SCO, BayStar Bury the Hatchet

After disputing over SCO's future with the company's management, BayStar backs down and shifts its SCO investment to cash and common stock. SCO now sits firmly in the driver's seat.

In a surprise announcement, The SCO Group Inc. on Tuesday announced that it has entered into an agreement with BayStar Capital II LP to settle their financial squabbles. The move appears to give a green light to SCOs continuing battle for Unix copyright claims while maintaining its development efforts.

The SCO Group Inc. will repurchase and retire all of Series A-1 shares currently held by BayStar Capital II LP. The shares, which have a face value of $40 million, will be retired through a payment of $13 million in cash and the issuance of 2,105,263 shares of common stock.

BayStar Capital had originally invested in SCO to help fuel SCOs Linux litigation with Microsofts encouragement. Since then, the investment house and the Lindon, Utah Unix firm have squabbled over SCOs future.

BayStar caught SCO by surprise in April by claiming that SCO had violated several clauses of its agreement with BayStar.

Later, however, Bob McGrath, then BayStars spokesperson, said that SCO must change three things to avoid BayStar pulling its investment out of the company. First, "the management team at SCO must be strengthened and enhanced with executives who are experienced in litigation issues and in dealing with those issues from a public-company standpoint to get the best possible return," he said at the time

BayStar also wanted, "SCO to not be spending resources, its time and money, on its other businesses, such as OpenServer and UnixWare. The return there, both now or in the future, will not give enough value for return to stockholders and investors."

In addition, McGrath said BayStar was unclear on "what the business rational is for their ongoing communications [with the public and Linux community], given that we think they should be focusing on litigation," McGrath said.

Following the announcement, SCOs management and board refused to give in to these demands. Now, the standoff appears to have come to a resolution.

Blake Stowell, SCOs Director of Communications, said to on Tuesday, "By converting their investment into common shares, its in BayStars interest to see our business succeed and out stock price go up."

At the same time, "BayStar will have less control over SCOs operations. They had the opportunity. to hold a seat on the companys board, which they choose not to fill, and with the conversion they will no longer have the opportunity to be on the board," he said

"BayStar has also given up certain voting rights. For example, if SCO had chosen to settle any litigation, BayStar had had veto power over any such settlements, BayStar essentially giving up this power, Stowell continued.

Jeremy Zweig, BayStars current spokesman, said, "This was a transaction beneficial for all the parties involved and protected the interests of BayStar investors."

Zweig also said, that if BayStar did desire to divest itself of its SCOs holdings, "It would take significant amount of time to unwind the whole position. Whether BayStar like it or not, it has no choice but to be significant shareholders for some time in SCO.

Thats because the agreement includes a restriction on sales and dispositions by BayStar of SCOs common stock. BayStar may not exceed on any trading day, 10 percent of SCOs average daily trading volume on NASDAQ during the five trading days preceding such trading day. With an average volume of not quite 300,000 shares a day, BayStar could sell no more than 30,000 shares of its 2,846,004 shares of common stock, which in this deal, are being valued at an effective price of approximately, $13.00 a share.

Upon repurchase, all shares of Series A-1 preferred stock will be cancelled and retired and the rights and preferences of the Series A-1 shares will be terminated including the right to $40 million of liquidation preference. Following the repurchase, SCO will have only common stock outstanding.

BayStar officials put the best face possible on the deal.

"After productive and substantial discussions with SCOs management team, board of directors and legal team, BayStar is extremely satisfied with SCOs current operating and cash management plans, new initiatives, management of the litigation, and plans for improving its business going forward," said Larry Goldfarb, managing general partner, BayStar Capital in a prepared statement.

"Were pleased that we are able to repurchase and retire the Series A-1 shares and we believe the agreement will benefit the Company and its shareholders," said Darl McBride, SCOs CEO in a prepared statement.

"This agreement will eliminate restrictions, covenants, preferences, accruals for dividends, and allow the company greater flexibility to manage key aspects of its strategy moving forward. We believe the net effect of this agreement will allow the company to focus on its strategic initiatives, retain sufficient cash to defend its intellectual property, accomplish its corporate objectives and provide greater flexibility in the management of our operations."

Meanwhile, to accomodate this new agreement, SCO said the company will delay its second fiscal quarter earnings report and investor conference call, previously scheduled for Wednesday morning. It will now take place next Thursday, June 10.

Editors Note: This story was updated to include information about changes to SCOs fiscal reporting schedule.


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