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SCO Repurchases BayStar's 40,000 A-1 Shares; BayStar Can't Sell Too Fast
Tuesday, June 01 2004 @ 06:32 PM EDT

BayStar and SCO have come to a meeting of the minds. SCO will repurchase and retire all 40,000 shares of Series A-1 Convertible Preferred Stock currently held by BayStar. I'm no financier, so don't go by me, but it looks like BayStar got the short end of the stick. For shares with a face value of $40,000,000, they are being paid $13 million and two million common shares. Of course, this is SCO's press release telling the tale, so who knows? Here is the press release. What stands out to me is that BayStar, while stating their current satisfaction with SCO for the record, have been restricted in how fast they can dump their SCO stock:

"The agreement includes a restriction on sales and dispositions by BayStar of the Company's common stock. BayStar may not exceed on any trading day, 10% of SCO's average daily trading volume on Nasdaq during the five trading days preceding such trading day."

The second quarter financial results conference call won't be tomorrow. It has been postponed until next Thursday.

Here is Dion Cornett's view on what it all means, in today's "Open Source Wall Street":

"SCOX smartly negotiates its way out of the Series A-1 preferred

"The SCO Group (SCOX: Underperform) announced today that it has redeemed $40M (face-value) in preferred A-1 stock for $13M in cash and roughly 2 million shares. We believe that this is a very good deal for SCOX shareholders as the company relieves itself of a major disgruntled investor and eliminates over $40M in preferences ahead of common. We expect shares to respond positively to the news and do not anticipate negative pressure from BayStar selling. While we do not know how quickly BayStar may attempt to liquidate its newly held common shares, we believe that the investment company may be inclined to hold – awaiting a potential legal victory – based on recent public comments by BayStar’s management.

"SCOX delays, preview of SCOX results, upcoming SCOX catalysts

"SCOX has delayed reporting its Apr-qtr results, originally to be announced tomorrow, now scheduled for next Thursday. We expect SCOX to report revenue of $11.6 million, a 46% year-over-year revenue decline and an EPS loss of $.31. Investors should also receive further details with respect to the company’s end-user Linux licensing efforts including dollars received from the controversial EV1.net deal. In aggregate, we believe that there is more potential downside than upside to our estimates, including the $250,000 we have attributed to EV1. Despite the anticipated soft results, we do not expect a meaningful move in the stock. We believe that investors are increasingly focused on court activity versus operations and that movement in the stock may be tied to legal events, the nearest being a June 9th hearing to review DaimlerChrysler’s Motion for Summary Disposition and on June 14 SCOX’s required response to IBM’s Partial Motion to Dismiss. Legal feedback suggests it may be too early for a court to grant dismissal. However, the potential negative catalyst versus the status quo causes us to maintain our Underperform rating, despite our belief that the A-1 conversion/redemption values the stock fairly short-term."

The story didn't make a headline on his page 1. He still rates SCO Underperform. More details on eWeek. Here is SCO's press release.

*********************************

Press Release
Source: The SCO Group, Inc.

The SCO Group to Retire All Shares of Series A-1 Convertible Preferred Stock
Tuesday June 1, 3:46 pm ET

LINDON, Utah, June 1 /PRNewswire-FirstCall/ -- The SCO Group, Inc. ("SCO") (Nasdaq: SCOX - News) today announced it has entered into an agreement with BayStar Capital II LP to repurchase and retire all 40,000 shares of Series A-1 Convertible Preferred Stock currently held by BayStar. The shares of Series A-1, 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 the Company's common stock, payable and issuable upon closing which will occur upon the effectiveness of a shelf registration statement for the resale of the common stock by BayStar.

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, preferred dividend rights that would accrue at a rate of 8% and escalate by 2% annually up to 12%, restrictive covenants and all other contractual rights granted to the holders of Series A-1 shares. Following the repurchase, the Company will have only common stock outstanding.

Upon closing, the effective result of the Company's Series A-1 financing activities (giving effect to the repurchase, together with the prior conversion of 10,000 shares of Series A-1 for 740,741 shares of common stock), will be the Company having received $37 million in proceeds, before expenses, and having issued 2,846,004 shares of common stock at an effective price of approximately $13.00 per share.

The agreement includes a restriction on sales and dispositions by BayStar of the Company's common stock. BayStar may not exceed on any trading day, 10% of SCO's average daily trading volume on Nasdaq during the five trading days preceding such trading day. The agreement includes a mutual general release by the parties and has not required compensation to any outside agents.

"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," said Larry Goldfarb, managing general partner, BayStar Capital. "We're 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, President and CEO, The SCO Group, Inc. "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."

Forward-Looking Statements

This press release contains forward looking statements related to SCO's relationship with BayStar Capital and BayStar's plans to sell shares of its Series A-1 Convertible Preferred Stock. SCO wishes to advise readers that a number of important factors could cause actual results to differ materially from those anticipated in such forward-looking statements. These factors that could cause actual results to differ materially from those anticipated include the risk that the transaction described in this press release may not close, the company's cash may not be sufficient for its needs and the Company may not realize the expected benefits of the transaction. Other factors affecting the company's business are discussed in more detail in SCO's filings with the Securities and Exchange Commission.

About SCO

The SCO Group (Nasdaq: SCOX - News) helps millions of customers in more than 82 countries to grow their businesses with UNIX business solutions. Headquartered in Lindon, Utah, SCO has a worldwide network of more than 11,000 resellers and 4,000 developers. SCO Global Services provides reliable localized support and services to all partners and customers. For more information on SCO products and services visit http://www.sco.com.

SCO and the associated SCO logo are trademarks or registered trademarks of The SCO Group, Inc. in the U.S. and other countries. UNIX is a registered trademark of The Open Group in the United States and other countries. All other brand or product names are or may be trademarks of their respective owners.

Source: The SCO Group, Inc


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