayStar] was wanting, they came to a better understanding of how we were conducting our business and doing it in a way that would be successful and help them understand how we were planning to achieve profitability for our Unix business," he said. "All together, that helped them feel much more comfortable with [SCO's] plans for the future. With that, it also helped them to want to be a shareholder in the company for the foreseeable future."

Stowell said the agreement doesn't call for any management or operational changes in the company and that both sides expect to conclude the agreement before July 1.

Last month the Royal Bank of Canada (RBC), who along with BayStar last year made a $50 million investment in SCO, sold $20 million of its Series A-1 shares to BayStar and converted the rest into common stock.

SCO is suing IBM for copyright infringement, charging that Big Blue engineers violated a contract to use Unix System V code by using it to boost select parts of the Linux kernel, used in everything from popular projects like Debian to lucrative commercial vendors like Red Hat, SuSE and MandrakeLinux.

If SCO should win its case, it could then have the right to charge a licensing fee to every user who uses the Linux kernel in their operating system.



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